Government auditors who canceled Bechtel’s $50 million contract will soon find reasons to cancel the company’s $2.85 billion in Iraq contracts.

A comprehensive U.S. government audit of a Bechtel project in Iraq has exposed gross mismanagement by the company. As a result, the $50 million contract has been canceled.

As the auditors plan to expand their investigations to all of Bechtel’s $2.85 billion in Iraq contracts, they are sure to discover a pattern of failure. Not only should Bechtel be dropped from all of its failing contracts, but the company should be required to refund all misspent U.S. taxpayer and Iraqi funds so that Iraqi contractors can get to work and real reconstruction can finally begin.

But time is running out.

On Sept. 30, 2006, all unobligated money for reconstruction in Iraq reverts back to the U.S. Treasury. This means that unless action is taken now to ensure that this money goes to Iraqis, U.S. corporations will keep their billions, while Iraqis are left with failed projects and little money to recover.

On July 31, the office of the special inspector general for Iraq reconstruction (SIGIR) released an audit of Bechtel’s Basra Children’s Hospital Project. Congress established SIGIR in October 2004 to provide much needed oversight to U.S. government expenditures on Iraq reconstruction. Under pressure from the public, members of Congress and U.S. soldiers in Iraq, SIGIR expanded its work beyond broad programmatic issues and criminal activities to assessments of individual reconstruction projects. It took even more pressure and time for SIGIR to publicly release the names of contractors responsible for failing projects.

SIGIR’s exhaustive (and much overdue) review in April of a $243 million contract held by the Parsons Corp. to construct primary health care centers across Iraq revealed that after more than two years and $186 million, only six of the planned 150 centers were complete. Parsons’ contract for the facilities was canceled (as was a $99.1 million contract to build a prison north of Baghdad after it fell more than two years behind schedule). More importantly, the work was turned over to the Army Corps of Engineers, who then handed the contracts directly to local Iraqi companies.

Parsons and Bechtel were once partners. In 1938, Bechtel and Parsons merged with a third company to form the Bechtel-McCone-Parsons Corp. The three companies split amicably after World War II. Parsons is the second-largest recipient of reconstruction dollars in Iraq (after Halliburton) with $5.3 billion in contracts.

Bechtel’s hospital boondoggle

In March 2006, SIGIR began investigating the Basra Children’s Hospital Project. It found that the project was nearly $90 million over budget and more than a year and half behind schedule (PDF).

Bechtel received the contract to build the new hospital in Basra in mid-October 2004 to “improve the quality of care and life expectancy for both women and children.” The original price tag was $50 million, and the due date was Dec. 31, 2005. The auditors now estimate that the project will be completed no earlier than July 31, 2007, and will cost as much as $169.5 million (including $30 million for equipment). However, the report cautions, “there is still an unclear picture of schedule control, security, construction quality, and the use of alternative contract management options that will impact the true cost to complete.” Thus, the cost and time involved could be much greater.

Because SIGIR focused more on the U.S. Agency for International Development’s (USAID) failure to manage Bechtel than on Bechtel’s inability to build the hospital, the report provides few details as to why the project was unsuccessful other than limited references to security concerns and unsatisfactory work by Bechtel’s subcontractors.

Bechtel subcontracted to a Jordanian company that subcontracted to Iraqi companies. The trail of subcontracting meant (1) a great deal of additional overhead, (2) little to no managerial oversight, and if this project was like others in Iraq, (3) short-term employment and low pay for Iraquis (compared to what they’d receive if they held the contract themselves).

In a recent article, New York Times reporter James Glanz quotes Sheik Abu Salam al-Saedi, a member of the Basra provincial council, who explains, “The pretexts given by Bechtel to the Iraqi government to justify its failure in finishing the project are untrue and unacceptable, especially the ones regarding the rise in security expenses.” Mr. Saedi said that Western engineers were seldom seen at the project, and that it was simply mismanaged.

Not only was the project mismanaged, both Bechtel and USAID lied about the status of the project.

