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Outsourcing War--The skinny on KBR-Halliburton

PMCs(Private Military Companies), like Kellogg, Brown, and Root, a division of Halliburton, are growing like topsy. They are not considered mercenary organizationsbecause they are corporations. And they are certainly not like those rag-tag armies in Africa...
Cover Image: Outsourcing War

Graphic: Where the U.S. Military Goes, So Goes Brown & Root

Graphic: The Corporate Military

Online Extra: A Talk with Halliburton's Generals

Outsourcing War
An inside look at Brown & Root, the kingpin of America's new military-industrial complex

Early on the morning of Aug. 5, a U.S. mail convoy pulled out of the airport in Baghdad and headed north. A U.S. Army Humvee bristling with weaponry led the way, followed by three heavily loaded trucks, each driven by a civilian employee of Kellogg Brown & Root (KBR). A second military Humvee brought up the rear. Near Tikrit, Saddam Hussein's hometown, a bomb detonated under one of the trucks. The military police pried its driver, Fred Bryant Jr., from the wreckage and raced him to a military field hospital. Bryant, 39, died en route, the first KBR combat casualty since the Texas contractor was founded in 1919.

Bryant's death underscores the U.S. military's heavy reliance on private military companies, or PMCs, to wage war in Iraq. By most estimates, civilian contractors are handling as much as 20% to 30% of essential military support services in Iraq. Scores of PMCs are active all across the country, but KBR in particular has become indispensable to the global projection of American military might in this unsettled age. "It is no exaggeration to say that wherever the U.S. military goes, so goes Brown & Root," says P.W. Singer, a Brookings Institution fellow and author of Corporate Warriors. Widely known as Brown & Root, KBR is a unit of oil-services giant Halliburton Co. (HAL ) -- Dick Cheney's old company.

KBR and its rivals figure crucially in the increasingly clamorous debate over the size and structure of America's armed forces. To save money, the U.S. has pared its roster of active-duty troops by 32%, to 1.5 million, since 1991. But a not-so-funny thing happened on the way to the post-Cold War new world order: Terrorist networks proliferated, and long-suppressed ethnic conflicts broke out all over the globe, prompting the U.S. to intervene militarily. The Pentagon was able to maintain -- and perhaps even boost -- the potency of America's armed forces by developing an awesome array of new high-tech weaponry and replacing tens of thousands of soldiers with civilian PMC workers.

The Bush Administration was so confident of America's military superiority that it went into Iraq with a much smaller, more nimble force than the huge multinational coalition that was assembled to push Saddam out of Kuwait in 1990. The swift defeat of the Iraqi army seemed to invalidate the Powell Doctrine, which holds that the U.S. should fight only when it has an overwhelming numerical edge. But occupying Iraq with 140,000 U.S. troops (plus 21,700 from Britain and other countries) is proving another matter altogether, putting the new contractor-dependent military to its most severe test to date.

Critics of the Bush Administration argue that it will require a force of 300,000 to 500,000 soldiers to pacify Iraq. But even if the U.S. wanted to substantially boost troop levels, it's not clear where reinforcements would come from. About 50% of the Army's active-duty troops are on foreign soil already, and in many key military specialities, the deployment percentage is much higher. For example, 90% of all American military police are already on active duty. With U.S. troops tied down in terrorist-hunting and peacekeeping missions from the Philippines to Liberia to Uzbekistan, America's downsized armed forces are stretched thin -- perilously so, say many experts.

The era of military shrinkage clearly has ended, yet the Bush Administration is resisting calls to begin expanding the Army again. Instead, Defense Secretary Donald H. Rumsfeld is weighing a series of measures designed to increase the potency of America's armed forces without incurring the expense -- financial and political -- of putting more Americans in uniform. In essence, Rumsfeld wants the Pentagon to make more effective use of existing resources. Above all, that means substituting even more civilians for troops and leaning even more heavily on PMCs. There are "something in the neighborhood of 300,000 men and women in uniform doing jobs that aren't for men and women in uniform," Rumsfeld said during Senate testimony in July.

