As the invasion and reconstruction of Iraq have demonstrated, the burgeoning privatized security industry has transformed the combat landscape. With a presence of some 20,000 contractors working for an estimated 60 Private Security Firms (PSFs), the industry has taken on increasingly core military functions in Iraq-selling not just security services, but strategic planning, combat training, interrogation, and operational support. And due to the industry's unique lack of accountability- to the legal system, Congress, the public, and even the Pentagon-it has attracted considerable controversy in the process. What few people realize, however, is that the PSF industry's biggest liability may turn out to be what is claimed to be its primary advantage: cost.
Because security contractors operate outside the military chain of command as well as most legal jurisdictions, they have been widely characterized as rogue mercenaries with deep pockets. After all, soldiers are subject to rules of engagement; contractors are governed only by the terms of their contracts. Soldiers serve their country; contractors serve their managers and shareholders. When soldiers break the law, they can be court-martialed. When contractors break the law, they can be fired.
The extraterritorial activities and corporate status of contractors makes them virtually immune from U.S. federal law or international treaties, and military law only applies to civilians when there has been a formal declaration of war. Using PSFs as force multipliers helps circumvent congressional troop caps-and, because contractor casualties are not officially counted, it obscures the human cost of war. In short, PSFs give the government plausible deniability, extending the arm of the state without leaving any fingerprints.
Even still, PSFs do not in fact inhabit a legal lacuna. They are beholden to a whole set of corporate imperatives-based on the calculations of actuaries, civil liability to employees and shareholders, compliance with commercial regulations, and the eternal quest to preserve profit margins-that have accompanied the transformation of the battlefield into a labor market. Instead of corporate commandos run amok, PSFs are better understood as a case study in the unintended consequences of privatization.
As corporations, PSFs are subject to private- sector mechanisms for limiting exposure to and mitigating risk, such as tort liability and insurance. While soldiers cannot sue the military for injuries sustained in battle, for instance, contractors can sue their employers. Last year, the families of four contractors who were brutally killed in Fallujah filed a wrongful death suit against the security provider Blackwater, alleging that Blackwater put the men at risk by breaching corporate protocol-and fraudulently covering it up. If the families prevail, the precedential effect will be far more significant than whatever punitive and compensatory damages Blackwater will have to pay. With well over 200 contractor casualties in Iraq so far, the PSF industry is awaiting the Blackwater verdict with understandable apprehension.
Unlike military commanders, PSFs must purchase life insurance for their contractors. Not only does this impose enormous costs on PSFs, it limits the range of activities that they may undertake. When insurance rates increased by upwards of 500 percent in the initial phases of the war, some firms were priced out of the market, leading to no-shows and contract breaches. Insurance premiums currently account for up to 40 percent of overhead for some PSFs, costs which are by many accounts unsustainable. Without regulation, rates will not drop: PSFs engage in extremely risky activities in dangerous places. But as these costs must be incorporated into contracts in order to preserve profit margins, they come at great expense to the industry's contracting partners.
On the other hand, as corporations, PSFs possess the leverage of private-sector mechanisms for structuring incentives. While even the most elite soldiers are compensated like mid-level bureaucrats, contractors are compensated like management consultants. The effect has been to cannibalize the military's labor pool-in particular the top echelon. Lured by salary increases of up to 400 percent, hundreds of soldiers have decided not to re-enlist but to "go private," adding to the resentment of the less-compensated and increasingly shorthanded force they leave behind. The Army has recently resorted to offering bonuses of up to $150,000 as incentive for soldiers to stay.
Finally, there is the Pentagon's preference for "cost-plus" contracts, which treat PSFs as if they are on retainer-they respond quickly when they are needed, provide the service desired, and bill after the fact for the costs outlaid, adding a fixed award on top. The result encourages neither cost-cutting nor enhanced performance. The rationale for using this form of contract is efficiency: it allows PSFs to provide surge capacity. However, when the surge turns out to be chronic and constant, this logic should be re-examined.
In short, the PSF industry's supporters and its fiercest critics share an assumption: that contractors allow for a forceful foreign policy on the cheap and quiet. In reality, contractors come with considerable strings attached, and these strings can prove costly and cumbersome.
Rebecca Ulam Weiner, a lawyer and specialist in the implications of corporate law on military policy, is an International Security Program fellow.