It All Depends on What You Mean by Cost-Effective

09/20/2010 09:07 am ET | Updated May 25, 2011

The July issue of the journal Armed Forces & Society had a section devoted to the issue of military privatization which is worth looking at.

The articles there are all worth reading but let's start with "Beyond Civil--Military Relations: Reflections on Civilian Control of a Private, Multinational Workforce" by Katherine E. McCoy who teaches at the University of Wisconsin - Madison Sociology Department. As she obviously put a lot of thought into this I am going to borrow liberally from her article in what follows.

She argues that "that military outsourcing strips the principal - agent relationship of many of the structures and dynamics that states have traditionally used to control militaries. Many of the same qualities that make private military corporations successful as both economic actors and political surrogates also lead to reductions in the possibility for effective civilian control."

Essentially she finds that the basic ideas behind the civil - military relations are problematic as a means of showing how states are expected to control military actors generally. And, in turn, many of the same tensions and issues that arise with national militaries could in principle also apply to PMCs, therefore necessitating similar levels of control.

Okay, not really controversial so far, as PMC advocates always say they are fine with governmental control, assuming it is not overly burdensome; a term which is usually left undefined.

Generally there are four central concerns that militaries raise for democratic governments: (1) that the military will seize political power, (2) that the military will absorb a disproportionate amount of scarce resources (i.e., the budget), (3) that the military will lead the country into unnecessary wars, and (4) that the military will fail to obey civilian leaders.

The above four threats boil down to two distinct sets of dangers that militaries can pose to civilian governments: either they can fail to obey commands (e.g., because they are too weak, poorly disciplined, etc.) or they can interfere with the state itself. Both of these are problematic given the desired relationship between the state and its military forces.

The "civil -military problematique" is a particular application of a more general arrangement known as the principal - agent problem, wherein principals (e.g., states) delegate responsibilities to their agents (e.g., soldiers or employees) while still seeking to maintain effective control over them. From the principal's point of view, agents are expected to faithfully carry out the will of the principal. Thus, states ideally rely on their military agents primarily to implement military policy without supposedly influencing it.

Under democratic systems, civilian institutions and representatives are the principals who are authorized and designated to develop policies. Any examples of the military stepping into this role--from being overly vocal about its political leanings to the outright "supplantment" of the civilian regime--is seen as a violation of the proper principal - agent (or civil - military) relationship. This can be called a fear of a "principal - agent inversion," wherein the agent assumes roles presumably reserved for the principal.

Despite the fact that the ideas behind the civil - military problematique have been developed based on the notion of "the army as a state institution," many of the basic concepts behind this question have relevance for any group that the state delegates to use force on its behalf. Although civilian contractors are not part of the military institution, when they are hired by the state to perform the work of war, they share the soldiers' role of being delegated agents of violence. As military agents, PMCs could hypothetically pose either aspect of the principal - agent problem: they could upstage their civilian principals (e.g., by exerting substantial influence over policy formation), or they could fail to act as dutiful agents (e.g., by being undisciplined in their work). As an example of the last point just think of the numerous scandals KBR has been involved in as part of its logistics work in Iaq.

With regard to issues that could fall under the category of the "principal - agent inversion," several scholars have expressed concerns that, as private companies, PMCs will be motivated to sway states toward more military exploits. With regard to the principal - agent breakdown, some observers have expressed concerns that PMC employees can act as "cowboys," "mercenaries," and "lawless rambos," prompting calls for greater regulation.

On the other hand, others have argued that as a private market, the PMC industry has built-in incentives that make the civil - military problematique irrelevant. This camp holds that by forcing PMCs into competition with one another for states' business, the market itself provides incentives for PMCs and their employees to act as diligent agents of the state. No special bureaucracy or military hierarchy is needed to enforce what the market itself demands. PMC advocates have also pointed to the ability of the PMC market to socialize its members into obedience through the creation of professional standards within the industry as well as the development of various codes of conduct. An example would be the code that IPOA, a PMC trade association, is constantly citing as an industry seal of good housekeeping. They argue that in the context of a competitive market, self-regulation by the PMC industry is sufficient to protect states from unscrupulous behavior by PMCs, either on the ground or on Capitol Hill.

While this school of thought has yet to be empirically proven it has a lot of support. As McCoy notes, the Montreux Document, a recent international agreement on PMC use that involved several powerful countries and was sponsored by the Swiss government and the International Committee of the Red Cross, promotes self-regulation (in addition to some state regulation) by encouraging PMCs to abide by the industry's "best practices" and to develop their own high standards for their employees. Such standards would include provisions for the types and circumstances of contracts to accept as well as general guidelines on personnel issues (i.e., training, vetting, internal hierarchies, etc.).

