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LGD 2004 (2) - Sophie Kavanagh

The Legality of Reconstruction Contracts in Post-War Iraq

Sophie Kavanagh

LLM Student,
School of Law,
Kings College, London.

sophie.kavanagh@kcl.ac.uk

Abstract

This paper is an analysis of the legal issues that surround the contracts awarded to reconstruct Iraq after the war in 2003. Initial consideration is given to the unilateral invasion of Iraq by the United States of America and the United Kingdom, the support given by the United Nations Security Council Resolutions, and the international conventions that govern the occupation of a country. Following this, an in depth analysis explores the major role of the United States in managing the reconstruction programmes, their justifications for not allowing certain countries to compete for these contracts, and the compatibility of such behaviour under international obligations. Research into American law shows that a number of contracts, awarded by the United States Government to American firms, have not complied with the accountability and transparency requirements that are essential when spending taxpayers’ money. It follows that such discrepancies are susceptible to the risk of corruption. A look at international and domestic anti-corruption measures provides further arguments into the uncertain legality of these contracts to reconstruct Iraq.

Keywords: Coalition Provisional Authority; US Government Agencies; Reconstruction Contractors; Public Procurement; International Standards; WTO-GPA; UNCITRAL Model Law; US FAR; Anti-Corruption Instruments


This is a refereed article published on: 28 February 2005

Citation: Kavanagh, S, ‘The Legality of Reconstruction Contracts in Post-War Iraq, 2004 (2) Law, Social Justice & Global Development Journal (LGD). <http://www.go.warwick.ac.uk/elj/lgd/2004_2/kavanagh>


1. Introduction

The crisis in Iraq following the invasion by the US and UK in spring 2003, has not only been subject to controversial debate over the legality and justifications for the war. Concerns have also been voiced about the methods adopted to reconstruct Iraq, now that the war has been declared ‘over’. Funding has been acquired from countries across the globe to provide for the humanitarian, reconstruction and economic reparation needs of Iraq1. However, the US decision to ban countries which opposed the war in Iraq from bidding for the contracts has resulted in condemnation by prospective donors.

The UN Security Resolution 1483 of 22 May 2003 empowers the Authority2 to disburse funds directly into the Development Fund for Iraq, so that such funds:

‘…shall be used in a transparent manner to meet the humanitarian needs of the Iraqi people, for the economic reconstruction and repair of Iraq’s infrastructure, for the continued disarmament of Iraq and for the costs of Iraqi civilian administration, and for other purposes benefiting the people of Iraq…’ (para.14)

This paper examines whether such transparent methods have been adopted by the US led Authority. Where taxpayers’ money is being spent, taxpayers are privy to these contracts. Public interest must be safeguarded. If the US government is not fully accountable to their own citizens, then there are possibilities of revolt which could undermine the US administration, and leave the situation in Iraq considerably worse off.

2. Iraq, the International Situation

2.1. The Invasion

The United States (US) and the United Kingdom (UK), in March 2003, took unprecedented unilateral military action against Iraq. The correctness or legitimacy of the action taken against Iraq is extremely important in terms of the future role of the UN and international law. However, the main purpose of this analysis is the legality of the contracts to reconstruct Iraq. Now that the Saddam regime has been overthrown, control over Iraq is shared between the US, UK and the new Iraqi interim government. The US and UK do have rights under the 1907 Hague Conventions3 and the UN Security Council Resolution 1483. However, without UN authority, they cannot impose a government, cannot make major structural economic changes, nor exploit the occupied state’s natural resources4.

The issues of legality of the initial invasion of Iraq must not obstruct the best way to reaffirm ‘the sovereignty and territorial integrity’ of Iraq and ‘the vital role’ for the UN in Iraq. These two major themes are central to the post-war UN Security Council Resolutions 1483 and 1511. They must be upheld and respected by all Member States of the UN.

2.2. The Role of the CPA-PMO

The US-run Iraq Coalition Provisional Authority (CPA) was comprised of 63 countries, encompassing every major religion and ethnic group, each undertaking to assist in the financial, material, and military needs in Iraq. The procurement component of the CPA was the Iraq Program Management Office (PMO), run by the US Pentagon, responsible for all activities associated with the program, project, asset, construction and financial management of the reconstruction in Iraq.

In July 2003, the CPA appointed an Iraq Governing Council. Both organisations were formally recognised by the UN Security Council under Resolution 1500 (August 2003). Resolution 1511 (October 2003) reaffirmed this recognition emphasising the ‘temporary nature of the exercise by the CPA of the specific responsibilities, authorities, and obligations under applicable international law … which will cease when an internationally recognized, representative government established by the people of Iraq is sworn in’ (para.1).

The CPA dissolved on 28 June 2004, at which point control was transferred to an interim Iraqi government comprised largely of Iraq exiles led by the US-appointed Prime Minister Iyad Allawi (Dinmore, G, 2004a) ‘White House getting used to idea of Shia Government’, Financial Times, 2 December 2004). The CPA awarded contracts funded by the Development Fund for Iraq (DFI), money accumulated from oil and gas sales, the UN oil-for-food programme, frozen Iraqi assets and contributions from the CPA countries and World Bank (Nichols, R, 2004, NA103-112). The US continues to supervise the administration of contracts funded by the DFI and the contracts awarded before the CPA’s dissolution. The DFI was originally worth USD 20.6 billion, but by the end of June 2004, its value had decreased to USD 2.9 billion5.

2.3. The Legal Status of Foreign Contracts in Iraq

The legal position of Iraq and the issues surrounding any contracts made between foreign firms and Iraq whether before, during or after the war, raises extremely important international law questions. The main applicable law governing such questions is international humanitarian law (including the 1907 Hague Conventions), the 1949 Geneva Conventions, investment treaties, customary international law concerning occupied territory, and UN law (particularly Resolution 1483). Precedent such as the post-World War II occupations of Germany and Japan may also be relevant to the Iraq situation.

