05/24/2010 12:09 am ET | Updated May 25, 2011

From BP to BPMC: What We Should Learn from the Deepwater Horizon Disaster About PMSC

What does the Deepwater Horizon oil spill have to do with the private military and security contracting industry? At first glance, nothing at all. But philosophically it nicely illustrates one of the enduring debates about the PMC industry, i.e., just how free does one let the free market be and to what extent does and should government regulate PMSC activities.

If your politics swing toward the right then you might consider it the latest culture war. Certainly Arthur C. Brooks, president of the American Enterprise Institute believes that is the case in this Washington Post op-ed he wrote, published yesterday. In his view:

Those old battles have been eclipsed by a new struggle between two competing visions of the country's future. In one, America will continue to be an exceptional nation organized around the principles of free enterprise -- limited government, a reliance on entrepreneurship and rewards determined by market forces. In the other, America will move toward European-style statism grounded in expanding bureaucracies, a managed economy and large-scale income redistribution. These visions are not reconcilable. We must choose.

Of course, if he thinks a marketplace that often trades in organized violence (i.e., security contracting) should be left to the marketplace, well, AEI needs a new president; preferably someone who understands history. The reason we have nations in the first place was to take violence out of the private sector.

But AEI's free market philosophy is not the issue here. The state of regulation of the PMSC industry is. Consider what we have been finding out in the aftermath of the fire on and the sinking of the Deepwater Horizon rig and the subsequent unchecked spewing of the oil from the ocean floor.

We have found that the Department of Interior's Mineral Management Service was so cozy with the petroleum industry it was supposed to regulate that to an astonishing degree it let BP and other companies use the old Joe Isuzu car slogan as proof that it was complying with required regulatory law. In other words, BP was saying just trust us.

Now consider the PMC industry. First, note that contrary to the claims of many critics, it is not an industry that doesn't have to comply with laws. In fact, as industry supporters frequently note there are numerous laws (both national and international), regulations, and directives that companies have to follow, Like any other industry, some companies are extremely scrupulous in following them; others less so.

Of course, not all these laws are relevant. Some of them have yet to be tested in court. Not all prosecutors are willing to use them, given the expense and difficulty of prosecuting a crime that may have taken place in another country. Some of the laws only apply contractors working for the U.S. military, so if you work for the State department you are out of bounds.

Perhaps, even worse, unlike, say, the oil industry, there is no industry wide standard prescribing best practices. Someday in the future, after the oil slicks are dispersed, it many turn out that BP, Transocean, and Halliburton cut corners, but at least there were standards on the book with which they were supposed to comply. For example, the International Organization for Standardization has 26 standards for the petrochemical and natural gas industries. It has nothing for private military or private security. And there is no one government agency that has the responsibility for overseeing all PMSC companies.

Remember, it is not the fault of the PMSC industry that there are not sufficient laws on the books that cover the type of situations it often finds itself in or that there are not enough, experienced people to enforce the laws. But the PMSC industry does not help itself when it argues that there are already sufficient laws on the books and that any new laws would be just an example of a burdensome government run amuck. Instead, industry supporters often says that because it complies with ethical standards put forward in voluntary codes of conduct devised by industry trade groups companies should be left alone to police themselves. In other words, just trust them.

Uh huh. Yes, about that; PMSC codes of conduct, or exhortations to do the right thing, have become quite di rigueur in recent years. All the major PMSC trade groups, such as IPOA, BAPSC, and PSCAI have them or something similar.

Should we be impressed? To answer that let's look at a recent paper by law professor Simon Chesterman who is now at the Lee Kuan Yew School of Public Policy, National University of Singapore, as part of the New York University - School of Law Singapore Programme.

In the interest of full disclosure I have a casual acquaintance with Prof. Chesterman. I presented a paper at a 2006 conference on the regulation of private military companies, he organized and contributed a chapter to a book "From Mercenaries to Market: The Rise and Regulation of Private Military Companies" he co-edited, published in 2007.

