Business Week: War biz profit boom

[pynchonoid]

Business Week Online
SEPTEMBER 15, 2003

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

[...] 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.

[...] 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.

[...] 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."

[...] 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. [...]

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