2.3.1. Legal Status of Contracts made Before the War

The overthrow of Saddam Hussein’s regime and any subsequent change of Iraqi government should not affect the legal position of any contracts made between the Republic of Iraq and foreign parties before the war. A state’s international obligations do not change merely because that state’s government has changed. In the Tinoco Case (UK v Costa Rica) despite the lack of recognition by a number of states of the regime under the former dictator of Costa Rica, Tinoco, the international arbitrator held that the new government of Costa Rica was bound by the concessions and bank notes given by Tinoco to British companies. It was irrelevant that Tinoco’s regime was a dictatorship. Unlike the Tinoco Case, Iraq was a recognised State by many states.

It is uncertain whether the Security Council has the authority to declare any existing contracts made with a former government of a UN member state, such as Iraq, null or void (Bekker, P, 2003a, p8). Resolution 1483 has not declared any contract null or void. Resolution 687 (1991) did provide that the force majeure defence was available to persons who complied with the economic sanctions against Iraq, and that no claim could be made by the Iraqi government, person or body in Iraq in connection with any contract affected by sanctions (para 29). Resolution 687 also provided that statements by the Iraq government disclaiming its foreign debt were null and void.

Under Article 46 of the Hague Regulations made under the Hague Conventions of 1907, any contracts made regarding ‘private property’, which include proprietary rights granted in a state contract, ‘must be respected’. This provides that the old and the new Iraq governments will be bound by any contacts made between Iraq and foreign private parties before the Iraq invasion, including any property rights.

Article 43 of the Regulations made under the Hague Conventions of 1907, provides that the Occupying Power must respect the laws of the occupied territory6. This will include Iraq’s law on contracts, provided that any such contract did not violate any UN sanctions. Therefore, the CPA, as the Occupying Power, is prohibited from nullifying (possibly suspending) any Iraq state contract concluded with foreign parties by amending the law of Iraq or by issuing legislation that could declare any such contract void.

With regard to the post-World War II occupations of Germany and Japan, the US did respect pre-war contacts, despite the major alteration in governmental authority and their ten-year occupation in the defeated states. The US was not subject to The Hague Regulations’ restrictions for a number of reasons, and the Geneva Conventions had not yet been established. Pre-war legal relationships made between the defeated state and any foreign government or national of the allied states were kept valid after the war had finished through various peace and reparation treaties, such as the Agreement on Reparation from Germany, 14 Jan 1946 and the Treaty of Peace with Japan, 8 September 1951.

2.3.2. Legal Status of Contracts made During the War

Article 52 of the Hague Regulations stipulates that enemy private property within occupied territory can not be taken or interfered with unless it is of use for local military purposes, for example, for the occupational army but not for its general needs at home or abroad. However, private property of non-belligerent bodies is protected from confiscation, but may be seized temporarily.

Article 43 of the Hague Regulations, provides that the Occupying Power must respect the laws of the occupied territory, subject to an exception (Bekker, 2003b, p8), and Article 46 of the Hague Regulations, provides that the ‘private property’ within the occupied territory ‘must be protected’ and ‘cannot be confiscated’ by the Occupying Power.

A foreign party’s right to compensation, under Iraqi law, may be initiated if the US or Iraq appropriate the foreign party’s lawful property rights in the occupied territory, or the US or Iraq declare any such rights worthless or void. This right to compensation is provided for under Article 3 of the Hague Convention IV, which states that a ‘belligerent party which violates the provisions of the said Regulations shall, if the case demands, be liable to pay compensation’. In Iran - US Claims Tribunal v AS, it was established that the cancellation of contractual rights, e.g. long-term oil concession rights, may constitute expropriation under international law. The status of contractual rights as property is confirmed in the UN General Assembly Resolution (V) of 2 December 1950, which states:

‘No one shall be deprived of property, including contractual rights, without due process of law and without payment of just and effective compensation’ (UN GAR, 1950)

The oil-for-food programme was ended within 9 months from the initial invasion of Iraq. The UN Secretary General, the CPA and the Iraqi interim administration examined the contracts concluded by the Hussein regime under the programme. However, the provisions that authorised the Secretary-General to interfere with these contracts did not clarify the position of whether or not this could be done without the consent of the contractor (Griffiths, J, 2003, p68). Until 31 December 2007, oil and gas exported from Iraq will be immune from legal proceedings (UN Security Council Resolution 1483, para 22). All proceeds from oil and gas exports are expected to be paid into the Iraq development fund until a suitable Iraqi government takes office. It follows from this, that if Iraq now breaches an export contract, in the interests of promoting stability, it can avoid any liability.

If the US, UK or Iraq breach a rule of international law (for example under the Hague Conventions), then either state may be internationally responsible for that particular breach to the injured party. However, it is not clear who can be sued and where. Under the US Foreign Sovereign Immunities Act (FSIA), jurisdiction over a foreign state is within the power of the US courts. This is likely in the case of Iraq. Section 1605(a) of the FSIA states that:

‘A foreign state shall not be immune from the jurisdiction of courts of the US or of the States in any case in which rights in property taken in violation of international law are in issue …’

Only in the situation of breach of international law will the US assert this exception to immunity. It is not clear how these matters will be dealt with in the UK or by European Union Legislation.

There is no binding international dispute instrument established by the Hague Regulations available for private parties. If a foreign company is incorporated into a State and has a registered office in that State’s territory, then a dispute may be settled by the laws of that State, for example Iraqi law.

2.3.3. Legal Status of Contracts Made After the War

Provided that no future UN Security Council Resolution is created that will affect the legal status of contracts made between foreign parties and the authority of Iraq (old and new), either before or after the war, then these contracts will remain valid.

There is legal uncertainty, however, with regard to contracts made between the Occupying Power (eg by the CPA or the US Department of Defense) and non-Iraqi firms during the occupation. The CPA had the authority to administer new Iraqi contracts, however, under The Hague Conventions and UN law, only for the period of the occupation. The uncertainty lies in legal status of these contracts now that the occupation is over, especially in relation to contracts for Iraq’s natural resources. The Preamble of Resolution 1483 emphasises ‘the right of the Iraqi people freely to determine their own political future and control their own natural resources’ (UN Resolution 1483).