Bear in mind that Prof. Chesterman is not an opponent or diehard critic of PMSC. He recognized that they have a role to play and are here to stay. He notes, for example, that the IPOA Code of Conduct, now in its twelfth iteration, includes expansive acknowledgement of the applicability of international humanitarian law and human rights. He writes:

The limitations of voluntary codes of conduct were displayed when IPOA authorized the first investigation of one of its members. This took place a few weeks after the Nisour Square incident in September 2007, in which Blackwater personnel killed 17 Iraqi civilians. IPOA opened an investigation into whether Blackwater was in compliance with the code. Two days after the investigation was announced, Blackwater withdrew from the association entirely and announced that it was setting up its own association, the Global Peace and Security Operations Institute. The boilerplate website included a few platitudes but made it clear that Blackwater is the only member of this institute and that it does not have a code of conduct. IPOA's code remains essentially untested.

He also writes something that could be considered a rebuttal to AEI's Arthur Brooks, even though it was obviously written long before.

Markets can be an effective form of regulation, but operate best where there is competition, an expectation of repeat encounters, and a free flow of information. It is far from clear that any of these conditions exist for businesses in conflict zones, especially for those whose business is conflict. Demand often outstrips supply, as we saw in the scramble to fulfill multi-million dollar contracts in Iraq; this creates monopoly-type problems and reduces the potential leverage of the hiring agency to impose strong oversight provisions. Even where such leverage exists it may not be exercised because the hirer regards the contract as an exceptional event in the life of the nation that will not establish a precedent for future conduct. And even where there might be leverage and established relationships -- for example in the many contracts issued by the U.S. Departments of State and Defense -- there has been minimal public scrutiny or active efforts to avoid it.

It is possible to shape that market, however. Scandal can be a useful discipline and has been encouraging the adoption of codes of conduct by bodies such as IPOA. This is, of course, self-serving: the creation of a "legitimate" business through professionalization and the creation of industry associations may distinguish reputable companies from cowboys, raising the cost of entry for competitors and enabling the charging of higher fees for similar services. But it may also point to the most promising way of dealing with an area in which governments have failed. Modest examples of this are the disbanding of Sandline and EO, and the more recent repositioning of Blackwater as Xe Services.

None of this is a substitute for regulation intended to deter and punish abuse. Indeed, one might argue that poor regulation is worse than nothing, as it gives the illusion of accountability while taking away the impetus for reform. Yet focusing only on after-the-fact accountability, particularly in an environment where investigations will always be difficult and prosecutions unlikely, overlooks the role that regulation can play not just punishing companies for behaving badly but encouraging them to behave well.

In a previous post I mentioned a recent law journal article by Andre M. Penalver, a student at Cornell University Law School. He also wrote something relevant to this discussion, "The relationship between the national government and big business of the Progressive Era teaches a valuable lesson in regulation: the state can only preserve the place of its democratic institutions against new concentrations of private power by growing its own state power."

After the Civil War, as industrialization swept society many observers, especially progressive Herbert Croly thought that that a large state presence would be necessary to defend the public interest from more dangerous private force.

In 1903, at the behest of President Theodore Roosevelt, Congress established the Department of Commerce and Labor, which operated the Bureau of Corporations. In Roosevelt's words, the Bureau would administer the law "with the firm purpose not to hurt any corporation doing a legitimate business--on the contrary to help it--and, on the other hand, not to spare any corporation which may be guilty of illegal practices, or the methods of which may make it a menace to the public welfare."

Subsequently, in 1910, about a year and a half after the end of his presidency, Theodore Roosevelt gave a "New Nationalism" speech on August 31, 1910, in Osawatomie, Kansas. "The citizens of the United States must effectively control the mighty commercial forces which they have themselves called into being."

Assuming big business was to be a permanent fixture in modern America, only the federal government could leverage the proper amount of external control on these new interstate corporations. Just as corporations had centralized their activity, Roosevelt argued, so should the government.

Might it be time for a Bureau of Private Military Contractors (BPMC)? Bully, as Teddy would say.