Iraq war turns handsome profit for Halliburton

Ground Floor: The situation in Iraq continues to form a dark backdrop to world economic affairs. Uncertainties over the direction that the country will take following the formal handover of power are allied with concerns over oil production and security both in the country itself as well as globally. The kidnapping and murder of contract employees makes it difficult to feel optimistic for the future. Being involved in Iraq is not an easy ride for anyone.

But what about Halliburton and its subsidiary companies whose awarding of significant contracts for rebuilding Iraq caused concerns both in the US and overseas? Executives within the company have recently expressed concerns about the viability of elements of its contract to provide support to US military troops by way of building bases, maintaining fuel supplies and - one of the most contentious of all - feeding the troops. Yet there are many outside the company who have been claiming that Halliburton is engaged in "war profiteering".

The company was always going to be under intense media scrutiny because of its relationship with its former CEO, now US vice-president Dick Cheney. It has worked on military projects for the last 50 years under a number of administrations, but it is Cheney's position in this administration that gives obvious cause for concern. That and the fact that he's still paid $150,000 (€124,000) a year by them.

There is no doubt that, despite the reservations expressed by the company's executives, its Iraqi contracts are currently profitable. In March this year, Halliburton reported a profit of $85 million on $3.6 billion of revenue from them. In the report it noted that "the US government has become a major customer", highlighting that government contracts now account for 26 per cent of revenue, from 10 per cent the previous year.

However, there have been a number of investigations into the way the company and its subsidiary, Kellogg Brown & Root (KBR), have billed the government for the services it provides and these are the ones that are leading to the profiteering charges. The most high profile is the discrepancy between the number of meals it has billed for and the number of meals that have been actually eaten by the troops.

The bills were for over 42,000 meals a day but the company only served about 14,000. The upshot is that Halliburton has now credited the military $36 million for the disputed bills and has withheld billing worth about another $140 million. The company is convinced that it will ultimately receive this money back and says that it is working with the Pentagon to come up with the best way of charging it for meals.

However, there have been other billing issues. The Pentagon claims that KBR overcharged for fuel deliveries from Kuwait to Iraq. Two Democratic congressmen issued a report which stated that Halliburton was charging an average of $2.64 per gallon for oil while the defence department's Energy Support Centre charged $1.32. In January, the company admitted that it had fired two employees who had taken $6 million in bribes for oil-delivery contracts.

Some Halliburton employees have claimed that the company put up around 100 workers in a plush Kuwaiti hotel, although the Pentagon wanted them to stay in tents (the hotel is supposed to have cost $10,000 a day.) They also maintain that there is a list of preferred suppliers that Halliburton insists are always used, even though these suppliers are not reliable nor the most competitive in pricing.

The current CEO, Dave Lesar, writing in the Washington Post, says that the company is not being given the chance to answer its critics and that a lot of the criticism stems from the fact that Cheney used to hold his job. The conflict of interest in the company continuing to pay him while he is in a position to award them with profitable contracts seems to have passed him by.

The right thing, in this instance, would be for Cheney to sever all ties to Halliburton and for Halliburton to insist that he does so. And then they can talk about profit-making as opposed to profiteering.

Because working for the military is very profitable.

Halliburton's revenues from Iraq increased from $320 million in the second quarter of the year to $2 billion in the final quarter. Revenue from US military projects brought in $3.9 billion in 2003 - an increase of 680 per cent on the 2002 numbers.

Yet Iraq isn't the only place where its critics are castigating it.

The SEC has commenced a formal investigation into payments made by it in connection with a natural gas project in Nigeria to see whether or not it violated the Foreign Corrupt Practices Act.

Whether it is found to be ethically suspect or not, management certainly knows how to get the best deals going. International lending institutions such as the World Bank are involved in many Halliburton projects and the company has received almost $8 billion in state funding since 1992.

The share price continues to trade well, implying that investors are not too concerned about the potential fallout from violations of the Foreign Corrupt Practices Act or potential overbilling for fuel and food.

Why should they be? Even if the contracts are rescinded (and how likely is that?) it would take too long and cost too much for the government to be reimbursed. And how likely is Cheney to pursue a company that pays him $150,000 a year, even if that is a mere drop in his oil-well ocean.

Halliburton has outperformed the Dow Jones Industrial over the year with a return of almost 30 per cent against around 15 per cent for the index. The graph since last year has been almost solidly one-way, despite the pressures of keeping a workforce in a war zone.

War is messy and horrible and frightening. But it can also be extremely profitable. And no amount of protesting on the part of Halliburton's CEO will prove otherwise.