A New War Over Iraq

The US and British tanks that helped win the war in Iraq have yet to be replaced by bulldozers that will clear away the rubble. But that has not stopped an army of international companies - from cellular telephone providers to construction giants - from lobbying to win the lucrative contracts to repair the country's infrastructure.

The reconstruction of Iraq is routinely described as the largest rebuilding project since the Marshall Plan, and a multi-billion-dollar business bonanza to boot. Analysts predict that $100bn or more will be spent over the next five years to put the country back together again. The Baker Institute for Public Policy at Rice University estimates that about $5bn will be required just to return Iraq's oil production to pre-1991 levels.

As Judith Barnett, a former Commerce Department official during the Clinton administration, put it: "How often do countries change regimes - especially ones that have the world's second largest oil reserves?"

But the optimism that rebuilding Iraq generates among businesses has been equalled - if not surpassed - by the controversy surrounding the task.

For a start, some of the financial projections are reminiscent of the thin-air forecasts that dotcom start-ups specialised in during the 1990s - and the obstacles to achieving even a fraction of the riches said to be on offer are formidable. Among them are the difficulties of knowing exactly the extent of reconstruction required, the risks involved, and who is likely to pay for it - the US government, the United Nations, or an Iraqi bureaucracy still in disarray?

More poisonous have been the accusations of cronyism and profiteering shouted by demonstrators outside the White House and at the doorsteps of the many companies vying for the work. These have come as conservative members of US Congress - fresh from their "freedom fries" triumph - have issued divisive calls to bar French and German companies from participating in the process because of their governments' opposition to the war.

In short, it seems the rebuilding process has picked up where the contentious debate over the war left off. An example of this is the emergency reconstruction contract that Bechtel, the San Francisco-based construction company, recently won to repair Iraq's roads, bridges, schools, power plants and other infrastructure. Many analysts believe the contract is worth much more than its nominal $680m value because it could give the company an inside track on billions of dollars' worth of future projects, particularly in Iraq's oil sector.

Despite winning a heated contest for the assignment, Bechtel's victory is hardly considered a public relations boon. US and European companies have complained that they were unfairly excluded from the contest because of the Bush administration's decision to conduct closed bidding that included only a handful of well connected US companies.

Sniffing political blood, Democratic members of Congress have demanded a government investigation into the bidding. "It was a blunder and a political error for the administration," says Brian Atwood, a former head of the US Agency for International Development, the State Department group overseeing the initial contracts.

The private sector has an important - some say patriotic - role to play in Iraq. The work done by companies such as Bechtel to resuscitate the country is crucial if the Bush administration is to press ahead with its goal of establishing a stable democracy.

Some companies may be asking if the opportunities merit the headaches. It remains uncertain just how much work there is to be done in Iraq; while analysis has focused on the size of the contracts available, experience indicates these figures may be overstated.

"There's a sort of breathlessness about these reconstruction contracts in Iraq," says Willard Workman, senior vice-president for international affairs at the US Chamber of Commerce. "They're not small but the government procurement opportunities in the European Union, Japan and the US are several orders of magnitude larger."

Optimistic bidders have overshot their estimates before: US companies clamoured for business in Kuwait following the first Gulf war, with analysts predicting that the region's budget for reconstruction would top $100bn. The Department of Commerce created a special liaison office to assist US companies. And lobbyists trekked to the desert to pitch for their clients, including James Baker who, after leaving the State Department, made a courtesy call on behalf of Enron.

But it turned out to be a mirage. A few years later, rebuilding costs totalled only about $25bn and US companies took less than half that amount.

A small minority of Washington appropriations lobbyists are sceptical about Iraq. They doubt much business will emerge for more than a handful of companies.

One much-publicised contract has turned out already to be less lucrative than expected. Halliburton, the construction and engineering company headed from 1995 to 2000 by vice-president Dick Cheney, won an assignment to put out Iraq's oil well fires and perform emergency repairs on its oil infrastructure. The contract had a maximum value of up to $7bn over two years. As it turns out, few wells were torched and Halliburton has received little more than $50m in work orders.

But optimistic analysts warn not to confuse the closely controlled first wave of contracts - mostly in the gift of the US administration and its agencies - with the longer-term opportunities.

