“You whore it out to a contractor,” Major Tim Elliott said bluntly. It was April 2012, and I was at a swank hotel in downtown London attending “Forward Operating Bases 2012,” a conference for contractors building, supplying, and maintaining military bases around the world. IPQC, the private company running the conference, had promised that the conference would be “attended by senior officials and decision-makers from industry worldwide” and “bring together buyers and suppliers in one location.” It was pitched as “an excellent platform to initiate new business relationships” through “face-to-face contact that overcrowded trade shows cannot deliver.”1 Companies sending representatives included major contractors such as General Dynamics and the food services company Supreme Group, which has won billions in Afghan war contracts, as well as smaller companies such as QinetiQ, which produces acoustic sensors and other monitoring devices used on bases. “We’re profiteers,” one contractor representative said to the audience in passing, with only a touch of irony.
Aside from the corporate representatives, a few officers from NATO member militaries were on hand to speak. Major Elliott, of the Royal Scots Brigades, had offered his stark “whore it out” assessment while explaining how to build a military base that allows a base commander to “forget the base itself”—that is, the work of running the place—and instead maximize his effectiveness outside the base walls.2
Of course, Elliott said, in wartime you won’t get contractors to run a base without “a shitload of money.” And at times, he said, vast amounts of “time, effort, and resources” are expended “just to keep a base running.” In Afghanistan, Elliott said, he saw situations so bad that on one base there were private security guards protecting privately contracted cooks, who were cooking for the same private security guards … who were protecting the privately contracted cooks … who were cooking for the private security guards … and so on it went.
After an extensive examination of government spending data and contracts, my calculations show that just from late 2001 (when the war in Afghanistan began) to 2013, the Pentagon has disbursed around $385 billion in taxpayer-funded contracts to private companies for work outside the United States. Most of this money has gone to overseas bases. And while some of the contracts are for nonbase items such as weapons procurement, the thousands of contracts believed to be omitted from these tallies thanks to accounting errors make the entire $385 billion figure a reasonable reflection of the funds flowing to private contractors to support the country’s global base collection. Indeed, because of the Pentagon’s poor accounting practices and the secrecy surrounding military budgets, the true total may be significantly higher.
Almost a third of the total—more than $115 billion—was concentrated among the top ten corporate recipients alone. Many of the names scoring the biggest profits are familiar: the former Halliburton subsidiary Kellogg Brown & Root, the private security company DynCorp, and BP. Others are less well known: Agility, Fluor, Bahrain Petroleum Company. The complete list includes major transnational construction firms, large food service providers, the world’s biggest oil corporations, and thousands upon thousands of smaller companies receiving government contracts.
All this base spending has been marked by spiraling expenditures, the increased awarding of noncompetitive contracts (and contracts lacking incentives to control costs), and outright fraud. Even companies with well-established histories of fraud and abuse have repeatedly been awarded noncompetitive sweetheart contracts. Financial irregularities have been so common that any attempt to document the misappropriation of taxpayer funds at overseas bases would be a mammoth effort. The Commission on Wartime Contracting, which Congress established to investigate waste and abuse, has estimated that there has been $31 billion to $60 billion in contracting fraud in the Afghanistan and Iraq Wars alone, with most of it involving bases in and around the two countries.3 In Singapore, at least four Navy officials have recently been charged with receiving bribes—in the form of cash, gifts, and sexual services—in exchange for providing a contractor with inside information and helping to inflate the company’s billing. Globally, billions of dollars are likely wasted or misused every year.
Proponents of outsourcing the work of building, running, and supplying bases overseas argue that contractors save the government and taxpayers money, and that, as Major Elliott suggested, they allow the military to focus on its combat duties. But research suggests that this is often not the case. On base and off, contractors tend to provide services at higher costs than the military itself.4 Around the globe, military bases have become an important source of corporate profit making, diverting hundreds of billions of taxpayer dollars from domestic needs.
