Iraq-o-mat: Cleaning Dollars for Corporations

The following article was published on IndyMedia in May 2005 when I was doing a lot of stuff around corporate activity in post-invasion Iraq (see the introductory blog below)....

Much of the post-war corporate activity in Iraq has come under heavy criticism from many different fronts. There are accusations of corruption, bribery and nepotism as well as simple incompetence - the jobs just aren't getting done... So what is all the `reconstruction' activity in Iraq really about? Supposedly post-war Iraq is a neo-liberal utopia, an economy freed of the tiresome and inefficient burdens of government regulation. Yet an examination of this same economy may lead one to conclude that the system as it stands is rampant with inefficiency. Indeed Iraq's economy today looks less like an economic utopia than a giant money-laundering operation...

Free Market Utopia

The Bush administration's post-war vision for Iraq is a matter of record: Iraq should become a utopia of laissez-faire economics for the rest of the world to see. The orders of the Coalition Provisional Authority, under Paul Bremer, are consistent with this vision: Corporate tax was slashed, tariffs and border controls were erased, state-owned utilities (with the exception of the oil utilities) were declared available for privatisation with no requirements for reinvesting profit back into Iraq.

The thinking behind these measures comes courtesy of Milton Friedman: Greed is the driving force behind economic activity and the market provides the most efficient method of organising this activity; in particular the market provides the most efficient method of producing and distributing goods and services: If companies are allowed to go about their business without interference from governments then the burdens of bureaucracy and red-tape, and the leakage of waste, can be eliminated and everyone benefits. (An example of how far this idea can be pushed is the USAID decision to contract a private company to oversee Iraq's "transition to a sustainable market-driven economic system". In other words the very process of privatisation and liberalisation was itself privatised and Bearing Point, an offshoot of KPMG, won this contract.)

Corporate Performance

Whether or not one subscribes to the principles of Milton Friedman is an argument for another time. What is interesting here is to seek to apply these tests of efficiency and minimal waste to the conduct of the corporations involved in the occupation and reconstruction of Iraq: For the occupation and reconstruction of Iraq has been a largely privatised process; corporations have tendered for occupation contracts put out by the US military (e.g. Halliburton's contract to cook meals and deliver mail at US bases), for reconstruction contracts put out by USAID (e.g. Creative Associates International's contract to overhaul the Iraqi education system) and for reconstruction and other contracts handed out by occupation authorities and paid for by Iraqi oil revenues (e.g. Halliburton's contract for the Repair of Oil Infrastructure (RIO)).

The first two sets of contracts were paid for by the US government out of the $87 billion that the Bush administration was granted by congress. Some $65 billion of this was used for military operations and has been mostly spent. The reconstruction element of this money, some $18 billion, remains largely unspent - instead reconstruction bills have tended to be paid using Iraqi oil revenues, rather than by the US government. In fact the Iraqi oil revenues have been used for more than just paying Halliburton; Pratap Chatterjee relates how much of this money has been "handed out in cash by soldiers to local people in return for favo[u]rs such as rebuilding offices or building football fields." He cites a New York Times article which claims that "[a]t least $1 billion has been distributed in this fashion - by some estimates more than $2 billion." (Steven Weisman, "U.S. is Quietly Spending $2.5 Billion From Iraqi Oil Revenues to Pay for Iraqi Projects," The New York Times, 21 June 2004)

But what of the rest of the money, the money that's gone to the corporations?

Economy as sieve

The key factor in understanding what the corporate activity in Iraq is really about, is `leakage'. This is the very thing which adherence to the sacred neo-liberal economic principles is meant to minimise: Bush's cabal of neo-liberal prophets tell us that if one releases economic activity from the restrictive oversight of government then one is rewarded with efficiency and productivity at every turn. Strange to say though, these very same prophets are administering a system in Iraq which is wracked with inefficiency and which leaks dollars at every turn.

Outlined below are a few examples of dubious corporate activity in Iraq. Many others are on the record, or await investigation. The problems start at the very first hurdle.

1. Drawing up the Contract: I mentioned earlier that Bearing Point, the former consulting division of KPMG, received a $240 million contract in 2003 to help develop Iraq's "competitive private sector." The irony is that Bearing Point had assisted in developing the contract itself. The Center for Corporate Policy reports,

Bearing Point spent five months helping USAID write the job specifications and even sent some employees to Iraq to begin work before the contract was awarded, while its competitors had only a week to read the specifications and submit their own bids after final revisions were made."No company who writes the specs for a contract should get the contract," says Keith Ashdown, the vice president of Washington, DC- based Taxpayers for Common Sense. (Source)

2. Awarding the Contract: The process of awarding contracts to corporations has been found to be flawed in many instances. Halliburton's success in winning contracts is well-documented, as are Halliburton's links to Vice-President Cheney and the potential conflict of interest which this involves. But the problems do not finish with Halliburton.

