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US limits likely to raise costs in Iraq

Competition to suffer from restricting firms

WASHINGTON -- The United States is likely to inflate Iraq's spiraling postwar costs by limiting the number of companies that can participate in Iraqi reconstruction, analysts and politicians say.

The Pentagon on Tuesday unveiled a list of contracts worth $18.6 billion it would award to help revive war-torn Iraq but said only firms from countries that supported the US-led assault on Saddam Hussein need apply for them. That excludes France, Germany, and Russia and strengthens the position of US giants Bechtel Group and Halliburton Co. -- which already dominate the rebuilding -- for more Iraq-related business.

"Any competitive process is enhanced with open bidders," said Ed Porter, research manager at the American Petroleum Institute. "A restricted bid does just the opposite."

The new contracts, which will be funded by the US government, would cover such tasks as repairing roads, communication systems, electricity grids, oil fields, and water and sewage lines. Until now, most Iraq reconstruction projects have been managed by major US firms, many of which were handed contracts after closed-door bids that fueled charges of cronyism. Bechtel and Halliburton are closely tied to the Bush administration; both are contributors to the Republican party and Dick Cheney served as Halliburton's chief executive before becoming George Bush's vice presidential nominee.

France said it was studying along with its European Union partners the Pentagon's restrictions to see if they violate international procurement laws; Canada, which also opposed the war in Iraq but donated $190 million for postwar reconstruction at an October conference, said the Pentagon's move would discourage it from donating additional funds.

In a memo released Tuesday, the Pentagon said it would issue the contracts in a competitive, transparent bidding process. The restrictions, it said, were imposed "for the essential security interest of the United States."

"Coalition partners share in the US vision of a free and stable Iraq," according to the memo, signed by Deputy Defense Secretary Paul Wolfowitz. "The limitation of sources to prime contractors from those countries should encourage the continued cooperation of coalition members."

But if the restrictions are good for inter-coalition cooperation, they make for poor business sense, say economists and business analysts. Of the 61 member-countries of the US-led coalition, only a handful boast companies with the resources and technology needed to be viable candidates for big contracts alongside established US firms. Excluding energy and engineering giants such as France's Total Fina Elf SA, Russia's Yukos, and Siemens AG of Germany from primary work may well erode overall competitiveness and lead to higher bids, those observers say.

"In an open bid you tend to get the best package in terms of performance and price," said Jeffrey Schott, a senior fellow at the Washington-based Institute for International Economics. "A restricted bid will lead to distortions and inefficiencies in the procurement process."

Representative Henry Waxman, a California Democrat who has conducted several investigations into Halliburton's operations in Iraq, called the Pentagon's move "a big mistake" that will "further decrease international assistance for reconstruction and the likelihood that US taxpayers will get the most for their hard-earned dollars."

In a statement, Siemens said it had no comment on US procurement policies. A spokesperson at Schlumberger, a major oil company with offices in the United States, France, and the Netherlands and a frequent rival of Halliburton, said it did not consider itself excluded from postwar Iraq work because it is a "global company." The company declined to comment on whether it would compete for any reconstruction contracts.

Any bid inflation that may result from the Pentagon's restrictions could be more than matched by the diplomatic costs of further antagonizing governments chafing over US policy on Iraq and unrelated trade disputes. Russia yesterday announced it would not write off the $8 billion in loans it is owed by Iraq, which would deal a huge blow to US officials working for a major reduction of Iraq's $120 billion debt burden.

All this, economists say, comes at a time when trans-Atlantic relations have been rubbed raw by disputes over steel and farm subsidies and a looming confrontation over tax benefits for US subsidiaries overseas that could lead to billions of dollars in EU retaliation.

"This is a ham-handed maneuver at a time when we should be working to bring allies together instead of driving new wedges," said Schott.

Stephen J. Glain can be reached at

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