No company is better positioned to take over those jobs than KBR. Over the past decade, the company has housed, fed, and maintained American fighting forces in some of the most geographically remote and politically dangerous regions on earth. It has proven itself capable of efficiently mobilizing its own vast army of engineers, cooks, and logistics experts, often on short notice. Even rival PMCs generally praise it as an adept and reliable operator. "They have a good performance record," says Albert J. Konvicka, president of AECOM Government Services Inc., a Fort Worth-based PMC. "They can react very quickly to situations. I respect them as a competitor."

But outsourcing is no panacea for America's overextended military. Brown & Root and most other PMCs work strictly in a supporting role. Their employees maintain America's high-tech weapons and train soldiers how to use them but depend heavily on their military customers for protection in combat zones. If security breaks down, as it often has in Iraq, the PMC support system is liable to malfunction, too. Lieutenant General Charles S. Mahan Jr., the Army's top logistics officer, recently complained that so many civilian contractors had refused to deploy to particularly dangerous parts of Iraq that soldiers had to go without fresh food, showers, and toilets for months. Even mail delivery fell weeks behind, Mahan complained in a July 31 interview with Newhouse News Service. "We thought we could depend on industry to perform these kind of functions," Mahan said. But it got "harder and harder to get [them] to go in harm's way."

General Mahan didn't knock Brown & Root by name. He didn't have to; the company is by far the biggest services contractor in Iraq, with more than 2,500 employees in Central Asia and the Middle East as a whole. U.S. Civil Administrator L. Paul Bremer III and the 1,000-person Office of Reconstruction & Humanitarian Assistance depend on the company for food and shelter, as do at least 100,000 of the U.S. troops stationed in Iraq. In addition, the U.S. Army Corps of Engineers turned to KBR and KBR alone to help repair damaged oil wells and pipelines and get Iraqi crude -- the key source of reconstruction revenue -- flowing again to export markets.

For its work in support of the invasions of Iraq and Afghanistan, KBR has billed the U.S. government about $950 million for work completed under contracts capped at $8.2 billion. At the same time, KBR is in line to earn tens of millions of dollars more to maintain the archipelago of U.S. military bases that now arcs from the Balkans south to the Horn of Africa and east to Afghanistan and Kyrgyzstan. Closer to home, KBR built the detention camps in Guantanamo Bay, Cuba, that house Taliban and al Qaeda prisoners. All in all, no corporation has played as central a role in America's global anti-terrorism campaign -- or profited as handsomely from it -- as KBR.

The company's high-profile success in winning contracts, coupled with its intimate ties to the White House, has aroused suspicions that it is a beneficiary of political favoritism. Although Cheney no longer owns stock in Halliburton, he was its chairman and CEO for five years and either hired or promoted many of the executives now running Halliburton and KBR. At the insistence of two powerful House Democrats, Henry A. Waxman of California and John D. Dingell of Michigan, the General Accounting Office, the investigative arm of the U.S. Congress, is looking into the issue of whether KBR has received special treatment in the awarding of Defense Dept. contracts over the past two years.

David J. Lesar, Halliburton's current chairman and CEO, is exasperated by the controversy swirling around his company. "Despite some of the media scrutiny you've seen, within the organization we are very, very proud of what we do to support the military and, I think, save the U.S. taxpayer some money," says Lesar, who insists that all of KBR's dealings with the Pentagon have been at arm's length.

Robert "Randy" Harl, KBR's president and CEO, insists that General Mahan's complaints do not apply to KBR. The company "has met every commitment we have made to the military," Harl says. "Our company has no higher priority than to support our military on the ground." Mahan was unavailable to discuss his criticisms of civilian contractors with BusinessWeek; the 57-year-old three-star general retired from military service shortly after making his comments. A Pentagon spokesman declined to comment.

