Posted on 22-7-2004

Profits Of War

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.

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.