Global Policy Forum

Contract Quagmire in Iraq


By David Phinney

April 27, 2005

Rioting and threats of work stoppages at critical transportation hubs needed to rebuild the war-torn Iraq have erupted in recent months following payment disputes between contractors originally hired by the U.S.-led Coalition Provisional Authority and Iraqi officials skeptical of the billings and the CPA's handiwork. The contractors include the world's largest shipping company managing Iraq's second largest port, a security contractor responsible for protecting Baghdad International Airport and a major Pentagon supplier hired to install new air traffic control equipment.

All have clashed with the Iraqi government, which has refused to pay the companies. Backing up the contractors' demands for payment, the U.S. State Department says the billing disputes stem from the transition of control from the CPA, which ran the country for 15 months, to the Iraqis. There is no cause for alarm, say the US officials: "patient firms have been rewarded."

Critics, including one Iraqi official who supervises the contractors, say the disputes are widespread and much more serious: many contracts were signed by CPA bureaucrats without proper paperwork or procedures. In addition many companies have overcharged for work done or failed to deliver on their promises.

Fast and Loose Contracting

The CPA originally hired these contractors after the 2003 invasion with plans to pay for the work with Iraqi funds collected from frozen international bank accounts and income from oil sales. But when the U.S. occupation authority disbanded last June, the work continued while the contracts were handed off to the Iraqi interim government led by Ayad Allawi.

Scrappy fights over the contracts may well be the legacy of the CPA's fast-and-loose business practices. Auditors working for the United Nation's Iraq Advisory and Monitoring Board (IAMB) as well as the CPA's own Inspector General have since blasted the occupation authorities for sloppy handling and faulty accounting of the more than $9 billion in seized assets known as the Development Fund for Iraq.

Now the new Iraqi government is arriving at similar conclusions, claiming that the CPA inappropriately awarded, executed and poorly documented the money it agreed to pay contractors. "It's a problem all ministries are dealing with because of the lack of paperwork provided by the U.S.-led administration on contracts they signed before handing over power in June," Iraq's deputy transport minister, Atta Nabil Hussein Auni Atta, told Bloomberg News in March.

The U.S. embassy in Baghdad acknowledged in early April that Iraq is specifically withholding payments from four companies -- A.P. Moeller-Maersk, Global Risk Strategies, Raytheon and Olive Security -- but sources at the Pentagon and former CPA officials believe that there are many more contractors engaged in similar quarrels over payment. "There's a lot of them," one former CPA official told CorpWatch.

Meanwhile, the U.S. embassy in Baghdad is going to bat for the four contractors -- and others -- by pressuring that Iraq pay up without publicly faulting the CPA's previous handling of the contracts. "It is not unexpected that there would be payment delays and occasional disagreements about who in the Iraqi government is responsible for, and has the funds to pay, particular contracts, many of which predate Iraqi sovereignty. The fact is that patient firms have been rewarded in Iraq; contract obligations are honored." said an April 5 statement e-mailed to CorpWatch from embassy spokeswoman Theresa Rachael Shope in Baghdad.

"The United States Embassy has been coordinating closely with other coalition partners, the involved Iraqi ministries, and the companies themselves to amicably resolve contract payments that are in arrears," the statement continued. Shope declined to identify the nature of the contracts or their value, maintaining that "all discussions which the Embassy has with U.S. corporations and foreign governments on such matters are conducted in strict confidence."

Riot over Port Management

A.P. Moeller-Maersk, a Danish shipping company, has been challenged both by the Iraqi government over contracts as well as by the local people. After Iraqis began rioting over its management contract for Iraq's second largest port, Khor Az Zubayr on the Persian Gulf, the company immediately shut down its operations and abandoned much of its equipment on March 1.

As one of the Pentagon's largest international contractors, the company assisted in the invasion by operating cargo ships carrying ammunition and tanks for occupation forces during the invasion, and was then awarded the port contract in July 2003 by the CPA to manage what has become an important and secure shipping center for food, consumer goods and oil exports. The contract was awarded without inviting competing bids, a practice that is usually expected in government contracting.

Details of the original contract are sketchy, but A.P. Moeller is said to have originally planned on managing the port for five years, which would have positioned the company for an even longer-term 10- to 15-year contract. In return, the company collected 93 percent of all revenue from port fees and a $15,000 daily management fee, according to sources familiar with the contract.