International law is unlikely to bind the new Iraqi government to the contracts awarded by the CPA (or other US State agencies) to foreign parties during its occupation. The new Iraqi government has the sole discretion to uphold or reject these contracts, whether partially or in whole. It may also change or repeal any legislation or measures made by the CPA during their occupation of Iraq (ASIL Sept/Oct 2003, p9).

3. Public Procurement and International Standards

3.1. Public Procurement

The damage caused in Iraq by the US and UK’s bombing has inevitably opened substantial building opportunities to reconstruct its demolished infrastructure. The main area of work to be addressed is public procurement, which involves obtaining goods or services for the use of the public sector. Procurement in this sector is often formalised, and contracts for public works, supplies, or services, which will be large in Iraq’s case, are normally advertised for formal tender. Public procurement has been described as ‘big business’ (Arrowsmith and Hartley, 2002, p ix), involving government at different levels purchasing goods and services from private firms.

Figures show that spending by governments on procurement is significant (Table 1), highlighting an area of great economic, political and legal importance in most countries.

Table 1: UN Procurement by Country

Government Procurement Country/Organisation

% GDP spent in 2000

WTO

10 - 15

European Union

14

United Kingdom

10.84

United States

28.45

Iraq

0.04


As an important policy tool, procurement spending must be seen to be efficient, legitimate and effective. Through ‘fair’ and transparent competition procedures, better procurement services can be obtained for less. Also, implementing procurement procedures to reduce bribery and corruption practices is fundamental ( Strombom, 1998a)

3.2. The Nature of the Post-War Iraq Contracts

United States firms have been recorded to have obtained USD 900 million reconstruction contracts from the United States Agency for International Development (USAID) before the war in Iraq had started (Arnold and Booth, 2003, p1). These were the ‘major’ contracts involving work on infrastructure, roads and seaport administration. A total of 8 contracts from this sum were awarded solely to American firms (Nikkhah, 2003a) on the basis that strict US government procurement guidelines maintain that only American firms can win prime contracts funded by the US government..

The US Defense Department, on 5 December 2003, issued a document listing 63 countries eligible to compete for the second round of 26 Iraq contracts, funded by the USD 18.4 billion that US Congress has allocated to rebuild Iraq. This decision excluded non-coalition countries, such as France, Germany and the UN Security Council, to bid for any of the prime contracts ( Pleming, 2003). A memorandum, titled ‘Determination and Findings’ and signed by the Deputy Secretary of Defense Paul Wolfowitz, states the reason for their decision to award the reconstruction contracts only to contractors from the 63 different countries:

‘..it is necessary for the protection of the essential security interests of the US to limit competition…’ (Palmeter and Meagher, 2003a)

This second round of contracts, described as the ‘prime’ contracts, are open to tender for all coalition countries and cover areas such as oil, power, communications, water, housing and public work buildings (King, 2003a, p2). However, only one out of seven of these contracts (worth USD 13 billion) worth USD 8,416,985 was awarded to a UK-based company to provide support to the Oil Sector Programme, and only part of a contract worth USD 43,361,340 to provide support to the Electrical Services Sector Programme was given to a UK-based company to share with an American firm. The rest of the contracts were awarded to solely American firms (CPA-PMO Construction Contracts Awarded as of 14 March, 2004 and CPA-PMO Programme Management Contracts Awarded as of 12 March, 2004).

The banned non-coalition countries have the potential to get business in Iraq through selling material and equipment to the major and prime contractors (Pleming, 2003). However, the argument stands that the US should not limit international competition to rebuild Iraq when its infrastructure has been destroyed by decades of neglect, war and post-war looting and economic sanctions (Nikkhah, 2003b).

3.3. International Standards and Regulations

There are a number of important policy documents on public procurement to guide government purchasing in all countries. Each document has a different influence within the legal framework governing international transactions and on the procurement processes for contracts similar to the Iraq reconstruction contracts (Hors, 2003). .

Without a single body responsible for creating internationally binding law upon all States, nor an appropriate judicial system to interpret and extend the law comprehensively, there are problems in international law to determine whether a specific proposal amounts to a rule of law (Shaw, 2003, p 66).

Most of the policy documents on public procurement do not fall within any of the four source categories provided by Article 38(1) of the Statute of the International Court of Justice. Instead, these particular documents may form part of another category of international law termed as ‘soft law’, which itself is arguably not law (Boyle, 1999, pp 901-913). Such documents have been known to ultimately be converted into legally binding rules, so their influence cannot be underestimated7.

Discriminatory procurement favouring domestic suppliers can constitute a barrier to trade and to international competition. These procurement systems share numerous objectives to combat such barriers (Arrowsmith, Linarelli and Wallis, 2002, p 103-10) including value for money, integrity, accountability, fair treatment and social/industrial development, all to be implemented through a cost-efficient process. Most systems also attempt to prevent discrimination against foreign industry (especially the WTO-GPA which actually establishes a procedural framework for making foreign suppliers aware of opportunities and ensuring that entities cannot hide discrimination) and provide procedures to ensure competition and transparency8.

An analysis of the most relevant international public procurement rules and provisions will help to determine their applicability to the Iraq reconstruction contracts and identify any possible breach of international law that may have occurred.

3.3.1. The WTO Rules

The WTO Agreements are largely made up of multilateral agreements that apply to all of the 140 WTO Members equally. The decision of the US Department of Defense to disallow some WTO Members, such as Germany, France, and Russia, to participate in the reconstruction effort in post-war Iraq apparently contradicts the fundamental principles of the WTO ( Palmeter and Meagher, 2003). However, the issue is much more complex than this, and difficult questions would have to be answered in order to successfully challenge the Department of Defense’s decision under WTO rules. A large share of US government procurement is excluded from these rules and according to the US government, it appears the same for the Iraq reconstruction contracts.

Firstly, there are two primary WTO rules both contained in the General Agreement on Tariffs and Trade (GATT), which entered into force for signature countries in January 1996:

(i) the most favoured nation (MFN) principle, which provides for all WTO Members to treat all other WTO Members equally; and
(ii) the national treatment principle, which provides for all WTO Members to treat goods of other WTO Members no less favourably than domestic goods.

