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REVIEW & OUTLOOK
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Hullabaloo Over Halliburton
October 5, 2004; Page A22
Tonight's Vice Presidential debate is expected to be a bare-knuckled affair -- traditionally it's the understudies who go negative while their bosses strike a higher tone. As well as making for good entertainment, this can give the voters some valuable information about the two tickets.
For instance, we expect that John Edwards will use the word "Halliburton" at least once as a shorthand way of accusing the Bush Administration of helping its friends in big business to ill-gotten gains. Last Saturday, John Kerry said, "In fact, the only people George Bush's policies are working for are the people he chooses to help. They're working for drug companies. They're working for oil companies ... and they're certainly working for Halliburton."
By sheer force of repetition the vague accusations hurled at Halliburton have unfairly dragged the company's good name down to the level of Enron. It's an article of faith among Democrats that Vice President Dick Cheney, who was Halliburton's CEO from 1995-2000, is somehow funneling contracts its way and is being compensated by the company for these services. The company is supposedly gouging the U.S. taxpayer in Iraq and employing "Enron-style accounting," in the words of the Kerry campaign. For good measure, Mr. Kerry recently accused the company of opening "some 20 offshore entities" on Mr. Cheney's watch.
All that's needed to refute this smear campaign are the facts: Mr. Cheney's deferred compensation is a standard practice for retiring executives and an entirely legal way of spreading tax liability for previously agreed compensation, so it does not imply any continuing relationship with Halliburton. In order to re-enter public service, Mr. Cheney had to forfeit millions of dollars worth of stock options to avoid any conflict of interest. And he has zero control or even input regarding Halliburton's Defense contracts.
But the attacks have gone on for so long despite no evidence of impropriety that there must be something else going on here. That's what we mean by saying that voters can learn from a campaign's negative attacks: They sometimes betray the accuser's own biases. In this case, it is a prejudice against large corporations and preference for big government.
Consider that Halliburton is a poster child for the efficient contracting out of government functions to the private sector. It owes most of its involvement in Iraq to the third Logistics Civilian Augmentation Program, or Logcap III, awarded to its KBR subsidiary in 2001 through competitive bidding against four other contractors. Congress has supported this practice because, by using private sector employees for non-military functions, the armed forces put fewer soldiers at risk in a war zone. And the private sector can cook meals and wash uniforms more cheaply than the Pentagon. The Clinton Administration and other New Democrats understood the logic of this "outsourcing."
Initially, Logcap III called for KBR to support 25,000 troops in a theater of war. As military men say, no war plan survives contact with the enemy, and today the company is supporting 211,000 soldiers and personnel in Iraq and Kuwait. In the course of ramping up such an enormous effort, there are bound to be difficulties. But KBR has done a tremendous job of responding quickly to changing circumstances. Some of the biggest snafus have occurred in accounting at both KBR and the Pentagon, and even then the company has blown the whistle on itself.
KBR's other major contract in Iraq was Restore Iraqi Oil, a program to get the country's petroleum flowing quickly to finance reconstruction. That contract was awarded without bidding, and with good reason. The company was simply the only one capable of handling all of the possible challenges, including oil-well fires and pipeline breakdowns. And the Pentagon's confidence has been rewarded: KBR restored production to pre-war levels three months ahead of schedule.
Given the risky work and the firestorm of criticism from Democrats, one would think that Halliburton was making profit hand over fist in Iraq. Sadly for the company's shareholders, that is not the case. Profit from Logcap would come mostly from an "award fee," granted by the military on the basis of how well the company contains costs, and which may not exceed 2% of costs. Likewise, the profit potential on the oil contract is strictly limited and will probably end up between 1% and 3%, compared to the usual margin of 15% for private oil industry services. Halliburton is so underwhelmed by the returns on this government contracting that it is trying to spin off its KBR subsidiary.
Not surprisingly, there's a lack of consistency here from the Kerry campaign. On the one hand, it criticizes the Bush Administration for not spending money Congress allocated to rebuild Iraq faster. Meanwhile, it criticizes the KBR oil contract needed to get oil flowing quickly. In an interview with this paper in May, Senator Kerry tried to back away from his primary-season labeling of companies that send jobs abroad as "Benedict Arnolds." Now he's back attacking Halliburton for doing business overseas.
All of this marks a striking return to the Old Democrat distrust of all private enterprise, which held that if it moves, tax it, if it keeps moving, regulate it, and when it stops moving, subsidize it. The idea of anyone making a dime of profit by taking over a government function and doing it better is anathema on the Kerry ticket, and the idea of that person then going into public service even worse. That's the subtext of the Halliburton attacks on Dick Cheney.
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