Unlike Afghanistan or Bosnia, there are hopes that a robust consumer market of Iraq's 24m people will develop once the economy is reformed. More important, Iraq's massive supply of oil should provide a ready cash flow to pay for future projects.

"This is the big one," says one business lobbyist. "Everyone is saying, 'how do we get in on this?' "

The more appropriate question might be: when? Oil sales are paralysed while the US, Russia, France and China wrangle about lifting UN sanctions on Iraq. Russia and France, in particular, are said to be concerned about handing over management of the Iraqi oil sector to the US before their own interests in the country - backed by deals signed before the war started - are secured.

Crispin Hawes, an analyst at Eurasia Group, a New York-based political risk consultancy, explains some of the other obstacles: "The invitation for bids presupposes insurance being available, then you need a bid target, you need a ministry to be established sufficiently well to be able to process bids . . . and they need to clarify the payment methods, which would require some clarification of the UN oil-for-food deal and the monies related to that [currently held in a UN escrow account]."

Mr Workman at the Chamber of Commerce says the reconstruction of Iraq requires that the new rulers make progress on several fronts simultaneously, including the establishment of proper governance and reform of the economy to reintroduce property rights and the rule of law.

Until then, the focus remains on USAID, whose procurement department is presiding over $1.7bn in initial reconstruction contracts.

In addition to the job it gave to Bechtel, USAID has also been awarding smaller contracts to manage Iraq's air and sea ports, supply textbooks for its educational system, and advise on basic governance - what Mr Hawes deems the "soft and fuzzy" contracts.

Officials defend their handling of the process by pointing to federal procurement laws, which state that US companies must be given priority when it comes to contracts funded by US taxpayers. They also claim that because many of these first contracts were put out to tender before the war had begun, bidders had to have security clearance.

But in Britain, trade unions and politicians complained that their industry was being overlooked despite the fact the country's soldiers shed blood alongside US forces. Before the fighting even began, Patricia Hewitt, the UK trade minister, was encouraged to ask US authorities for an exemption from the rule that American companies should receive preferential treatment for government aid contracts.

The initial Iraq contracts seem to have taken on such political sensitivity because many Europeans - still sceptical of the US's motives for waging war - have seen these deals as a first signal from the Bush administration about whether it will reach out to the international community to administer postwar Iraq or take a more unilateralist approach. The closed bidding process has not gone over well.

In the US, allegations of cronyism have resonated because of prior concerns about the administration's close ties to big business. Mr Bush and Mr Cheney hail from Big Oil, which is considered a key commercial beneficiary of the campaign in Iraq.

The vice-president is still fighting to to keep private his meetings with energy industry executives two years ago as the administration was setting its energy policy.

The political dimension of the process has frustrated some US companies. In the past, they complained that they were routinely passed over in favour of French and Russian companies for billions of dollars' worth of contracts under the UN's oil-for-food programme. The coalition victory was supposed to move them "to the front of the line", in the words of one executive.

They believe they are qualified to do the work. Halliburton's Kellogg Brown & Root division has been a major government contractor for more than 60 years, most recently building the prison in Guantanamo, Cuba where the US is detaining suspects from the war on terror. But suddenly those ties have become a liability.

"There's a great deal of naivety when foreign companies complain about contracts being paid for by US taxpayers going to US companies," one executive involved in the bidding said. "It has been that way for decades."

Subcontracting could alleviate the situation. Andrew Natsios, the head of USAID, has pledged that as much as 50 per cent of the work would go to subcontractors from a variety of nations. That was the case in Afghanistan, where the Kabul-Herat highway is now being rebuilt by a US contractor in conjunction with regional construction companies and local Afghan workers.

Bechtel has said that it plans to hand "the majority" of its work to other companies, and will hold briefings in Europe and the Middle East to educate companies on the bidding process.

In Iraq, those subcontractors could include Egyptian, Turkish and Kuwaiti companies. The British Consultants and Contractors Bureau has met recently with trade officials to discuss ways of winning this longer-term infrastructure work - an area where many UK companies feel they are better-placed to win contracts.

Engineers say it is unlikely that political concerns would rule out sub-contractors from certain countries, particularly if they can offer a high level of expertise or local knowledge. "When it comes down to the projects being performed, it's going to be down to global teams," says Albert Gray, executive director of the National Society of Professional Engineers, an association of individual US engineers. He adds that team leaders "will insist on being able to use the the equipment that's best suited to the application", irrespective of the nationality of its supplier.