By September 2005, the project was already running 10 months behind schedule. The delay alone would add several million dollars to the estimated cost of the project. In addition, the onsite representative from the Army Corps of Engineers reported problems with construction and further delays. However, according to SIGIR, “neither USAID nor Bechtel reported any problems with the contract throughout this period (July to September 2005).” While Bechtel increasingly came clean in its reporting to USAID, USAID was unfailing in its lies to Congress: It continually reported the project as on budget and on time.

Ultimately, SIGIR found that USAID, the State Department, and the U.S. Embassy in Iraq had all failed in their accounting and managerial systems. In fact, USAID still does not know exactly how much money it has disbursed for the project. SIGIR recommended that Bechtel’s contract be canceled and responsibility be given to the Army Corps of Engineers, which is likely to turn the project directly over to Iraqis.

SIGIR estimates that this transfer will save approximately $90 million “exclusively from the reduction in contractor overhead.”

Bechtel’s $50 million is just the tip of the iceberg in Iraq

Bechtel’s $50 million Basra hospital project represents less than 2 percent of the company’s $2.85 billion award for Iraq reconstruction.

However, to date, Basra hospital is the only Bechtel project to receive SIGIR’s attention by name (Bechtel projects may have been investigated by SIGIR, but the company has been identified only once. I asked a SIGIR representative if other Bechtel projects have been investigated, but I did not receive a response by the time of publication.)

San Francisco-based Bechtel was one of a select handful of U.S. companies that received a quiet “request for proposals” from the Bush administration more than a month before the invasion of Iraq. Thus, without any competition, on April 17, 2003, Bechtel was awarded a $680 million contract for work in Iraq. In September of that year, an additional $350 million was added to the first contract, and then, on Jan. 6, 2004, it received a second contract — bringing Bechtel’s combined total to more than $2.8 billion.

The company’s contracts are both “cost plus.” This means that Bechtel is guaranteed that all of its costs are covered, and it’s guaranteed a fixed profit above those costs.

In Bechtel’s first contract, “Iraq Infrastructure I,” the company was to “provide the successful design, rehabilitation, upgrading, reconstruction and construction in Iraq of one port, five airports, electric power systems, road networks and rail systems, municipal water and sanitation services, school and health facilities, select government building and irrigation systems, as well as institutional capacity building for operation and maintenance of roadmaps for future longer term needs and investments in support of Iraq Infrastructure Reconstruction Program.”

The second contract, “Iraq Infrastructure II,” is for more of the same. Both contracts are managed by USAID.

Bechtel is not the only company working on these projects, to be sure, but it was the first — and for a considerable amount of time, the largest — to receive such contracts for reconstruction in Iraq. These deals, in turn, led Bechtel’s non-U.S revenues to increase by 158 percent in 2003. The company had record overall revenues of $17.4 billion in 2004 and $18.1 billion in 2005.

Bechtel’s travesties reach beyond the health sector. It has taken over three and half long years after Bechtel entered Iraq for electricity, water and sewage systems to finally creep above prewar levels — and not even in all cases. At the same time, services remain far below U.S. government expectations and Bechtel’s (and likely most other companies’) original contractual obligations. Electricity is the most crucial of these systems, as it controls both water and sewage.

Bechtel’s lost summer: electricity, water and sewage

Depending on whom you ask, either Bechtel or the Bush administration decided that, instead of getting Iraq’s electricity system up and running as quickly as possible, a countrywide assessment of all systems was necessary before any reconstruction could begin. The assessment took five long months. These happened to be summer months in a country where temperatures regularly top 125 degrees Fahrenheit. No electricity meant no fans, no ice, no cold drinks and no air conditioners, and a lack of clean water and reliable sewage treatment. It’s difficult to exaggerate the extent of Iraqi suffering during those five months.

The summer following the March invasion was a particularly crucial period in which Iraqi goodwill all but evaporated.

It certainly made sense to assess the situation before building, but much of this assessment could have been done prior to the invasion as part of the post-invasion planning. After the invasion, short of turning the reconstruction over to the Iraqis, at least the assessment should have been done in direct discussions and partnership with Iraqi engineers who had run the systems for decades.

What the Bechtel employees discovered was that two wars and 12 years of economic sanctions had taken their toll. The systems were far more difficult to repair than they had assumed. Of course, the Iraqis who ran the systems could have easily conveyed this information to Bechtel from the start if the administrator of the U.S. occupation government of Iraq, L. Paul Bremer, had not fired the vast majority of them and if Bechtel had asked.

