Army overpaid $61 million for gas

Pentagon auditors find Halliburton subsidiary charged $2.64/gal. in Iraq


WASHINGTON - A Pentagon investigation has found evidence that a subsidiary of the politically connected Halliburton Co. overcharged the government by as much as $61 million for gasoline delivered to Iraq under huge no-bid reconstruction contracts, senior defense officials said yesterday.

The subsidiary, Kellogg, Brown & Root, also submitted a proposal for cafeteria services that inflated the cost by $67 million, the officials said. The Pentagon rejected that proposal.

The problems involving Halliburton, of which Vice President Dick Cheney was formerly CEO, were described in a preliminary report by auditors, the officials said. They said the issues were a source of deep concern within the Pentagon, whose contracts with KBR were awarded without competitive bidding and have a potential value of $15.6 billion.

The company denied overcharging and called the inquiry a "routine audit."

Dov Zakheim, the Pentagon's budget chief, told reporters that "contractor improprieties and/or contract mischarging on department contracts will neither be condoned nor allowed to continue."

Halliburton, a enormous corporation that had more than $12.5 billion in revenues in 2002, has emerged as a symbol for many people who opposed the war in Iraq and who claimed that the interests of such companies with close political ties were given too much consideration by the administration.

Criticism of the company intensified when it received the no-bid contract worth billions of dollars to provide a variety of services in Iraq.

Administration officials counter that few companies have the resources and expertise to carry out the work that is needed there.

Defense officials said the Pentagon was negotiating with KBR over how to resolve the issue of fuel charges.

But Michael Thibault, deputy director of the Defense Contract Audit Agency, said in a telephone interview that a draft report by the agency has recommended that the Army Corps of Engineers seek reimbursement from the company.

The defense officials said that Halliburton did not appear to have profited from the overcharging for fuel but had instead paid a subcontractor too much for the gasoline in the first place.

Halliburton has said that one reason it needs to charge a high price for fuel is that it must be delivered in a combat zone. Several KBR workers have been killed or wounded in attacks by Iraqi insurgents.

Other questions, in connection with a second contract with the Army, involve unacceptable delays by the Halliburton subsidiary in providing cost estimates to the government for dozens of separate projects already under way in Iraq, Thibault said.

These violations, for work that includes the construction of food, housing and other facilities for the military, could involve inflated costs as well, Thibault said.

A spokeswoman for Halliburton, Wendy Hall, said in an e-mail message that the inquiry was part of a "routine audit."

"KBR is confident its processes will continue to stand against the rigorous audits conducted by the defense contract auditing agency," Hall said in the message. "It would not be appropriate to discuss the specifics of the questions until our conversations with DCAA are complete."

Recent public estimates by the Army have put the current value of the Halliburton contracts at about $5 billion, considerably less than the figure cited by the auditors.

Thibault said in a telephone interview that it would be "premature" to describe the auditor's conclusions as final, saying that the investigation was continuing and that the Halliburton subsidiary "deserves a chance to respond to our findings."

He said auditors expected to issue a final report this month, but added that the preliminary findings involved overcharging that was "potentially very substantial."

The two Halliburton contracts are by far the largest awarded by the Pentagon for work by private companies in Iraq.

The initial value of the work was set at $7 billion. A second contract with the Army for logistical support has a maximum value of $8.6 billion, defense officials said.

But government documents show the U.S. government is paying the Halliburton Co. an average of $2.64 a gallon to import gasoline to Iraq from Kuwait, more than twice what others pay to truck in Kuwaiti fuel.

Rep. Henry A. Waxman, the leading congressional critic of the contract, said the report of the audit "confirms what we've known for months: Halliburton has been gouging taxpayers, and the White House has been letting them get away with it."

"It is deplorable and we need to put an immediate end to it," the California Democrat said in a written statement.

Cheney is Halliburton's former chief executive officer. He left the company in 2000, after Bush asked him to become his vice presidential nominee.

The Army awarded the logistics support contract to Halliburton in 2001, on a competitive basis, but its size has swelled since the Iraq war, with additional work awarded to Halliburton without competition.

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