PEELING POTATOES AND BRINGING HOME THE BACON
Once upon a time, the military, not contractors, built and ran U.S. bases. Soldiers, sailors, marines, airmen, and airwomen built the barracks, cleaned the clothes, and peeled the potatoes. But this started changing during the Vietnam War, when Brown & Root began building major military installations in South Vietnam as part of a contractor consortium. Brown & Root enjoyed deep ties with President Lyndon Johnson dating back to the 1930s, leading to well-founded suspicions that Johnson personally steered contracts to the company.5
The use of contractors grew as the war in Vietnam continued. Amid nationwide resistance to the draft, contractors were one way to solve the military’s labor problem, which became permanent with the end of conscription in 1973. In the era of the all-volunteer force, hiring contractors reduced the need for the military to recruit new troops. Instead, it passed the labor problem to the contractors, who have frequently searched the globe for the cheapest possible workers. Often, these have been Filipinos and other non-U.S. citizens from formerly colonized parts of the world who are willing to work for much less than uniformed troops. By recruiting foreign workers, the government and contractors could also often avoid paying for the health care, retirement, and other benefits provided to U.S. troops. A general trend toward the privatization of government services only accelerated this trend in the military.
Without forced conscription, the military was also under pressure to retain recruits once they joined. Keeping troops and their families happy with a growing array of comforts played an important part in retaining the military’s labor force. Especially at bases abroad, military leaders sought to mitigate the challenges of overseas tours with a generally cushier lifestyle than troops could afford at home. As time passed, troops, families, and, importantly, politicians came to expect elevated—and ever rising—living standards not just at peacetime bases, but also in war zones. To deliver this lifestyle, the military would pay contractors with increasing generosity.
During the first Gulf War in 1991, one out of every hundred deployed personnel was a contractor. Later in the 1990s, during military operations in Somalia, Rwanda, Haiti, Saudi Arabia, Kuwait, and especially the Balkans, Brown & Root received more than $2 billion in base support and logistics contracts, covering construction and maintenance, food services, waste removal, water production, transportation services, and much more.6 In the Balkans alone, Brown & Root built thirty-four bases. The largest, Camp Bondsteel in Kosovo, covered 955 acres and included two gyms, two movie theaters, extensive dining and entertainment facilities, coffee bars, and a PX for shopping. Speaking of off-duty soldiers, a U.S. Army representative told USA Today, “We need to get these guys pumping iron and licking ice cream cones, whatever they want to do.” By contrast, military personnel from other NATO countries lived in existing apartments and factories.7
By the second Gulf War, contractors represented roughly half of all deployed personnel in Iraq. Brown & Root, now known as KBR, employed more than fifty thousands people in the war zone—the equivalent of five divisions or one hundred army battalions.8 For most in the military, the days of peeling potatoes are long gone.
CONTRACTS, CONTRACTS, CONTRACTS
Figuring out who has been profiting from this increasingly comfortable military lifestyle has not been easy. Because the government does not compile many aggregated lists of contract winners, I had to pick through hundreds of thousands of individual records from publicly available data and research scores of companies worldwide. With these lists in hand, I adopted the methodology for tracking funds used by the Commission on Wartime Contracting.9 Ultimately, for the period between October 2001 and May 2013, I put together a list of every Pentagon contract with a “place of performance”—that is, the country where most of a contract’s work is performed—outside the United States.
There were 1.7 million of them.
Generally, the companies winning the largest contracts were those providing one or more of five things: construction, operations and maintenance, food, fuel, and security. Scrolling through all 1.7 million rows (more than can be handled by a single Microsoft Excel spreadsheet) offered a dizzying feel for the immensity of the Pentagon’s activities and the amount of money being spent worldwide. The breadth was remarkable. There was one contract for $43 for sand in South Korea, another for a $1.7 million fitness center in Honduras. There was $23,000 for sports drinks in Kuwait, $53 million in base support services in Afghanistan, and everything from $73 in pens to $301 million for army industrial supplies in Iraq.
Cheek by jowl I found the most basic services, the most banal purchases, and the most ominous acquisitions. The Pentagon paid contractors for concrete sidewalks, a traffic light system, diesel fuel, insect fogger, showerheads, black toner, a 59-inch desk, a 50-inch plasma screen, unskilled laborers, chaplain supplies, linen for “distinguished visitor” rooms, easy chairs, gym equipment, flamenco dancers, and the rental of six sedans. There were funds for phone cards, billiards cues, Xbox 360 games and accessories, Slushie machine parts, and a hot dog roller. There were payments for scallops, shrimp, strawberries, asparagus, and toaster pastries, as well as for hazardous waste services, a burn pit, ammo and clips, bomb disposal services, confinement buildings, and blackout goggles for detainees.
