NEWS

Halliburton's Rising Cost for Bush

The ever-growing list of charges swirling around Cheney's former company could repel key swing voters in a tight election

FEBRUARY 20, 2004 (BusinessWeek Online) -- In a normal political season, President George W. Bush could tough out the string of embarrassing charges of war profiteering and bribes emanating from Halliburton (HAL), where Vice-President Dick Cheney used to hang his hat. But as Democrats more or less unite behind Senator John Kerry (D-Mass.), they're getting the better of Bush on issues ranging from missing Iraqi weapons to missing American jobs. With the 2004 election looking to be as tight as 2000's cliffhanger, the drip-drip-drip of Halliburton charges threatens to erode one of the President's greatest strengths: Character and credibility.

Asked whether Bush is a leader they can trust, a stunning 61% of independent voters said they had "doubts and reservations" in a Feb. 5-6 CNN-Time poll. In a sharply polarized electorate, swing voters could hold the keys to the White House -- and Halliburton "could have enough appeal as a wedge issue to swing a few votes," says independent pollster John Zogby.

A CLOUD OF DOUBTS. Questions about Halliburton are piling up rapidly -- and they won't go away soon. The Pentagon Inspector General has asked the Defense Criminal Investigative Service to probe allegations by Representatives Henry Waxman (D-Calif.) and John Dingell (D-Mich.) that the outfit inflated the price of fuel it supplied in war-torn Iraq.

Also under scrutiny: Allegations that Halliburton overcharged for meals at a base in Kuwait and might have wildly overstated estimated costs for food services in Iraq. On Feb. 16, Halliburton announced that it was holding on to subcontractors' bills totaling $174.5 million until the amounts it should bill Uncle Sam are resolved. "We did this to take the issue off the table from a political standpoint," says Wendy Hall, Halliburton's director of public relations in an e-mail.

Separately, Halliburton has acknowledged that employees took $6.3 million in kickbacks from a Kuwaiti subcontractor. And the Justice Dept., Securities & Exchange Commission, and French authorities are probing accusations that a Halliburton joint venture paid $180 million in bribes in connection with a Nigerian natural gas plant in the 1990s -- while Cheney was Halliburton's CEO.

AVOIDING COMPETITIVE BIDS. There's plenty more to come. The General Accounting Office is studying Iraq reconstruction contracts and troop-support services -- two reports in which Halliburton should figure prominently. The first is due out in March. Democrats also want a thorough review of the Pentagon's plan to award monopoly, cost-plus contracts for services in Iraq.

Critics charge that such deals will offer little incentive to keep costs low -- especially at companies with lax internal cost controls. A former Halliburton employee confirmed these suspicions when he told Senate Democrats that the outfit tried to avoid competitive subcontractor bids. An aide to House Government Reform Committee Chairman Tom Davis (R-Va.) says Davis may hold hearings, which could prolong Halliburton's public agony. "There should be a thorough congressional investigation of the Administration's relationship with Halliburton," Waxman said in a statement.

At the other end of the political spectrum, some Administration supporters such as Richard Perle, a member of the Defense Advisory Board, think the real problem with defense procurement is that companies are overregulated.

PREVENTING LAISSEZ-GOUGE. Waxman and Perle are missing a key point. Waxman is surely right in arguing that cost-plus contracts, which slap a percentage profit on top of a contractor's costs, offer no incentive to keep costs down. Why take a 2% profit -- about what the margins are for Halliburton on its Iraq work -- on $100 of costs when you can take 2% on $200 of costs?

However, if the alternative is fixed-price contracts, under which the contractor has to eat cost overruns or squeeze profits by keeping expenses down, that won't work. It's fine if you're talking about shipping computers or pencils to Boise, where you can calculate precisely the cost of goods and transportation. That's not what Iraq is like. Contractors would have to build in profit margins of 200% or even more because of the uncertainty over whether convoys would be blown up or facilities bombed -- and the same products would have to be shipped or the same work done time and again.

Imagine the howls in the halls of Congress when such practices come to light. The best solution probably is cost-plus contracts with a heavy dose of oversight by the folks with green eyeshades at the Pentagon, by the denizens of Capitol Hill, and by the media -- exactly what's happening now. Otherwise, laissez-faire would turn too quickly into laissez-gouge -- and wouldn't be fair to taxpayers.

TARNISHED VEEP. Halliburton is feeling the heat from all this and is defending its Iraq activities, which accounted for 40% of its $5.5 billion in fourth-quarter revenue and 30% of its $146 million income. It has denied wrongdoing in its Iraq contracting and has hired outside lawyers, whom it won't identify, to probe the Nigerian payments.

And it has launched an ad blitz in Washington, its hometown of Houston, and other cities to polish its image. The impact so far: Comedy Central's The Daily Show, my favorite political barometer, panned the most widely seen ad to howls of laughter from a live audience.

The politician tarnished most by all this is Cheney, whose experience and grasp of foreign affairs were strong assets when Bush recruited him from Halliburton. But a Feb. 4-5 Fox News poll gave the Veep only a 46% favorable rating, vs. a dangerously high 39% disapproval score.

Does the public's sentiment about a Vice-President matter? Not usually, says George C. Edwards, a political scientist at Texas A&M University, but "in a really tight election, anything can matter." And the 2004 election is shaping up to be just that.

Crock covers national security and foreign affairs for BusinessWeek from Washington. Follow his views in Affairs of State twice a month, only on BusinessWeek Online

Edited by Beth Belton