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Newsday March 25, 2006

Businesses find benefits, costs in war work

By Randi F. Marshall

It's not business as usual when DynCorp International is providing logistical support, security and police training in Iraq. The Irving, Texas-based company has lost 26 employees to accidents, helicopter crashes and roadside bombings since the war started three years ago.

And the financial costs are high, too. The expense of insurance and security for employees, and even security for the security, has grown considerably, according to DynCorp spokesman Gregory Lagana, who wouldn't reveal specifics.

But the war in Iraq has boosted DynCorp's revenues, responsible for about $400 million of the company's nearly $2 billion in sales. And while the company didn't specify how much the effort has added to profits, there has certainly been an upside, Lagana said, although he added that profit margins are lower than in other private industry -- often below 10 percent.

For government contractors and other U.S.-based businesses that are doing work in Iraq, the war there has continued to provide opportunity and benefits, although experts and companies alike say they are difficult to quantify. To be sure, security businesses, oil producers and defense contractors are among the biggest winners. Those who manufacture key products, from bulletproof vests to bullets themselves, and, more recently, those involved in reconstruction, have reaped the benefits, too.

But the war in Iraq is far from a total economic success. Plenty of businesses have lost money too, as they deal with rising fuel costs partly because of the war, employees who have been called up to serve in the military and a palpable uncertainty that has hovered over the U.S. economy and business growth since before the war began. While the increasing defense spending might add to the U.S. gross domestic product, the broadest measure of economic activity, it also results in opportunity costs, from larger deficits to the other industries that might have benefited from the funds now going toward the war.

"This is not a war on the scale that it changes the face or personality of the domestic economy, but it is a small tax on the domestic economy," said Peter Morici, a University of Maryland economist.

Without the war, Morici noted, the trade deficit could be smaller, causing a ripple effect. "That would mean a more robust manufacturing sector and more robust exports that would cause the economy to grow more in the long run."

So, what about the often-touted assumption that war is good for the economy? Certainly, the war in Iraq stimulated the U.S. economy in the beginning, as it adds between $60 billion and $80 billion a year in spending. But it's a relative drop in a $12 trillion economy, noted Economic Policy Institute economist Jared Bernstein.

The economic stimulus becomes even less significant as time goes on when the rate of spending doesn't rise, Bernstein added. A recent report from the institute's research director, Lee Price, found that, while defense spending had a big effect on job growth in 2004, its effect on 2005 payroll gains was relatively small.

Nonetheless, individual companies, and some key industries, have certainly found ways to do profitable business in Iraq.

There are ammunition makers and body armor manufacturers, such as DHB Industries Inc. in Westbury, N.Y., which earlier this month received a $54 million order from the U.S. Army for vests. There are oil companies that saw prices rise with the region's instability.

Large companies like Boeing and Northrop Grumman have benefited by association, experts said. And contractors, military companies and others gain more directly, through federal government contracts, often with the U.S. Departments of State or Defense.

"Never again in their lifetimes will they see the largess being heaped upon the national security industry as it has over the past four years," said Brett Lambert, a managing partner at the Densmore Group, a defense merger and acquisition company in Washington.

The most well-publicized business story out of Iraq is the question of political influence involving contracts with Houston oil company Halliburton and its subsidiary, Kellogg, Brown and Root. (Vice President Dick Cheney headed Halliburton from 1995 to 2000.) But there are a host of others. In the beginning, large and small companies thought they'd be able to make huge amounts of money from it. It was almost like the California Gold Rush, according to Steve Casteel, who oversees companies' efforts there for Vance International, a security provider and consulting business.

"When gold was first found, everybody rushed in there to extract some," said Casteel, who spent two years in Iraq before joining Vance four months ago. "Over time, the big opportunities disappear. You can still get gold out of the country (Iraq) but you have to know how to do it."

Vance, which was once a small domestic security company, now has found a niche for itself in northern Iraq, Casteel said. One reason for its success: a shift to a mostly Iraqi work force from a primarily American one.