Not surprisingly, given the recent wars, contractors have won the most taxpayer dollars in Afghanistan and Iraq. With more than thirteen hundred installations between the two countries, corporations received around $160 billion in contracts there between 2001 and 2013. In Kuwait, which hosted hundreds of thousands of troops deploying to Iraq, corporations enjoyed $37.2 billion in contracts. The next four countries where contractors have secured the most money are those that have generally been home to the largest numbers of bases and troops since World War II: Germany ($27.8 billion in contracts), South Korea ($18.2 billion), Japan ($15.2 billion), and the United Kingdom ($14.7 billion).10
Given a federal data system that has been called “dysfunctional,” the real totals are almost surely higher.11 Black budgets and CIA contracts for paramilitary activities could also add tens of billions of dollars in overseas base spending.12
Even the data that have been recorded and made available are unreliable and opaque. This is highlighted by the fact that the top recipient of Pentagon contracts abroad is not a company at all, but “miscellaneous foreign contractors.”13 In other words, almost a quarter of a million contracts, totaling $47.1 billion—some 12 percent of the total—have gone to recipients that the Pentagon has not identified publicly. As the Commission on Wartime Contracting explains, “miscellaneous foreign contractors” is a catchall “often used for the purpose of obscuring the identification of the actual contractor.”14
Complicated subcontracting arrangements, the use of foreign subsidiaries, frequent corporate name changes, and the general lack of corporate transparency make identifying the value of contracts received by specific companies yet more difficult. But in general, a troubling pattern emerges: the majority of benefits have gone to a relatively small group of private contractors. Indeed, almost a third of the $385 billion spent around the world has gone to just ten contractors. Putting aside the “miscellaneous foreign contractors” topping the list, it’s helpful to examine the top recipients in some detail.
KBR
Among the contracting companies bringing home billions, Kellogg, Brown & Root dominates. It has almost five times the contracts of the next company on the list, and it is emblematic of broader problems in the contracting system.
KBR is the latest incarnation of Brown & Root, the company that built U.S. military installations during the Vietnam War. From its beginnings in 1919, when it got its start paving roads in Texas, Brown & Root eventually grew into the largest engineering and construction firm in the United States. In 1962, it was bought by Halliburton, an international oil services company. Dick Cheney, who helped significantly increase the Pentagon’s reliance on private contractors when he was President George H. W. Bush’s secretary of defense, became Halliburton’s president and CEO in 1995. During the five years when Cheney ran the company, KBR, as it was now known, won $2.3 billion in U.S. military contracts—compared to $1.2 billion in the previous five years.15
Later, when Cheney was vice president of the United States, Halliburton and its KBR subsidiary won by far the largest wartime contracts in Iraq and Afghanistan. It is difficult to overstate KBR’s role in the two conflicts. Without its work, there might have been no wars. In 2005, Paul Cerjan, a former Halliburton vice president, explained that KBR was supporting more than two hundred thousand coalition forces in Iraq, providing “anything they need to conduct the war.” That meant “base support services, which includes all the billeting, the feeding, water supplies, sewage—anything it would take to run a city.” It also meant taking care of Army “logistics functions, which include transportation, movement of POL [petroleum, oil, and lubricants] supplies, gas supplies … spare parts, ammunition,” and more.16
Most of KBR’s contracts to support bases and troops overseas have come under the multibillion-dollar Logistics Civilian Augmentation Program, known as LOGCAP. In 2001, KBR won a one-year LOGCAP contract to provide an undefined quantity and an undefined value of “selected services in wartime.” Thanks to a series of one-year contract extensions, the company then enjoyed nearly eight years of work without facing a competitor’s bid. Overall, between 2001 and 2010, the number of Pentagon contracts issued without competitive bidding nearly tripled. “It’s like a gigantic monopoly,” a representative from Taxpayers for Common Sense said of LOGCAP.17
The work KBR performed under LOGCAP also reflected the Pentagon’s frequent use of “cost-plus” contracts. These reimburse a company for its expenses and then add a percentage of the costs on top of that as the company’s fee. In other words, as the Congressional Research Service explains, “increased costs mean increased fees to the contractor,” and therefore there is “no incentive for the contractor to limit the government’s costs.”18 As one Halliburton official bluntly told a congressional committee, the company’s unofficial mantra in Iraq became, “Don’t worry about price. It’s ‘cost-plus.’”19
