Profits of war

http://www.guardian.co.uk/usa/story/0,12271,1266328,00.html

Halliburton has become a byword for the cosy links between the White House and Texan big business. But how did the company run in the 90s by Dick Cheney secure a deal that guaranteed it millions in profit every time the US military saw action? In this exclusive extract from his new book, Dan Briody reveals how the firm made a killing on the battleground

Thursday July 22, 2004

The Guardian

On January 12 1991, Congress authorised President George HW Bush to engage Iraq in war. Just five days later, Operation Desert Storm commenced in Kuwait. As with the more recent war in the Gulf, it did not take long for the US to claim victory - it was all over by the end of February - but the clean-up would last longer, and was far more expensive than the military action itself. In a senseless act of desperation and defeat, Iraqi troops set fire to more than 700 Kuwaiti oil wells, resulting in a constant fog of thick, black smoke that turned day into night.
It was thought the mess would take no less than five years to clean up, as lakes of oil surrounding each well blazed out of control, making it nearly impossible to approach the burning wells, let alone extinguish them. But with the fighting over, Halliburton angled its way into the clean-up and rebuilding effort that was expected to cost around $200bn (£163bn) over the next 10 years.

The company sent 60 men to help with the firefighting effort. Meanwhile, its engineering and construction subsidiary Kellogg Brown & Root (KBR) won an additional $3m contract to assess the damage that the invasion had done to Kuwait's infrastructure - a contract whose value had multiplied seven times by the end of KBR's involvement. More significantly still, KBR won a contract to extract troops from Saudi Arabia after their services were no longer needed in the Gulf. Halliburton was back in the army logistics business in earnest for the first time since Vietnam. The end of the Gulf war saw nothing less than the rebirth of the military outsourcing business.

Military outsourcing was not new. Private firms had been aiding in war efforts since long before KBR won its first naval shipbuilding contract. But the nature of military outsourcing has changed dramatically in the last decade. The trend towards a "downsized" military began because of the "peace dividend" at the end of the cold war, and continued throughout the 1990s. This combination of a reduced military but continued conflict gave rise to an unprecedented new industry of private military firms. These firms would assist the military in everything from weapons procurement and maintenance to training of troops and logistics.

In the decade after the first Gulf war, the number of private contractors used in and around the battlefield increased tenfold. It has been estimated that there is now one private contractor for every 10 soldiers in Iraq. Companies such as Halliburton, which became the fifth largest defence contractor in the nation during the 1990s, have played a critical role in this trend.

The story behind America's "super contract" begins in 1992, when the department of defence, then headed by Dick Cheney, was impressed with the work Halliburton did during its time in Kuwait. Sensing the need to bolster its forces in the event of further conflicts of a similar nature, the Pentagon asked private contractors to bid on a $3.9m contract to write a report on how a private firm could provide logistical support to the army in the case of further military action.

The report was to examine 13 different "hot spots" around the world, and detail how services as varied as building bases to feeding the troops could be accomplished. The contractor that would potentially provide the services detailed in the report would be required to support the deployment of 20,000 troops over 180 days. It was a massive contingency plan, the first of its kind for the American military.

Thirty-seven companies tendered for the contract; KBR won it. The company was paid another $5m later that year to extend the plan to other locations and add detail.

The KBR report, which remains classified to this day, convinced Cheney that it was indeed possible to create one umbrella contract and award it to a single firm. The contract became known as the Logistics Civil Augmentation Programme (Logcap) and has been called "the mother of all service contracts". It has been used in every American deployment since its award in 1992 - at a cost of several billion dollars (and counting). The lucky recipient of the first, five-year Logcap contract was the very same company hired to draw up the plan in the first place: KBR.

The Logcap contract pulled KBR out of its late 1980s doldrums and boosted the bottom line of Halliburton throughout the 1990s. It is, effectively, a blank cheque from the government. The contractor makes its money from a built-in profit percentage, anywhere from 1% to 9%, depending on various incentive clauses. When your profit is a percentage of the cost, the more you spend, the more you make.

