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The $500 billion fire sale

In a shattered postwar Iraq, there are rich pickings to be had - and for US businesses at least, it promises to be a risk-free bonanza. Naomi Klein joins those at a trade show jostling for a stake

Naomi Klein
Saturday January 17, 2004
The Guardian

It's 8.40am, and the Sheraton Hotel ballroom thunders with the sound of plastic explosives pounding against metal. No, this is not the Sheraton in Baghdad, it's the one in Arlington, Virginia. And it's not a real terrorist attack, it's a hypothetical one. The screen at the front of the room is playing an advertisement for "bomb-resistant waste receptacles" - this trash can is so strong, we're told, it can contain a C4 blast. And its manufacturer is convinced that, given half a chance, these babies would sell like hot cakes in Baghdad - at bus stations, army barracks and, yes, upscale hotels. Available in Hunter Green, Fortuneberry Purple and Windswept Copper.

This is ReBuilding Iraq 2, a gathering of 400 businesspeople itching to get a piece of the Iraqi reconstruction action. They're here to meet those doling out the cash, in particular the $18.6bn in contracts to be awarded in the next two months to companies from "coalition partner" countries. The people to meet are from the Coalition Provisional Authority (CPA), its new programme management office, the Army Corps of Engineers, the US Agency for International Development, Halliburton, Bechtel and members of Iraq's interim governing council. All these players are on the conference programme, and delegates have been promised that they'll get a chance to corner them at regular "networking breaks".

There have been dozens of similar trade shows on the business opportunities created by Iraq's decimation, in hotels from London to Amman. By all accounts, the early conferences throbbed with the sort of cash-drunk euphoria not seen since the heady days before the dotcoms crashed. But it soon becomes apparent that something is not right at ReBuilding Iraq 2. Sure, the organisers do the requisite gushing about how "nonmilitary rebuilding costs could near $500bn" and that this is "the largest government reconstruction effort since the US helped to rebuild Germany and Japan after the second world war".

But for the undercaffeinated crowd staring uneasily at exploding garbage cans, the mood is less gold rush than grim determination. Giddy talk of "greenfield" market opportunities has been supplanted by sober discussion of sudden-death insurance; excitement about easy government money has given way to controversy about foreign firms being shut out of the bidding process; exuberance about CPA chief Paul Bremer's ultraliberal investment laws has been tempered by fears that those laws could be overturned by a directly elected Iraqi government.

At ReBuilding Iraq 2, held last December, it seems finally to have dawned on the investment community that Iraq is not only an "exciting emerging market", it's also a country on the verge of civil war. As Iraqis protest about layoffs at state agencies and make increasingly vocal demands for general elections, it's becoming clear that the White House's prewar conviction that Iraqis would welcome the transformation of their country into a free-market dream state may have been just as off-target as its prediction that US soldiers would be greeted with flowers. I mention to one delegate that fear seems to be dampening the capitalist spirit. "The best time to invest is when there is still blood on the ground," he assures me.

"Will you be going to Iraq?" I ask.

"Me? No, I couldn't do that to my family." He was still shaken, it seemed, by the afternoon's performance by ex-CIAer John MacGaffin, who had harangued the crowd like a Hollywood drill sergeant. "Soft targets are us!" he bellowed. "We are right in the bull's-eye ... You must put security at the centre of your operation!" Lucky for us, MacGaffin's own company, AKE Group, offers complete counterterrorism solutions, from body armour to emergency evacuations.

Youssef Sleiman, managing director of Iraq Initiatives for the Harris Corporation, has a similarly entrepreneurial angle on the violence. Yes, helicopters are falling, he says, but "for every helicopter that falls there is going to be replenishment".

I notice that many delegates are sporting a similar look: army-issue brush cuts paired with dark business suits. The guru of this gang is retired Major General Robert Dees, freshly hired out of the military to head Microsoft's "defence strategies" division. Dees tells the crowd that rebuilding Iraq has special meaning for him because, well, he was one of the people who broke it. "My heart and soul is in this because I was one of the primary planners of the invasion," he says with pride. Microsoft is helping to develop "e-government" in Iraq, which Dees admits is a little ahead of the curve, since there is no g-government in Iraq, not to mention functioning phone lines.

No matter. Microsoft is determined to get in on the ground floor. In fact, it is so tight with Iraq's governing council that one Microsoft executive, Haythum Auda, was the official translator for the council's minister of labour and social affairs, Sami Azara al-Ma'jun, at the conference. "There is no hatred against the coalition forces at all," al-Ma'jun says, via Auda. "The destructive forces are very minor and these will end shortly ... Feel confident in rebuilding Iraq!"

