Tuesday, November 4, 2003

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Is Al Gore responsible for Halliburton?

I've received a lot of e-mail traffic from the Slate piece on whether there was systemic corruption in the awarding of official reconstruction contracts in Afghanistan and Iraq. Half of them raise the following point:* even if there's no systemic pattern of corruption, it is true that Halliburton and Bechtel received big, fat, cost-plus contracts of indefinite duration. Clearly, these firms are closely linked to this administration. Isn't this a specific example of corruption?

This is definitely a valid question. My answer here is a bit murkier, but I still say no. The best source on this beyond the CPI report is Dan Baum's June 22nd story, "Nation Builders for Hire," in the New York Times Magazine.

If you read that article and the CPI report, you discover three things:

1) Kellogg, Brown & Root (KBR) got the current contracts because of path dependence. Because KBR got contracts in the past, it increased the likelihood of getting them now. Consider this paragraph from Baum's story:

The Army says KBR got the Iraqi oil-field contract without having to compete for it because, according to the Army's classified contingency plan for repairing Iraq's infrastructure, KBR was the only company with the skills, resources and security clearances to do the job on short notice. Who wrote the Army's contingency plan? KBR. It was in a position to do so because it holds another contract that is poorly understood yet in many ways more important, and potentially bigger, than the one to repair the oil fields: the Logistics Civil Augmentation Program, or Logcap, which essentially turns KBR into a kind of for-profit Ministry of Public Works for the Army. Under Logcap, which KBR won in open bidding in 2001, KBR is on call to the Army for 10 years to do a lot of the things most people think soldiers do for themselves -- from fixing trucks to warehousing ammunition, from delivering mail to cleaning up hazardous waste. K.P. is history; KBR civilians now peel potatoes, and serve them, at many installations. KBR does the laundry. It fixes the pipes and cleans the sewers, generates the power and repairs the wiring. It built some of the bases used in the Iraq war. (emphasis added)

2) The people who work at Kellogg, Brown & Root are pretty good at their job. One example from Baum:

Proponents of contracting make the point that as the the overall size of the military shrinks, the ''tooth'' needs to increase relative to the ''tail,'' or, as one analyst put it, ''You want the 82nd Airborne training to kill people and blow things up, not cleaning latrines or trimming hedges.'' They also argue it's cheaper to hire contractors to do short-term work rather than have the military maintain full-time capabilities it needs only briefly.

A good example is Camp Arifjan, a U.S. Army base about 90 minutes southwest of Kuwait City. Six months ago, this was nothing but a small collection of buildings that was supposed to be a training base. On Oct. 11 -- the day Congress gave President Bush authority to wage war on Iraq -- someone in the Pentagon picked up a phone and told KBR it had nine weeks to turn Arifjan into a full-blown Army base for 7,000 people. The job went to Robert (Butch) Gatlin, a wizened 59-year-old Tennessean who served 32 years in the Army Corps of Engineers before coming to perform the same work, at much greater pay, for KBR.

''When we got here, there was no power or water,'' Gatlin said as we stepped from the air-conditioned trailer that is KBR's Arifjan headquarters into the blinding desert sun. Within about 72 hours of the Pentagon's call, Gatlin had a handful of KBR specialists -- electricians, carpenters, plumbers -- on planes headed here. Most of the rest were hired locally. ''I had a thousand people working here in 24 hours,'' he said. ''The Army can't do that.''

If you read the article in it's entirety, it's clear that comparative advantage for KBR is not necessarily cost-efficiency but speed. Baum concludes, "There is no question that companies like KBR are up to the job."

3) KBR's ability to win contracts they get emerged prior to the Bush administration taking office. Again from Baum:

In 1992 the Defense Department, under Dick Cheney, hired Brown & Root to write a classified report detailing how private companies could help the military logistically in the world's hot spots. Not long after, the Pentagon awarded the first five-year Logcap -- to Brown & Root. Then Bill Clinton won the election, and Cheney, in 1995, became C.E.O. of Halliburton, Brown & Root's parent company. A lot of Halliburton's business depends on foreign customers getting loans from U.S. banks, which are in turn guaranteed by the government's trade-promoting Export-Import Bank. In the five years before Cheney took the helm, the Ex-Im Bank guaranteed $100 million in loans so foreign customers could buy Halliburton's services; during Cheney's five years as C.E.O., that figure jumped to $1.5 billion.