On 25 May 2004 a $293 million contract was awarded by the U.S. military to Aegis Defence Services, a U.K. corporation headed by Tim Spicer. Tim Spicer is a former officer of the Scots Guard and former head of the arms firm Sandline. Spicer "has been investigated for illegally smuggling arms and planning military offensives to support mining, oil, and gas operations around the world." (Pratap Chatterjee, "Iraq, Inc. A profitable Occupation" (New York: Seven Stories Press, 2004), p.134)

The contract was to co-ordinate top-secret intelligence in Iraq, a job that had become of vital importance to the U.S. military with the proliferation of private security firms on the ground in Iraq. That Sandline won the contract came as a surprise to many. Analyst Peter Singer had the following to say:

The contract is a case study in what not to do... To begin with, a core problem of the military outsourcing experience has been the lack of coordination, oversight and management from the government side. So outsourcing that very problem to another private company has a logic that would do only Kafka proud. In addition, it moves these companies further outside the bounds of public oversight.

The usual mechanisms that increase efficiency in contracting - like choosing, rewarding and punishing firms based on their experience and reputation - have again been short- circuited.... Aegis has been in existence for little more than a year, has worked primarily on antipiracy efforts rather than security coordination, and has never before had a major contract in Iraq. (Peter Singer, "Nation Builders and Low Bidders in Iraq," The New York Times, 15 June 2004)

Kafkaesque logic seems to be an essential and recurring theme of the corporate adventure in Iraq.

3. Contractor Performance: Again Halliburton's shortfallings in delivering value on their $12 billion worth of contracts is well-documented (See, in particular, Michael Shnayerson's article in Vanity Fair). Bechtel is another large corporation that has had problems delivering the services it's been paid for. Bechtel won its first contract before George Bush had even declared the war over, its second contract was awarded in January 2004 for $2.8 billion; the company was to repair and refurbish sewage, water and school systems. A month prior to the awarding of this contract, Riley Bechtel, CEO of Bechtel Corp. was sworn in as a member of President Bush's Export Council to advise the government on creating markets for American companies overseas. There have been problems with all areas of this contract.

One of Bechtel's earliest priorities was to ensure the provision of portable water supplies to the population of Southern Iraq. One year later this had not been achieved; water-born illnesses in the area were reported to be on the increase. (Bechtel's record with water is far from glorious. Several years ago, Bechtel won the contract to manage Bolivia's water supply under the Bolivian government's program of privatisation. Rates for local residents shot up and civil unrest ensued.)

Similar poor results have been reported from Bechtel contractors working on Iraqi schools. An internal study by U.S. Army personnel strongly criticised Bechtel's performance (Chatterjee op cit, ), p.74). Problems include poor paint jobs; a lack of textbooks, desks or blackboards; schools strewn with refuse; and toilets which don't work. And to top it all, this has all been done at a price which locals insist is astronomical.

To be fair to Bechtel, security conditions in Iraq have definitely hampered their work; sabotage has been a serious problem. However this does not appear to explain all of Bechtel's shortcomings. Indeed the confusion which one would expect from operating in a hostile place seems to be exacerbated by Bechtel's unwillingness to listen to Iraqis who know the local situation: Bechtel appear to have a deliberate policy of subcontracting low-level rote maintenance jobs to Iraqi companies, while, for sophisticated work, they bypass Iraqi engineers and managers with local hands-on knowledge. (Source)

Many other contractors have come in for similarly heavy criticism. In particular, it is worth noting that private contractors were heavily implicated in the Abu Ghraib torture scandal. Two companies, CACI and Titan, won contracts from the Pentagon as interrogators. In the past, these jobs would have been done by military interrogators but these jobs were outsourced as a money-saving measure (Chatterjee, op. cit., p.138). An internal army report implicated four civilian contractors in the abuse of prisoners at Abu Ghraib. "But legal experts say that civilians working for the military are subject to neither Iraqi nor military justice." (Chatterjee, op. cit., p. 152). Chatterjee goes on to explain that Paul Bremer, in June 2003, explicitly granted broad immunity to civilian contractors and their employees in Iraq.

4. Paying for the Contract: If there is any remaining doubt that private corporate activity in Iraq is increasing the efficiency of the economy there, then the words `cost-plus' should erase that doubt. `Cost-plus' is the method of payment for many of the large contracts currently underway in Iraq. Halliburton, in particular, has benefited from system of "costs plus a profit margin of one percent" which Pratap Chatterjee describes as follows: "In addition to its direct costs, Halliburton can bill as cost a percentage of its overhead, all the way up to its Houston head office." (Chatterjee, op. cit.,p. 29) As a check to this, military overseers can award an additional performance bonus of up to two percent; with some of this bonus dependent on cost control. However, ultimately, the more money the company spends, the more profit it will make, regardless of performance.

