Sometimes, Government Is the Answer
Saturday, March 4, 2006-- the Los Angeles Times
Thanks to Halliburton, U.S. taxpayers are getting an expensive lesson
Thanks to Halliburton, U.S. taxpayers are getting an expensive lesson
in the costs of private contractors.
by Moshe Adler
The Pentagon's Defense Contract Audit Agency discovered that Halliburton Co.
subsidiary Kellogg, Brown & Root paid $208 million too much for transporting
oil to Iraq for the Army. But that is not all that it discovered. It also found that the government functions better when government employees, not private contractors, perform its tasks.
In addition to using Halliburton, the Pentagon has its own agency that supplies fuel to U.S. forces all over the world, including in Iraq. This is the Defense Energy Support Center, or DESC.
To deliver oil in Iraq, both Halliburton and the DESC contracted the same
Kuwaiti trucking company, Altanmia. But Halliburton's deal with Altanmia was
more costly-- so much so that the final bill Halliburton submitted to the
American taxpayers was 40% higher per gallon of gasoline than the DESC's.
In its defense, Halliburton explained that it had to pay a high price for
trucking because of factors it couldn't control -- the conditions of war and the
fact that Kuwait Petroleum Corp., the company that supplied the oil itself,
backed Altanmia during the negotiations and was a hard-nosed bargainer.
But what is this Kuwait Petroleum Corp. that it knows so well how to negotiate with Halliburton? It is a company owned by the Kuwaiti government. There are three possibilities, then.
Either the government-owned Kuwait Petroleum Corp. serves the people of
Kuwait better than the private company Halliburton and its subsidiaries serve the
people of the United States, or the government-owned DESC serves the people
of the United States better than Halliburton does, or both are true.
And all these possibilities can be explained in one word: incentives.
Halliburton has a cost-plus contract with the Army. This type of contract is
typical when the price of a job is hard to estimate -- the contractor is
subsequently reimbursed all costs and paid a percentage of those costs (the plus)
as a fee. Even though the contractor's job is to serve the American taxpayer
on such contracts, whenever it can inflate its costs, it will. The paycheck
of a government employee, however, is the same no matter what he does.
Therefore there is no conflict between his personal interest and his duty to the taxpayer.
If Halliburton had been denied reimbursement for overcharging the American
taxpayer, the story would have had a happy ending. But it didn't. The Army
decided to reimburse Halliburton nearly $204 million out of the $208-million
overcharge.
However, the last thing that needs to come from this fiasco is another
investigation into how to make government contracting more efficient. Government
contracting worked as well as it possibly could here. All the bells and whistles were in place, and they did what they were supposed to do. And although this was a
cost-plus contract, that in and of itself wasn't the problem. The government did discover the overcharge, and it could have denied reimbursement for it.by Moshe Adler
The Pentagon's Defense Contract Audit Agency discovered that Halliburton Co.
subsidiary Kellogg, Brown & Root paid $208 million too much for transporting
oil to Iraq for the Army. But that is not all that it discovered. It also found that the government functions better when government employees, not private contractors, perform its tasks.
In addition to using Halliburton, the Pentagon has its own agency that supplies fuel to U.S. forces all over the world, including in Iraq. This is the Defense Energy Support Center, or DESC.
To deliver oil in Iraq, both Halliburton and the DESC contracted the same
Kuwaiti trucking company, Altanmia. But Halliburton's deal with Altanmia was
more costly-- so much so that the final bill Halliburton submitted to the
American taxpayers was 40% higher per gallon of gasoline than the DESC's.
In its defense, Halliburton explained that it had to pay a high price for
trucking because of factors it couldn't control -- the conditions of war and the
fact that Kuwait Petroleum Corp., the company that supplied the oil itself,
backed Altanmia during the negotiations and was a hard-nosed bargainer.
But what is this Kuwait Petroleum Corp. that it knows so well how to negotiate with Halliburton? It is a company owned by the Kuwaiti government. There are three possibilities, then.
Either the government-owned Kuwait Petroleum Corp. serves the people of
Kuwait better than the private company Halliburton and its subsidiaries serve the
people of the United States, or the government-owned DESC serves the people
of the United States better than Halliburton does, or both are true.
And all these possibilities can be explained in one word: incentives.
Halliburton has a cost-plus contract with the Army. This type of contract is
typical when the price of a job is hard to estimate -- the contractor is
subsequently reimbursed all costs and paid a percentage of those costs (the plus)
as a fee. Even though the contractor's job is to serve the American taxpayer
on such contracts, whenever it can inflate its costs, it will. The paycheck
of a government employee, however, is the same no matter what he does.
Therefore there is no conflict between his personal interest and his duty to the taxpayer.
If Halliburton had been denied reimbursement for overcharging the American
taxpayer, the story would have had a happy ending. But it didn't. The Army
decided to reimburse Halliburton nearly $204 million out of the $208-million
overcharge.
However, the last thing that needs to come from this fiasco is another
investigation into how to make government contracting more efficient. Government
contracting worked as well as it possibly could here. All the bells and whistles were in place, and they did what they were supposed to do. And although this was a
What did break down is what normally breaks down when the work of the
government is outsourced. All too often there is someone in the government who has both the power to decide on the contracts and a personal stake in the
well-being of the contractor he supervises.
When the Army brass ignored the audit, were they doing what they thought
Vice President Dick Cheney -- who once headed Halliburton -- expected of them, or were they currying favor with Halliburton because they would perhaps like to work for the contractor after retiring from the military?
Whenever a government employee supervises a private contractor, the inclination to do an honest job may come into conflict with his personal interests.
And this is why, as the Defense Department audit so clearly shows, the taxpayer is better off when the government fulfills its function with government employees instead of private contractors who are supervised by government employees.
Moshe Adler teaches economics in the department of urban planning at
Columbia University.
Copyright 2006 Los Angeles Times
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