In 2009, the Pentagon’s top auditor testified that KBR accounted for “the vast majority” of wartime fraud.20 The company has faced accusations of overcharging for everything from delivering food and fuel to providing housing for troops and base security services.21 This shouldn’t have been a surprise: back in 2006, Halliburton/KBR paid $8 million to the government to settle lawsuits charging double billing, inflating prices, and other fraud connected to its work at Camp Bondsteel in Kosovo.22
After years of bad publicity, in 2007, Halliburton spun KBR off as an independent company and moved its own headquarters from Houston to Dubai. But despite KBR’s track record, which includes a 2009 guilty plea for bribing Nigerian government officials to win gas contracts, the company has continued to receive massive Pentagon money. Its latest LOGCAP contract could be worth up to $50 billion through 2018.23
In early 2014, the Justice Department sued KBR and two subcontractors for exchanging kickbacks and filing false reimbursement claims for costs “that allegedly were inflated, excessive or for goods and services that were grossly deficient or not provided.” The suit also charged KBR with transporting ice for troops’ consumption in unsanitized trailers previously used as temporary morgues.24
SUPREME GROUP
Next on the list of top Pentagon contractors is the company that has been described as the “KBR for the Afghan War.” Supreme Group has won well over $9 billion in contracts for transporting and serving meals to troops and supplying fuel at bases in Afghanistan and other countries worldwide.25 The company’s growth perfectly symbolizes the soldiers-to-contractors shift in who peels the potatoes.
Supreme was founded in 1957 by an Army veteran, Alfred Ornstein, who saw an opportunity to provide food for the hundreds of growing U.S. bases in Germany. After expanding over several decades into the Middle East, Africa, and the Balkans, the company won multibillion-dollar “sole source contracts” that gave it a virtual monopoly over wartime food services in Afghanistan. In the decade since the start of the war in 2001, the company’s revenues grew more than fiftyfold to $5.5 billion. Its profit margins in 2008–2011 ranged between 18 and 23 percent. Wartime contracts account for 90 percent of revenues for the company, which, like KBR, is now based in Dubai. They have made its majority owner, the founder’s son, Stephen Ornstein, a billionaire.
Supreme’s chief commercial officer, the former Army lieutenant general Robert Dail, provides a prime example of the revolving door between the Pentagon and its contractors. From August 2006 to November 2008, Dail headed the Pentagon’s Defense Logistics Agency, which awards the Pentagon’s food contracts. In 2007, Dail presented Supreme with DLA’s “New Contractor of the Year Award.” Four months after leaving the Pentagon, he became the president of Supreme Group USA.
The Pentagon now says Supreme overbilled the military by $757 billion. Others have started to scrutinize how the company won competition-free contracts and charged service fees as high as 75 percent of costs. Supreme, for its part, denies overcharging and instead claims the government owes it $1.8 billion. In 2013, Supreme sued the Pentagon for awarding a new $10 billion Afghanistan food contract to a competitor that underbid Supreme’s offer by $1.4 billion. The lawsuit failed.26
AGILITY LOGISTICS
After Supreme comes Agility Logistics, a Kuwaiti company formerly known as Public Warehousing Company KSC and PWC Logistics. It won multibillion-dollar contracts to transport food to troops in Iraq. When the Pentagon decided against awarding similar contracts in Afghanistan to a single firm, Agility partnered with Supreme in exchange for a 3.5 percent fee on revenues. Like Supreme, Agility hired a former high-ranking Defense Logistics Agency official, Major General Dan Mongeon, who now serves as its U.S. president of defense and government services. He joined the company just months after it won its second multibillion-dollar contract from DLA, where Mongeon was director of operations.27
In 2009 and 2010, grand juries indicted Agility on criminal charges for $6 billion in false claims and price manipulation.28 In 2011, a grand jury subpoenaed Mongeon as part of investigations into new charges against Agility.29 With the litigation ongoing, the Pentagon suspended the company and 125 related companies from receiving new contracts. Agility, in turn, has filed a $225 million suit against the DLA for breach of contract. But strangely, the Army and the DLA have continued to do business with Agility, extending contracts on at least seven occasions via “compelling reason” determinations that override the company’s suspension.30
THE REST OF THE TOP TEN: A PATTERN OF MISCONDUCT
Things do not get much better farther down the list. DynCorp International and Fluor Intercontinental, the next two companies in the top ten, won the latest LOGCAP contracts along with KBR. Awarding this work to three companies rather than one was intended to increase competition. In practice, according to the Commission on Wartime Contracting, each corporation has enjoyed a “mini-monopoly” over logistics services in Afghanistan and other locations. DynCorp, which has also won large wartime private security contracts, has a history littered with charges of overbilling, shoddy construction, smuggling laborers onto bases, sexual harassment, and sex trafficking. Meanwhile, a Fluor employee pleaded guilty in 2012 to conspiring to steal and sell military equipment in Iraq.