"It was like a Danish colony," one former CPA transportation official said glibly. Although the contract was adjusted several times, Iraq's transportation ministry began complaining some months ago about the process of the awarding of the original contract as well as A.P. Moeller's documentation on the estimated 60 ships now entering the port each month.

The March 1 riot outside the port put a sudden end to the agreement, with A.P. Moeller citing safety concerns for its workers. The company continues bickering over money it believes it is owed. "We received payment, but not all," said Hans Peter Clipman, managing director of A.P. Moeller in Kuwait City, who said that all management of the port was independently audited and that the company employed hundreds of Iraqis.

Several former CPA officials familiar with the contract offered varying views on the port deal. "The original contract was awarded in the middle of the night without competition by a couple of Army majors and the company was a little too greedy," said one. "It's proper that the Iraqis are now reconsidering such contracts." Another said that the riot at the port was waged by a "rent-a-crowd" so that local Iraqi officials could take over the port operation as soon as possible. "Those protestors were never heard of before or since," he claimed.

Work Stoppage at Iraq's Largest Airport

The U.S. embassy in Baghdad claims to have made progress in resolving at least one of the disputed contracts - held by Global Risk Strategies, which provides security services at Baghdad International Airport (BIAP), Iraq's main air terminal and a key lifeline for occupation forces and international support. The British-based firm recently received back payments for November and December 2004 billings totaling as much as $17 million, as a result of embassy intervention with the government.

Established in 1998 with two employees, Global Risk witnessed rapid growth after the war in Afghanistan and grew to over 1,500 workers by 2004 with work in Iraq where it employs a large number of Fijian and Nepalese Gurkhas for armed security at a reported $1,000 a month. Since the occupation of Iraq, the company has held contracts to protect CPA operations and guard Iraq's currency exchange program. Then in July 2004, it took over security tasks at the airport after another contractor, Virginia-based Custer Battles, was relieved following allegations of fraud, multi-million-dollar billing problems and staffing shortages.

Global Risk spokesman Giles Morgan declined to comment on the present problems with the airport contract, but tacitly admitted there have been problems in getting paid. "In the course of our work on key projects relating to the operation of Iraq's infrastructure, we have on occasion been grateful to the United States Embassy" for securing payment from the Iraqi Government, Morgan said.

Ron Chavez, a Halliburton security coordinator at the airport working on an Army logistic services contract sheds a different light on the gravity of Global Risk's grievance with the Iraqis. "I have been working very hard to secure this airport and it is a dangerous place," Chavez says in a December 27 e-mail to his father. "The company that runs the security is undermanned and when you have people in your perimeter it's almost impossible to secure."

"I feel it's not if a bomb will hit, but when. I'm trying to persuade people we need to move the operation to our own facility. [But] I'm meeting political resistance. I just want to save lives. Cost is a terrible weapon." Saying that employees of Global Risk Security threatened to walk off the job if they were not immediately paid, Chavez adds: "The Army was not ready to take over their positions, so they finally settled on a handshake deal."

Giles Morgan says Global Risk has seen passenger traffic rise by over 50 percent to over 14,000 passengers per week since the company took over the prime contract for security last July. In response to Chavez' claim, he says, "At no stage since Global took responsibility for security management of BIAP, in July 2004, have security levels been compromised through under-manning."

Air Traffic Control

Iraqis are also bristling over charges on another airport contract held by Raytheon of Waltham, Massachusetts, one of the Pentagon's largest missile providers. The company also previously provided the CPA's communications systems. Hired by the CPA to install state-of-art air traffic control equipment touted by the company as the "infrastructure needed in order for Iraq to rejoin the international air traffic community," the project soon flew over budget by millions of dollars, according to one anonymous source acquainted with the contract.

When the Iraqi government put the brakes on payment, the company walked off the job and didn't return to work until Raytheon received part of what it was owed. Marcos Costilla, an advisor in Baghdad from the U.S. Federal Aviation Administration, says that the project was originally estimated to cost $27 million, but has now reached $33 million because of increased expenses for security, staff and the installation of flooring. Costilla believes the payment problems stem from Iraq's new banking system. "They are two invoices on the table right now being discussed," Costilla claims. "They are not disputes, other than the invoicing." Raytheon declined comment.

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