So, the big jump in KBR's contracts takes place under the Clinton administration. By Clinton's second term, "one of every seven Pentagon dollars passed through KBR."

Why the dramatic increase under Clinton? Blame Al Gore. Well, not really, but sort of. According to this section of the CPI report:

At one time, federal agencies constructed buildings, built machines and cleaned offices themselves, or found another agency to do it. Today, the U.S. government spends some $200 billion a year buying everything from information technology services to pencils to advanced weapons systems from the private sector.

The Defense Department alone accounts for 75 percent of that spending. Following a series of scandals in the 1980s, where the Pentagon was revealed to have paid outrageous sums for commercially available products, Congress decided to overhaul government procurement. The result was the Federal Acquisition Streamlining Act of 1994, which simplified the maze of procurement regulations to make it easier for federal agencies to buy products from the private sector.

The new law dovetailed with former Vice President Al Gore's "Reinventing Government" initiative, which aimed to trim the federal workforce, and matched the realities of the Pentagon's shrinking budget. As a result, where the federal workforce has shrunk, the contractor workforce has grown.

Matthew Yglesias makes a similar point:

By and large, the Bush administration is following the law and using all the procedures the law lays out. The trouble is that the laws are bad. We've privatized significant portions of government operations in areas where there is no need for doing so. In principle, privatization might lead to competition and cost savings for the taxpayer. In practice, in many of these areas there is no competition -- Halliburton and Bechtel are essentially monopoly suppliers in the fields where they've won contracts. When you outsource services to private monopolies, all you're setting yourself up for is the busting of some public sector unions and some price-gouging at the hands of monopolist corporations. (emphasis added)

I agree completely with Yglesias that there should be a full debate about whether contracting has gone too far. I'd disagree with him, but it's a perfectly proper topic for discussion.

The corruption claim, however, is far weaker.

UPDATE: For a good discussion of these issues, see this transcript from last night's NewsHour. One point made by former Major General Patrick Kelly:

In the case of one of the companies that was cited by Mr. Lewis, which is Kellogg Brown and Root, they, they, the Army and the Corps of Engineers exercised an existing contract with the Army that I might point out was consummated during the Clinton administration. It was not consummated in this administration. And they took that existing contract and then they realized that Kellogg, Brown and Root had the necessary skills, they were in the MidEast, and they could immediately go into Iraq and help restore the oil service industry, which is why they were selected. But they were not given a special contract. They already had that contract.

ANOTHER UPDATE: Jon Henke at QandO takes a look at Halliburton's 3rd quarter statement from this year, and notes the following sentence, "Total company revenue and operating income from Iraq-related work in the third quarter were $900 million and $34 million, respectively."

As Jon puts it:

Yep, a profit margin of less than 4%. Good times are here again.

Look, I've no doubt that there is a degree of "politics" involved in the decision-making process. That's true for every industry. I've also no doubt that there is a lot of waste. It is, after all, government.

But the allegations that this is a "pay off" for friends and supporters is simply unsupported.

ANOTHER UPDATE: David Adesnik links to this Washington Post op-ed by Steven Kelman, who served from 1993 to 1997 as administrator of the Office of Federal Procurement Policy. The key bits:

One would be hard-pressed to discover anyone with a working knowledge of how federal contracts are awarded -- whether a career civil servant working on procurement or an independent academic expert -- who doesn't regard these allegations as being somewhere between highly improbable and utterly absurd.

The premise of the accusations is completely contrary to the way government contracting works, both in theory and in practice. Most contract award decisions are made by career civil servants, with no involvement by political appointees or elected officials. In some agencies, the "source selection official" (final decision-maker) on large contracts may be a political appointee, but such decisions are preceded by such a torrent of evaluation and other backup material prepared by career civil servants that it would be difficult to change a decision from the one indicated by the career employees' evaluation.

Having served as a senior procurement policymaker in the Clinton administration, I found these charges (for which no direct evidence has been provided) implausible....

The whiff of scandal manufactured around contracting for Iraq obviously has been part of the political battle against the administration's policies there (by the way, I count myself as rather unsympathetic to these policies). But this political campaign has created extensive collateral damage. It undermines public trust in public institutions, for reasons that have no basis in fact. It insults the career civil servants who run our procurement system.