While that may be so, spreading the work around would help boost broader political support for the US-led rebuilding. If nothing else, it may be a matter of playing good defence. Some US multinationals are said to fear French or German companies being cut out of the process because it could lead to reprisals against their own operations.

What is clear already is that as the fighting in Iraq has wound down, the lobbying for a role in the commercial aftermath has intensified. During the military campaign, most US companies voiced their support for the troops while quietly informing the administration that they would be proud to do their part by, say, securing oil fields or rebuilding bridges. Now that Congress has approved Mr Bush's $79bn supplementary budget request, the lobbying has become more overt.

Some of it appears to be paying off. Darrell Issa, a Republican Congressman from California, has introduced legislation to block GSM mobile phone technology, the European standard, from being used in Iraq. Mr Issa warned that GSM would benefit French and German companies such as Alcatel and Siemens. As it turns out, the alternative CDMA standard was developed by Qualcomm, a telecommunications company that is located in Mr Issa's district.

In the past week companies outside the US have made aggressive pitches for work. The Turkish foreign ministry has just appointed a sen ior diplomat to co-ordinate government and private sector efforts to win work in Iraq. And Polish companies are also hoping to benefit from their government's support of the war effort.

The director-general of one UK business lobby association summed up the mood: "After Kosovo, we did the decent thing and waited a few months before going on a trade mission with ministers, only to discover we were being driven over bridges already rebuilt by French and German companies. We are determined to make sure this doesn't happen again."

Additional reporting by Dan Roberts

Friends in the right places

For many construction companies, a contract to rebuild Iraq would be the project of a lifetime. But for the Bechtel Group, it is just another job.

Since its founding more than 100 years ago, the San Francisco-based construction giant has worked on projects from Hoover Dam in Las Vegas to the Bay Bridge i n San Francisco.

Its contracts abroad include an industrial city, Jubail, in Saudi Arabia, and the Channel tunnel, linking England and France. During the last Gulf war, Bechtel oversaw the fight against the oil well fires in Kuwait.

Bechtel came to such projects from humble roots. The company was founded by Warren Bechtel, a struggling Kansas cattle rancher. Mr Bechtel set out for Oklahoma and then Reno: "I arrived with a wife, two babies, a slide trombone and a $10 bill," he later recalled.

Mr Bechtel began preparing railroad beds, and his fortunes soon changed. By 1929, his company was in the pipeline business, and later built oil refineries and drilling platforms.

The private company is still run by Mr Bechtel's descendants. Yet it has branched from its construction roots to embrace new activities such as telecommunications and nuclear waste disposal. The company helped clean up the Chernobyl and Three Mile Island disasters. It had revenues of more than $11.6bn (£7.4bn) last year.

But Bechtel has faced some obstacles. It has come under heavy scrutiny in Massachusetts for its role as one of the lead contractors on Boston's "Big Dig", the largest public works project in US history.

The job has come in years late and billions of dollars over budget, leading the state to call for an independent review. Meanwhile, the company claims it has saved taxpayers more than $1bn on the project through advanced engineering, and that the allegations made against it are untrue.

In 1983, Bechtel vied for a contract from Saddam Hussein to build an oil pipeline from Iraq to Jordan. The deal never came to fruition.

In the most recent Iraq contract, it is Bechtel's network of government contacts that has raised eyebrows. George Shultz, the former secretary of state, sits on its board. Caspar Weinberger, the former secretary of defence, is an alumnus. And earlier this year, Riley Bechtel, the company's current chief executive, was appointed by President George W. Bush to serve on the president's Export Council.

But Bechtel steadfastly rejects the notion that its business has any correlation to its political connections.

Besides, Bechtel is not the only contractor to enjoy government contacts. Halliburton, for instance, another recipient of Iraq contracts, was run by Dick Cheney, the vice-president, from 1995 to 2000.

In the end, even some of Bechtel's critics do not begrudge its role in Iraq. Layton McCartney, author of "Friends in High Places: The Bechtel Story", acknowledges the company's connections, but also points to its prowess.

"The surprise would be if they didn't land the [Iraq] contract," Mr McCartney said recently. "It's one of the few companies that has the capacity to do a major job like this."