It has been called the “logistics Super Bowl” and compared to reversing a faucet or shoving a basketball though a narrow pipe. But despite the amusing turns of phrase, the United States military is orchestrating a massive effort to get out of Iraq. It’s turning out to be a daunting task for military officials, and a huge opportunity for logistics firms in the region.
Striking the set
Among US President Barak Obama’s first actions after taking office in 2009 was to order the American troop presence in Iraq to be reduced from 142,000 to 50,000 by August 2010, with a complete exit by December 2011, giving a tough deadline for what General William Webster called the largest military operation “since the buildup for World War II.”
There is no consensus on how much “stuff” the US Army has in Iraq, and differing reports from high-ranking officials indicate that the military itself is unsure. On April 2, Webster stated that 2.8 million pieces of equipment would be moved over the course of the operation; the same day, Ashton Carter, US undersecretary of defense for acquisition, technology and logistics, put that number at 3.4 million items. Other reports have suggested a total of 1.5 million pieces of equipment, ranging from radios and coffee makers to M-16 rifles, body armor, bulldozers and combat vehicles. The only thing that is agreed upon, it seems, is that the amount of work involved will be staggering.
As such, the US is gearing up to spend tens of billions of dollars on the movement, repair and redeployment of what Webster estimated to be $54 billion worth of the army’s effects.
“We have six years’ worth of stuff that we’ve gathered here,” said General Ray Odierno, US commander in Iraq, at a “rehearsal of concept” drill held at Camp Arifjan in Kuwait in December 2009.
At that drill, military officials reported that between May and December of 2009, the US military orchestrated the exit of 76,000 pieces of equipment from Iraq, which, by April 2010, had skyrocketed to 2.2 million items, according to Carter. All this is now piling up at Camp Arifjan, as will the windfall to come.
Arifjan and logistics hub Joint Base Balad, 64 kilometers north of Baghdad, are constant hives of activity. Countless combat vehicles roll onto carrier planes while rows of Humvees sport a litany of defects, listed on their sides in chalk.
In these bases, the equipment is sorted, repaired if possible, and shipped either back the US, Afghanistan, or other regional commands. Equipment damaged beyond repair is scrapped, or destroyed to preserve the confidentiality of proprietary technology.
Most of the material can be transported by trucks and rail, some provided by contractors and some by the US Army, but some big-ticket items present unique challenges.
The Mine Resistant Ambush Protected (MRAP) vehicle for example, weighs 265.35 metric tons. A US Department of Defense (DoD) statement in February said that there are 8,500 MRAPs on the ground in Iraq, all of which must eventually be transported to Kuwait.
Inevitably, cost-benefit analysis has led to the conclusion that some items will be left behind.
For example, ‘non-tactical’ sports utility vehicles, which were purchased for $30,000 several years ago, are worth about $5,000 today. The shipping cost of each vehicle is around $10,000, so the US Army has decided that these will remain in Iraq.
The Headliner
Logistics contractors operating in combat zones provide a wide range of services from building bases to staffing cafeterias and transporting essentials such as food and water.
At Joint Base Balad, the largest in Iraq and a logistics hub for the withdrawal operation, contractors help the soldiers to catalogue and handle cargo coming through the base. Trucks containing incoming cargo, and buses full of personnel are often driven by contractors and protected by Army escorts.
The biggest civilian player in the “Operation Iraqi Freedom” logistics game has been KBR, based in Houston, Texas, formerly a subsidiary of Haliburton, where former US Vice President Dick Cheney was chairman of the board from 1995 to 2000.
As of March 29, KBR was operating in 61 permanent locations in Iraq and rotating through another 105. In Afghanistan, the contractor services 63 locations full-time and rotates through 34 more. The company also has a permanent presence in eight locations in Kuwait. So far, KBR has closed some 50 bases in Iraq.
KBR’s dominance over the US military logistical support throughout the war in Iraq was due to the Logistics Civil Augmentation Program (LOGCAP), the largest logistics contract awarded by America’s DoD. The program allows the US military to expedite contingency contracting through indefinite-quantity/indefinite-delivery contracts, meaning that KBR was required to carry out any task order made by the US military for as long as the contract stood.
The LOGCAP III contract, of which KBR was the sole provider, encompassed supplying housing, food and fuel for the US troops in multiple locations, involving the transport of all necessary materials and the building of all structures. LOGCAP III was awarded in 2001, before the attacks of September 11, 2001, and before the war in Iraq began.
Negotiated without the knowledge that KBR would soon be the largest logistics contractor in an active warzone, the contract included a ‘cost-plus’ structure with a one percent profit margin.
In other words, individual tasks within the contract are ordered, the cost estimated by the contractor, debated with military personnel and agreed upon. The contractor then fronts the cost of the action and is reimbursed with a 1 percent profit with the option of a 2 percent bonus, at the US government’s discretion.
“They low-balled LOGCAP III so much. Before 9/11 they never thought it would be such a huge contract and they shaved it to the bone,” said Doug Brooks, president of the Washington-based IPOA, a trade organization whose members include several logistics companies currently operating in Iraq. “Their idea at time was that it would be a $6 billion contract for the life of the contract and it would give them all this capacity that they could use for everything else.”
The contract ended up totaling $30 billion, but with such a low profit margin, it was no great moneymaker for KBR. “This is why Haliburton got rid of them. KBR wasn’t earning any money,” said Brooks.
Due to the eventual size of the contract and controversy over its sole-provider nature, the successor contract — LOGCAP IV — has been awarded to three different American companies: Fluor Corp, DynCorp International and KBR.
