Who Profited from the Iraq War?
Linda Bilmes

The next question after “How much did the war cost?” is, “Where did the money go?” Issues such as corruption, fraud, and war profiteering attract media attention, but there’s a more fundamental question about who were the primary beneficiaries of the very large amounts of money that have been dispersed by the US government.

The work involved in putting this together is enormous. It involves looking through financial statements of thousands of companies and hundreds of thousands of contracts. The transparency is very poor, so I’m still trying to make sense of what I’m finding.

Joe Stiglitz and I have estimated the total budgetary and economic cost of the war as somewhere around $4 trillion and growing. That $4 trillion includes operational components, long-term veterans’ benefits, Social Security benefits, long-term military reset, and a variety of other social and economic costs. This study looks at the most narrow subset of this, which is about $1.7 trillion in direct operational costs and increases to the Department of Defense budget.

The short answer to who benefited from the wars is:
1) unsurprisingly, the petroleum industry;
2) surprisingly, the large health care companies serving the military;
3) defense contractors (particularly highly specialized defense contractors like those who make specialized armor, do infrastructure and munitions cleanup, and train the Iraqi police); and
4) within the military, the army has been the big winner compared to the other forces.

We know that the story of Iraq is almost inseparable from the story of oil. Before the wars, Iraq was a small but significant oil exporter to the US. After the war started, production fell off; so one set of beneficiaries were those who made up the gap, primarily Canada and Mexico. Petroleum-related expenditures have averaged about 10 percent of US war spending in Iraq, and about 25 percent of US war spending in Afghanistan. In Iraq there were more than 500 bases being operated with their own generators. There were about 42,000 specialized military vehicles in Iraq, using very high octane fuel costing about $13 for a liter of fuel, on vehicles that go about two miles a gallon. That’s about $26 per mile for fuel.

Why is it that the costs in Iraq and Afghanistan grew from about $4 billion a month in the early stages of the war, to about $16 billion a month by 2008? The GAO, Congressional Research Service, CBO, etc. have pointed out that increases in personnel and operating tempo only explain a small part of this rise. One of the major explanatory variables has been the increase in oil prices.

The average troop today consumes 27 gallons a day, compared with 1.6 gallons per day in World War II. Secretary Gates estimated that every one-dollar price increase in a barrel of oil costs the Department of Defense $130 million. This rise in oil price, from $25 per barrel to $140 per barrel at the peak in 2008, was a major factor in the rise in operating costs.

Ten percent of the top 100 DoD contractors are now petroleum companies, including three in the top 20 contractors, compared with zero in 1999. The scale of some of these contracts is simply stunning. Just last week International Oil Trading Company in Florida was awarded a $1.1 billion new contract. There are hundreds of other oil companies that are lower down the food chain, but to give you a sense of the scale of it, the top three (BP, Royal Dutch Shell, and Bharain Petroleum Co.) earned $5.5 billion in 2009 for Defense Department contracts associated with Iraq and Afghanistan.

The second sets of companies that have profited from the wars are the health care providers to the military. TRICARE is the medical insurance provider for active duty troops, retirees, and dependents. This has been the fastest growing component of the Defense Department’s budget for some years now, growing at more than 85 percent in real terms in the past decade. It’s now about 10 percent of the total defense budget, up from less than 6 percent in 2001. Three companies – Humana, Healthnet, and Tri-West Health Care – administer TRICARE’s three regions. If combined, they would actually be the sixth largest defense contractor: bigger than KBR, and just below the biggest defense contracting names such as Lockheed, Northrop Grumman, and Boeing.

A significant amount of this growth in military health care costs can be attributed to the war. First of all, for the active duty service members and their families, the differential between the costs of participating in TRICARE compared with the cost of paying for private insurance has grown enormously over the past decade. Per year, TRICARE costs $250 for an individual, and $460 for a family – compared to a cost of at least $4,000 in the private sector for similar coverage. Before the wars, the co-pays for TRICARE were scheduled to be increased; but that was canceled every year because of difficulties in recruiting. Accordingly, the percentage of enrolled eligible service members/families has grown from 45 percent in 1999 to 71 percent today. In just in the last two years, more than 400,000 service members and families have joined TRICARE. TRICARE has also been expanded to include mobilized Guards and many reservists who were not previously eligible. Utilization of services by active duty and their families has risen significantly as well, particularly for services such as counseling for active duty military, their spouses and children, and treatment for common musculoskeletal disorders that are typically incurred during active duty.

This has produced very healthy profits to the companies. The largest TRICARE provider, Humana, has tripled its revenues during this period; its profits have gone up about nine-fold, and the specific military premia income among after-duty troops has gone from $2.6 billion to $4.5 billion. The other companies enjoyed similar benefits.

Third, let’s turn to the most complicated sector: defense contractors. Just this past year, DoD awarded over 500,000 contracts for a total value of more than $350 billion. At least $200 billion has been spent in Iraq and Afghanistan on contracting since 2001. Procurement grew from 10 percent of war outlays in 2004 to 34 percent in 2008. That also includes the oil contracts. This research is particularly difficult because many of the Pentagon’s core tracking databases are dysfunctional. Several different systems are especially problematic. The Synchronized Pre-deployment Operational Track (SPOT) system is supposed to track information on contracts and personnel. However – in the way of all the wonderful euphemisms that come out of the war – the Pentagon refers to it as a system on which it has “lost visibility.” In 2010 the system reported $22.7 billion in contracts, but the GAO found it had missed out at least $4 billion due to double-counting, under-counting, and over-counting.

