[IP] Outsourcing War
Delivered-To: dfarber+@xxxxxxxxxxxxxxxxxx
Date: Mon, 29 Sep 2003 14:58:42 -0700
From: Kurt Albershardt <kurt@xxxxxx>
Subject: Outsourcing War
To: dave@xxxxxxxxxx
An inside look at Brown & Root, the kingpin of America's new
military-industrial
complex<http://www.businessweek.com/magazine/content/03_37/b3849012.htm>
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.
(<http://www.businessweek.com:/print/magazine/content/03_37/javascript:
void showTicker('HAL')>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.
(<http://www.businessweek.com:/print/magazine/content/03_37/javascript:
void showTicker('LLL')>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
(<http://www.businessweek.com:/print/magazine/content/03_37/javascript:
void showTicker('CSC')>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 five-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
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