Secrets and Lies:
How Secret Bidding and the Shut-Out of Foreign Corporations in Iraqi Reconstruction Violates International Trade Principles

At the same time that the U.S. has promised to foster democracy in Iraq, it seems to have forgotten some basic principles of capitalism.

One is free competition, which serves both to lower prices and improve product quality and variety. Another is free trade - which increases competition by drawing in suppliers all over the world.

A third is transparency - which is important whether the government is in the role of buyer or that of seller. Transparency requires publishing full information about the government's proposed deal, and freedom of access to the process to become its partner in that deal. Without transparency and free competition, cronyism and bribery proliferate.

These principles are elementary. They are essential to remember today because the Iraqi reconstruction project may be the world's biggest since the Marshall Plan that helped rebuild post-war Europe. Yet the U.S. has ignored these basic tenets - awarding huge contracts for rebuilding Iraq in secrecy, exclusively to U.S. companies, and almost without competition.

The lack of competition harms the U.S.'s claim to be Iraq's liberator. Rather than championing justice, the U.S. appears to be engaged in the colonial enterprise of propping up domestic industry through foreign engagements.

A Largely Secret Process Favors Select Group of U.S. Contract Partners

Perhaps most notoriously, the U.S. government awarded Halliburton - a Houston-based oil services company that is Vice President Dick Cheney's old firm - the contract to put out oil fires in Iraq without any competitive bidding at all. Indeed, when the Kuwaiti national firefighters arrived in Iraq to put out oil fires, they had to negotiate to be allowed to put some out--even though they offered to do so for free--because Halliburton already had the contract.

The contract was seen as no small prize. The Corps of Engineers estimated it to be worth up to $7 billion over two years. (It turns out that there are only a few blazes, and so the contract will likely run only in the millions, not the billions, but this was not the expectation when the contract was awarded.)

Meanwhile, when the U.S. has permitted bidding, the process has not been open and transparent. Rather, the government hand-picked a number of U.S. corporations to submit bids. For instance, DynCorp won a contract to provide police advisors in Iraq after receiving a confidential State Department invitation to participate in the "limited competition" bidding. The one-year contract is worth $50 million, and could be worth significantly more if extended.

DynCorp received the contract despite its checkered past. Just three years ago, its American employees on U.S. government contracts in Bosnia were allegedly deeply implicated in an international prostitution ring, which included child prostitutes. Because of the fact that they were outside the U.S. when they committed their alleged crimes, and were foreign government employees in Bosnia, the employees escaped punishment. Their only sanction was to be fired by DynCorp.

Unsurprisingly, the choice of DynCorp has drawn international criticism: Turkish commentators described the policing contract as going to "pimps and rapists." Had the contracting process been open, this criticism might well have put pressure on the government not to allow DynCorp to bid; at a minimum, critiques would have been aired while they could still make a difference.

In addition, the United States Agency for International Development (USAID) awarded what will probably be the largest contract of all - the main Iraqi reconstruction contract - to the San Francisco firm Bechtel, a company with deep Republican ties. The award was the result of secret bidding among only a few American companies that had been invited to participate. Many (perhaps all) of the bidders had given significant campaign contributions in recent years, the bulk of which went to Republican candidates. The contract was for an initial $34.6 million, but could grow up to $680 million over the next 18 months.

The result of these compromised processes is likely that U.S. taxpayers paid too much, and Iraqis will not receive the best reconstruction services possible. After all, firms with extensive experience in Iraqi construction (including European and Egyptian firms) were shut out of the process. And it will appear to many that cronyism, rather than ability, seems to have been the decisive factor when it comes to the Halliburton and Bechtel contracts.

These Contracting Processes Not Only Are Bad Policy, They Also Violate Treaties

Perhaps even more disturbing, the processes the U.S. has used are contrary to international law.

To begin, they are contrary to international trade principles, such as open competition, that the United States has championed for the last half century. Under these principles, the law must treat foreign producers just like domestic ones, thereby encouraging international competition. Instead, the U.S. foreclosed competition by shutting out foreign companies entirely.

