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The War Profiteers - War Crimes,
Kidnappings, Torture and Big Money |
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May 17th,
2008 - Blackwater’s Aggressive Culture Keeps its Business Growing |
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Blackwater’s Aggressive,
Entrepreneurial Culture Keeps its Business Growing By McClatchy-Tribune News Service May 17, 2008 Blackwater was all over the
news last fall, and the news wasn't good. The North Carolina company created
a diplomatic crisis when its guards killed 17 Iraqi civilians in a Baghdad
square. The Iraqi government
promised to evict the company from Iraq. Blackwater's reclusive owner, Erik
Prince, was called to Congress to testify; and afterward, he began a PR blitz
of the national media. He even appeared on "60 Minutes." Today, however, the trouble
has subsided. Last month, the State Department renewed its contract with
Blackwater to provide security in Iraq. It's still in Afghanistan for the
military. In the fall, Blackwater won a new contract, for $92 million, to fly
soldiers and cargo around Pakistan and Afghanistan for the Army. And the
company was one of five picked to support the Pentagon's Counter
Narcoterrorism Technology Program, a five-year contract worth up to $15
billion. As the company grows, so do
its headaches: a persistent congressional investigation, several high-profile
lawsuits and a federal weapons investigation. Still, Blackwater is thriving
because of its aggressive and entrepreneurial business culture and a strong
network of Republican connections. The company has hired extensively from the
top levels of the CIA, Defense Department and State Department, and named the
former No. 2 official at the CIA to its Board of Advisors. "Their connections
certainly help a lot," said Peter Singer, an expert on military
contractors at the Brookings Institution. "But they may be a
vulnerability in the future, if the regime changes in Washington." This is a company that
barely existed at the start of the decade; Blackwater grew from $204,000 in
federal contracts in 2000 to almost $600 million in 2006. Its rise is a case
study in business timing and the power of financial and political capital to
take advantage of a new market. Blackwater Lodge and
Training Center was the brainchild of Al Clark, a Navy SEAL and instructor.
Dissatisfied with the Navy's rented training grounds, Clark told colleagues
he would open his own when he left the service. Clark hooked up with Erik
Prince, a young Navy SEAL who shared his interest in training. Clark didn't
know it at the time, but Prince was an heir to a billion-dollar auto-parts
fortune. When the two broke ground on
Blackwater Lodge and Training Center in Currituck and Camden counties in
northeast North Carolina in 1997, the timing was good. The military had
closed and consolidated bases after the Cold War and neglected training
facilities. Blackwater built the largest shooting facility in the country,
with indoor ranges, mock urban landscapes, a 1,200-yard firing range, driving
tracks and a lake for naval training. Blackwater boasted it could design any
sort of training a client might want. The location was excellent,
within four hours of the Pentagon in Washington, and Fort Bragg and Camp
Lejeune in North Carolina. The country's biggest naval base in Norfolk, Va.,
was less than an hour away. Despite the steady stream of business, Blackwater
wasn't making money. Clark recalled how Prince summoned him to his office, on
Christmas Eve 1999 and said, "I want this place profitable
tomorrow." Clark said his relations
with Prince went downhill when Prince complained that he was training the
students so well that no one would come back for more training. Clark left Blackwater in the
summer of 2000. Business was growing steadily, Clark said, but the company
wasn't making a profit. "There are two people
who put Blackwater on the map," Clark said _ "Al Clark and Osama
bin Laden." After the attacks of Sept.
11, 2001, the demand for training from military and law enforcement filled
Blackwater's ranges and classrooms. Blackwater's most lucrative
line of business wouldn't be in the Eastern North Carolina town of Moyock,
but overseas. It was the brainchild of a former CIA employee, Jamie Smith. While working at Blackwater
before Sept. 11, Smith had suggested that Blackwater go into the private
security business, guarding businessmen or government officials. Prince was
initially skeptical, but warmed to the idea after the attacks on New York
City and the Pentagon. Prince contacted Alvin
"Buzzy" Krongard, the No. 2 official at the CIA. Krongard had known
Prince since at least 1999, when Krongard's son, a Navy SEAL, had trained at
Blackwater, according to Al Clark. Krongard had visited Blackwater and shot
at the firing ranges, Clark said. (In October, Krongard stepped down from
Blackwater's Board of Advisors because his brother, Howard Krongard, was the
State Department inspector general responsible for investigating Blackwater.
Howard Krongard later resigned.) The CIA was stretched thin
in the aftermath of Sept. 11 and the invasion of Afghanistan. Blackwater
landed a sole-source, no-bid contract to provide security at CIA stations in
Afghanistan. When Blackwater won the
contract, the company had no one to staff it. Smith advertised for security
contractors in the Washington Post, according to author Robert Young Pelton.
