Army to End Expansive, Exclusive Halliburton Deal

By Griff Witte
Washington Post
July 12, 2006


The Army is discontinuing a controversial multibillion-dollar deal with oil
services giant Halliburton Co. to provide logistical support to U.S. troops
worldwide, a decision that could cut deeply into the firm's dominance of
government contracting in Iraq.

The choice comes after several years of attacks from critics who saw the
contract as a symbol of politically connected corporations profiteering on the war.

Under the deal, Halliburton had exclusive rights to provide the military with a
wide range of work that included keeping soldiers around the world fed,
sheltered and in communication with friends and family back home. Government
audits turned up more than $1 billion in questionable costs. Whistle-blowers
told how the company charged $45 per case of soda, double-billed on meals and
allowed troops to bathe in contaminated water.

Halliburton officials have denied the allegations strenuously. Army officials
yesterday defended the company's performance but also acknowledged that reliance
on a single contractor left the government vulnerable. The Pentagon's new plan
will split the work among three companies, to be chosen this fall, with a fourth
firm hired to help monitor the performance of the other three. Halliburton will
be eligible to bid on the work.

The decision on Halliburton comes as the U.S. contribution to Iraq's
reconstruction begins to wane, reducing opportunities for U.S. companies after
nearly four years of massive payouts to the private sector.

Of the more than $18 billion Congress allocated for reconstruction in late 2003,
more than two-thirds has been spent and more than 90 percent has been
contractually obligated, according to the inspector general's office overseeing
reconstruction work. The rest of the money, which is collectively known as the
Iraq Relief and Reconstruction Fund, needs to be obligated by the end of September.

Army spokesman Dave Foster said in a written response to questions that funding
for 11 contracts covering various aspects of reconstruction -- including
transportation, communications, water distribution and the electric grid -- will
expire this fall. While the contractors will be allowed to finish any work
previously requested, no new work can be ordered after September.
Among those contracts is another Halliburton deal, for up to $1.2 billion to
restore oil services in southern Iraq. As with the others, it will not be extended.

"The Iraq reconstruction is winding down . . . so there is no need for new
contracts to replace the existing," Foster said.

Instead, the Iraqi government will have to find its own contractors to do the
work, which includes tackling a large number of projects left undone by the United States.

"This is the year of transition for Iraqi reconstruction. The U.S.-funded
projects are being completed and transferred to Iraqi management and control,"
said James Mitchell, spokesman for the inspector general's office.

That office has repeatedly warned of a "reconstruction gap" between what the
United States promised in rebuilding the country after the spring 2003 invasion
and what it has delivered. For instance, a contract aimed at building 142 new
health centers across Iraq instead produced 20 before the program ran out of money.

The heavy involvement of U.S. contractors in Iraq has been one of the defining
features of the American presence there, with private companies called on for
duties as varied as guarding supply convoys and analyzing intelligence.

No contractor has received more money as a result of the invasion of Iraq than
Halliburton, whose former chief executive is Vice President Cheney.

The logistics work is performed through a subsidiary, Kellogg Brown & Root
Services Inc. Last year, the Army paid the company more than $7 billion under
the contract, according to a search of government contracting data by Eagle Eye
Inc., a private consulting firm. The number this year is expected to be between
$4 billion and $5 billion, according to Randy King, a program manager with the Army.

The company maintains that its billing disputes with Defense Department auditors
have been resolved and that its work has received rave reviews from the
military. "By all accounts, KBR's logistical achievements in support of the
troops in Iraq, Kuwait and Afghanistan have been nothing short of amazing," said
company spokeswoman Melissa Norcross in a statement.

King, the Army official, agreed yesterday. "Halliburton has done an outstanding
job, under the circumstances," he said. He added that Pentagon leaders
ultimately decided they did not want to have "all our eggs in one basket"
because multiple contractors will give them better prices, more accountability
and greater protection if one contractor fails to perform.

Halliburton initially won the contract in December 2001. At the time, the deal
was relatively modest in size, but stubborn insurgencies in both Iraq and
Afghanistan have stretched U.S. troops and kept Halliburton busy trying to meet their needs.

Known formally as the Logistics Civil Augmentation Program, or LOGCAP, the
contract "has expanded beyond what anyone could have imagined," said Dov S.
Zakheim, the Pentagon's comptroller from 2001 until 2004 and now a vice
president at consulting firm Booz Allen Hamilton Inc. "The KBR people themselves
would point out that the challenges they had coming out of Iraq, over and above
everything else they had to do, were taxing their systems. You're really asking
too much of one firm to be able to manage all of this."

The original contract included one base year with nine option years. The Army
says it will not pick up the next option year and instead plans to put out a new
request for proposal by the end of the month. It expects to announce winners in November.

The bidding on the new contract is likely to attract some high-profile suitors,
including weapons makers Lockheed Martin Corp. and Northrop Grumman Corp.
"These are huge contracts. They are among the biggest government services
contracts that have ever been created," said Loren Thompson, chief operating
officer of the Lexington Institute, a defense research organization in
Arlington. "Most of the big, integrated defense contractors recognize that new
sales of military hardware are going to be hard to come by in the years ahead.
There's a general migration to services. And no contract on the horizon is
bigger in services than LOGCAP. It's just too big to ignore."

Rep. Henry A. Waxman (D-Calif.), a frequent Halliburton critic, said he would
like to see even more companies included as winners in order to increase
competition as work arises. But he welcomed the move away from the exclusive
contract with Halliburton as a good first step. "When you have a single
contractor, that company has the government over a barrel," Waxman said. "One
needs multiple contractors in order to have real price competition. Real
competition saves the taxpayer money."