Halliburton Finds Profits in Terror War

By JEFF GERTH and DON VAN NATTA Jr. - New York Times
July 12, 2002.

WASHINGTON, July 12 — 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.

"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 "
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."


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