The speakers on a panel about managing risks have a very different message, however: feel afraid about rebuilding Iraq, very afraid. Unlike previous presenters, their concern is not the obvious physical risks, but the potential economic ones. These are the insurance brokers, the grim reapers of Iraq's gold rush.

It turns out that there is a rather significant hitch in Bremer's bold plan to auction off Iraq while it is still under occupation: the insurance companies aren't going for it. Until recently, the question of who would insure multinationals in Iraq has not been pressing. The major reconstruction contractors such as Bechtel are covered by USAID for "unusually hazardous risks" encountered in the field. And Halliburton's pipeline work is covered under a law passed by Bush last May that indemnifies the entire oil industry from "any attachment, judgment, decree, lien, execution, garnishment, or other judicial process".

But with bidding now starting on Iraq's state-owned firms, and foreign banks ready to open branches in Baghdad, the insurance issue is suddenly urgent. Many of the speakers admit that the economic risks of going into Iraq without coverage are huge: privatised firms could be renationalised, foreign ownership rules could be reinstated and contracts signed with the CPA could be torn up. Normally, multi-nationals protect themselves against this sort of thing by buying "political risk" insurance. Before he got the top job in Iraq, this was Bremer's business - selling political risk, expropriation and terrorism insurance at Marsh & McLennan Companies, the largest insurance brokerage firm in the world. Yet, in Iraq, he has overseen the creation of a business climate so volatile that private insurers, including his old colleagues at Marsh & McLennan, are simply unwilling to take the risk. Bremer's Iraq is, by all accounts, uninsurable.

"The insurance industry has never been up against this kind of exposure before," R Taylor Hoskins, vice-president of Rutherford International insurance company, tells the delegates apologetically. Steven Sadler, managing director and chairman at Marsh Industry Practices, a division of Bremer's old firm, is even more downbeat: "Don't look to Iraq to find an insurance solution. Interest is very, very, very limited. There is very limited capacity and interest in the region."

It's clear that Bremer knew Iraq wasn't ready to be insured: when he signed Order 39, opening up much of its economy to 100% foreign ownership, the insurance industry was specifically excluded. I ask Sadler, a Bremer clone with slicked-back hair and bright red tie, whether he thinks it's strange that a former Marsh & McLennan executive could have so overlooked the need for investors to have insurance before they enter a war zone. "Well," he says, "he's got a lot on his plate." Or maybe he just has better information.

Just when the mood at ReBuilding Iraq 2 couldn't sink any lower, up to the podium strides Michael Lempres, vice-president of insurance at the Overseas Private Investment Corporation (Opic). With a cool confidence absent from the shellshocked proceedings so far, he announces that investors can relax: Uncle Sam will protect them. A US government agency, Opic provides loans and insurance to US companies investing abroad. And while Lempres agrees with earlier speakers that the risks in Iraq are "extraordinary and unusual", he also says that "Opic is different. We do not exist primarily to generate profit." Instead, Opic exists to "support US foreign policy". And since turning Iraq into a free-trade zone is a top Bush policy goal, Opic will be there to help out. Earlier that same day, Bush signed legislation providing "the agency with enhancements to its political risk-insurance programme", according to an Opic press release.

Armed with this clear political mandate, Lempres announces that the agency is now "open for business" in Iraq, and is offering financing and insurance, including the riskiest insurance of all: political risk. "This is a priority for us," he says. "We want to do everything we can to encourage US investment in Iraq." The news, as yet unreported, appears to take even the highest-level delegates by surprise. After his presentation, Lempres is approached by Julie Martin, a political risk specialist at Marsh & McLennan.

"Is it true?" she demands.

Lempres nods. "Our lawyers are ready."

"I'm stunned," says Martin. "You're ready? No matter who the government is?"

"We're ready," Lempres replies. "If there's an expro[priation] on January 3, we're ready. I don't know what we're going to do if someone sinks $1bn into a pipeline and there's an expro." Lempres doesn't seem too concerned about these possible "expros", but it's a serious question. According to its official mandate, Opic works "on a self-sustaining basis at no net cost to taxpayers". But Lempres admits that the political risks in Iraq are "extraordinary". If a new government expropriates and re-regulates across the board, Opic might have to compensate dozens of US firms for billions of dollars in lost investments and revenues, possibly tens of billions. What happens then?