They are also contrary to the World Trade Organization (WTO) Agreement on Government Procurement, to which the U.S. is a party. Unlike other WTO treaties, this Agreement, importantly, imposes strong international competition and transparency requirements even for purchasing by governments. It prohibits discrimination against foreign suppliers in deciding which bidders are qualified. Instead of secret invitations to a select few corporations, it generally requires the publication of notices of bidding in specified newspapers in all the countries that are parties to the Agreement.

The Bechtel contract, however, may be exempt from this obligation. The U.S.'s signature to the treaty specifically exempted USAID's "procurement for the direct purpose of providing foreign assistance." And since the Bechtel contract is to be funded by the U.S. taxpayer, it qualifies as "foreign assistance." Nevertheless, even if the discrimination against foreign bidders may have been technically legal in this instance, it was still unwise.

Every year, the United States Trade Representative (USTR) reports on discrimination in foreign nations' government procurement. A recent USTR report cites Canada, Germany, Japan, and Taiwan for such practices. The U.S. cannot credibly both condemn such discrimination, and at the same time, practice it. Perhaps next year, the USTR should cite the United States for its discriminatory policies.

Security and Timing Concerns Cannot Justify the Secret, Limited Process

The United States has offered two basic justifications for its curtailing contract award processes: security and urgency. Neither justifies the processes that were used.

First, while security is key, it should simply mean that any company seeking the contract should have to demonstrate its commitment to security. Does any foreign company present a security threat? Clearly, the U.S. doesn't believe so: It has said it will permit Bechtel and other U.S. companies to subcontract to companies around the world (with the exception of a handful of countries on the government's terrorism list). If foreign corporations can be trusted to be subcontractors, why can they not be trusted to be the general contractors?

What about urgency? It might have justified expedited bidding, but not secret bidding. And if time was really of the essence, and corners had to be cut, the contracts should not have been multi-year, but for a period of months - subject to extension through an open, competitive bidding process. As Representative Henry Waxman has noted, the government has yet to explain why the fire-fighting contract needed to be for a term of two years.

The Big Prize: Oil Contracts That Must Be Awarded Via Open Competition

Of course, the big prizes are the oil contracts to tap Iraq's enormous oil wealth. With 112 billion barrels of oil, Iraq holds the world's second largest proven reserves (only Saudi Arabia, with its 260 billion barrels, has more). Iraq also holds an estimated 110 trillion cubic feet of natural gas.

Contracts relating to Iraqi oil should be awarded through an open, transparent competitive process - one totally unlike the processes we've seen so far in the Halliburton, DynCorp and Bechtel examples. American companies should be favored, irrespective of whether such favoritism is technically legal, as was the case with the Bechtel contract.

Privatization Is Not the Answer

In a recent Wall Street Journal editorial, M.I.T. economist M. A. Adelman offered one possible solution: Privatize Iraq's oil, by simply selling it to the highest bidder. Rather than granting contracts to produce and sell the oil, simply sell it outright.

That would be a grave mistake. First, the price Iraq would get would be a mere fraction of the true value of Iraq's oil riches - for any bidder would discount the price due to the possibility future governments wouldn't honor the contract, as other countries have done in the past. (Indeed, on the same day that Professor Adelman offered his proposal, the Wall Street Journal ran a story two pages earlier entitled "Russia to Scrap Pacts Protecting Foreign Oil Firms.")

Second, it is hard to believe that liquidating Iraq's oil wealth in one fell swoop would be promising either politically or economically. If Iraqis later had valid complaints about the sale, there would be no remedy; the rights to the oil would already have been permanently transferred. In contrast, in a short-term contracting process, the contractor can be switched, and contract terms do not last forever.

Of course, leaving anything in governmental hands carries great risks, too. Governments can be corrupt--for instance, the few hundred million dollars just discovered behind a wall of one of Saddam's palaces may have been a personal stash skimmed from the sale of Iraqi oil. But this is where democracy and freedom of press demonstrate some of their greatest virtues. Hopefully, these institutions, along with international monitoring, will protect the Iraqis' patrimony for generations to come.

So far, the U.S.'s contracting processes when it comes to Iraq have been gravely disappointing. Fortunately, one crucially important contracting process - relating to oil - has yet to come. Whoever manages that process--be it the United States, the United Nations, or the Iraqi people--must ensure that that process conforms to international standards for government contracting.

We must make sure to remember our own principles in our engagement with Iraq so that we may set a good example for this possible fledgling democracy.