Firms Fear Iraq Contracts Won’t Survive Transfer of Power

Foreign businesses helping to rebuild Iraq are increasingly worried about the validity of their contracts after June 30, the proposed deadline for the U.S.-led Coalition Provisional Authority to turn over control of the country to Iraqis.

A number of U.S. businesses that initially expressed interest have dropped out of the bidding process, but it is too early to tell whether that will slow the pace of reconstruction.

“We just didn’t know what was going to go on over there,” said Cole Schaeffer, executive vice president of an Alaskan construction firm that had explored opportunities in Iraq this year.

Because many of the contracts awarded -- and another multibillion-dollar round of contracts up for bid -- are administered by the CPA, a small army of lawyers is scrambling to protect the contractors, prevent legal chaos and continue the reconstruction process after the hand-over.

The issue came up repeatedly during a two-day conference in Washington on reconstruction, leaving Pentagon officials to acknowledge that there were no guarantees that the contracts would remain in place.

Officials said they expected the new government to continue the rebuilding effort without major changes because the Iraqis now participating in the planning would presumably have a role in the new government.

Iraq will still need new bridges, roads and water systems, the Pentagon officials said, making it unlikely that the new government will want drastic changes.

“That’s not saying that a new Iraqi government couldn’t take a new course of action,” said James Crum, an engineer who runs the coalition’s rebuilding effort in Washington. “In that situation, we’d have to try to accommodate, and in the worst case, the contracts could be terminated.”

International law experts, however, said legal mechanisms would kick in to allow contractors to seek reimbursement for their losses -- at least on contracts funded by U.S. taxpayers.

It is less clear what might happen to other contracts -- including those being paid with Iraqi oil revenue.

“These are complex issues, but I consider contract payments to be a low risk,” said Timothy B. Mills, an attorney at the Patton Boggs law firm who works frequently in Baghdad on Iraqi reconstruction issues.

The U.S., Iraq and the international community have pledged $30 billion for Iraq’s reconstruction; the funds are coming from a variety of sources, including $18.6 billion the U.S. allocated in November to rebuild the country’s infrastructure.

The biggest chunk of the U.S. money -- about $5 billion in construction contracts for electrical, water and other such projects -- will be awarded in March, barring further delays.

Although most of that money is expected to go to large firms experienced in working amid the uncertainties of war zones, most of the subcontracts will be awarded to smaller firms, both in Iraq and the United States.

Halliburton Co., which already has several multibillion-dollar contracts in Iraq, estimates that subcontractors account for as much as 70% of its work worldwide. No figure was available for Iraq. The firm declined to comment on the possibility of contract cancellations.

The company and its subcontractors have come under scrutiny for several of its contracts, allegedly overbilling the U.S. government by $61 million for fuel costs and $27.4 million for meals at U.S. bases.

There are few signs to date that the risks of working in Iraq have scared off businesses. Tens of thousands of companies from around the world have crammed into conferences, registered for work with the U.S. government or simply shown up in Baghdad to look for a share of reconstruction work.

Typical is the example of Danny Benjamin, an Iraqi American who is vice president of the North American operations of Al Fawares, a Kuwait-based construction firm. Al Fawares was part of a group of businesses that recently won a $95-million contract to set up a new Iraqi television network, as well as radio stations and a newspaper.

Benjamin said his firm was aware that a new Iraqi government could yank the licenses the provisional government had awarded to run the TV and radio stations.

But, he said, the company believes that the likelihood is remote because it is actively working with current government officials in Iraq.

“Everybody’s on common ground, and we hope to continue that relationship,” Benjamin said. “We have to step forward to take risks.”