Perhaps most tragically, it could cause mismanagement of the procurement system. Over the past decade we have tried to make procurement more oriented toward delivering mission results for agencies and taxpayers, rather than focusing on compliance with detailed bureaucratic process requirements. The charges of Iraq cronyism encourage the system to revert to wasting time, energy and people on redundant, unnecessary rules to document the nonexistence of a nonproblem.

If Iraqi contracting fails, it will be because of poorly structured contracts or lack of good contract management -- not because of cronyism in the awarding process.


*So, what are the other half of the e-mails like?--ed. They're mostly of the "you're a partisan hack" variety, a fact that should amuse my regular group of cantankerous readers.

posted by Dan on 11.04.03 at 04:36 PM


If US companies are in this particular case doing such a bang-up jobs, then we ought to have no problem establishing an expedited open bidding system *going forward* for *long term contracts*.

Note I am NOT saying retract current contracts. Just divy up the 20 or so billion of the $87 billion going forward differently. If American companies are competitive, then we can win AND remove the appearance of impropriety.

That will silence critics espousing cronyism and restore some of our credibility. Refusal to do so will tarnish even the most sterling progress however.

posted by: Oldman on 11.04.03 at 04:36 PM [permalink]

Where is the weak point in the argument for privatization? It's exactly where the Times Magazine article says it is -- private contractors cannot be ordered to work in war zones. Thus far in Afghanistan and Iraq they have not often been exposed to enemy fire, and the KBR and other employees of private contractors who have appear to have conducted themselves well. But we may face future situations where the enemy is more formidable than the ones we have faced in the last two years, and the threat to rear echelons greater. That is when we will find out how good an idea contracting out logistics is.

posted by: Zathras on 11.04.03 at 04:36 PM [permalink]

Actually, it's probably LBJ's fault. As detailed in the second volume of Robert Caro's LBJ bio, Brown and Root might not have gotten off of the ground without LBJ's support/patronage. Nor would have LBJ's career gone as far without B&R's money. Also, it might be worth considering that the US gov't is in a position to have market power as well. Much like, say, baseball unions and owners, the negotiations b/t the gov't and KBR would just be over a big pile of rent. The moral hazard here would be that those negotiating for the gov't may not have the gov't's best interests/checkbook, in mind. Which is why it would be nice if some modern-day Harry Truman would run a commission to make sure everything is on the up'n'up.

posted by: tom on 11.04.03 at 04:36 PM [permalink]

This may be off-topic a bit, but point 3 dates Brown and Root's involvement with government contracting far too early. The story of the company's government activities is related in Robert Caro's Path to Power, the first volume of his biography of Lyndon Johnson. Brown and Root financial support was critical to Johnson's early election victories in the 1930s, and Johnson was instrumental in landing government contracts for the firm. He was able to get the contract for the Mansfield Dam near Austin, TX, which produced the Lake Travis reservoir, electrified much of Johnson's congressional district, and bailed Brown and Root out of financial difficulty due to the depression. Much of this firm's business has been based upon connections to government throughout a long portion of its history.

posted by: cks on 11.04.03 at 04:36 PM [permalink]

Economically speaking I would not be adverse to hiring, say, a German or British company to do work in Iraq if they could do it cheaper than and just as effectively as Halliburton et al. That said, given the howls of disapproval from Democrats on the stump on the phenomenon of outsourcing and "lost jobs," I find it amusing that they'd rather spend American funds to hire foreign firms than "buy American."

posted by: Matthew on 11.04.03 at 04:36 PM [permalink]

Drezner's Slate article was an exercise in partisan obfuscation. He sets up a "straw man" hypothesis that the CPI report never attempted to put forth . . . and then debunks it.

Specifically, he tries to set up some kind of a thesis of proportionality between the amount of contributions and the size of the reconstruction contracts. This is a bullshit hypothesis, that conveniently ignores the fact that both Halliburton and Bechtel are well connected to the Administraiton insiders--in fact, they ARE the administration insiders--and therefore don't have to spend as much to get favors.

After reading about Drezner's political affiliation, I am not surprised that he wrote the article that he did on Halliburton and contracts. In fact, I suspected as much when I saw he taught at University of Chicago.

He's essentially an apologist for the GOP.

In any event, here is another "gem" of reasoning from his Slate article:

"On the other hand, if you look at Table 2, top 10 campaign contributors, you find that only four of them received more than $100 million in contracts—and none of those top four donors are in the top 10 for contracts. General Electric, the biggest campaign contributor, has actually spent more in contributions than it has received in reconstruction contracts."