On the positive side, Fluor is the only defense firm in the world to receive an A on Transparency International’s anticorruption index, which rates companies’ efforts to fight corruption. On the other hand, ITT/Exelis, number seven on the list, received a C for its anticorruption efforts. So did KBR and DynCorp.31
Rounding out the Top Ten list are BP (which tops the Project on Government Oversight’s federal contractor misconduct list)32 and the petroleum companies of Bahrain and the United Arab Emirates. In total, ten of the top twenty-five firms are oil companies, with contracts for delivering oil overseas totaling more than $37 billion. The military consumed five billion gallons of oil in fiscal year 2011 alone.33
The Pentagon and the government generally justify the use of so many contractors based on their supposed efficiency, but reality appears to be the opposite. Research shows that contractors cost two to three times as much as Pentagon civilians doing the same work. More than half of Army contracts go to administrative overhead rather than contract services.34 Military comptrollers acknowledge that when it comes to the use of contractors, “growth has been unchallenged.”
“The savings are here,” the comptrollers conclude.35
PERKS AS PATRIOTISM
Among the speakers at the Forward Operating Bases 2012 (FOB2012)conference in London was U.S. Marine Corps Major Patrick Reynolds. After talking about an energy-saving forward operating base that the Marines are experimenting with, Reynolds ended his presentation by alerting the contractors to a list of upcoming contract opportunities. “RFP to be posted on FEDBIZOPPS soon!” read one of his PowerPoint slides, referring to the website advertising government procurement opportunities.
“I know you guys from the industry pay a lot to be here,” Reynolds said. So he thought it was right to offer some “food for thought [to] give you something to walk away with” from the conference. Suddenly there was a noticeable surge in energy in the room. People sat up in their chairs, and for the first time during his talk, many in the audience began taking notes on their mostly blank notepads.
Equally telling was Reynolds’s explanation of how bases tend to expand dramatically over time. “You start out small” with an outpost, he said, “thinking you’ll only be there for a week … And then it’s two weeks. And then it’s a month. And then it’s two months.” In the process, bases add facilities, fancier food, and recreational amenities: steak and lobster, flat screen TVs, and Internet connections. The major said he and others in the military refer to these comforts collectively as “ice cream.”
Right now, he told the audience, “there’s no ‘ice cream’” at small outposts. It’s just at headquarters and forward operating bases. “But eventually you’ll get to the point where it’s out” at the outposts, too, he said. “It’s a building block process.”
The process Major Reynolds described is precisely what happened on bases in and around Afghanistan and Iraq. According to a Congressional Research Service report, the Pentagon “built up a far more extensive infrastructure than anticipated to support troops and equipment.” Funds for the operation and maintenance of bases, including food and amenities, grew three times as fast as the number of deployed troops would suggest.36
During a Q&A session, a Supreme Group representative asked Reynolds if the Marines were thinking about cutting back on the TVs and the other amenities.