Mahan's departure will do nothing to quell the debate over the military's rising dependence on Brown & Root and other PMCs. There is general agreement that it makes sense to shift troops out of jobs that contractors can handle at least as well -- and probably at less cost -- and let them concentrate on purely military tasks. "The cost-savings argument for outsourcing is not nearly as compelling as the potential improvement from quality of service or flexibility," says Steven L. Schooner, co-director of government-procurement law at George Washington University Law School.

The outsourcing trend also is being driven by the accelerating sophistication of military software and hardware. The high-tech weapon systems used to such devastating effect in Afghanistan and Iraq are so complex that combat units in the field have no choice but to depend on expert civilians to maintain and, in some cases, operate them. The F-117 stealth fighter, M1A1 tank, Patriot missile, and Global Hawk unmanned drone are all heavily contractor-dependent.

Skeptics, who include many members of the military Establishment, warn that the growing PMC presence on the battlefield exposes America's armed forces to potentially catastrophic risk. As civilians, contract employees are not subject to military command and discipline. Workers who refuse an assignment can be fired by their employers but not tossed into the brig. The Pentagon's only recourse is to sue -- no comfort at all to a commander in the field who has been left in the lurch by vanished contractors. A PMC's ultimate duty is not to its military customers but to its shareholders. "Contractor loyalty to the almighty dollar, as opposed to support for/of the front-line soldier, remains [a] serious question," warned a U.S. Army War College paper last year.

Although the ultimate interests of the military and the PMCs diverge, their routine dealings are defined by cooperation, not conflict. The emergence of a robust private military industry has set the revolving door between the Pentagon and private industry spinning faster than ever. From top to bottom, the typical PMC is heavily staffed by ex-military officers. "Roger that," replies Billy J. Gray, a well-traveled KBR manager now stationed at Camp Bondsteel in Kosovo, when asked if he is ex-Army. Like many of his colleagues, Gray gets a bigger paycheck from KBR than he did in his Army days, and he still gets his military pension, which, for a veteran with 20 years' service, amounts to 50% of his old salary.

Military Professional Resources Inc. (LLL ), an Alexandria (Va.) military consulting firm, boasts of having "more generals per square foot than the Pentagon." But no PMC has forged a more intimate connection with America's warfighters than Brown & Root, whose forté is building and maintaining military bases in dangerous places. At locations such as Camp Bondsteel and Camp Arifjan in Kuwait, KBR employees literally live with the soldiers -- albeit within a separate compound on the base -- thereby alleviating the privations while sharing many of the dangers of military life. Says GWU's Schooner: "Brown & Root has won the hearts, minds, and stomachs of everybody in the military."

Unlike soldiers, however, KBR employees have the option of quitting at any time. "I've raised my hand before and said, 'Guys, I'm burned out,"' says Gray, an engineer who oversees vehicle maintenance and electric-power generation at Bondsteel. Gray, who has worked for KBR for a decade, has taken three home leaves over the years. He just returned to work in April after a nine-month break. "I called up and said, 'Hey, I'm deployable again,"' he says.

The Defense Dept. is the private military industry's biggest customer, but hardly the only buyer in what is a truly global market. Great Britain and other established military powers have embraced military outsourcing to varying degrees, while numerous Third World countries have hired PMCs to train their armies and in some cases -- Sierra Leone, Angola, the Congo -- to literally fight their battles.

Brown & Root ranks among the five top defense contractors in the United Kingdom. Since 1997, KBR has owned a 51% stake in the Davenport Royal Docks, a former government facility where the company and its two English partners maintain the Trident fleet of nuclear submarines. In late July, the Ministry of Defense named a consortium led by Brown & Root as the preferred bidder for a 4 billion-pound, 30-year contract to upgrade British Army garrisons housing a total of 18,000 soldiers and civilians.