Article III does provide an exception to the national treatment rule, stating;

‘… laws, regulations or requirements governing the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale …’.

An issue to address would be whether any of the Iraq reconstruction contracts fall within this exception. There is no express exception from the MFN principle for procurement, therefore, the US Department of Defense policy to favour some WTO Members over others may be a cause for concern. However, both of the primary WTO rules cover the import and distribution of goods, and it is unlikely that they do cover the Iraq reconstruction contracts which mostly involve the purchasing of services.

Secondly, the Government Procurement Agreement (GPA) is undoubtedly the most relevant set of WTO rules to the procurement of the Iraq reconstruction contracts. The GPA entered into force in 1996 and is a means used to regulate public tenders to guarantee the transparency of the procedures and to ensure equal treatment of domestic and foreign suppliers. It is one of the four WTO plurilateral agreements, therefore, in law is optional for WTO members to consent to, however, applicants are now expected to consent to it as a condition of WTO membership (Arrowsmith, S, 2004, p21). WTO-GPA signatories include the US, the European Community (including its Member States), Canada, Japan and Korea. Russia is not a party, nor is Iraq ( USInfo.State.Gov). In order to challenge the consistency of another party’s actions with its obligations under the GPA, the challenging party must also be a signatory to the GPA.

Only central government entities and contracts of value above the threshold of approximately USD 7.2m are subject to the GPA (Trionfetti, 2000, p 57). The majority of the Iraq contracts are valued above the threshold requirement. Even so, parties are only bound by the extent that they have expressly agreed to commit particular procurement processes and entities to be covered by the GPA. Each party submits an Appendix I which contains annexes that identify all the public entities which that party wishes to be subject to the GPA. One of the annexes identifies a positive and negative list of the types of services to be covered by the party’s obligations (which includes the types of construction services).

Therefore, it is necessary to analyse the Iraq reconstruction contracts to determine whether the entity involved is covered by the US’s GPA obligations, and whether the type of service involved is also covered by those obligations.

Firstly, the public entities awarding the Iraq reconstruction contracts must be listed in the US Appendix I of the WTO USAID is listed, however, it is also stated that this does not include procurement for ‘the direct purpose of providing foreign assistance’. It is unlikely, therefore, that the first round of contracts awarded by USAID for Iraq redevelopment to US firms will be covered by the GPA. The Department of Defense is listed in Annex 1, therefore, any contracts awarded by them are also covered.

Problems emerge in determining whether the CPA is also covered by the GPA. The Department of Defense has stated that the 26 prime contracts awarded by the ‘CPA and the Department of Defense, on behalf of the CPA’ ( US Department of Defense, 2003) are not covered by international trade procurement obligations because the CPA is not an entity subject to these obligations ( USTR, 2003).

Article I:3 of the GPA states that:

‘…where entities, in the context of procurement covered under this Agreement, require enterprises not included in Appendix I to award contracts in accordance with particular requirements, Article III shall apply mutatis mutandis to such requirements …’

Although the CPA is not an entity specifically listed in the US’s Appendix I, it may still be covered by the GPA. In the Korea - Government Procurement case9, the US challenged some of the procurement practices adopted by Korea under the GPA. The issue in question was whether an entity not specified on the Korean Appendix I was ‘essentially a part’ of an entity already on the list, and whether the two entities were legally incorporated. The US had argued that it had ‘reasonably expected’ that it had received Korea’s commitment to extend GPA-consistent treatment to US suppliers for the procurement for an international airport. However, the Panel held that the specific entities responsible for the procurement were not included in Korea’s commitments; therefore, Korea had not violated the GPA.

Analysis of the Korea - Government Procurement case, however, does not fully resolve the issue of the relationship between the Department of Defense and the CPA as an incorporated entity under the US Appendix I. There are at least three reasons why the legal personality of the CPA is unclear:

(i) the US have argued that the CPA is an international entity, and not a party of the GPA;
(ii) the assertion of the US Department of Defense in their Determination and Findings memorandum to control the activities of the CPA in awarding the reconstruction contracts could be interpreted to be within the meaning of Article I:3 of the GPA;
(iii) the independence of the CPA in awarding the contracts is not clear, which could be a major factor in deciding whether or not it should be treated as a US entity under GPA obligations (Palmeter and Meagher, 2003).

If it can be successfully argued that the CPA is an independent body from the US, and is not covered by the WTO rules, then it is free to discriminate in awarding the contracts as it pleases (Busk and Alden, 2003).

Secondly, it is important to determine whether the types of contracts awarded by any of the public entities in Appendix I are covered by the US obligations under the GPA. The 26 contracts awarded by the Department of Defense and CPA involve many different services, such as construction activities, communication, management services in the health sector, equipping the new Iraqi Army, etc (Determination and Findings Memo, Attachment 1).

Annex 4 of the US obligations to the GPA excludes ‘all services purchased in support of military forces located overseas’. It is arguable that some of the contracts awarded to reconstruct Iraq are considered as necessary to support the US military forces in Iraq, therefore, exclude them from any obligations under the GPA. However, contracts to construct Iraq’s infrastructure is not likely to be within this exception.

The US has stated that ‘any form of government assistance, including cooperative agreements, grants, loans, equity infusions, guarantees’ are also exempt from its obligations under the GPA. Therefore, contracts of a type to reconstruct Iraq’s infrastructure (rather than purchase services to support the US military abroad) may be excluded as well from the GPA. This will ultimately depend on the individual details of each of the 26 contracts procured.

The GPA does not apply to ‘procurement indispensable for national security or for national defence purposes’ (Busk and Alden, 2003). This security exception is provided for in Article XXIII:1 of the GPA, and the Deputy Defense Secretary has said that it is for this reason that the US adopted the policy to ban countries from the rebuilding contracts in Iraq. It is debatable whether such an argument by the US is valid for the reconstruction of Iraq’s infrastructure (King, 2003, p2). There is a possibility that such use of the exception could undermine important WTO obligations and encourage WTO Members to evade them at their own discretion.

