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PMC = Private Military Costs

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One fiercely held, long asserted, if sparsely substantiated, talking point of the private military contracting (PMC) industry is that its cost-efficient. I've often said that such a point would be more convincing if there were some dispassionate studies actually backing up the point, but, for the sake of argument, let's concede that at least some of the time PMCs are more efficient, if not effective, which is a whole different argument, than regular military forces. Like most things in life the ultimate success of something depends on the circumstances.

So, it could be a benefit. But there are few unalloyed benefits in life. If you are going to make a judgment about the utility of PMC you should also consider costs.

Costs, you ask? What costs? I'm glad you asked. As it happens, a very interesting master's thesisUS Government Outsourcing, the Private Military Industry, and Operation Iraqi Freedom: A Case Study in Conflict Contracting by Allison Halpin at the University of Kansas was published last year.

It is hardly a novel point but one that bears emphasis, as Ms. Halpin writes, that PMC "are economic beneficiaries of war and thus have an investment in it. That investment may compel companies to act in their best financial interests, which may not coincide with the political and diplomatic goals and interests of the state that hired them."

Here are some of the questions that Halpin investigated:

How is outsourcing to PMSCs thought to increase cost savings? To what extent have anticipated cost savings been realized in the case of OIF? How are the savings for wartime service contracts determined?

How is the use of PMSCs thought to increase military effectiveness? Have these benefits been realized in the case of OIF?

Has OIF outsourcing increased the availability or number of combat troops?

Does outsourcing wartime support services to PMSCs increase or decrease the prevalence of corruption, fraud, and waste? If so, how?

What is the relationship between the utilization of PMSCs and the duration of conflict?

And here are some points she makes.

"As of mid-2007 Halliburton subsidiary Kellogg, Brown, & Root's (KBR) OIF support contracts with the USG totaled roughly $20 billion. Industry expert Peter Singer says that after converting the costs of previous wars into current dollars, "the U.S. government paid Halliburton about $7 billion more than it cost the United States to fight the American Revolution, the war of 1812, the Mexican-American War, and the Spanish American War combined."88 In relation to contemporary US engagements, KBR (as of mid-2007) had already made three times more than the 1991 Gulf War cost the United States in its totality."

Of course, let's be fair; in and of itself that doesn't say anything regarding KBR, other than the government spent a lot of money on it. But we may recall that classic economic theory states that cost-efficiency is dependent on competition -- more on this below -- and competent contract management. In the early years of Operation Iraqi Freedom there wasn't much of either. That leads us to the following important point.

"The private sector is presumably more efficient than the public sector because private sector enterprises are motivated by profit. The private sector can provide goods and services of better quality, at lower costs, or in a speedier fashion because private sector actors strive for efficiency and innovation to maximize profits and undercut competitors. However, businesses do not necessarily emphasize efficiency, nor do they necessarily deliver it. This is not to say public sector efficiency rivals that of the private sector, rather, "many private sector enterprises are as inefficient as are their government counterparts." Jonas Prager suggests that with government functions, "the issue is not inherent inefficiency as much as a lack of political will" to prioritize and promote efficiency."

Indeed, I know you will be shocked, shocked I say, to learn that in the past PMC advocates have overstated the benefits that come from outsourcing. For example:

"The Defense Science Board (DSB) task force on outsourcing and privatization pronounced overstated savings estimates as it promoted DOD outsourcing in the mid-1990s. In one analysis, the DSB estimated a potential $6 billion in annual savings from outsourcing logistical support for DOD facilities located in the US. The Office of the Secretary of Defense's Program Analysis and Evaluation department analyzed this estimate and concluded it was overstated by $4 billion. In addition, the GAO contended the DSB estimate assumed an outsourcing environment of intense competition in areas where "competitive markets may not... exist."

Just to cite one example of the lack of competition:

"When the US Congress approved the $18.4 billion Iraq Relief and Reconstruction Fund 2 (IRRF2) in November 2003, it stipulated IRRF2 funded contracts be awarded through competitive procedures. This provision was largely in response to Iraq Relief and Reconstruction Fund 1 (IRRF1) spending. Many IRRF1 funded contracts were awarded without adequately competitive bidding processes."

But perhaps lack of competition could be compensated for by great contract management, or perhaps not.

"Inadequate and inefficient contract management plagued USG OIF outsourcing efforts. Prager contends that contract management "is inefficient for the very same reasons" as "general cost-inefficient government production." When outsourcing for OIF support, as with government outsourcing in general, a primary question for analysis asks, "will contracting out prove even more costly than inefficient government provision of specific services?" Personnel shortages, a poor institutional framework, poor interagency coordination, relevantly unskilled personnel, high turnover rates, security concerns, and widespread apathy towards contract management have significantly impeded the USG's abilities to manage OIF contracts successfully."

Ms. Halpin deserves much credit for pointing out (see pp. 56-63) some of the flaws in two past studies by the Congressional Budget Office and Government Accountability Office, which PMC advocates have cited in the past to try and make their case for cost-efficiency.

Over the years we've seen a lot of coverage of contractor fraud waste, and abuse. Much of this gets dismissed as the actions of a few bad apples that are not representative of the overall PMC industry. That's true but, perhaps, not the whole truth. Here's one example of how it works:

"Much of the potential cost savings from OIF outsourcing derive from labor. Interestingly, contractors use the very same source to widen their profit margins. Contractors increase profits by inflating labor costs. An anonymous letter sent in May of 2005 to Colonel Theodore S. Westhusing, then director of Counter Terrorism / Special Operations (CTSO) activities in Iraq, outlines how this happens. The contractor (in this case US Investigative Services (USIS)) bills the government labor costs for the number of trainers and staff outlined in the contract. Meanwhile, the number actually employed is much less. Poor oversight enabled such practices, which effectively increased contractor profits while undermining US operations in Iraq, as USIS's contract entailed training Iraqi Emergency Response Unit (ERU) forces. The letter to Colonel Westhusing illustrates:

Every day that they don't have an instructor on the ground means more profit for them. They know that you and the COR [Contracting Officer Representative] are not going to check their numbers against what they are supposed to have. USIS also thinks that even if you catch them, they will be able to argue their way out of it because you did not Define Instructor numbers under your SOW [Statement of Work] ... It is a safety problem... We are so short of instructors that we are not really teaching anything out here... USIS still gets their money but you do not get your training... don't take my word for it, actually come out here and ask!!!"

Some people may recall that Colonel Westhusing was found dead in his room in Iraq on June 5, 2005. His death was determined a suicide. In his suicide note, Westhusing wrote "I didn't volunteer to support corrupt, money grubbing contractors."

Admittedly fraud and waste are hardly unique to the private sector. It is essentially a political phenomenon and we find it all too frequently in the public sector as well. Still, the next time you hear of a cost-efficiency claim by a PMC advocate you might keep Ms. Halpin's conclusion in mind:

"The costs of outsourcing during OIF remain largely unarticulated, especially as these costs compare to whether such services were provided in-house. The USG does not have a systematic approach or established methods to compare these costs, nor have any significant or extensive attempts been made to appraise them. CBO and GAO security service cost assessments each employ their own individual cost considerations, producing comparisons that do not include comprehensive costs and savings elements. These comparisons are both highly limited in scope, analyzing scenarios within just one service sector."

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