The Military-Industrial Complex Revisited: Shifting Patterns of Defense Contracting in the Post-9/11 Period. William D. Hartung

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1 The Military-Industrial Complex Revisited: Shifting Patterns of Defense Contracting in the Post-9/11 Period William D. Hartung The 2000s have been good years to be a military contractor. Increases in the Pentagon s base budget combined with expenditures on the wars in Iraq and Afghanistan have pushed total military contracts the portion of the Pentagon s $700 billion budget that is given to private companies -- to over $400 billion, their highest levels since World War II. The largest contractors have seen their Pentagon awards nearly double between FY2001 and FY2008 (the most recent year for which full data is available). Lockheed Martin alone received $29 billion in Pentagon contracts in Just this one company received more federal dollars in 2008 than the Environmental Protection Agency ($7.5 billion), the Department of Labor ($11.4 billion), or the Department of Transportation ($15.5 billion). 2 Pentagon contracting has been highly concentrated over this period, with just five contractors Lockheed Martin, Boeing, Northrop Grumman, Raytheon and General Dynamics accounting for over one-third of all Pentagon contracts. This concentration is a legacy of the merger boom of the 1990s, when the Clinton administration subsidized mergers of companies like Lockheed and Martin Marietta, Northrop and Grumman, and Boeing and McDonnell Douglas as a way to deal with post-cold War reductions in military spending. Lockheed Martin alone is a product of mergers and acquisitions involving over 20 companies. 3 So as military spending increased, there were fewer large companies left to split up a growing pie. 1

2 A second factor that has contributed to the massive levels of contracts received by the largest players in the defense market has been the fact that the Pentagon budget is now composed of three distinct revenue streams weapons designed to meet Cold War threats that no longer exist; the costs of the two wars themselves; and the design and purchase of new weapons systems designed to meet future contingencies. This reflects the fact that the generous post-9/11 spending environment has allowed the Pentagon to avoid making any serious choices among programs or approaches. While the wars themselves have accounted for over $1 trillion in budgetary costs since 2001, there have been comparable increases in the Pentagon s base budget over the same time frame. 4 While weapons makers have done very well in the era of the Global War on Terror, or GWOT (a term since abandoned in official circles), other firms have done even better in terms of the percentage increase in their military contracts. Most notable in this respect has been Kellogg, Brown and Root, which until April 2007 was a division of the Halliburton corporation. 5 Halliburton s contracts grew more than tenfold from FY2002 to FY2006 on the strength of contracts to rebuild Iraq s oil infrastructure and provide logistical support to the U.S. interventionary force in Iraq. 6 Halliburton s contracts generated controversy on several fronts, from the circumstances under which they were awarded to the high incidence of cost overruns to the conflicts-of-interest involved in the company s relationship with Bush administration Vice President Dick Cheney. Halliburton s first Iraq-related contract was awarded before the war even began. It was an open-ended, seven year contract for work doing everything from putting out oil fires to rebuilding and operating Iraq s oil infrastructure in the wake of the U.S. 2

3 intervention. 7 Critics like Rep. Henry Waxman (D-CA) questioned why Halliburton received no-bid, cost-plus contract for this work. The Pentagon s response was that the need was too urgent, particularly with respect to putting out oil fires in the event that Saddam Hussein s regime set them on fire as it had done during the 1991 Persian Gulf War, and that in any case Halliburton was the only company capable of doing the work. Critics of the deal refuted both arguments, noting that there was a firm available that had put out oil fires during the 1991 Persian Gulf War, and that the emergency nature of the oil fire problem did not explain why Halliburton should get a seven year contract that included running Iraq s oil facilities. The oil operations contract was later split up among three companies in response to the criticisms of Waxman and others, but Halliburton still received the lion s share of the work. 8 Halliburton s most egregious actions were related to its work under the Army s Logistics Civil Augmentation Program (LOGCAP). Under this contract, Halliburton served as an all-purpose logistics support service for the Army, doing everything from building bases to providing food and laundry services, to repairing and maintaining vehicles. The LOGCAP concept had been developed in the early 1990s at the behest of then Secretary of Defense Dick Cheney, and Halliburton received the first contract under the program in 1995, by which time Cheney had left government to become Halliburton s CEO. It is hard to imagine a more blatant example of the conflicts of interest inherent in the revolving door the movement of government officials into positions with the very corporations they had been involved in regulating and steering millions or even billions of dollars to during their period of government service. 9 Unfortunately, under current law 3

4 Cheney s behavior is considered perfectly legal a huge loophole that allows officials like him to cash in on their government service with relative impunity. While the LOGCAP concept had been utilized in prior conflicts such as the wars in Bosnia and Kosovo, nothing had been undertaken on the sheer scale involved in supporting 150,000 U.S. troops in Iraq and surrounding nations. Halliburton profited handsomely from its logistics role, with its Pentagon contracts jumping from $483 million in 2002 to over $6 billion in But a significant portion of this funding was generated via gross overcharging for basic services, from charging $100 to do a bag of laundry to charging for thousands of meals that were never actually delivered to the troops in the region. 11 Examples abound of Halliburton s exorbitant prices and lack of accounting for its charges. An August 2004 Pentagon audit revealed that a Halliburton contract to supply housing and food to United States troops in Iraq included $1.8 billion in unsupported costs. 12 In another case, Halliburton claimed that it had paid more than $27 million to transport petroleum that it had purchased in Kuwait for $82,000. Auditors described the fee as illogical. 13 In the summer of 2005, the Democrats released a report including Pentagon audits that identified over $1.03 billion in questioned costs and $422 million in unsupported costs for work by Halliburton in Iraq 14 Billions more have gone unaccounted for as the Pentagon actually reduced its number of auditors and contracting officers even as spending in Iraq ballooned. 15 Other major beneficiaries of the war effort included rebuilding contractors like Bechtel and private security firms like Blackwater (now known as Xe) that supplied armed personnel to guard embassies, oil pipelines and other critical facilities. 16 4