Before the ink was dry on the first Logcap contract, the US army was deployed to Somalia in December 1992 as part of Operation Restore Hope. KBR employees were there before the army even arrived, and they were the last to leave. The firm made $109.7m in Somalia. In August 1994, they earned $6.3m from Operation Support Hope in Rwanda. In September of that same year, Operation Uphold Democracy in Haiti netted the company $150m. And in October 1994, Operation Vigilant Warrior made them another $5m.

In the spirit of "refuse no job", the company was building the base camps, supplying the troops with food and water, fuel and munitions, cleaning latrines, even washing their clothes. They attended the staff meetings and were kept up to speed on all the activities related to a given mission. They were becoming another unit in the US army.

The army's growing dependency on the company hit home when, in 1997, KBR lost the Logcap contract in a competitive rebid to rival Dyncorp. The army found it impossible to remove Brown & Root from their work in the Balkans - by far the most lucrative part of the contract - and so carved out the work in that theatre to keep it with KBR. In 2001, the company won the Logcap contract again, this time for twice the normal term length: 10 years.

To the uninitiated, the appointment of Cheney to the chairman, president, and chief executive officer positions at Halliburton in August 1995, made little sense. Cheney had almost no business experience, having been a career politician and bureaucrat. Financial analysts downgraded the stock and the business press openly questioned the decision.

Cheney has been described by those who know him as everything from low-key to downright bland, but the confidence he inspired and the loyalty he professed made him an indispensable part of Donald Rumsfeld's rise to power. In the 1970s, Rumsfeld became Gerald Ford's White House chief of staff, with Cheney as his deputy. In those days, Cheney was assigned a codename by the secret service that perfectly summed up his disposition: "Backseat".

But Halliburton understood Cheney's value. With him as CEO, the company gained considerable leverage in Washington. Until Cheney's appointment in the autumn of 1995, Halliburton's business results had been decent. After a loss of $91m in 1993, the company had returned to profitability in 1994 with an operating profit of $236m. With the new revenue coming in from Logcap, Halliburton and its prize subsidiary, KBR, were back on track. Though Logcap was producing only modest revenues, it was successful in reintegrating KBR into the military machine.

The big opportunity came in December 1995, just two months after Cheney assumed the post of CEO, when the US sent thousands of troops to the Balkans as a peace-keeping force. As part of Operation Joint Endeavour, KBR was dispatched to Bosnia and Kosovo to support the army in its operations in the region. The task was massive in scope and size.

One example of the work KBR did in the Balkans was Camp Bondsteel. The camp was so large that the US general accounting office (GAO) likened it to "a small town". The company built roads, power generation, water and sewage systems, housing, a helicopter airfield, a perimeter fence, guard towers, and a detention centre. Bondsteel is the largest and most expensive army base since Vietnam. It also happens to be built in the path of the Albanian-Macedonian-Bulgarian Oil (Ambo) Trans-Balkan pipeline, the pipeline connecting the oil-rich Caspian Sea region to the rest of the world. The initial feasibility project for Ambo was done by KBR.

KBR's cash flow from Logcap ballooned under Cheney's tenure, jumping from $144m in 1994 to more than $423m in 1996, and the Balkans was the driving force. By 1999, the army was spending just under $1bn a year on KBR's work in the Balkans. The GAO issued a report in September 2000 charging serious cost-control problems in Bosnia, but KBR retains the contract to this day.

Meanwhile, Cheney was busy developing Halliburton's business in other parts of the world. "It is a false dichotomy that we have to choose between our commercial and other interests," he told the [public policy research foundation] Cato Institute in 1998, speaking out against economic sanctions levied by the Clinton administration against countries suspected of terrorist activity. "Our government has become sanctions-happy," he continued.

In particular, Cheney objected to sanctions against Libya and Iran, two countries with which Halliburton was already doing business regardless. Even more disconcerting, though, was the work the company did in Iraq. Between his stints as secretary of defence and vice-president, Cheney was in charge of Halliburton when it was circumventing strict UN sanctions, helping to rebuild Iraq and enriching Saddam Hussein.

