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In Tough Times, a Company Finds Profits in Terror War
Published on Saturday, July 13, 2002 in the New York Times
In Tough Times, a Company Finds Profits in Terror War
by Jeff Gerth and Don Van Natta Jr
 

WASHINGTON — The Halliburton Company, the Dallas oil services company bedeviled lately by an array of accounting and business issues, is benefiting very directly from the United States efforts to combat terrorism.

From building cells for detainees at Guantánamo Bay in Cuba to feeding American troops in Uzbekistan, the Pentagon is increasingly relying on a unit of Halliburton called KBR, sometimes referred to as Kellogg Brown & Root.

Although the unit has been building projects all over the world for the federal government for decades, the attacks of Sept. 11 have led to significant additional business. KBR is the exclusive logistics supplier for both the Navy and the Army, providing services like cooking, construction, power generation and fuel transportation. The contract recently won from the Army is for 10 years and has no lid on costs, the only logistical arrangement by the Army without an estimated cost.

The government business has been well timed for Halliburton, whose stock price has tumbled almost two-thirds in the last year because of concerns about its asbestos liabilities, sagging profits in its energy business and an investigation by the Securities and Exchange Commission into its accounting practices back when Vice President Dick Cheney ran the company. The government contracts, which the company said Mr. Cheney played no role in helping Halliburton win, either while he led the company or after he left, offer the prospect of a long and steady cash flow that impresses financial analysts.

Since the Sept. 11 attacks, Congress has appropriated $30 billion in emergency money to support the campaign against terrorism. About half has gone to the Pentagon, much of it to buy weapons, supplies, and services. Although KBR is probably not the largest recipient of all the government contracts related to terror efforts, few companies have longer or deeper ties to the Pentagon. And no company is better positioned to capitalize on this trend.

The value of the contracts to Halliburton is hard to quantify, but the company said government work generated less than 10 percent of its $13 billion in revenue last year.

The government business is "very good, a relatively stable source of cash flow," said Alexandra S. Parker, senior vice president of Moody's Investors Service. "We view it positively."

By hiring an outside company to handle much of its logistics, the Pentagon may wind up spending more taxpayer money than if it did the work itself.

Under the new Army contract, KBR's work in Central Asia, at least for the next year, will cost 10 percent to 20 percent more than if military personnel were used, according to Army contract managers. In Uzbekistan, the Army failed to ascertain, as regulations require, whether its own units, which handled logistics there for the first six months, were available to work when it brought in the contractor, according to Army spokesmen.

The costs for KBR's current work in Central Asia could "dramatically escalate" without proper monitoring, but adequate cost control measures are in place, according to Lt. Col. Clay Cole, who oversees the contract.

The Army contract is a cost-plus arrangement and shrouded in secrecy. The contractor is reimbursed for its allowable costs and gets a bonus based on performance. In the past, KBR has usually received the maximum performance bonus, according to Pentagon officials. Though modest now, the Army contract could produce hundreds of millions of dollars for the company. In the Balkans, for instance, its contract with the Army started at less than $4 million and turned into a multibillion-dollar agreement.

Mr. Cheney played no role, either as vice president or as chief executive at Halliburton, in helping KBR win government contracts, company officials said.

In a written statement, the company said that Mr. Cheney "steadfastly refused" to market KBR's services to the United States government in the five years he served as chief executive. Mr. Cheney concentrated on the company's energy business, company officials said, though he was regularly briefed on the company's Pentagon contracts. Mr. Cheney sold Halliburton stock, worth more than $20 million, before he became vice president. After he took office, he donated his remaining stock options to charity.

Like other military contractors, KBR has numerous former Pentagon officials who know the government contracts system in its management ranks, including a former military aide to Mr. Cheney when he was defense secretary. The senior vice president responsible for KBR's Pentagon contracts is a retired four-star admiral, Joe Lopez, who was Mr. Cheney's military aide at the Pentagon in the early 1990's. Halliburton said Mr. Lopez was hired in 1999 after a suggestion from Mr. Cheney.

"Brown & Root had the upper hand with the Pentagon because they knew the process like the back of their hand," said T. C. McIntosh, a Pentagon criminal investigator who last year examined some of the company's Army contracts in the 1990's. He said he found that a contractor "gets away with what they can get away with."

For example, KBR got the Army to agree to pay about $750,000 for electrical repairs at a base in California that cost only about $125,000, according to Mr. McIntosh, an agent with the Defense Criminal Investigative Service.

KBR officials did not dispute the electrical cost figures, which were part of an $18 million contract. But they said government investigators tried to suggest wrongdoing when there was not any.

"The company happened to negotiate a couple of projects we made more money on than others," said one company lawyer, who insisted on anonymity. He added, "On some projects the contractor may make a large or small profit, while on others it may lose money, as KBR sometimes did on this contract."

Mr. McIntosh said he and an assistant United States attorney in Sacramento were inclined to indict the company last year after they developed evidence that a few KBR employees had "lied to the government" in pricing proposals for electrical repair work at Fort Ord. Mr. McIntosh said the Sacramento prosecutor said to him, "Let's go for this, it's a winnable criminal case."