I’d love to do that, the major replied. Is it going to happen? “Sort of, kind of, not really … Do we need ice cream? Do we need cable TVs? Do we need high-speed Internet and all the crap? No,” he said. But there are senators and congressmen coming out and “visiting their constituents and they want to help.” Reynolds paused. “That’s probably all I’ll say on that.”
Reynolds’s circumspect phrasing pointed to some of the political players shaping the base world. In Afghanistan and Iraq, congressmembers have used base amenities as a public way to demonstrate their patriotism and support for the troops. One former soldier told me his reaction to arriving at Iraq’s Camp Liberty was, “This is awesome!” Like thousands of others, he found comfortable rooms, beds, and amenities that eventually included unrestricted Internet access, thanks to a favor from a KBR contractor. “It was really plush,” he said. “It was dope.” Later, he admitted, “I felt ashamed it wasn’t harder.”
The perks of the overseas base life are even greater for the generals and the admirals, who often enjoy personal assistants, chefs, vehicles, and private planes. And beyond such authorized perks, there are cases like that of the former Africa Command commander General William “Kip” Ward. Pentagon investigators found Ward “engaged in multiple forms of misconduct”—including billing the government for hundreds of thousands of dollars of personal travel and misusing government funds on luxury hotels, five-car motorcades, and spa and shopping trips for his wife. Ward also accepted free meals and tickets to a Broadway musical from an unnamed “construction management, engineering, technology and energy services company” with millions in Pentagon contracts.37
ELECTION DONATIONS
In addition to their illegal efforts to influence base contracting, contractors have also contributed millions of dollars to congressmembers’ election campaigns. According to the Center for Responsive Politics, individuals and PACs linked to military contractors gave more than $27 million in election donations in 2012 alone and have donated almost $200 million since 1990.38
Most of these donations have gone to members of the committees on appropriations and armed services in the Senate and House of Representatives. These committees have most of the authority over awarding military dollars. For the 2012 elections, for example, Virginia-based DynCorp’s political action committee donated the legal maximum of $10,000 to both the chair and ranking member of the House Armed Services Committee. It also made additional donations to thirty-three other members of the House and Senate Armed Services Committees and to sixteen members of the two appropriations committees.39
As they try to sway military budgeteers and policymakers, contractors also pay millions more to lobbyists. KBR and Halliburton spent nearly $5.5 million on lobbying between 2002 and 2012.40 This included $420,000 in 2008, when KBR won the latest LOGCAP contract, and $620,000 the following year, when it protested being barred from bidding on contracts in Kuwait.41 Supreme spent $660,000 on lobbying in 2012 alone.42 Agility spent $200,000 in 2011, after its second indictment on fraud charges.43 Fluor racked up nearly $9.5 million in lobbying fees from 2002 to 2012.44 Overall, the ten leading military contractors spent more than $32 million on lobbying in 2001 alone.45
AVOIDING TAXES
While the contractors have enjoyed billions in taxpayer funds, many have sought to use both legal and illegal means to minimize U.S. taxes paid on their profits. Across the entire aerospace and military industry, the effective tax rate as of 2010 was just 10.6 percent, compared to the top federal statutory corporate tax rate of 35 percent and an average effective tax rate for large profitable U.S. companies of 12.6 percent.46
In 2004, the Government Accountability Office found that 27,100 Pentagon contractors—about one in nine—were illegally evading taxes while still receiving money from government contracts. Privacy rules prevented the government from naming names, but in one case a contractor providing base services owed almost $10 million in taxes while receiving $3.5 million from the Pentagon. The government estimated the total taxes owed by military contractors at $3 billion.47
In recent years, major military contractors have also increasingly created foreign-chartered subsidiaries to lower their taxes legally. At bases overseas, foreign companies frequently receive a significant proportion of base contracts, meaning these contractors legally pay little if any U.S. taxes at all. Some U.S. companies have taken advantage of this situation by creating foreign subsidiaries to do much of the work on base contracts abroad. KBR, for example, has avoided paying taxes on contracts in Iraq by using shell companies in the Cayman Islands that exist only as a name in a computer file. By technically hiring more than 21,000 of its employees via two Cayman subsidiaries, the company was able to avoid paying Social Security, Medicare, and Texas unemployment taxes.48
