In Struggle to Rebuild,

MUSAYYIB, Iraq -- The gleaming new power plant here could have been a rare example of a successful Iraq reconstruction project. Its control rooms are stocked with state-of-the-art computer systems, and its enormous generators -- equipped to boost Iraq's total electricity supply by 10% -- are ready for use.

Yet as Iraqis struggle with continual power outages, and the searing summer nears, most days this sprawling compound 40 miles south of Baghdad is nearly deserted. The buildings here are shuttered, the unused generators gathering dust. This plant wasn't derailed by insurgent attacks. It was hijacked by a bitter dispute between the Iraqi government and a Texas contractor, a clash that has roped in the U.S. Embassy and escalated into charges of corruption and incompetence.

The fight highlights the dangers of the Bush administration's stated plan to wind down the U.S. rebuilding effort here, leaving it to the Iraqi government to rebuild the country. U.S. reconstruction officials say it's already clear that the $33 billion spent by the U.S. won't restore Iraq's basic services to their prewar levels.

Awash in oil revenue, the Iraqi government has tens of billions of dollars to spend rebuilding. But Iraqi officials have virtually no systems in place for negotiating large construction contracts, overseeing the work itself, or making payments to foreign contractors on time. That has led the Iraqis to hire foreign contractors who were inexperienced or incapable of doing the job.

The plant at Musayyib, which officials say is weeks away from being operational, has become the most prominent symbol of the paralysis. "The Iraqis have spent $300 million on this plant, and all they have is some metal sitting in the desert," says John Dempsey, a U.S. reconstruction official during a recent visit to the plant.

Three years ago, the Musayyib plant was a symbol of something else: the optimistic, ambitious push by Iraq's first post-Saddam Hussein government, in conjunction with its American benefactors and American companies, to repair the country's infrastructure. Electricity shortages had become a major source of public anger toward the American and Iraqi governments, with insurgent attacks and production problems pushing Iraq's power supply below prewar levels.

Iraq's Ministry of Electricity signed the contract with Southeast Texas Industrial Services Inc., a privately held company that specializes in building power plants, refineries and oil-drilling sites. The project was the largest undertaken by the Iraqi government since the U.S. invasion -- a $283 million effort to build a 500-megawatt plant, plus an adjacent refinery that would process much-needed fuel for other nearby electricity plants.

A Big Step

It was also a big step up for Southeast Texas. The assignment was the largest in the company's history, and the most challenging. Based in a low-slung brown building in the small town of Buna, three hours outside of Houston, Southeast had never worked overseas, let alone in a war zone like Iraq. Its total 2003 revenues were about $250 million, smaller than the Musayyib contract.

Exactly how Southeast Texas won the Iraqi contract is a matter of dispute. Iraqi officials believe Southeast bribed the then-electricity minister, later arrested on unrelated corruption charges, to win the business. "To hire a company that is not well-known to do a project this big, and sign the contract in a couple of days? Who has ever heard of such a thing?" says Senior Deputy Minister of Electricity Raad al-Haris. "I think money changed hands." Mr. Dempsey, the U.S. reconstruction official, concurs: "They probably paid a bribe," he wrote in an internal memorandum earlier this year.

"We've never paid a bribe to anybody," says W.C. Cole, the company's executive managing director. Southeast says it was in Amman bidding on a Jordanian government project when it got word that Iraq was accepting bids for a large power plant. Southeast says it then submitted what it was told was the lowest bid.

However the deal originated, Southeast Texas executives say they were excited about the project. "We supported our president completely and we thought it would look good for our company if we went in and helped rebuild Iraq," says Mr. Cole, who has spent 40 years in the construction business.

The good feelings didn't last long.

In March 2004, the company says it notified the Iraqi government that it was behind in its payments. Having been warned by Iraqi officials that the site needed better security, Southeast says it built new concrete walls and guard towers. So it wasn't able to begin work at the site until May 25, nearly four months later than planned.

Insurgents began targeting the site almost immediately. On June 4, mortars slammed into the construction site. A few days later, three of the company's security guards were badly wounded when their vehicles were ambushed. On Oct. 15, 2004, the site was hit by nine mortars and a car bomb. Amid continuing security problems, Southeast shut down its operations on Oct. 9, 2005.

Southeast notes that under its contract, the Iraqi government was responsible for "security for the site and transportation for equipment and personnel to/from the site." "The Iraqis would promise to send guards, but the guys would show up without guns," says Paul Spence, Southeast's president and son-in-law of its late founder. "Then they'd have guns, but they wouldn't have bullets." As a result, Southeast says it had to spend millions on Western bodyguards and other measures. The company passed its security expenses on to the Iraqi government, infuriating many Iraqi officials.

The Iraqis acknowledge they were late with payments, citing the confusion resulting from many changes of leadership, and say they occasionally fell short in meeting their contractual promises. But the Iraqis also accuse the company of continually setting conditions for resuming work at the plant, leaving the site idle for long stretches.

"I knew they were cheating us. But the government was desperate to finish the plant, so we gave in," says Mr. al-Haris, a Western-educated official involved in the Musayyib project since its inception.

Under the terms of a Nov. 2, 2005, agreement, Southeast agreed to resume work on the plant in exchange for an additional $9.1 million from the Iraqi government. The company says the next payment didn't arrive until Feb. 17, 2006 -- 108 days late.

Work on the Musayyib plant finally resumed on March 23, 2006. One week later, the bad blood exploded during a meeting at Amman's Sheraton Al-Nabil Hotel & Towers. According to participants on both sides, the Iraqis were told they would have to pay more if they wanted Southeast to test the plant's machinery and bring it on line. Mr. al-Haris, the Iraqi government official, says he told the Southeast executives that they were a "bunch of cheats," and then stormed out of the room.