It is possible however, that the US has alternative justifications not to comply with WTO rules. The GPA does contain an endnote which provides that certain types of development assistance (eg ‘tied aid’) are not subject to the GPA rules, which indeed may cover the reconstruction contracts for Iraq.

3.3.2. The UNCITRAL Model Law on Procurement of Goods, Construction and Services

The United Nations Commission on International Trade Law (UNCITRAL) adopted a Model Law in 1993, a non-binding instrument offering flexibility and guidance for States to form part of wider trade regulations (Arrowsmith, 2004, p 17-46)10.

The UNCITRAL ‘model’ rules cover:

‘…all essential procedures and principles for conducting procurement proceedings in the various types of circumstances likely to be encountered by procuring entities…’ (Guide to Enactment, para 12)

Its main objectives are to avoid inefficiency, ineffectiveness and abuse in public procurement as a result of an inadequate legislative national framework. It is more detailed and demanding than the WTO-GPA, however, is unlikely to have as much an impact (Arrowsmith, 2004, pp 17, 25-26).

Articles 52-57 of the Model Law provide for a system of supplier review which includes a complaint made by the challenging party to the procuring entity or authority supporting the challenged decision, a review by a superior administrative authority, and judicial review. Any successful challenges against the US government under this model law for non-compliance is unlikely, however, as its methods of enforcement are not strict enough to interfere with recognised constitutional arrangements.

3.3.3. Procurement Guidelines Under World Bank Loans

The relevance of the World Bank in Iraq is its involvement in the International Reconstruction Fund Facility for Iraq (the Facility). At the European Commission’s Conference in Madrid on the Reconstruction in Iraq on the 24 October 2003, the World Bank’s involvement was discussed in relation to the creation of a transparent and operational multilateral framework for reconstruction. The World Bank and the UN were in the process of establishing a Multi-Donor Trust Fund for Iraq, through which donors wishing to contribute to the reconstruction effort could channel their contributions (European Commission, 2003).

It was agreed that the World Bank is to administer its Iraq Trust Fund (ITF) under the Facility11 in accordance with its ‘Guidelines for Procurement under IBRD Loans and IDA Credits’ (World Bank 2004, para 56). Eligibility criteria and the application of the guidelines apply, including strict accordance with certain procurement procedures, that is the UNCITRAL Model Law. Failure to comply may result in cancellation of financial lending (Report No P7615, paras1.5, 1.6-1.8, and 1.13).

There are no issues of illegality here, per se, for two main reasons:

(i) the procedures are internal and any concerns raised are subject to review by the Facility’s Coordination Committee and the Donor Committee;
(ii) the World Bank, as an international public organisation, is unlikely to be subjected to international rules12.

4. American Procurement Law and Corruption

4.1. Federal Acquisitions Regulations

There are a number of different US Government agencies involved in the reconstruction effort in post-war Iraq (for example, the Department of Defense, United States Agency for International Development (USAID)). The procurement of these contracts, therefore, occurs under different statutes and rules but all contractors are obliged to comply with the Federal Acquisitions Regulations (FAR).

FAR is the primary regulation for use by all Federal Executive agencies in their acquisition of supplies and services with the appropriations that the US Government has acquired from tax payers. It provides for full and open competition (40 US Code 474), fair and transparent assessment of a contractor’s ability to perform, simple and uniform procedures to conduct the pre-solicitation, selection and negotiation processes, and provide notification to offerors in making an award. The FAR entered into force on 1 April 1984.

Under the joint authorities of the General Services Administration, the Secretary of Defense, and the Administrator for the National Aeronautics and Space Administration, the FAR was issued within other applicable laws.

For example, USAID, the agency that has awarded $900m worth of contracts to US firms for the Iraq reconstruction programme, is subject to the terms of the Foreign Assistance Act of 1961. Section 604(2)(g) of the FAA states that:

‘…none of the funds authorised to be appropriated or made available for obligation or expenditure under this Act may be made available for the procurement of construction or engineering services from advanced developing countries …

….which have attained a competitive capability in international markets for construction services or engineering services…’

Therefore, only US firms can be awarded the prime Iraq contracts by the US Government It was stated that these firms must however understand the federal procurement rules, accounting standards, standards of the (USAID) inspector general and the General Accounting Office (of Congress) and have security clearance ( Scherr, 2003).

4.1.1. USAID’s Compliance Record with the FAR

The Office of Inspector General (OIG) makes a review of each contract awarded by USAID to determine compliance with Federal regulations. Table 2 represents some of the non-compliance issues with the FAR from a random selection of the USAID awarded contracts.

It can be seen that out the five contracts selected, only one complied fully with the requirements of the FAR. Through recommendations given by the OIG, USAID is given the opportunity to correct themselves or implement measures to ensure non-compliance does not reoccur in future contracts.

In circumstances such as the crisis situation in Iraq, USAID can be authorised under statutory authority by the Office of Inspector General ‘expedited acquisition’ and ‘assistance procedures for activities and programmes’. This authorisation allows USAID to award such contracts using other than full and open competition requirements (as specified under 40 USC 474). However, awarded contracts must be supported by written justifications and approvals as described in the FAR. The statutory authority also requires that agencies request offers from as many sources as is practicable under the circumstances.

A detailed examination of the memorandums issued by the OIG shows that even under the authorisation of limited competition, USAID still did not comply fully with the requirements of the FAR under expedited circumstances in a number of contracts. For example, the largest value contract, for the Iraq Infrastructure Reconstruction (IIR), it is stated that under limited competition conditions, the average procurement time to award a contract is seven months. In this case, the Iraq Infrastructure Reconstruction contract was awarded within three months. Considering the nature, size and expense of such a contract to be performed, it is fundamental that the procurement process is seen to be carefully executed and value for money is achieved. This is always important in an area which concerns the public interest and welfare of political society. There a number of indicators that can be used to help identify corruption risk (discussed in 4.2), and the misuse of an expected time frame of a procurement operation is one specific example. Therefore, concerns about corruption may arise.