Others have found success by taking advantage of the wide variety of work that needs to be done. Take Norshield Security Products. The Alabama security company manufactures a perimeter detection system the troops use, and other security products used in embassies and palaces. The company is also participating in a huge construction project, involving up to 50 employees, according to Norshield president Brad Wiggins, who didn't want to provide specifics because of security concerns.

Norshield's work in Iraq represents only 10 percent of the revenues of its parent company, CompuDyne Corp. But shortly after the Sept. 11, 2001, terrorist attacks, CompuDyne readied itself for involvement in what was to come, according to Martin Roenigk, CompuDyne's chief executive. The company spent up to $4 million adding capacity and buying a new 75,000-square-foot plant -- before receiving any orders.

Costs continue to remain high and CompuDyne hasn't yet made a profit off that investment, but hopes to soon, Roenigk said. The Norshield division may turn a profit on its Iraq work within the next quarter, Wiggins said.

To bring its expenses down, Norshield got creative. Focused on bomb-resistant doors and windows, it ships its products in pieces, reducing the number of containers on a recent shipment from 86 down to six and saving $500,000.

Still, the constraints are considerable. Weather shifts make construction work difficult at times and housing, clothing and feeding workers is more complicated, Wiggins said.

Security, meanwhile, is a constant concern -- but also a constraint on many businesses in Iraq. At first, for instance, workers would spend four hours a day getting in and out of security checkpoints at their work sites, said Stan Soloway, who presides over the Professional Services Council, a trade association representing federal government contractors. That had a huge effect on companies' abilities to get anything done.

That has improved as procedures have been refined, Soloway noted. But some companies have pulled out of Iraq, saying the risks aren't worth it.

The Iraq story differs from doing international business elsewhere, experts said, because it combines the security problems of some regions with the economic limitations of others and adds in the possibility of fraud or waste. Concerns about overcharging, for instance, led auditors to examine Halliburton and its Kellogg, Brown & Root contract. Last month, the U.S. Army said it would reimburse most of the $222 million contract.

Back home, the war ripples throughout the economy in good ways and bad. John Pike, the director of globalsecurity.org, a Washington, D.C., think tank that follows the defense industry, noted that, beyond the obvious winners, restaurants, shops, attractions, real estate agents and construction companies in Washington, D.C., are benefiting from the work in Iraq, as defense contractors add employees, who, at times, flood the D.C. area and shop, eat and work there.

"A rising tide lifts all boats," Pike said.

Also among those boats are information technology companies that have been "gobbled" by eager defense firms looking to become more specialized, said Jay Korman, a consultant with DFI International, a Washington research firm.

The overall economy may not be so lucky. "It has a net economic drag," said Ivan Eland, director of the Center on Peace and Liberty at the Independent Institute, a research company.

Some companies have been hurt more directly, as they deal with employees called up to service. At American Airlines, 450 employees are on military duty, 300 of them pilots. Before the war, the total was less than 100, said Mark Burdette, American's vice president of employee relations. The airline has to keep jobs for those workers, pay for their health care and prepare for their return, when they may need new training and face administrative requirements to make up retirement contributions and return to payroll.

"There are some financial burdens associated with it," Burdette said, adding that American hasn't hired temporary employees because the staff levels are managed by normal attrition and furloughs.

In future years, the opportunities and constraints are likely to continue; only the cast of business characters may change. Companies specializing in infrastructure, from roads and water to electricity and telecommunications, will be the next entrants, said Fariborz Ghadar, director of the Center for Global Business Studies at Penn State University. "In the next year, certain sectors are going to pick up more quickly than ever," he said.

Even as that happens, executives said, employee safety far outweighs the potential profit.

"Under no circumstances can you justify an income statement versus somebody getting hurt or coming home in a body bag," Norshield's Wiggins said. "It doesn't matter how much profit we make off this thing. If something happens to one of our people, it's a total failure."

 


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