In short, can we trust the market to regulate itself? Hmm, that's a tough one all right. Of course, the financial market did such a great job. Oh wait, it didn't.

Now here is where it gets interesting. As PMC advocates have long noted the PMC industry is a global industry.

Many of the presumed advantages of PMCs over traditional militaries spring from how the labor relationship is structured within the former. As sleek, low-overhead companies that lack the bulk and heft of traditional militaries, PMCs are presumably able to deploy much quicker than the traditional military. Rather than having a large number of permanent employees, as the military does, PMCs hire on a limited term for specific contracts. Such companies essentially see their job as providing high-quality temp labor to fill military needs. Indeed, in many cases PMCs in fact rely on standard temp firms to recruit and vet their labor force. For instance, the U.S.-based company Manpower, Inc. has been used widely across the PMC industry.

This flexible labor force requires very little in terms of long-term investments, from both the state and the corporation. The state is spared the need to vet, train, and manage this outsourced workforce, thereby reducing some of the bureaucratic burdens of relying on soldiers. And because PMCs rely on short-term contract labor, the companies themselves do not generally provide extensive initial training, pensions, or other long-term benefits. Although the actual cost-effectiveness of PMCs is much debated, this setup is designed to decrease labor costs (thereby increasing profitability and market efficiency) and increase PMCs' flexibility and responsiveness--all of which are appealing to prospective clients in the market for military-style forces.

As multinational corporations, PMCs have a global reach that allows them to maximize these advantages. In addition to being private and flexible, the PMC labor force is also highly globalized. As with other multinational industries, this global workforce helps PMCs to further reduce labor costs, which contributes to their competitive edge and profitability. Having a global labor force also allows PMCs to retain their flexibility since they can hire locals or workers from neighboring countries rather than shipping large numbers of U.S. citizens to the far corners of the world. 25 In fact, despite the fact that most PMCs are based in the United States or United Kingdom, approximately 90 percent of the PMC workforce comes from other countries. Depending on the site, between 60 percent and 65 percent of the workforce is composed of locals (called "host-country nationals," or HCNs), with the remaining 25 to 30 percent being foreigners from neither the sending nor the receiving countries. This last group is collectively referred to as "third-country nationals," or TCNs. This makes for a remarkably diverse labor force. For instance, Cha reports that a single U.S. firm, KBR, has employees from thirty-eight countries working on the ground in Iraq. Of sixty-six companies whose publicly available materials I reviewed, 56 percent advertise that they have a "global workforce" or "international workforce." Those companies collectively listed fourteen different countries as recruiting sites, including such diverse places as Nepal, Peru, Bulgaria, and the Ukraine. While Middle Easterners and South Asians have been well represented in this industry, there is also significant representation of Latin Americans (particularly Peruvians, Chileans, Hondurans, and Colombians) and Africans, especially South Africans and Ugandans. The remaining 10 percent of employees from the U.S. and U.K. are referred to as "expatriates," or "ex-pats." They tend to occupy the management positions and other high-paying roles within the PMC workforce. As such, they are a rough PMC equivalent to the military's officer corps.

The industry is able to secure such a diverse labor force through the extensive use of subcontracts. Large PMC contracts typically have several layers of subcontractors. In the United States, contracts are initially awarded to a major U.S.-based PMC, called the "prime contractor" or simply "prime." From there, the prime might pass the contract along to a U.S.-based subsidiary or an international affiliate. The contract may then be subcontracted to a non-U.S. company, with perhaps one or more subcontractors involved at a local level. Describing the contract chains that lead to hiring Asian TCNs for the type of work described here, Phinney suggests that the primes are usually major American companies. "First tier" subcontractors tend to be based in the Middle East, and the "second tier" subcontractors are based in the recruiting country, such as India or the Philippines. A Washington Post article provides the complete contract chain for a group of typical Indian TCNs: Subhash Vijay had hired them to work for Gulf Catering Co. of Riyadh, Saudi Arabia, which was subcontracted to Alargan Group of Kuwait City, which was subcontracted to the Event Source of Salt Lake City, which in turn was subcontracted to KBR of Houston.

The large-scale presence of PMCs in Iraq and Afghanistan would not be possible without this sprawling, global infrastructure. The PMC industry has been able to rapidly expand in recent years because of this ability to quickly draw on and organize large work forces with a variety of skill sets, experiences, and wage expectations from around the globe. It has therefore allowed PMCs to effectively respond to the demands of their state clients. Incorporating a global labor force also helps PMCs to remain competitive and respond to the exigencies of the government contracting process. For instance, states often try to increase accountability over the contracting process through the use of a competitive bidding process. This provides incentives for any company--including PMCs--to keep the costs of labor and materials as low as possible (although in other industries states often impose stipulations meant to curb this tendency, including provisions for unionized labor). Drawing from a global labor force therefore helps PMCs to respond to states' demands for market competition culminating in low bids for contract work.