KBR officials claim that the practice saved the military money by allowing it to perform work more cheaply. But a Boston Globe investigation noted that the maneuver “results in a significantly greater loss in revenue to the government as a whole” while giving KBR a competitive advantage over companies that are not using the loophole.49 The use of shell companies not only lowered KBR’s contributions to the Social Security and Medicare trust funds, but also meant that its employees could not receive unemployment benefits if they lost their jobs because they were technically employed by a foreign corporation. Robert McIntyre, the director of the advocacy group Citizens for Tax Justice, told the Globe, “The argument that by not paying taxes they are saving the government money is just absurd.”50
Similarly, when Halliburton spun off KBR as a separate company in 2007, the move of its corporate headquarters to Dubai was probably not unconnected to Dubai’s lack of a corporate income tax and taxes on employee income. (Halliburton already had seventeen foreign subsidiaries in tax haven countries.) Although the company has remained legally incorporated in the United States, moving top executives to Dubai likely allowed Halliburton to avoid some employee payroll taxes and to reduce its corporate taxes by arguing that a portion of its global profits is attributable to work performed outside the United States.51
In general, under U.S. tax law, a U.S. firm with overseas operations can indefinitely postpone paying U.S. corporate tax on its foreign income by conducting its foreign operations through a foreign-chartered subsidiary. As long as the company’s foreign earnings remain under the control of the subsidiary and are reinvested abroad, U.S. corporate income taxes are “deferred.” The firm pays U.S. taxes on the overseas earnings of the subsidiary only when the parent company “repatriates” the earnings from the foreign subsidiary as intrafirm dividends or other income.52 According to a 2012 J. P. Morgan study, U.S. multinational firms have over $1.7 trillion in foreign earnings “parked” overseas in this manner and thus shielded from U.S taxes.53
During a Government Accountability Office investigation, major military contractors admitted that “the use of offshore subsidiaries in foreign jurisdictions helps them lower their U.S. taxes. For example, one defense contractor’s offshore subsidiary structure decreased its effective U.S. tax rate by approximately 1 percent, equaling millions of dollars in tax savings.” Foreign subsidiaries also help protect companies from some legal liabilities and potential lawsuits.54
Because U.S. corporations are taxed only when they repatriate such foreign earnings, the current tax system encourages companies to earn and then keep their income overseas.55 This congressionally enacted structural incentive applies to all industries, not just military contractors. However, in the case of contractors doing work on U.S. bases overseas, its significance extends far beyond lost tax revenues. Given equivalent contracts to provide services on a base in Texas and a base in the United Arab Emirates, for example, the base in the UAE offers significantly more options for indefinitely reducing U.S. taxes. In short, the U.S. tax code actually encourages contractors to support the stationing of bases and troops abroad rather than at home.
A SELF-LICKING ICE CREAM CONE
As the FOB2012 conference neared its end, I asked another conference participant (who requested that I not use his name) whether during his wartime deployments in Iraq he had seen the problem Major Elliott had described—a base with private security guards doing nothing but protecting privately contracted cooks who were doing nothing but cooking for those same private security guards.
“A lot,” he replied. It’s the “self-licking ice cream cone”—by which he meant a self-perpetuating system with no purpose or function except to keep itself going.
“I sat with my ice cream and my prime rib on Sundays” in Iraq, he continued. It’s been this way since 2001, maybe even since Kosovo. There’s been lots of waste and inefficiency. Maybe, he said of the logisticians who coordinate all the amenities, it would be better “to fire the lot and start over.”
In one of the conference’s final conversations, contractor and military representatives discussed fears about the military market drying up as U.S. and European governments cut defense budgets. Many agreed that contractors would increasingly move to build, supply, and maintain bases for UN and other international peacekeepers, as well as for oil and mining companies, whose extraction facilities often look like military bases already.
Peter Eberle, a representative from General Dynamics (which just missed making my list of the top twenty-five overseas contract recipients), asked: “What if we have peace break out” after the United States and NATO withdraw from Afghanistan?
“God forbid!” replied Major Elliott.
Caserma Dal Molin (now known as Caserma Del Din) under construction at an old airport in Vicenza, Italy. Although the base’s main tenant is an airborne brigade, the construction destroyed the airport’s sole existing runway; its remnants can be seen at bottom right.