Under this new arrangement, the three contractors compete for every task order commissioned. US lawmakers and officials welcomed the competition as an improvement to the single-provider LOGCAP system.
“They low-balled LOGCAP III so much. Before 9/11 they never thought it would be such a huge contract and they shaved it to the bone”
Supporting players
KBR is just one of many logistics contractors working on DoD contracts. Though most of them are American, Kuwait’s Agility has played a sizeable role in the US conflict in Iraq.
The largest logistics firm in the Gulf, Agility has held three major contracts with the US government, some since the beginning of the conflict in 2003. But recent legal disputes between the company and the US Department of Justice (DOJ) have put a question mark over the company’s future relationship with one of its largest clients.
In November 2010, the DOJ indicted two of Agility’s subsidiaries, US-based Agility Defense and Government Services Holdings Inc. and Kuwait-based Agility Defense and Government Services KSC, for allegedly overcharging an unreported amount on $8.5 billion worth of contracts in Iraq, Kuwait and Jordan. Disputes over violations of legal process led to a second indictment from the DOJ and the company is still fighting the validity of the claim.
A source close to the case who spoke on the condition of anonymity told Executive in January that Agility had spent more than $33 million in legal fees. He also said that John Negroponte, former US ambassador to the UN, and several four star generals on Agility’s board were helping Agility with the case.
Agility will continue to service its standing contracts until their expiration, but is forbidden from bidding on new contracts until the legal issues are resolved. One of Agility’s major contracts still in effect is Heavy Lift VI, a $1.5 billion contract to transport military supplies and personnel, which it won part of in June 2005 with the final option period expiring this July. Agility, formerly the Public Warehousing Company, was awarded the Subsistence Prime Vendor (SPV) contract by the US Defense Logistics Agency in June of 2005.
The $14 billion contract procured storage and transport of food to US bases in the region. With the final option period expiring in December 2010, and Agility forbidden to bid on any new contracts, the SPV has been awarded to another regional firm, Anham LLC of Dubai, for an amount that could total $6.4 billion. The value of the SPV contract is decreasing with the continual exit of troops from Iraq and, eventually, Kuwait.
Agility will remain a major player in the region as it still holds both commercial and other government contracts which keep it engaged in Iraq, Kuwait and Afghanistan, but its future role in US military operations remains uncertain. But the source close to the case said that Agility’s “bread and butter is still the defense and government business, not the commercial business.”
The source said that if the legal disputes are not resolved, Agility would most likely consider selling its defense and government services arm.
SIGIR has found $340 million in suspicious payments, mostly involving contractors and vendors
At the sharp end
But even giants like KBR and Agility do not have the inherent capability to perform all of the tasks they are given, which is where local and regional companies play an integral role. When a large contractor is ordered to build a base, parts of the effort such as supplying water or serving food, are subcontracted to another, often local, provider. In fact, $21 billion of KBR’s $30 billion LOGCAP III contract went to subcontractors, according to a May 2009 report from the US Congress’s General Accountability Office.
A February 2010 census of contractor support for Iraq and Afghanistan performed by the office of the assistant deputy undersecretary of defense showed that there were some 100,000 contracted civilian employees working in Iraq, 6 percent of which were providing logistics or maintenance services. Of these, 20,200, were Iraqi and 52,000 originated from a country other than the US or Iraq. Just less that 28,000 were American. In Afghanistan the local contingent is even higher, constituting 80,800 of the total 107,300 contractors working there. These numbers still represent a 13 percent decrease in contractors in Iraq since the last quarter of 2009.
Stage Managers
According to a 2010 Deloitte study entitled “Performance Based Logistics in Aerospace and Defense,” yearly DoD spending on logistics more than tripled from 2001 to 2009, reaching $5 billion last year. The study predicts this amount will surge to $7.4 billion by 2013. The value of individual contracts has also been rising steadily, increasing from an average of $26.4 million from 2000 to 2002, to $59.5 million from 2007 to 2009. By 2013, Deloitte predicts that the average size of a performance-based logistics contract will be $85.8 million.
Even a simple contract such as upgrading suspension units on the MRAP, which struggled on the tough Afghanistan terrain, earned American arms firm BAE Systems & Armaments, an $82 million contract: a drop in the ocean, considering the billions to be spent in the coming months.
Government oversight and contractor supervision is not a new task for the US, but the sheer size of the contractor workforce and the number of contracts going out has overwhelmed the government’s ability to keep track of them all.
Before contracts are awarded, they go through several layers of planning by military commanders in the field as well as several secretaries in the defense department and the Defense Contract Management Agency (DCMA). After contracts are awarded, they are governed by on-sight supervisors, auditors, the DCMA and the Defense Contract Audit Agency (DCAA) and, in the case of Iraq, the Special Inspector General for Iraq Reconstruction (SIGIR). As of January, SIGIR had found $340 million in suspicious payments and transactions, mostly involving contractors and vendors. The DCAA has doubled its number of auditors dedicated to LOGCAP in the last year from 55 to 110. Oversight is slowly improving, but KBR Vice President of Operations Douglas Horn told the Senate Wartime Contracting Commission in March that too many cooks in the kitchen are making for more confusion on the ground.
“The structure and discipline of the contracting system is often at odds with the realities of the warzone operational environment,” said Horn, adding that contractors were often left unable to act while waiting for government policy to manifest into contracted services. But with current trends set to continue, the management and oversight of contractors is going to have to be sorted. And, if Afghanistan turns into anything like Iraq, contractors are going to be playing a starring role.