Table 2: USAID’s Compliance Review with Federal Acquisitions Regulations (FAR) by the Office of Inspector General (OIG)

Date of Memo

Value of Contract

Name of Contract Awarded

US Firm Awarded

Non-compliance issue(s) noted

Recommendation(s) by the OIG

Response to Recommendation(s)

27.01.2004

$10.2m (18 months) Plus two optional years,

a potential total cost of $31.3 m

Iraq Airport Administration

Contract

SkyLink Air and

Logistic Support (USA), Inc

-There was no documentation in the contract files of market research performed to support the size and complexity of this acquisition

-SkyLink USA’s incorporation status had lapsed before it was asked to participate in the bidding process (nb: this lapse was corrected several days before the final contract was signed)

-USAID had not reviewed SkyLink USA’s newly implemented cost accounting system and provisional indirect cost rates

-USAID had not determined if SkyLink USA needed a facilities clearance*

Recommendation No.1: Before sponsoring SkyLink USA for a facilities clearance and modifying the airport administration contract to require one, the Asia & Near East Bureau should determine if there is a need for SkyLink USA to have a facilities clearance and take appropriate action when this decision is made

The Office of Procurement and

the Asia & Near East Bureau determined that there is not a justifiable need for SkyLink USA to have a facilities clearance. Therefore, final action has been taken on Recommendation No.1

27.01.2004

$4.8m (one year with no option years)

Iraq Seaport Assessment and Operation Contract

SSA Marine, formerly known as Stevedoring Services of America

-USAID failed to comply with the need to document market research described in the negotiation memorandum

-USAID changed the facilities clearance requirements of the Request for Proposals (RFP) during the procurement process

Similar recommendation to the Airport Administration Contract. Also, 2 recommendations made to the Office of Procurement:

1) issue a policy directive to provide guidance to procurement officials on the requirements for documenting contractor facilities clearances during the procurement process,

& 2) ensure that when facilities clearance requirements are part of an RFP, the decision to go forward or delete the requirement is made prior to selection

The Office of Procurement has not yet developed specific procedures requiring contracting officers to verify, in the early stages of the procurement process, the facilities clearance level of the bidding contractor. USAID is still in the process of taking action on these recommendations

14.01.2004

$36.9m (one year plus 2 option years)

Agriculture Reconstruction and Development Programme for Iraq Contract

Development Alternatives, Incorporated (DAI)

USAID complied with applicable federal regulations in making the award

n/a

n/a

Date of Memo

Value of Contract

Name of Contract Awarded

US Firm Awarded

Non-compliance issue(s) noted

Recommendation(s) by the OIG

Response to Recommendation(s)

17.10.2003

$43.8 m

(cost-plus-fixed-fee completion type contract)

Health System Strengthening in Post-Conflict Iraq Contract

Abt Associates

-USAID did not consult the General Councel for a legal opinion, as required by the FAR, before excluding a firm (out of two offerors) from the invitation to bid on the contract

Recommendation No.1: USAID should use a checklist of contract procurement steps, which among other things, will ensure that it requests and obtains an opinion from it's Office of General Counsel on conflict of interest issues regarding potential bidders.

Recommendation No.2: the Office of Procurement should obtain an opinion from USAID's Office of General Counsel, which specifies whether the firm providing personnel support services to USAID in Iraq should have been excluded from the invitation to compete for the Health System Strengthening in Post-Conflict Iraq Contract

USAID concurred with the OIG that it had not obtained advise from the General Counsel, and would include a step to refer conflict of interest issues to the Counsel to help ensure compliance with the FAR.

USAID subsequently obtained the required opinion from the General Counsel, who concluded that the firm was appropriately excluded from bidding on this contract. Final action has therefore been taken on Recommendation No.2

23.07.2003

$679,833,259

(cost-plus-fixed-fee type contract)

Contract for Iraq Infrastructure Reconstruction (IIR)

Bechtel National, Inc

-USAID did not comply with Federal Regulations in providing notification to offerors who were not selected (FAR 15.503(b)(1))

-USAID did not comply with Federal Regulations in providing timely debriefings to all requesting offerors (FAR 15.506)

-Pre-solicitation contacts with offerors were not documented (FAR 15.201), to maintain good business practice and provide further evidence of USAID's compliance with FAR 3.101-1 ("Standards of conduct - General")

Recommendation made to USAID's Office of Procurement to develop administrative procedures to ensure that timely award notification and debriefings are performed in accordance with FAR requirements.

Second Recommendation made to the Office of Procurement to issue an Agency-wide notice that would ensure that items discussed in pre-solicitation meetings with potential offerors are documented.

-USAID, whilst admitting that it was late in providing the non-selected contractors with a debriefing, stated that the delay was a result of the urgency of getting the selected contractor working in Iraq.

-USAID felt that documenting these meetings would place a burden on USAID personnel. The OIG maintain that records of such meetings would provide additional information to officials in the Office of Procurement as the award process progresses, and provide evidence of USAID's compliance with FAR.

 

4.1.2. Department of Defense’s Compliance Record with the FAR

The results from an audit published by the Office of the Inspector General on the 18 March 2004, discloses the following specific contracting rules that were evaded or liberally interpreted:

  • firm contract requirements were not established by the personnel who generated the contract requirements (8 of 24 contracts);
  • of 24 contracts awarded, 18 were awarded using the General Service Administration Federal Supply Schedules which the contracting officers ‘misused’ (10 of 18 contracts);
  • personal services contracts were inappropriately awarded by the contracting officers (10 of 24 contracts);
  • ‘out-of-scope activity’ was permitted by the contracting officers (1 contract);
  • price reasonableness determinations were not supported by the contracting officers (22 of 24 contracts);
  • little or no Government surveillance on awarded contracts was performed by officials (13 of 24 contracts).

The reason given by the Department of Defense for the non-compliance of the contracting rules was that they had to acquire supplies and services quickly because of the rapidly changing situation in Iraq in early 2003.

Out of 24 contracts awarded by the Department of Defense, only two are considered to have followed the FAR. As a result, the Department of Defense have been warned that they cannot be assured that the best contracting solution was provided, that they received fair and reasonable prices for the goods and services, or even that the contracts will perform the work that the contract required.