Objection: If GE's only reward for its political contributions were reconstruction contracts, then I would agree with Drezner. But he CONVENIENTLY ignores the fact that GE has its tentacles into many things . . . including military/defense contracts.

Don't tell me that overall, GE hasn't gotten MUCH MORE THAN WHAT IT HAS contributed to the GOP in terms of the sum total of Iraq reconstruction contracts, weapons systems contracts, and other types of contracts.

Drezner's article was an excercise in dishonest obfuscation that masked as "journalism." In reality, it was just a partisan hackjob.

As I told him in an e-mail message, to the undiscering, he might appear to be some kind of insightful debunker of "liberal" or "Democratic" myths. The reality is, however, he either is not that bright, or you is an outright liar.

posted by: Phillip G. on 11.04.03 at 04:36 PM [permalink]

Isn't "path dependence" just a way of saying "an entrenched pattern of cronyism"? KBR created the Logcap program when Cheney was SecDef, and the contract pays off now now that he's VP? They're still paying him money, through a tax loophole, and he's still making them money by the boatload. Most people would call that corruption of an elected office.

Mr. Drezner, it seems to me that your whole argument can be summed up this way: Halliburton & Bechtel are not guilty of corruption & war profiteering now, because they've been guilty of corruption & war profiteering for the past 15 years.

posted by: Jordan on 11.04.03 at 04:36 PM [permalink]

There is an old saying in business, as I am sure everyone knows, "we can do it fast, good and cheap, pick any two."

We wanted it fast and good. That costs.

posted by: Chris on 11.04.03 at 04:36 PM [permalink]

Phillip G.
You really don't understand GE at all. Having worked there for 15 years I can say that the corporation has heavily withdrawn from government business having sold off most of the operations that dealt with the DoD. It really does not invest in portions of the business that deal with the government for a variety of reasons, mostly dealing with exposure to audit.

KBR did not create the LOGCAP, the DoD did. If they were so wired in how did they lose it in the recompete in the mid-90's?

posted by: TRFarmer on 11.04.03 at 04:36 PM [permalink]

Phillip G:

You have good thoughts in your post, but your language is, um, intemperate. So let's translate, 'cause our proprietor here has not addressed the problem.

Basically, you take isssue with the Slate article, because by finding no correlation between contributions and contracts, you believe that DD has missed the main point, which is that the folks causing the contracts to be issued are benefitting their buddies (whther or not the buddies are giving money). And if you look at Drezner's post, you can trace an interesting problem:

In 1992, Dick C., as Sec of Defense, has KKR write a report how private companies can help DoD. Then, Gee, surprise, KKR gets the contract that's based on the report. (Probably since KKR wrote the report suggesting various contract specifications. Of course, any such specs were written in a way that favored KKR.)

And, Dick Cheyney becomes CEO of KKR's parent. Hmmmm....

BTW, Jordan -- Cheyney's deferred comp package from H does not increase if Haliburton's stock price rises, and Cheyne's bought insurance to ensure that he is not affected if the stock price falls, or H goes bankrupt. The corruption you are looking for is not there, and not quite that obvious. The problem is the age old one of friends doing favors for friends, even if the national interest might dictate another course.

This all said, our proprieter certainly did not misrepresent the press coverage of the CPI. But his article does not exempt this administration from charges of cronyism, either.

posted by: appalled moderate on 11.04.03 at 04:36 PM [permalink]

KBR did not create the LOGCAP, the DoD did. If they were so wired in how did they lose it in the recompete in the mid-90's?

TRFarmer, I see dots, I connect the dots. KBR, or then BR, wrote a report at SecDef Cheney's request. Cheney moves to Halliburton. Enter Clinton, no doubt with his own cronies. Exeunt, Cheney becomes VP, KBR picks up the Logcap contract. Point is, via Cheney, DoD and KBR are much one and the same. If you don't smell a dirty deal, then I've got some bridge property you ought to look at.

posted by: Jordan on 11.04.03 at 04:36 PM [permalink]

To blame Gore is to demonstrate a willful ignorance of history.

What I see here is that KBR and other Texas energy-related companies have a long and storied history of corrupt links to Texas politicians.

If you haven't read Caro's account of how KBR was giving piles and piles of illegal cash to politicians all over the country, via Johnson, you're missing a vital part of the story.

That said, it sounds like KBR is great at what they do.