Thus multinationals draw on the cheapest they can find. That is hardly news. PMC advocates usually spin this as a virtue, saying that workers brought to Afghanistan or Iraq may earn less than ex-pats but still earn more than in their home countries. So what is the problem?

The question of whether companies and, by extension, states are able to effectively monitor and control PMC employees has been a recurring theme over the years. A number of reports by both U.S. government agencies and various military watchdog groups have pointed to the inability of PMCs to provide "adequate discipline and professionalism in the guard force." For example, the watchdog group Project on Government Oversight raised this issue after its investigation of ArmorGroup contractors in Afghanistan, who were tasked with guarding the U.S. Embassy in Kabul. The group described a "Lord of the Flies" environment involving serious and continual hazing, public drunkenness and nudity, and failure of workers to perform basic duties or of supervisors to exercise leadership. While the Afghanistan example is particularly sensational, the disciplinary problems it describes are not an isolated event. One of my interview participants for a larger project on PMCs described how his company continually struggled to exert control over their contractors in the field, many of whom openly abused drugs and operated in a culture of impunity. Despite such problems, management was unwilling to increase the company's supervisory capacity, fearing that this would cut into their profit margins and lead them to lose future bids for government contracts. Overall, states have noted significant difficulties in getting PMC employees to professionally and consistently perform their duties. The contractual nature of the relationship between PMCs and governments means that if the companies themselves are unable (or unwilling) to secure compliance, the government principals also find themselves at a loss. A series of U.S. government reports dating from the early years of PMC contracting through the Iraq war note that "the armed services could not ensure continuity of service, compel contractors to perform, or enforce contractual terms." While these types of delays and principal - agent problems may be ubiquitous in government contracting, they raise particular concern in a military context.

Thus, PMCs pose some of the same control problems for civilian officials as do traditional soldiers, including failing to faithfully "do anything the civilians ask them to." This can lead to many of the same problems caused by a breakdown in civil - military relations, including mission failure, insubordination, the indiscriminate use of violence, and leaving states militarily and politically vulnerable. Despite these similarities, when outsourcing, states lack the direct "command and control" relationship that they have with soldiers and PMCs lack the other tools that the state traditionally uses to effectively manage civil - military relations, namely, a large bureaucracy and intense socialization.

Indeed, these characteristics are precisely the opposite of the qualities that are rewarded by the PMC market. PMCs are known--and prized--in part for their minimal structure, which contrasts with the hulking bureaucracy of many state militaries. Although the military bureaucracy is a "total institution" designed to maximize oversight and control over the soldier at all times, PMCs are modern corporations that eschew such large, redundant bureaucracies and instead rely on a minimal management structure for supervision of workers. This has obvious consequences for the ability of both PMCs and states to exert direct control over these private military agents. Although many commentators have referred to PMC indiscipline as a problem of inadequate legal regulation of the PMC market, such explanations brush over the deeper tensions at play in military outsourcing. PMCs' inability to impose discipline is not only due to the lapses of individual supervisors or companies or even inattention by the state. Rather, they can be at least partly attributed to the significant structural differences between PMCs and the military. Although the military has a large, sophisticated, and tightly integrated bureaucracy in place to impose the "chain of command," the PMC world has a more lightweight, contingent, and fragmented structure, marked by the kinds of subcontracting chains described above. As a result, PMCs lack the comprehensive oversight capacity of a traditional military. This means that PMC employees generally operate within a much more lax institutional environment than soldiers. If we consider that both soldiers and PMC employees are agents of state violence, then outsourcing signals a net loss of control for most states under most circumstances.

What does McCoy mean by loss of control? Here is one example.

The current market for PMCs provides incentives that further increase these differences between the oversight structures and capacities of militaries and PMCs. For instance, in accordance with market economics, PMCs continually seek to shed the bureaucratic structures that would allow them more direct control over their workforces. As mentioned above, many companies use other, outsourced firms to vet their employees. In the context of civil - military relations, careful and deliberate vetting would seem to be a crucial task in the construction of a reliable, disciplined security force. Yet the quality of PMC vetting procedures has repeatedly come under question in government reports and journalistic accounts, particularly in the wake of scandals involving contractors with known criminal records.