Recommendations to prevent future problems included an analysis of all the ongoing contracts, determination of Government liability, and initiation of appropriate termination actions. Also, compliance with the FAR when documenting the contract files, appointment of representatives for the Iraqi contracts, provision of monthly status reports of the contracts, and ensure that contractors refund any overpayments to the Government. It is reported that the majority of these recommendations have been agreed upon.

The audit also notes that the OIG did not identify any actions taken by Government personnel which ‘were based on the desire for personal gain’ despite the various acquisition problems. Interestingly, the proposal for a review and initiation of appropriate administrative action against the contracting officers who failed to apply the FAR and misused the General Service Administration Federal Supply Schedules was rejected by the commander. The commander stated that there was no evidence that any contracting officials acted illegally or in bad faith, and that it was ‘unconscionable’ that action be taken against contracting officials without holding any senior officials responsible for making the demands accountable.

4.2. Corruption in Public Procurement

Corruption is an offence relating to the improper influencing of people in certain positions of trust (Oxford Dictionary of Law). It is an important consideration with regard to the reconstruction contracts for post-war Iraq because these contracts involve large sums of tax payers’ money, the involvement of a State government and private firms. Also, issues have been raised from this assessment that some important procurement rules have not been complied with.

Public procurement usually accounts for the largest share of public expenditures at all levels of government. The value of individual contracts is high and government salaries and social benefits are relatively low. The risk of punishment for corruption is small. The opportunities and temptations for bribes and other pay-offs are abundant. The result is that corruption is notorious in public procurement (Strombom, 1998).

Corruption undermines the institutions and legitimacy of a State and affects the efficiency of public action. The importance of combating corruption is to essentially protect the taxpayer, as it is clear that it is the public who lose out in the end. A recent example of the consequences of a State’s citizens, through non-compliance of regulations and poor quality construction, is the earthquake in Turkey (2001) that killed 176 people (Hors, 2003).

Procedures that include the principles of fair competition, transparency and efficiency are thought to be only part of the solution to corruption in public procurement. Efficient controls, the provision of education to private and public actors and a strong political will are also required to circumvent corruption (Hors, 2003).

4.2.1. Detecting Corruption

A method adopted by the Central Service for Corruption Prevention (SCPC)13 is based on known patterns of corrupt practices in public procurement and an identification of the tracks that these practices are likely to leave.

Reliable records of companies should be easily compared to the following information for each procurement operation;

1. the expected time delay and the budget allocated initially;

2. the actual duration and cost;

3. the procurement method used;

4. whether the procurement operation gave rise to litigation;

5. the identity of the company who won the contract and information of its activities and history

6. the identity of the public officials involved in the definition of the project, in the evaluation of the bids and in the allocation of the contract (Hors, 2003)

If there is any variation from the above information, then a suspicion of corruption may arise which will initiate an investigation line that will reveal either an illicit operation or inefficient implementation of procurement procedures (Hors, 2003,).

4.2.2. International Anti-Corruption Instruments and the US

The first multilateral instrument specifically designed to combat corruption was signed by 21 Member States of the Organisation of American States (OAS) in 1996. The Inter-American Convention Against Corruption (ICAC) entered into force on the 6 March 1997, and has been the main influence for the enactment of other international instruments (Baistrocchi, 2002).

Corrupt acts covered by the Convention include the direct or indirect solicitation or acceptance by a government official of any benefit for his personal benefit, in exchange for any act or omission in the performance of his public functions (Article VI). Corrupt acts must be established as a criminal offence in the domestic law of a State Party (Article III). Measures are also prescribed to prevent corruption that the Parties ‘agree to consider establishing’. The wording of the Convention does suggest that these measures are more instructive than legally binding. States that do not punish these acts internally are required to assist and cooperate within the framework of the Convention.

The ICAC broadly defines ‘Public Function’ to cover temporary or permanent, paid or voluntary activity, performed by a natural person in the name of the State, the service of the State or its institutions at any level of its hierarchy (Article I). The Convention also broadly defines a ‘Public Officer’ to cover any civil servant at any level of its hierarchy. Interestingly, the US has made an explicit reservation that no obligations may be imposed with respect to the conduct of officials other than Federal officials (Baistrocchi, 2002).

In October 2000, the US passed the International Anti-Corruption and Good Governance Act. S.203(a)(5) of this Act amends the Foreign Assistance Act 1961 by establishing ‘the promotion of good governance through combating corruption and improving transparency and accountability’ (Baistrocchi, 2002). This new US policy authorises the US President to establish such programmes in foreign countries where it has either a significant economic interest, provides it with significant foreign assistance or where the practice of corruption is well known.14 It is likely that the US will set up anti-corruption programmes in Iraq to govern government procurement processes.

However, the accountability of the US government for the procurement of the Iraq reconstruction contracts is already doubtful. Numerous demands have been made by members of the US Congress to improve oversight and accountability over the reconstruction of Iraq which highlights the concerns about corruption ( Corporate Watch et al, 2003).

4.2.3. Improving the Accountability of the Iraq Reconstruction Contracts

In the House of Representatives, the following demands are recorded to have been made;

1. to introduce the ‘Rebuild Iraq Contractor Responsibility Act’, which would require that businesses seeking contracts in Iraq possess a satisfactory record of integrity andbusiness ethics;

2. to make an amendment to the House Resolution 1837 through the ‘Services Acquisition Reform Act of 2003’, so that government agencies procuring Iraq reconstruction contracts are required to publish full details of all non-competitive contracts. This was accepted by the House Government Reform Committee on the 8th May 2003;

3. to call upon the General Accounting Office (GAO) to investigate contracts with private firms for work in Iraq;

4. to call upon the GAO to investigate the US agencies, offices and international organisations involved in reconstructing Iraq and their roles in the procurement process.

In the US Senate, two amendment proposals were passed on the 22 May 2003 following strong demands for legislative alteration. The first amendment was to the Defense Authorisation Bill (Warner-Boxer Amendment 826), requiring the Department of Defense to comply with standard competitive bidding practices when awarding any contract for Iraq reconstruction. This was passed unanimously by the Senate. The second amendment was to the Defense Authorization Bill (the ‘Sunshine in Iraqi Reconstruction’ amendment) which requires that the Department of Defense to publish justification documents for any Iraq contract awarded through a non-competitive bidding process.