5 Blackwater is best known for its role in the massacre of 17 Iraqi civilians at Nisoor Square in September Blackwater was just one of dozens of private contractors supplying similar security services in Iraq. It is interesting to note that Blackwater s main contracts came from the State Department, not the Pentagon, an example of the spread of national security-related contracting to other agencies that has been characteristic of the post-9/11 period. 18 The Iraq and Afghan wars have marked a high point in the utilization of private contractors in and near war zones. For example, during the 1991 Persian Gulf War, about one in ten personnel in theater worked for private contractors. By the time of the 2003 Iraq conflict this number had mushroomed to the point that there were more private contract employees involved in the war as there were uniformed military personnel. 19 In addition to the rise of private security contractors, the most significant change in contracting patterns since 9/11 has been the increase in awards to companies like Lockheed Martin, SAIC, Northrop Grumman, and General Dynamics from other agencies such as the CIA, the National Security Agency and the Department of Homeland Security (a post-9/11 creation). Intelligence outsourcing has been one major source of revenue, with private contractor employees growing to the point that they outnumber government employees in the U.S. government s intelligence operations. 20 And the Department of Homeland Security has undertaken major initiatives like the $24 billion Deepwater project, which aims to provide a new generation of ships, helicopters, unmanned aerial vehicles and communications systems for the Coast Guard. 21 All of the trends mentioned above, which accelerated dramatically after 9/11, have created a new military-industrial complex in which defense services, surveillance, 5

6 and intelligence gathering are growing faster than weapons procurement, and a broader group of agencies is involved in national-security-related contracting. As a result, the 21 st century complex is both larger and more far reaching than anything that President Dwight D. Eisenhower could have imagined when he gave his farewell address on January 17, Endnotes 1 Contracting data in this section comes from 2 White House Office of Management and Budget, The Budget of the United States Government, FY Summary Tables, Table S-3. Note that the FY2009 budget is used because it has final estimates for FY2008 spending. 3 For more on the merger boom, see William D. Hartung, St. Augustine s Rules: Norman Augustine and the Future of the American Defense Industry, World Policy Journal, Summer 1996, pp For a fuller analysis of the relative shares of war spending and the base Pentagon budget in the growth of overall military spending over the past decade, see Carl Conetta, An Undisciplined Defense: Understanding the $2 Trillion Surge in U.S. Defense Spending, PDA Briefing Report Number 20, Project on Defense Alternatives, January 18, Pratap Chatterjee, Halliburton s Army: How a Well-Connected Texas Oil Company Revolutionized the Way America Makes War (New York: Nation Books, 2009), p Data on growth in Halliburton s Pentagon contracts comes from 7 Dan Baum, Nation Builders for Hire, New York Times Magazine, June 22, Neela Bannerjee, Bechtel Ends Move for Work in Iraq, Seeing a Done Deal, New York Times, August 8, On the genesis of Halliburton s no-bid contract for work on Iraq s oil infrastructure, see Chatterjee, op. cit., pp. 80 to T. Christian Miller, Blood Money: Wasted Billions, Lost Lives and Corporate Greed in Iraq, (New York: Little, Brown and Company, 2006), pp. 77 to Figures are taken from annual editions of the Department of Defense document, 100 Companies Receiving The Largest Dollar Volume Of Prime Contract Awards. 11 Dina Rasor and Robert Bauman, Betraying Our Troops: Destructive Results of Privatizing War (New York: Macmillan, 2008), p Miklaszewski, Jim. March 15, Pentagon Audit Reveals Halliburton Overcharges. Electronic resource, accessed February 25, Eckholm, Erik. March 15, Halliburton Overcharged $108 million, Report Says. Electronic resource, accessed February 25, Reuters. June 28, Halliburton accused of $1bn overcharge. Electronic resource, accessed February 25, Chatterjee, pp. 200 to 202; and T. Christian Miller, Contract Flaws in Iraq Cited, Los Angeles Times, March 11, For a detailed accounting of the early beneficiaries of private contracts for work in Iraq and Afghanistan see, Center for Public Integrity, Windfalls of War: U.S. Contractors in Iraq and 6

7 Afghanistan. The project was originally unveiled in October 2003, but has been updated several times since, at 17 Blackwater Incident: What Happened?, BBC News, December 8, Details on Blackwater contracts available at 19 T. Christian Miller, Contractors Outnumber Troops in Iraq, Los Angeles Times, July 4, Tim Shorrock, Spies for Hire: The Secret World of Intelligence Outsourcing (New York: Simon and Schuster, 2008). pp. 12 to Eric Lipton, Failure to Navigate: Billions Later, Plan to Remake the Coast Guard Fleet Stumbles, New York Times, December 9,