Regulation can be imposed to mitigate these problems, but its practical limitations are substantial. For instance, states could try to resolve this particular problem by stipulating that PMCs perform such vetting in-house or else rely on a reputable, certified third party. This is the type of control that could be either regulated or simply written into individual government contracts. However, even this solution fails to take into account the complexities of the PMC industry. The current structure of the PMC workforce precludes the possibility of thorough vetting. As discussed above, the PMC workforce is highly globalized and subcontracted. Contracting globally makes it significantly more difficult for the company--and consequently the state--to gather reliable information about those acting on its behalf. In recent years the U.S. government has started to register concern over the lack of basic information about military contract workers in general and foreign workers in particular. Criminal background checks provide a telling example. Although the government requires its contractors to conduct criminal background checks on their employees, in practice it is extremely difficult to do this with a global workforce. There is simply no international database against which to check applicants' criminal backgrounds, and individual countries widely vary in terms of how much data they collect and how much data they release.

For instance, some countries have laws against releasing individual criminal records to a third party (e.g., an employer and the contracting government), while other countries do not collect or compile criminal records at the national level. Even Interpol data (i.e., that are collected by international law enforcement) are incomplete, in that they include only information submitted by member countries and the information is retained for only five years. 41 Thus, while the global contracting and subcontracting arrangement frees the state up from the direct work of vetting and monitoring employees--one of the presumed advantages of hiring PMCs--it also puts states at the disadvantage of having less information about the qualifications and reliability of agents acting on their behalf. This disadvantage complicates the principal - agent problem.

This initial lack of information about PMC employees is compounded by the high turnover in the PMC industry. Companies hire most of their workers on a contractual basis rather than as permanent employees. News accounts and government reports suggest that even then, many employees opt to leave their contracts early because of a combination of the high-risk environment and dissatisfaction with the labor relationship.
In the short term, this high turnover can lead to immediate problems for the state, such as understaffing and overwork of a few individuals. For example, the high turnover in Afghanistan led to understaffing in which contractors were expected to put in fourteen-hour shifts for eight weeks at a time, leading to sleep deprivation and concerns over a vulnerable security environment.
Even if contracts are adequately staffed, however, there are aspects of this flexible labor force that pose problems for the state. The emphasis on flexible, short-term contract labor means that PMCs have little incentive to invest in extensive training or socialization of their employees. Yet in traditional notions of civil - military relations, these investments are key to cultivating a disciplined and cohesive force. While many PMCs advertise some on-the-job training, overall the industry tends not to offer extensive training and socializations but to rely instead on the previous military training that their employees received in the public sector (i.e., as former military or police officers).

Since I mentioned the cheap-labor issue above here is what McCoy writes on that.

Nationality plays a key role in how much PMC employees are paid and employees are often aware of the pay disparities between national groups. As with any global industry, there is open debate over the implications of these disparities. Representatives of the PMC industry argue that foreign workers are well compensated relative to jobs they could secure at home, a claim that seems to be bolstered by journalistic interviews with TCNs and demonstrated by the continual supply of PMC workers onto this market. On the other hand, many disgruntled workers have raised the issue of disparities in pay and working conditions as key to their dissatisfaction with the PMC industry. For instance, Colombian security guards returning from Baghdad reported that they were the latest in several national cohorts hired to protect a U.S. base in Baghdad, with each paid progressively less than the previous group. The contract had initially been staffed by Americans, then by Brits, later Romanians, Chileans and finally Colombians. Labor violations against foreign workers also complicate the matter. The Colombians in this case were promised a wage that was significantly less than other national groups doing comparable work yet still attractive by Colombian standards. However, in this case they were not even paid the promised sum. Once home, they complained of both sets of injustices: that they had initially been offered a lower wage and that the promised wages were never delivered. As discussed below, such contract violations are common.

McCoy's conclusion is:

In this article, I have argued that the very qualities that make PMCs competitive as a market and attractive to states also make them difficult to manage effectively and properly. States are drawn to PMCs based on the latter's economic, strategic, and political advantages. As sleek, modern corporations with little bureaucratic structure, PMCs can be rapidly hired and deployed to various trouble spots throughout the world. Hiring PMCs allows states to break the military monopoly on security services and introduce competitive bidding into the security market, with the possibility of cost savings. Lastly, the fact that PMCs are private companies as opposed to public forces means that the political obstacles to deploying them are diminished.

These same characteristics produce several disadvantages, however, with regard to the state's ability to effectively control its private military agents. The flexible, highly subcontracted, and global nature of the PMC labor force leaves states with little direct or even indirect control over much of their labor force. This can jeopardize the mission (e.g., if contractors neglect to fulfill their duties) or even produce diplomatic problems for the state (e.g., if contractors' actions are negatively viewed by the local population).

Keep this in mind the next time you hear PMC supporters arguing that their industry is more cost-effective than their public sector counterparts. Perhaps, to paraphrase Bill Clinton, it all depends on what you mean by cost-effective.