Another malfunctioning database is the CENTCOM tracking system. CENTCOM is the military command for the region. To prevent money falling into the hands of insurgents, this system is supposed to vet all non-US vendors who receive more than $100,000. However, the system is not working, because 74% of the vendors receive less than $100,000 – in some cases, just a few dollars less. Perhaps most disturbing is that over $40 billion (at a very conservative estimate) has been spent on a category called “Miscellaneous Foreign Con-tractors.” After Lockheed Martin and Boeing, “Miscellaneous Foreign Contractors” comprise the third largest contractor over the last 10 years, yet these are contractors on which there is no information.

Despite the lack of transparency in the Pentagon’s tracking systems, it is possible to piece together a partial picture of contractor earnings by searching the federal government’s overall procurement database and by looking at the financial statements of the contractors.

The major war activities involving contracted support were: construction and operation of over 500 bases in Iraq; land and air transportation; training of the Iraq and Afghan police and military (over $70 billion); infrastructure to support US military presence; reconstruction of water, roads and utilities in Iraq and Afghanistan; environmental clean-up; production of armed vehicles, Humvees and M-RAPS; and security services. Security services are all provided by private companies, such as Blackwater, and make up between 10 and 15 percent of expenditures. The firms that were involved directly in these activities were the primary beneficiaries of government war expenditures.

The war spending has produced a fundamental restructuring of corporate earnings for some of the publicly traded companies involved in these activities. For example, the Halliburton subsidiary KBR, which holds the biggest operational contract, LOGCAP (Logistics Civil Augmentation Program, providing contingency support), was the thirty-seventh largest Pentagon contractor in 1999, with contract values of $830 million. By the time it spun off from Halliburton in 2006, it was the sixth largest, with contracts totaling $24.2 billion. Another example, DynCorps – owned now by the hedge fund Veritas Capital – has grown very rapidly in profits and revenues. Fluor grew its operating profit from $23 million in 2001, to $142 million in 2010. URS grew from revenues of $2.3 billion to $9 billion. L3 Communications, which provides helicopter transportation, has seen its earnings rise from $2.3 to $15 million, and net income from $116 to $966 million.

Some of the firms that have earned the most money are privately held. These include Washington Group International, which does a lot of the construction of the bases; Environmental Chemical for munitions disposal; Armor Holdings – over $1 billion for armor for military vehicles; International American Products for the electrical wiring; and First Kuwaiti General, which built the US Embassy.

The fourth beneficiary from war is the Army, and to some extent, the Marines. Traditionally, the military has divided funds among the forces on the basis of historical proportions. However, during the past decade, it has invested much more in the Army, particularly in expanding the number of active duty troops. The number of forces in the Marines has also increased, though only temporarily. Meanwhile, the Pentagon has disinvested in the Navy and Air Force. The Air Force now has 2500 fewer aircraft, and the Navy has fewer than half the number of ships, as before the war.

One final objective is to identify who stands to reap the financial benefits from the aftermath of the conflicts. Iraq has the fourth largest known oil reserves in the world. It also has the tenth largest natural gas reserves and enormous amounts of minerals. These are concentrated in the northern Kurdish regions, and in the southern Shia regions, leading to many of the problems with the Sunni population in the middle.

The oil industry will be the main beneficiary of expanding oil, gas and mineral production in the future; but not, by and large, those firms based in the US and the UK. In Afghanistan, China has emerged as the biggest winner. China National Petroleum has signed a $3 billion deal to develop minerals, and it has signed the main deal for oil and gas reserves in Afghanistan. The US position has been that anything that can develop the economy in Afghanistan is a good thing, and we don’t want it to appear as if we’re in there for the oil; so China has become the de facto winner.

In Iraq, Exxon Mobil has a big contract in Kurdistan, but there have been also been major deals with producers in Turkey, Iran, China, South Korea, and France. What these actors have in common is that they did not support the US invasion. Turkey, for example, has emerged as a big winner with an $11 billion contract to build housing, several billion dollars to expand wholesaling distribution. South Korea is building several billion dollars in power plants, and has cornered the market on a lot of the infrastructure services that will enable Iraq to increase its oil production.

Iraq wants to quadruple its oil production, and has awarded 12 major contracts so far: six of them for oil fields that are already known and producing, and the other six for fields that are not yet commercially developed. South Korea, Turkey, and France have emerged as the winners in providing the water and electricity infrastructure needed to make even half of the planned expansion come true.

In conclusion, this is a very early picture of who the beneficiaries were in Iraq and Afghanistan. What we see is that the cost of the war is not the whole story. I think the overall lesson from doing this research is that, as with constructing the cost of the war, finding it so difficult to figure out where the money was spent is a disturbing problem. The nation would be better served if our tracking and accounting systems allowed this scale of spending to be transparent, so we have the potential to draw lessons from it for the future.

Linda Bilmes is a full-time faculty member at the Harvard Kennedy School where she teaches budgeting, applied budgeting, and public finance. She has held senior positions in government, including Assistant Secretary and Chief Financial Officer of the US Department of Commerce, Deputy Assistant Secretary of Commerce for Administration, and US Representative to several high-ranking commissions. Bilmes has written extensively on financial and budgetary issues.