These demands and alterations are the result of public pressure calling on the US Government to account for the massive tax expenditure being invested into the reconstruction effort in Iraq, in which corporate enterprises are set to profit. Contracts that have been examined in the previous chapter show substantial cost differences between the initial budget allocated for purchasing a firm’s services and the final sum awarded ( USAID, 2003). Overspending is a prime example of a specific indicator of corruption risk (Hors , 2003). The publication of justification documents and full investigations into the procurement process adopted by State agencies, such as USAID, will inevitably help answer obvious questions that arise such as how USAID could have made such a dramatic mistake in evaluating the contract. Also, an investigation line may be initiated to discover corruptive practices that may bring the firm into disrepute. Without a satisfactory record of integrity and business ethics, it is unlikely that such a firm could have future business with the government. This will encourage other firms to bid, opening up the procurement process to become accountable, transparent and non-discriminatory, satisfying international rules and more importantly the taxpayer.

5. Conclusion

It would seem that the home biased procurement activities of the US agencies and their non-compliance with the important GPA rules is justified. However, the analysis of compliance by the US agencies with respect to US domestic law has revealed dubious justifications for their adoption of non-transparent, unaccountable and discriminatory practices.

The FAR are strict procurement rules and provide that the US Government is not allowed to award firms, other than US firms, contracts that are to be procured with US appropriations. However, the US Government agencies have had to justify why they themselves have not complied fully with these ‘strict procurement rules’. Firstly, the Office of Inspector General (OIG) granted USAID statutory authority to award their contracts using ‘other than full and open competition requirements’. However, it has been discovered that even under these conditions, the FAR provides that written justifications and approvals must be submitted to support the contract award. This has not always been accomplished. Secondly, the Department of Defense did not comply with the FAR for the expressed reason that the need to acquire supplies and services quickly was a response to the rapidly deteriorating situation in Iraq. Although no statutory authorisation was given by the OIG to use such methods for awarding these contracts (to the knowledge of the author), it would appear that little more than ‘recommendations’ have been given to ensure compliance.

The discussion concerning corruption is particularly relevant, as without a transparent and accountable government, public involvement and participation is restricted. Essentially, it is the US taxpayers’ money that is being spent by the US agencies. If the public are not satisfied with the integrity of their national system, then a radical change of government aims should be engaged. As a consequence of which, the Iraq contracts could be abandoned to channel the funds back into US society.

In relation to the 80 percent of the DFI awarded largely to US contractors by the CPA before 28 June 2004, it has been reported that most of this money was awarded without any competition or application of US government procedures against fraud, waste and abuse. This appalling example seems to have been continued by the Iraq interim government when awarding further contracts, as little, if not any, information has been made publicly available since their empowerment (OSI Revenue Watch Report No 7 Sept 2004).

While the lack of security in Iraq exists, US firms may find that they are physically unable to work there. The elections scheduled in Iraq beginning of 2005 may result in an emergence of ‘a coalition dominated by religious parties of the Shia majority’, (Dinmore, 2004). This could demolish the US’s objective to create a democracy and stability in the region. The main concern resulting from a further change in Iraqi government, for both US, UK and Iraq will be the length of time foreign troops will remain in Iraq to fight against the persistent rebel forces.

The future of Iraq depends on making the country more secure and on its successful reconstruction, as Brian Wilson, the former UK construction minister, stated in August 2003:

‘…nobody would underestimate the safety issue, but it also emphasises why the reconstruction is so important. Rebuilding is needed so the region can move forward…’ (cited in Broughton, 2003, p 11).

Endnotes

1 For example, the Development Assistance Committee (DAC) which includes the following members; Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the UK, the US and the European Commission.

2 The Coalition Provisional Authority is comprised of 63 countries and led by the US Pentagon.

3 On 18 October 1907, the US signed and ratified the Hague Regulations. Iraq has only signed these conventions, so is therefore, not a party.

4 See Regulations Respecting the Laws and Customs of War on Land, annexed to the Convention Respecting Laws and Customs of War on Land (1907), and the Convention Relative to the Protection of Civilian Persons in Time of War (1949)

5 Disorder, Negligence and Mismanagement: How the CPA Handled Iraq Reconstruction Funds OSI Revenue Watch Report No 7 September 2004.

6 Article 43 does provide an exception which applies when the occupying power is ‘absolutely prevented’ from respecting an occupied state’s law, e.g. if such pre-existing laws threaten safety and supply of the occupying force, public order and civilian life of the occupied state. Ignoring or amending such laws may also be justified by necessity in relation to the occupied population or the occupying force.

7 For example, the IAEA Guidelines 1985 which were rapidly adopted in the 1986 Convention on Early Notification of a Nuclear Accident after the Chernobyl catastrophe.

8 The two standard GPA procedures, included in the UNCITRAL Model Law, are ‘open tendering’ and ‘selective tendering’.

9 Korea - Measures Affecting Government Procurement, WT/DS163/R (June 2000) para7.59 < http://www.wto.org/english/tratop_e/gproc_e/disput_e.htm>

10 The World Bank has consistently and actively participated in the preparation of the Model Law, therefore, it recommends that legislation be based on it before the World Bank finances procurement reform. The significance of this could be that Iraq, after the occupation, may have to adopt the Model Law in its legislation as a condition to obtain funding from the World Bank.

11 The Facility is composed of two trust funds, the World Bank’s ITF, and the UN Development Group Iraq Trust Fund to be administered by the UN Development Programme (UNDP) and participating UN organisations.

12 In Mendaro v World Bank [1983] 92 ILR, pp92, 97-99, the US Court of Appeal held that the justification for granting immunity to international organisations was to enable them to pursue their functions more effectively, in particular, to operate freely from unilateral control by a member state over their activities within its territory.

13 The SCPC is a specialised unit for analysing corruption, providing education and training on corruption, advising public authorities and assisting courts (Hors, 2003).

14 The Transparency Index of Transparency International lists the countries that are known to have problems with corruption.

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