It also sounds like it's time for a look at the Sherman Antitrust Act here.

posted by: praktike on 11.04.03 at 04:36 PM [permalink]

Glad someone mentioned LBJ (via Caro). [Kellogg] Brown & Root have had their fingers in the pie, regardless of party, for more than two generations.

posted by: xian on 11.04.03 at 04:36 PM [permalink]

Specifically, he tries to set up some kind of a thesis of proportionality between the amount of contributions and the size of the reconstruction contracts. This is a bullshit hypothesis, that conveniently ignores the fact that both Halliburton and Bechtel are well connected to the Administraiton insiders--in fact, they ARE the administration insiders--and therefore don't have to spend as much to get favors.

So, why did they spend more?

Isn't "path dependence" just a way of saying "an entrenched pattern of cronyism"?

It could be. Cronyism is one of the manifestations of path dependence, but not all forms of path dependence are cronyism. If you know how to do your job function well, and it requires a certain amount of specialization, you're likely to be sought out for similar jobs. And within the same company, your contract will be easier to extend or renew when it lapses. Similarly, you're a lot more likely to get a teaching position at a good university if your degree is from Harvard or Yale (or the University of Chicago). And your path to Harvard or Yale may have started with a good relationship with a HS teacher, or even earlier with a parent who instilled good work habits.

What Dan is saying is that there's no reason to jump to the conclusion that corruption is involved (since I'm not even sure that all forms of cronyism are necessarily corrupt).

posted by: Scott on 11.04.03 at 04:36 PM [permalink]

A couple observations/questions: The fact that companies give money to curry influence with politicians of both stripes is hardly reassuring and demonstrates the enmeshment of industry and the military (echos of Ike). Should anyone be allowed to profit from war? The profit motive and ability to influence politicians of whatever party is the danger. Why on earth would these companies give so much money? Patriotism? If so wouldn't they forgo much/all the profit? Firmly held political beliefs? Why spread the money to both party's (Repub's always get the lion's share)? Simple answer is to corrupt the process in your favor, which may or may not be in the interest of the nation as a whole. Bad policy, corrupt political process. Not discussed, how often have these companies been cited for over charges etc.?

posted by: Gaines on 11.04.03 at 04:36 PM [permalink]

Why indeed, Gaines?!?!?

Say it with me now...

T-a-x D-e-d-u-c-t-i-o-n. What, you think all corporate philanthropy is done out of the goodness of their hearts ? How do you think Microsoft managed to pay ZERO taxes last year ? They all know that they have to pay money out somewhere, either to private charities / organizations, or to the government in the form of taxes. And we all know how well the government does at spending our tax money efficiently.

posted by: Sherard on 11.04.03 at 04:36 PM [permalink]

Actually, I believe Drezner has proved that if Halliburton and Bechtel are guilty of war profiteering, they are extremely bad at it.

posted by: Mark Buehner on 11.04.03 at 04:36 PM [permalink]

Jordan and Philip G, I strongly encourage you to learn something about government contracting before you say another word on KBR. You are revealing yourselves to be so anxious to find scandal where none exists that you reveal either a breathtaking ignorance of the law and policy, or you just don't care about truth when it comes to the larger objective of finding something, anything, to trash Cheney.

I worked in contracting for the Army for several years, went through all their training, then spent 16 years in the aerospace industry. I'd be glad to educate you on reality if you care to learn. The point is, as Kelman said, every nickel put against an unpriced task order issued under the public Exigency rule has to be justified by the procurement professionals. And not even the President can direct the Contracting Officer. That means that all follow-on longer term procurements are handled on a more traditional basis, where there is 6 months available to conduct a full procurement, with advance procurement planning, time on the street, bid conferences, etc. That process is just beginning now for the $19 billion (not $87B) for reconstruction, and that will mostly be openly competed.

This whole phony non-issue obscures more legitimate elements of debate regarding Iraq. Find a different issue.

posted by: Duane on 11.04.03 at 04:36 PM [permalink]

If I understand Philip G correctly -- and I confess that I may not as his writing style and logic are a bit, um, dense -- we should assume that Bush & co. are guilty of corruption because they are aquainted with the people doing contract work for the military. And the only evidence of this is that Cheney once worked for Haliburton. No proof, no evidence, just the fact that people in the administration may know people who win military contracts.

Seems a bit thin to me. Got anything else?

posted by: Conor on 11.04.03 at 04:36 PM [permalink]

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