The critical time lost on the assessment bred increasing hostility toward the invasion among ordinary Iraqis. The lack of water, electricity, and sewage services led to increasing acts of sabotage against all foreign contractors, including Bechtel.

Nobody at Bechtel or in the U.S. government denies that the water and electricity reconstruction has failed. According to SIGIR, while $3 billion has been paid out, only half of the projects planned in the electricity, water and sewage sectors have been completed, while nearly a third in the electricity sector have not yet been begun. Many of the systems that have been built are poorly run or have not been connected to peoples’ homes. In fact, one of the biggest problems plaguing the electricity system today is the failure to build transmission and distribution lines. Bechtel and some Bush administration officials lay the blame squarely with the Iraqis.

According to Bechtel, of the more than 40 water plants it has built, which are now being run by the Iraqis, “not one is being operated properly.” U.S. officials say the same: “None of the 19 electrical facilities that has undergone U.S.-funded repair work is being run correctly.” They blame a poor Iraqi work ethic and a lack of knowledge and skill in running the plants.

Iraqis may be unable to run the systems built by Bechtel in Iraq, but a poor work ethic and lack of knowledge are not to blame.

Paul Bremer fired the upper echelons of Iraqi management, sidestepped skilled engineers and workers, hired Bechtel to build state-of-the-art facilities that are foreign to these workers and then handed the systems over as a fait accompli, whether or not they were even connected to the homes they were intended to serve.

Baghdad’s Mayor Alaa Tamimi, an engineer who returned to Iraq after years of exile to help rebuild the country, said that U.S. officials “made a lot of decisions themselves, and the decisions were wrong. This is our country. It’s our city. They didn’t accept that.”

The other problem is money. Iraqis simply do not have enough of it to run the expensive new facilities that they have been handed. The money has gone to U.S. contractors to (largely fail to) build Iraq’s systems, rather than to the Iraqis to run the systems after they have been rebuilt.

SIGIR’s most recent report to Congress found that in the last week of June, overall electrical generation in Iraq finally crept above prewar levels, while remaining below what the U.S. government contracted for. However, Baghdadis are still receiving an average of just eight hours a day of electricity compared to 16-24 before the war. Iraqis throughout the country are fairing better — receiving an average of 12 hours per day versus their previous four to eight. Water and sewage services have begun to reach a larger population than before the war, although the increase is just half of what the U.S. government contracted for (4.2 million people newly added instead of a planned increase of 8.4 million).

Return the money, hire the Iraqis

Bechtel’s Iraq contracts are set to expire in October and, as David Snider of the U.S. Agency for International Development told me, Bechtel “is currently closing out and demobilizing from Iraq as scheduled.” Bechtel should leave Iraq, but its misspent funds should stay.

According to USAID, Bechtel has been paid $970 million on its Infrastructure I contract. Bechtel was originally awarded $1.8 billion for its Infrastructure II contract. In November 2004, USAID reduced the amount to $1.4 billion in response to a reallocation of funds, primarily to training Iraqi soldiers. Of the $1.4 billion, $1.26 billion has been obligated and $977 million has been paid to Bechtel.

This means that $511 million from Bechtel’s contracts is immediately available to for Iraqi companies.

Although we hear little about them in the United States, there are literally hundreds of companies, both public and private, with long histories and great experience in Iraq. This includes companies that rebuilt Iraq’s water, electricity and sewage systems in just three months following the 1991 U.S. invasion. With unemployment hovering around 40 percent in Iraq today, these companies and their employees are more than eager to get to work.

There is also $166 million in unobligated funds from Bechtel’s Infrastructure II contract that must be immediately turned over to Iraqi companies before that money reverts to the U.S. Treasury on Sept. 30. Finally, there are likely millions of misspent dollars that Bechtel must return to U.S. taxpayers and Iraqis.

In its July 2006 report to Congress, SIGIR states its plan to investigate all of Bechtel’s contracts. We must remain vigilant to ensure the audits take place, the results are heard, and that Iraqis are hired to rebuild their country so that more people have the opportunity to pick up shovels rather than guns.