In September 1998, Halliburton closed a $7.7bn stock merger with Dresser Industries (the company that gave George HW Bush his first job). The merger made Halliburton the largest oilfield services firm in the world. It also brought with it two foreign subsidiaries that were doing business with Iraq via the controversial Oil for Food programme. The two subsidiaries, Dresser Rand and Ingersoll Dresser Pump Co, signed $73m-worth of contracts for oil production equipment.

Cheney told the press during his 2000 run for vice-president that he had a "firm policy" against doing business with Iraq. He admitted to doing business with Iran and Libya, but "Iraq's different," he said. Cheney told ABC TV: "We've not done any business in Iraq since UN sanctions were imposed on Iraq in 1990, and I had a standing policy that I wouldn't do that."

Three weeks later, Cheney was forced to admit the business ties, but claimed ignorance. He told reporters that he was not aware of Dresser's business in Iraq, and that besides, Halliburton had divested itself of both companies by 2000. In the meantime, the companies had done another $30m-worth of business in Iraq before being sold off.

The Dresser merger was, it appeared, the crowning achievement of the Cheney years at Halliburton. But Cheney left Halliburton several other legacies. David Gribbin, Cheney's former chief of staff, became Halliburton's chief lobbyist in Washington. Admiral Joe Lopez, a former commander of the sixth fleet, was hired to be KBR's governmental operations expert. Together, Cheney's team made Halliburton one of the top government contractors in the country. KBR had nearly doubled its government contracts, from $1.2bn in the five years prior to his arrival, to $2.3bn during his five years as CEO. Halliburton soared from 73rd to 18th on the Pentagon's list of top contractors.

After 9/11, KBR went to work on the war on terrorism, building the 1,000 detention cells at Guantanamo Bay, Cuba, for terrorist suspects, at a cost of $52m. The work had to feel familiar to KBR: it had done the exact same job 35 years earlier in Vietnam. When troops were deployed to Afghanistan, so was KBR. It built US bases in Bagram and Kandahar for $157m. As it had done in the past, KBR had men on the ground before the first troops even arrived in most locations. They readied the camps, fed the troops, and hauled away the waste. And they did it like the military would have done it: fast, efficient, and effective. It was good work, solid revenues, but nothing like the windfall the company had experienced in the Balkans.

In addition, Halliburton won the contract for restoring the Iraqi oil infrastructure - a contract that was not competitively bid. It was given to Halliburton out of convenience, because it had developed the plan for fighting oil fires (all, by this time, extinguished). Despite the new business, the fortunes of Halliburton and its subsidiary have not prospered. The stock that Cheney cashed in near its peak, when he renewed his political career in 2000, has since plummeted. The main culprit was the 1998 merger with Dresser, which saddled the company with asbestos liabilities that ultimately led to two Halliburton subsidiaries - one of them KBR - having to file for bankruptcy.

When Cheney left to become Bush's running mate, he took a golden parachute package - in addition to the stock options he was obliged to sell for $30m. In September 2003, Cheney insisted: "Since I've left Halliburton to become George Bush's vice-president, I've severed all my ties with the company, gotten rid of all my financial interests. I have no financial interest in Halliburton of any kind and haven't now for over three years."

The Congressional Research Service (CRS), a non-partisan agency that investigates political issues at the request of elected officials, says otherwise. Cheney has been receiving a deferred salary from Halliburton in the years since he left the company. In 2001, he received $205,298. In 2002, he drew $162,392. He is scheduled to receive similar payments through 2005, and has an insurance policy in place to protect the payments in the event that Halliburton should fold. In addition, Cheney still holds 433,333 unexercised stock options in Halliburton. He has agreed to donate any profits to charity.

· The Halliburton Agenda by Dan Briody is published by John Wiley and Sons Ltd at Ј16.99. To order a copy for Ј14.99 plus p&p, call Guardian Book Service on 0870 836 0875.

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