A KBR lawyer said that the government's theory "was novel and unfairly tried to criminalize what was only a preliminary proposal."

The United States attorney's office in Sacramento declined to discuss its internal deliberations in the cast. But it dropped the criminal inquiry and reached a civil settlement in February, in part because of weak contract monitoring by the Army, according to Mr. McIntosh and a lawyer involved in the case.

As part of the settlement, KBR paid $2 million but denied any liability.

Last December the Army's Operations Support Command, unaware of the criminal investigation, found KBR's past contracting experiences to be exemplary as it awarded the company the 10-year logistical support contract, according to a command spokeswoman, Gale Smith.

The Army command's lengthy review of bidders did not discover that KBR was the target of a criminal investigation though it was disclosed in Halliburton's annual report submitted with the bid, according to Ms. Smith. She said that if the support command's managers had known of the criminal inquiry, they would have looked further at the matter but not changed the award.

KBR's ability to earn the Pentagon's trust dates back decades.

"It's standard operating procedure for the Department of Defense to haul in Brown & Root," said Gordon Adams, who helped oversee the military budget for President Bill Clinton.

The company's first military contract was in 1940, to build a Naval air station in Corpus Christi, Tex. In the 1960's, it built bases in Vietnam. By the 1990's, KBR was providing logistical support in Haiti, Somalia and the Balkans.

KBR's military logistics business began to escalate rapidly with its selection for a $3.9 million contract in 1992, Mr. Cheney's last year at the Pentagon. Over the last 10 years, the revenues have totaled $2.5 billion, mostly a result of widening American involvement in the Balkans after 1995.

"We did great things to support the U.S. military overseas — we did better than they could support themselves," said Charles J. Fiala, a former operations officer for KBR. "I was in the Department of Defense for 35 years. We knew what the government was like."

Robert E. Ayers, another former KBR executive who still consults for the company, said Mr. Cheney "stayed fairly well informed" on the Balkans contract.

Stan Solloway, a former top Pentagon procurement official who now heads an association of contractors, said the company "understood the military mind-set" and "did a very good job in the Balkans."

But reports in 1997 and 2000 by the General Accounting Office, the audit arm of Congress, found weak contract monitoring by the Army contributed to cost increases in the Balkan contract that benefited KBR.

The audit agency's 1997 report concluded that the Army allowed KBR to fly in plywood from the United States, at a cost of $85.98 a sheet, because it did not have time to procure it in Europe, where sheets cost $14.06.

Mr. Ayers, the former KBR executive, had worked on the Balkans contract. "If the rules weren't stiff and specific," he said, "the contractor could make money off of overspending by the government."

The contract awarded last December by the Army's Operations Support Command, is "open ended" with "no estimated value," said Ms. Smith, the command's spokeswoman. She said that was mainly "because the various contingencies are beginning to unfold."

KBR won this and most of its other Pentagon contracts in a competition with other contractors, but KBR is the sole source for the many tasks that fall under the umbrella contract.

Pentagon officials said the company had recently taken over a wide range of tasks at Khanabad Air Base in Uzbekistan, from running the dining operation to handling fuel and generating power for the airfield. The company employs Uzbeks, paying them in accordance with "local laws and customs" but operating under United States health and safety guidelines, according to Halliburton's statement.

For the first six months that American troops were at Khanabad, the logistical support was provided by the Army's First Corps Support Command. Mr. Cole, the contract manager for the joint command in Kuwait, said the contract would initially cost 10 to 20 percent more than if the Army had done the work itself. He said that he and his staff recommended using the contractor because "they do a better job of maintaining the infrastructure." In addition, he said, the contractor should provide long-term flexibility, an asset in a war with many unknowns, and cost savings by avoiding Army troop transfers.

Ms. Smith said that the criticisms by the G.A.O. had led the Army to build additional controls into the contract.

At its base in Cuba, the Navy has followed the same pattern as the Army: use the military first and augment it with KBR. The Navy's construction brigade, the Seabees, built the first detention facility for battlefield detainees at Guantánamo Bay. Then the Navy activated a recently awarded $300 million, five-year logistic support contract with KBR to construct more permanent facilities, some 600 units, built mostly by workers from the Philippines and India, at a cost of $23 million.

John Peters, the Navy Facilities Engineering Command spokesman, said the permanent camp was "bigger, more sophisticated than what Seabees do." But the Seabees built the facilities for the troops guarding the detainees, and in the 1990's the Seabees built two tent cities capable of housing 20,000 refugees in Guantánamo Bay.

"Seabees typically can perform the work at about half the cost of contractors, because labor costs are already sunk and paid for," said Daryl Smith, a Seabees spokesman.

Zelma Branch, a KBR spokeswoman, said the company relied on its excellent record rather than personal relationships to win its contracts. But hiring former military officers can help the company understand and anticipate the Pentagon's needs.

"The key to the company's success is good client relations and having somebody who could anticipate what the client's needs are going to be," Mr. Ayers, the former company executive, said.

©Copyright 2002 The New York Times Company

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