In September 2006, Southeast told the Iraqis that its American employees needed Defense Department badges so they could enter U.S. military facilities across Iraq and take refuge there in emergencies. Since the badges could only be given to contractors working on U.S.-funded projects, Al Herman, a senior U.S. Embassy official, suggested awarding Southeast a small U.S. contract to train Iraqi workers on the new equipment. "The idea was to give them a make-work contract worth $100,000 or so," Mr. Herman says.

A few days later, Southeast submitted a $7.95 million bid. The offer angered the U.S. Embassy officials, who felt the company was trying to take advantage of them.

Mr. Cole says Southeast was simply trying to submit an honest bid. U.S. officials had asked the company to send a proposal for six months of on-the-job training, which would entail millions of dollars in security costs alone. "They never told us this was a dummy contract," he adds.

Final Chance

By that point, Southeast executives had made the decision to walk away from the project. In January, Mr. Cole emailed Karim Hasan, the new Iraqi electricity minister, to say that the company was giving the government a final chance to correct its "innumerable" failures to secure the site, provide the badges, and make timely payments. If the ministry failed to do so within four days, Mr. Cole wrote, Southeast would consider the contract "terminated" and begin seeking financial damages.

In his emailed reply, Mr. Hasan accused the company of acting in bad faith. "STIS's behavior, we now see, has for some time had the objective of engineering a means for STIS to avoid its obligations under its contract," the Iraqi official wrote.

Southeast formally severed the Musayyib contract on Jan. 31. In an email to Mr. Hasan, a lawyer for the company said it would attempt to recover financial damages of at least $20 million for its security expenses and lost profits.

On Feb. 18, Mr. Hasan accused Southeast of "holding the Iraqi people hostage to its attempt to extort both the Iraqi and American governments" and threatened to open arbitration proceedings and refer the company to the U.S. Justice Department. Mr. Cole replied in kind: "We are confident in our position and in our opinion, were you confident in yours, you would not succumb to such baseless threats."

While the Iraqi government and Southeast traded attacks, U.S. officials were quietly looking for a way of somehow finishing the plant. They had long ago given up on Southeast, whom they deemed unreliable. In his memo to colleagues, Mr. Dempsey wrote: "I do not believe STIS is competent to complete this project."

"If the plant is practically complete, and we're not 'competent' to complete it, how did it get this far?" Mr. Cole replies. "If the U.S. government had done anything to help us, the plant would be up and running already."

U.S. officials say they're even willing to use American funds to finish the plant. But they knew that it wouldn't be enough for them to simply hire another contractor and send them to Musayyib. Without Southeast's blueprints and software, it would be extremely difficult for another company to get the plant's generators and computers running properly.

When U.S. officials approached Southeast, Mr. Cole said in an email that Southeast would be willing to turn over the software and blueprints and drop its planned litigation -- if the Iraqi government agreed to terminate the contract and pay the company approximately $8.2 million.

Rejecting the Offer

The Iraqis rejected the offer, and on April 11, Southeast filed arbitration papers with the Paris-based International Chamber of Commerce accusing the Iraqi Ministry of Electricity of defaulting on the contract. In the filing, the firm asks for damages of as much as $35 million.

The Iraqi government says it will soon file a countersuit asking arbitrators to force Southeast to return as much as $40 million to the ministry. Iraqi officials accuse Southeast of pulling out of Iraq without meeting its contractual obligations to complete the plant, and then refusing to return. U.S. Embassy officials side with Baghdad, saying Southeast was incapable of completing the job and charged too much for its services.

Southeast officials defend the quality of their work on the plant and say all the accusations are unfounded. Managers say they regret what happened at Musayyib. "Do you understand that I lost people on this job? Friends?" asks Jack Childress, the project manager for the Musayyib plant, brushing away tears as he discusses the saga from his office in the company's headquarters. Mr. Childress devoted two years living in Musayyib, missing his youngest son's high-school graduation. He became friends with Iraqis who worked on the plant, and says he was devastated when his deputy was kidnapped by insurgents and never seen again. "To get the project this far, and not get to crank the machines? It stings. It really stings."

Now it's up to the U.S. to try to pick up the pieces. During a visit in March, Mr. Herman accepted a cigarette from Mohammed Nashoom, a Ministry of Electricity official stationed at the plant, and inhaled deeply. Mr. Herman told the Iraqi that the U.S. hoped to hire a Boise, Idaho-based contractor, Washington Group International Inc., to assume responsibility for the plant.

"The minister of electricity wants you to keep Southeast Texas off this site from here on out. If any of their people come here, shoot them," Mr. Herman joked. "But when Washington Group comes, greet them with open arms, OK?"

Mr. Nashoom promised to help, but told Mr. Herman that Southeast welded the doors of some of the control rooms shut, which will make it harder for the new contractors to get access to the computers and files stored inside. Southeast says it did so to protect the equipment left behind.

On a tour of the plant, Mr. Herman pushed open the door to a trailer Southeast used for offices. A new printer was still covered in shrink wrap, and the dusty desks were covered with overflowing ashtrays and empty Coke cans.

Mr. Herman headed to the generator buildings a short distance away. A Washington Group engineer scampered up a short ladder and swung open the heavy metal doors. Inside was the generator itself, a large copper and silver engine. It was in excellent condition.

"It's brand-new and ready to roll," Mr. Herman said, shaking his head. "What a damn shame