The decision stems from the 2007 incident where Blackwater security guards fired on, and killed 17 Iraqis in a disputed who-shot-first incident.

But their bad news could be investor’s gain.

Including Blackwater, the State Department uses three separate security contractors in Iraq. The only competition for the coveted security contracts now rests with Triple Canopy and DynCorp International (NYSE: DCP). For investors, DynCorp is the only publicly listed company of the three.

Before you think a few extra security guards in Iraq can’t be that expensive, consider that there are thousands of private security contractors in Iraq. They protect everything from government personnel to corporate executives and buildings, earning thousands a day. Blackwater’s contract in Iraq was worth nearly $2 billion – despite its poor performance reviews.

And Iraq isn’t the only hotspot these companies operate in. There are dozens of other hotspots around the world for private security contractors to “clean up” in – like Afghanistan’s reconstruction.

Source: Blackwater’s Loss is DynCorp’s (NYSE: DCP) Gain

Two things will define 2009. One is the huge $1 trillion economic stimulus package featuring “smart grids,” roads and bridges.

The other is the winding down of the war in Iraq. I believe that this will supersede handling the aftermath of the current eruption of violence between Israel and Hamas in the Gaza Strip.

The promise of ending the war helped President-Elect Obama get elected, though I believe the policy differences between the two presidential candidates were not as great as generally perceived.

Now Iran and Afghanistan are Obama’s problem. It’s not quite as urgent as the deteriorating state of the economy, but it’s close. Obama will begin withdrawing troops as soon as he can. That may not be until 2010. If violence and instability regain traction, it could be the year after. But much of the planning will be laid out this year.

But downsizing troops doesn’t mean downsizing our involvement. The goal is to save lives. And the quid pro quo will be spending more money.

The U.S. government doesn’t have much of a choice. If it doesn’t, any semblance of peace and stability in Iraq would be jeopardized.

So talk about reducing contractor levels in Iraq is just that– talk. The next stage will be outsourcing reconstruction and security functions to the private sector.

Such private-sector functions have been complementary to the overall role of the U.S. military in Iran. In the next stage, the U.S. military will complement the central role of the private sector in Iraq.The companies already providing their services over there are in a better position than anybody to know what‘s going on. And they also don’t believe the talk of cutting back the private-sector presence.

For example, William Ballhaus, the CEO of DynCorp (NYSE:DCP), an infrastructure and security company with a large presence in Iraq , said that with existing commitments stretching military manpower, capacity, contractors add value by letting the military focus on security operations.

Iraq’s needs are gigantic. Usually, a country’s needs grow organically as it modernizes and the economy expands.

But Iraq is emerging from a devastating war followed by years of destructive civil violence. Rebuilding Iraq is going to take a great deal of effort, money, and heavy equipment.

Think construction equipment… transportation and infrastructure services… and know-how.

Iraq will be getting loads of new stuff, including tow trucks, communications vehicles, hauling vehicles, aerial platforms for construction, fire and garbage trucks, and heavy-load hauling vehicles.

And Uncle Sam, of course, will be paying the bill.

Ballhaus, in his last quarterly earnings conference call, said that he expects Iraq will continue to provide American infrastructure contractors with plenty of business for several years.

He says that a withdrawal will increase work, at least temporarily. He also expects Obama to increase U.S. involvement in Afghanistan, and that an increase in force levels should lead to more work through 2010.

So this is the deal. U.S. government spending in Iraq and Afghanistan isn’t going to slack off. If anything, it’ll go up as reconstruction and security responsibilities shift to the private sector.

The companies that can take advantage of both of Obama’s huge infrastructure programs – the one that will play out in the U.S. and the one that will play out in Iraq and Afghanistan – will be big winners in 2009.

Source: The Other Infrastructure Stimulus Program: Iraq and Afghanistan