Smith led the security team when it arrived in the early spring of 2002. The contract was not a big
one; it called for 16 Blackwater security personnel, plus dozens of Afghan
guards hired locally. But it was profitable, a Blackwater budget spreadsheet
shows. Blackwater expected a 26 percent profit on the job. Most important, the contract
was a start, a foot in the door of what would expand into a billion-dollar
industry once the U.S. invaded Iraq. The invasion created a huge
demand for private security in Iraq. Secretary of Defense Donald H. Rumsfeld
sent about half the troops recommended by his Army chief of staff. There
weren't enough soldiers to secure the country, let alone protect U.S.
diplomats and civilian workers. In August 2003, Blackwater
won a $27 million sole-source contract to guard Paul Bremer, the head of the
Coalition Provisional Authority and probably the top assassination target of
insurgents. The contract called for
helicopters to fly Bremer around Iraq. Blackwater was well positioned for
that; the company had bought a Florida aviation company four months earlier. Peter Singer, an expert on
private military contractors, said this was typical of Blackwater's business
savvy. "They are very good and
very savvy at identifying market needs and pushing hard to enter into those
markets, even before clients have recognized the need," Singer said. The private security
business turned Blackwater into a heavyweight government contractor; the
company went from $204,911 in government contracts in fiscal 2000 to $593
million in 2006, an average annual growth rate of 277 percent. Blackwater
went from having 16 guards in Afghanistan to more than 850 personnel in Iraq. By the end of 2006,
Blackwater had received more than $1 billion in government contracts. That
doesn't include classified contracts, including providing security at CIA
sites overseas. The CIA contracts are
lucrative, according to a document Blackwater filed in a federal lawsuit. Blackwater had a contract
since 2003 to protect a CIA site in Pakistan, the document said. "The
profit potential is high (25%+ margin)," because of the classified
nature of the budgets, and the knowledge gained from past performance on
existing contracts. During congressional
testimony in October, Erik Prince said that Blackwater made a 10 percent
profit on his State Department contracts, but he declined to elaborate or
discuss the company's annual profits. He also declined to comment for this
report. But there is a healthy markup for the company's services: Blackwater
bills the State Department $1,221 for a security guard earning $500 a day. For all the controversy,
Blackwater has an unblemished record on its main task in Iraq: None of the
diplomats in the company's care have been killed or wounded. Undersecretary
of State Patrick Kennedy recently told The New York Times that the diplomats
could not function in Iraq without Blackwater: "If the contractors were
removed, we would have to leave Iraq." A company that has banked
more than $1 billion in federal payments since Sept. 11, 2001, doesn't sound
like a small business, but Blackwater says it is. For a company providing
security services, the threshold for a small business is $17 million in
annual revenue. Blackwater passed that threshold in 2003, yet continued to
list itself as a small business. In 2006, Blackwater's
aviation division won a $91 million contract for air charter work in Guam, a
contract the Navy had set aside for small businesses. Two losing bidders
challenged the award, saying Blackwater had more than 1,500 employees, the
threshold for an aviation contract. An administrative judge ruled for
Blackwater, saying the company's 1,000-plus guards working overseas did not
count as employees. Blackwater's contention that
its guards are not employees has generated a lot of controversy. Last year, an Internal
Revenue Service hearing officer ruled that a Blackwater security guard was an
employee, not an independent contractor. U.S. Rep. Henry Waxman has asked the
IRS to investigate whether the company used the independent contractor
designation to avoid paying federal taxes. Blackwater disputes Waxman's
complaint. If that ruling were applied to Blackwater's entire work force, the
company could be on the hook for $50 million in unpaid Medicare and Social
Security taxes that companies must pay for their workers. Prince, Blackwater's
founder, is known for his libertarian views. He touts the virtues of the free
market and entrepreneurs. But the company is not averse to exploiting
contracting loopholes and government giveaways. Blackwater teamed up with
the Chenega, an Alaskan Native American tribe of 69 people, to guard a
missile defense installation in northern Japan. As a native-owned company,
Chenega can win special no-bid contracts because of rules crafted by Alaska's
powerful U.S. Sen. Ted Stevens. But to fulfill the terms,
Chenega needed a partner to supply the guards, so it turned to Blackwater.
The contract was worth $5 million for Blackwater in 2006 and $6 million for
the first half of 2007. In North Carolina, the
Department of Commerce approved a $120,000 grant for Blackwater to support
the company's production of its Grizzly armored vehicle. The department
projected that Blackwater would file for $637,500 in tax credits for the same
project. Despite the phenomenal
growth, Prince has been quietly looking for more investors. At the end of
April, the giant hedge fund Cerberus said it had decided against investing as
much as $200 million in Blackwater. After news broke of Cerberus' interest,
Blackwater President Gary Jackson sent an e-mail message saying the company
was anticipating even more growth, the Wall Street Journal reported. "The company has
"had two successive quarters of unprecedented growth," Jackson
wrote, and is "exploring multiple avenues to finance our continued
expansion." © 2008, The News &
Observer (Raleigh, N.C.). External link: http://www.tradingmarkets.com/.site/news/Stock%20News/1575255/ |