Everyone agrees that the global PMC business is booming, but no one knows exactly how big it is. A two-year study completed in 2002 by the International Consortium of Investigative Journalists identified 90 PMCs operating in 110 countries. U.S. companies dominate, but sizable PMCs operate out of Britain, South Africa, Russia, Israel, and elsewhere. Many PMCs are privately owned, and even the ones that are part of publicly held corporations, such as KBR, tend to provide minimal financial detail. Much of the work PMCs perform is classified "secret" by their government clients. But for many of them, reclusiveness also is a public-relations strategy. The private military industry has an image problem reducible to a single, rather dirty word: mercenary.

The tradition of hired foreign guns is older than the gun, dating to ancient times. The Geneva Conventions of 1949 criminalized the mercenary trade, driving it underground. Mercenaries are still very much with us -- especially in Africa -- but they tend to operate in small, ragtag units of limited effectiveness. In short, they cannot begin to compete with PMCs, which have legitimized the military-services business by reorganizing it into corporate form. Scrupulously avoiding the shadowy, freebooting margins of the business, KBR acts only as a working partner of the armed forces of the U.S. and its allies, never as their proxy. In addition, the company shuns all assignments that require carrying weapons, including sentry duty at military bases, a PMC staple.

Brown & Root's military-contracting operation is an extension of the company's original business: engineering and construction. During World War II, Brown & Root landed its first military contracts and eventually built hundreds of ships for the U.S. Navy. Its employees accompanied U.S. troops to Korea and Vietnam, building bases, roads, harbors, and so on. In 1963, Brown & Root sold out to oil-services giant Halliburton (becoming Kellogg Brown & Root with the addition of oil-pipe fabricator M.W. Kellogg in 1998). Taking its cues from Halliburton, KBR emphasized energy projects, exiting the military business altogether after the U.S. withdrew from Vietnam in 1973.

Desperate for new sources of revenue during the cataclysmic oil-industry contraction of the mid-1980s, KBR tiptoed back into military contracting in 1987 -- this time to stay. "We see it as a very nice adjunct to the rest of the business," says Halliburton CEO Lesar. "It requires many of the same capabilities that we must have to execute our basic strategy, which is serving our oil-and-gas customers: good engineering, good logistics, the ability to get people on the ground fast, the ability to handle enormous amounts of data."

Military contracting now accounts for only about 20% of KBR's revenues -- which is unfortunate for shareholders, since this business is the best thing the beleaguered unit has going for it. Over the past 12 months, KBR has incurred operating losses of $675 million on revenues of $6.1 billion. The company is so weighed down by asbestos-related liabilities incurred by its construction business that it plans to file for Chapter 11 bankruptcy this fall to settle pending personal-injury claims. KBR's government-contracting unit will not be included in the Chapter 11 filing.

In this year's second quarter, KBR earned $17 million on the $292 million in revenue produced by its work in Iraq, a paltry margin of 5.8%. On the other hand, the military business is reliably profitable and far less capital-intensive than either oil services or construction because the government owns virtually all the fixed assets. Under the "cost-reimbursable" contracts common in military logistics, KBR passes along 100% of its costs to the customer and is assured of a 1% profit. In addition, the company can earn an "award fee" of 1% to 8% of total expenditures depending on how well it performs.

The bulk of KBR's military business has come in through a single, infinitely expandable contract called the Logistics Civil Augmentation Program, or LOGCAP for short. When Brown & Root won the first LOGCAP contract in 1992 over three other bidders, no one imagined that it would burgeon into what the Contract Services Assn. calls "the mother of all service contracts." For a fee of $3.9 million, LOGCAP I required KBR to develop contingency plans for deploying U.S. forces to 13 different parts of the world. But LOGCAP was more than brainwork: The company had to be ready, on short notice, to transport a fighting force of up to 50,000 troops to any location in the world and to supply them with food and other essentials for as long as six months.