A Government Reform Committee at the House of Representatives in Washington, DC has heard testimonials from various whistle-blowers from within Halliburton who have told of that corporation's economic practices. Pratap Chatterjee cites one employee, Mike West, who asked his camp manager if it was OK to order a drill:

He said to order four. I responded that we didn't need four. He said: "Don't worry about it. It's a cost-plus contract." I asked him, "So basically, this is a blank check?" The camp manager laughed and said, "Yeah." (Robert Michael West, statement, 6 June 2004)

The fact, though, that a government committee has looked into Halliburton's activities is a sign that Halliburton is subject to some public scrutiny at least. However congressional scrutiny is largely restricted to the activities of corporations who are paid by the American tax payer. This is one reason why most of the reconstruction work in Iraq has been paid for using the mortgaged revenues of Iraqi oil, rather than using the $18 billion which congress approved for this purpose. Pratap Chatterjee explains:

The reconstruction money [approved by Congress] was hardly touched because the bidding and oversight requirements were stringent to prevent fraud or waste. As a result, many of the reconstruction bills were paid for with revenue from the sale of Iraqi oil. (Chatterjee, op. cit.,p. 211)

So U.S. and U.K. occupiers are paying U.S. and U.K. corporations with Iraqi money. Now this is supposedly for reconstructing Iraq but, as we have seen, this is not necessarily what actually happens. In addition this practice saddles the Iraqi people with a legacy of debt which they are no position to service.

Why such a state of affairs?

We have, then, an economic system in Iraq which, despite its being laid out along supposed principles of economic efficiency, demonstrably leaks money at every turn. But what's the point in all this? Who is allowing this to happen, and why? What is the advantage in wasting all this wealth? The answer lies in the wrong-ness of the question: This wealth is not wasted, it is redirected. It is redirected into the coffers of corporations and into the bank balances of their share holders. It will circulate around the upper reaches of society in the US and UK, swelling already bloated lifestyles. It will find its way into the campaign coffers of politicians through political donations, it will fund executive perks and bonuses; its passage through these exalted passage will buy luxuries and power and... more wealth.

For the contracts will keep being handed out to the people who already have all the money; they will keep finding ways not to fulfill their obligations so that the contract can last for as long as possible. They will avoid scrutiny because the scrutineers are themselves living off the fat of this war. In the rare event that brave voices speak up about the endless gravy train, they will protest that conditions on the ground are very difficult, that the security situation is grave, that they are doing their best in a desperate situation and they will plead that we must be patient and allow the process to play itself out.

War is a gift from heaven for these corporations. Their everyday `peace-time' activity is rampant enough, but the checks and balances on their activity still chafe. War provides a chance to avoid these checks, it releases massive amounts of money and creates a chaos of unaccountability and lack of regulation. In the midst of all this, money can leak away in bundles and be quietly directed towards those who desire it most - the greedy rich.

A warning though: This is not to say that this is the reason we went to the war in the first place, or even that it was a factor in the decision to go to war. Instead it is simply the case that war tends to throw up situations of chaos which can be easily exploited by the wealthy and powerful. When war is prosecuted by people who have a vested interest in maintaining this chaos (as is often the case) this exploitation increases.

In Iraq this process has gone one surreal step further: The economic chaos of war has itself been promoted by the US and UK as being a major benefit of the war. War has `opened the Iraqi economy to the world,' and has `freed the Iraqi economy for investment and corporate economic activity.' The creed (neo-liberalism) under which these claims are made has provided the cover for this process which amounts to little more than the pillage of Iraq and the laundering of American tax payer's money.

Sources and Other Reading

Much of the material for this article came from "Iraq, Inc." by Pratap Chatterjee. It is highly recommended background reading and provides a host of other examples of dubious corporate activity in Iraq. Naomi Klein's Baghdad Year Zero: Pillaging Iraq in pursuit of a neo-con utopia provides further background, as does Iraq Occupation Focus’ excellent fact sheet on the corporate takeover of Iraq.

This article has not examined the [il]legal side of the corporate invasion of Iraq. Explanation of the dubious legal status of much of the corporate activity in Iraq is available at various places on the web: Naomi Klein’s article mentioned above discusses it, and there are various links available, including a legal briefing, in a recent IndyMedia feature.

Getting involved

Activism against corporate exploitation of the occupation of Iraq has been underway in the UK for more than a year. The author is involved with a group called the Corporate Pirates who have recently organised a successful week of action against a British Company called Windrush Communications. The Corporate Pirates campaign has been launched in the UK to highlight the corporate takeover of Iraq and to campaign against those companies profiteering from the war. Later this year four anti-war activists from the group face trial for laying siege to a British company Windrush Communications that facilitates the pillaging of Iraq. [Website Email]

More action is planned focusing on the `Iraqi Petroleum Conference 2005’which is taking place at The Hilton, Paddington from 29 June, a week before the G8. Before the invasion of Iraq the US drew up `sweeping plans to remake Iraq’s economy … based on free-market principles’, including the ‘mass privatisation of Iraqi industry’ – including Iraq’s oil sector (Wall Street Journal, 1 May ‘03). The Iraq Petroleum Conference will form part of this process and activists are focussed on disrupting it.