At the Microsoft-sponsored cocktail reception in the Galaxy Ballroom that evening, Dees urges us "to network on behalf of the people of Iraq". I follow orders and ask Lempres what happens if "the people of Iraq" decide to seize back their economy from the US firms he has so generously insured. Who bails out Opic? "In theory," he says, "the US treasury stands behind us." That means the US taxpayer. Yes, them again: the same people who have already paid Halliburton, Bechtel et al to make a killing on Iraq's reconstruction would have to pay them again, this time in compensation for their losses. While the vast profits being made in Iraq are strictly private, it turns out that the entire risk is being shouldered by the public.

For the non-US firms in the room, Opic's announcement is anything but reassuring: since only US companies are eligible for its insurance, and the private insurers are sitting it out, how can they compete? The answer is that they likely cannot. Some countries may decide to match Opic's Iraq programme. But, in the short term, not only has the US government barred companies from non-"coalition partners" from competing for contracts against US firms, it has made sure that the foreign firms that are allowed to compete will do so at a serious disadvantage.

The reconstruction of Iraq has emerged as a vast protectionist racket, a neo-con New Deal that transfers limitless public funds - in contracts, loans and insurance - to private firms, and even gets rid of the foreign competition to boot, under the guise of "national security". Ironically, these firms are being handed this corporate welfare so they can take full advantage of CPA-imposed laws that systematically strip Iraqi industry of all its protections, from import tariffs to limits on foreign ownership. Michael Fleisher, head of private-sector development for the CPA, recently explained to a group of Iraqi businesspeople why these protections had to be removed. "Protected businesses never, never become competitive," he said. Quick, somebody tell Opic and US deputy secretary of defence Paul Wolfowitz.

The issue of US double standards comes up again at the conference when a CPA representative takes the podium. A legal adviser to Bremer, Carole Basri has a simple message: reconstruction is being sabotaged by Iraqi corruption. "My fear is that corruption will be the downfall," she says ominously, blaming the problem on "a 35-year gap in knowledge" in Iraq that has made Iraqis "not aware of current accounting standards and ideas on anti-corruption". Foreign investors, she adds, must engage in "education, bring people up to world-class standards". It's hard to imagine what world-class standards she's referring to, or who, exactly, will be doing this educating. Halliburton, with its accounting scandals back home and its outrageous overbilling for gasoline in Iraq? The CPA, with its two officers under investigation for bribe-taking and nonexistent fiscal oversight?

On the final day of ReBuilding Iraq 2, the front- page headline in our complimentary copies of the Financial Times (a conference sponsor) is Boeing Linked To Perle Investment Fund. Perhaps Richard Perle, who supported Boeing's $18bn refuelling-tanker deal and extracted $20m from Boeing for his investment fund, can teach Iraq's politicians to stop soliciting "commissions" in exchange for contracts.

For the Iraqi expats in the audience, Basri's is a tough lecture to sit through. "To be honest," says Ed Kubba, a consultant and board member of the American Iraqi Chamber of Commerce, "I don't know where the line is between business and corruption." He points to US companies subcontracting huge taxpayer-funded reconstruction jobs for a fraction of what they are getting paid, then pocketing the difference. "If you take $10m from the US government and sub the job out to Iraqi businesses for a quarter-million, is that business, or is that corruption?"

These were the sorts of uncomfortable questions faced by George Sigalos, director of government relations for Halliburton KBR. In the hierarchy of Iraqi reconstruction, Halliburton is king, and Sigalos sits on stage, heavy with jewelled ring and gold cufflinks, playing the part. But the serfs are getting restless, and the room quickly turns into a support group for jilted would-be subcontractors: "Mr Sigalos, what are we going to have to do to get some subcontracts?"

"Mr Sigalos, when are you going to hire some Iraqis in management and leadership?"

"I have a question for Mr Sigalos. I'd like to ask what you would suggest when the army says, 'Go to Halliburton', and there's no response from Halliburton?"

Sigalos patiently tells them all to register their firms on Halliburton's website. When they respond that they have already done so and haven't heard back, he invites them to "approach me afterward".

The scene afterwards is part celebrity autograph session, part riot. Sigalos is swarmed by at least 50 men who elbow each other out of the way to shower the Halliburton VP with CD-roms, business plans and résumés. When Sigalos spots a badge from Volvo, he looks relieved. "Volvo! I know Volvo. Send me something about what you can achieve in the region." But the small, no-name players who have paid their $985 entrance fees, here to hawk portable generators and electrical control panelling, are once again told to "register with our procurement office". There are fortunes being made in Iraq, but it seems they are out of reach for all but the chosen few.

The next session is starting and Sigalos has to run. The serfs wander off through the displays of shatterproof glass and bomb-resistant trash cans, caressing Sigalos's business card and looking worried

@ Naomi Klein, 2004. A version of this article first appeared in the Nation.

Guardian Unlimited © Guardian Newspapers Limited 2004