Brown & Root was called into combat for the first time in late 1992, accompanying U.S. forces into Somalia in support of a U.N.-sponsored intervention. Soon, KBR was Somalia's largest employer, with 2,500 locals on the payroll. The Army paid the company $110 million for Somalia and $141 million to assist 18,000 troops sent into Haiti on another U.N. mission in 1994. But it wasn't until the U.S. led NATO forces into Bosnia in 1995 that KBR -- and the entire private military industry -- came of age.

Limited by Presidential order to calling up no more than 4,300 reservists, the Army turned to Brown & Root and scores of other contractors. During one of the harshest Balkan winters on record, KBR joined with military engineers to create 34 bases from former U.N. camps, abandoned factories, ruined buildings, and open fields. The company supplied most of the building materials needed because it was able to make deliveries faster than the Army could, according to a GAO report. The 16,200 soldiers who filled the camps depended almost entirely on KBR for food and other necessities.

KBR's LOGCAP agreement expired in 1997, and the U.S. Army Material Command awarded a new five-year contract to rival Dyncorp (CSC ) "Losing that was quite a blow," Harl concedes. "We turned in a proposal that was not fully responsive to what [the AMC] was looking for." The Army softened the blow considerably by carving out the Balkans under a separate contract given to Brown & Root. The company continued to operate in Bosnia -- and moved south into Kosovo with the Army when war erupted there in 1999. In short order, KBR built three more large bases and scores of peripheral outposts.

Through 2002, the Army has paid KBR about $2.5 billion for its work in the Balkans. Neither the company nor the Army will disclose how much of this is profit. An Army spokeswoman says that on average, KBR has received about 90% of the maximum fee award of 8% to 9%. This works out to a profit of about $200 million. In recent years, the U.S. has sharply reduced its troop levels in the Balkans and closed most of its bases. KBR continues to run the bases that remain and is projected to receive $367 million more in payments this year and next, when its contract expires.

The Army's spending in Bosnia repeatedly exceeded projections, attracting intensive scrutiny in Washington. However, in 1997, a Logistics Management Institute study found that it would have taken 8,918 troops and $638 million to do what KBR's 6,766 employees had done for $462 million. "When compared with the costs of using an equivalent military force," the study concluded, "the use of LOGCAP contractors is economical."

The big savings is in labor costs. A PMC does not have to pay the cost of training and deploying a soldier. It also can subcontract out to local workers -- "host country nationals" in the parlance of the trade -- at much lower rates than U.S. government scale. For example, in the Balkans, KBR paid carpenters, electricians, and plumbers $15.80 an hour on average, compared with the $24.38 government rate. The wage gap was largest for basic laborers: $1.12 an hour, vs. $15.99.

Still, the GAO, which twice investigated LOGCAP spending in the Balkans, chided the Army for the laxity of its oversight of contractors' cost-plus spending. "Army and other [Defense Dept.] officials have typically accepted [KBR's] judgment and not questioned the level of services being provided," the GAO noted in a 2000 report entitled Army Should Do More to Control Contract Cost in the Balkans. The agency gave KBR high marks, the report continued, but noted that military officials often were unable "to explain the frequency of services being provided, such as...cleaning latrines three times a day."

In 2001, KBR outbid Dyncorp and another company to win back the LOGCAP contract, now extended to a duration of 10 years. Under LOGCAP, KBR has received assignments potentially worth as much as $183 million to support the hunt for al Qaeda and other terrorist operatives in Afghanistan and neighboring countries. The company maintains the two biggest bases in Afghanistan -- at Bagram and Kandahar -- and Camp Stronghold Freedom in Uzbekistan. Meanwhile, Operation Iraqi Freedom has sent $1 billion more in LOGCAP business KBR's way to date, and new work orders still are being issued at the rate of a half-dozen per month.

