Halliburton's Terror War Cash

WASHINGTON -- The Halliburton Co., the Dallas oil services company bedeviled lately by an array of accounting and business issues, is benefiting very directly from U.S. efforts to combat terrorism.

From building cells for detainees at Guantanamo 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 U.S. Navy and the Army, providing such services as 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 due to concerns about its asbestos liabilities, sagging profits in its energy business and an investigation by the Securities and Exchange Commission into its accounting practices when Vice President Dick Cheney ran the company. The government contracts, which the company said 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.

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

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 Lieutenant Colonel 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 performance-based bonus. In the past, KBR has usually received the maximum performance bonus, according to Pentagon officials. The Army contract could produce hundreds of millions of dollars for the company. In the Balkans, its contract started at less than $4 million and turned into a multibillion-dollar agreement.

In a written statement, the company said that Cheney "steadfastly refused" to market KBR's services to the U.S. government in the five years he served as chief executive officer. Cheney concentrated on the company's energy business, company officials said, though he was regularly briefed on the company's Pentagon contracts. 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 defense contractors, KBR has numerous former Pentagon officials who know the government contracts system in its management ranks, including a former military aide to 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 Cheney's military aide at the Pentagon in the early 1990s. Halliburton says Lopez was hired in 1999 after a recommendation from 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 1990s. He said he found that the contractor "gets away with what they can get away with."

KBR's ability to earn the Pentagon's trust dates back decades, but its defense logistics business began to escalate rapidly with its selection for a $3.9 million contract in 1992, Cheney's last year at the Pentagon. Over the last 10 years, the revenues have totaled $2.5 billion, mostly the result of widening U.S. involvement in the Balkans after 1995.

"I was in the Department of Defense for 35 years," said Charles Fiala, a former KBR operations officer. "We knew what the government was like."