In late 2002, the Pentagon asked KBR to grapple with a question complicating U.S. plans for invading Iraq: What to do if Saddam torches his own oil fields, as he did Kuwait's during the last Gulf War? KBR drew up a classified contingency plan to deal with this nightmare scenario. The work was done under LOGCAP, but to help implement the plan, the Army Corps of Engineers signed KBR to a separate contract capped at $7 billion. General Robert Flowers, the Corps' commander, said the contract was awarded to KBR because the Army had complete confidence in the company and there wasn't time to put it out to bid -- an explanation that inflamed suspicions that the political fix was in.

Harl emphatically denies it. "Our people did a great job in securing that work, and Dick had nothing to do with it," Harl insists. Bill Allison of The Center for Public Integrity, a Washington-based government watchdog group, argues that Cheney does not have to actually pull strings to help his old company. "Cheney knows how things work," Allison says. "There are a number of ways you can help without actually being involved."

As it turned out, Saddam's forces set fire to only 9 of Iraq's 1,821 oil wells. But in the months since the U.S. captured Baghdad, saboteurs have done heavy damage to oil wells, pipelines, and other facilities throughout the country. This massive repair job has fallen to Task Force RIO (Restore Iraqi Oil), which consists of some 300 Brown & Rooters and a smaller Army Corps of Engineers contingent. KBR has finished $705 million worth of this work to date. The money will keep rolling in for another few months but likely will fall well short of $7 billion -- a figure that presumed an oil-field conflagration of apocalyptic scope. KBR's contract, which was always intended as a stopgap measure, will be replaced at yearend by two new contracts, each potentially worth $500 million, according to the Corps of Engineers. KBR is an odds-on bet to win one but not both contracts, if only because a double victory likely would provoke Waxman and Dingell to new heights of outrage.

Lesar expects KBR to remain an opportune political target for as long as Cheney occupies the White House. "That's just part and parcel of living with who my predecessor was," he says, adding that no amount of contention will dissuade KBR from pursuing new military business. "If I believe there is a piece of work out there that we have the capability to do," Lesar says, "I have an obligation to my shareholders to go after it."

In coining the term "military-industrial complex" in his farewell address to the nation in 1961, President Dwight D. Eisenhower -- retired four-star general and war hero Eisenhower -- warned of the incestuous ties that had formed between the Defense Dept. and the "permanent armaments industry" birthed by World War II. Eisenhower worried that the Pentagon's pursuit of its bureaucratic imperatives could combine with arms makers' pursuit of profit to thrust the U.S. into a war the country did not need and perhaps could not win.

The big weapons manufacturers that alarmed Eisenhower have shrunk in number and size since the Cold War ended. But the emergence of the private military company has extended the relationship that so worried Eisenhower, pushing it beyond the executive suite and factory floor onto the battlefield itself. The PMCs' adaptability is politically as well as militarily useful to the government. Why take the heat of calling up reservists when you can summon civilians-for-hire? Why try to persuade Congress to sanction the use of U.S. troops in Colombia's war on narco-guerrillas when you can send in contractors to spray coca fields and train paramilitary groups -- as both the Clinton and Bush Administrations have done?

The new military-industrial complex seems to pose at least as much danger to itself as it does to society. Contractor no-shows in Iraq have jolted U.S. military planners who expected a repeat of Brown & Root's yeomanlike performance in the Balkans. Says Brooking Institution's Singer: "Now that the Army's eyes have been opened up on this, they are thinking through other scenarios, with war in Korea being not only the most likely but the most worrisome possibility."

If conditions in Iraq continue to deteriorate, plenty of other people will be focused on whether the policy of replacing soldiers with private contractors, even in support roles, can be taken too far. The ultimate fear, of course, is that contractors under extreme duress will flee en masse, exposing U.S. soldiers to catastrophic risk -- a disastrous outcome that not even Eisenhower foresaw.

By Anthony Bianco & Stephanie Anderson Forest
With Stan Crock in Washington and Thomas F. Armistead in Iraq
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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