12/21/2012 03:52 pm ET Updated Feb 20, 2013

The Ghost of Contracting Past

There are numerous ways to consider private military and security contractors (PMSC): as a tool in a toolkit, policy option, force multiplier, and even strategic asset. But those are macro ways of looking. Let's try going granular, or micro, and think of them as weapons. And, as people who have served in the military know, there are two possible ways to sue a weapon. You can use it well or you can use it badly.

From that perspective let's consider past one type of PMSC use in Afghanistan and Iraq; their role in reconstruction and stability operations. After all, PMSC advocates are always fond of reminding the public, quite correctly, that most contractors are not carrying guns. Instead they are working to rebuild shattered infrastructure and implement reconstruction programs. Indeed, one of the major trade groups for PMSC is named the International Stability Operations Association.

Fortunately, in the spirit of Charles Dickens' A Christmas Carol a report was released earlier this week by the Washington, D.C.-based Center for Strategic and Budgetary assessments that offers some useful observations on how well the United States has learned to effectively utilize PMSC. Sadly, it appears the U.S. has not yet absorbed the lessons it has learned at dear cost during the past decade, meaning it has used its contracting weapon badly.

They found that:

only a meager body of research exists on how U.S. resources in the form of wartime contracts can be used most effectively to rebuild a war-torn economy. Consequently, if the United States embarks on another attempt at nation building, it may again be found ill prepared without a more concerted research effort into the economic reconstruction aspects of warfare, often referred to as expeditionary economics. Despite the U.S. military's long history of engaging in reconstruction, expeditionary economics remains relatively less understood than other aspects of war.

Put more simply, after thousands of American lives lost and at least a couple of trillion dollars, we deserve more at this point than a Dummies Guide to Contingency Contracting.

In their report "Contracting Under Fire: Lessons Learned in Wartime Contracting and Expeditionary Economics," senior fellow Todd Harrison and research assistant John Meyers assess the U.S. Expeditionary Economics effort employing four case studies: Iraq's State-Owned Enterprises, Local-First Programs, the National Solidarity Program and Commander's Emergency Response Programs.

In fairness, the problems with expeditionary economics described in the report were often beyond the ability of contractors to deal with. Security was obviously a big problem.

Physical security in a war zone has proven to be a fundamental obstacle to the use of U.S. contract dollars and the development of a stronger local private sector in both Afghanistan and Iraq. The terms "expeditionary" and "economics" do not easily merge into a coherent concept because physical danger often complicates the effective use of contracting dollars to promote economic reconstruction.

A different aspect of the security problem is this:

Security services are an area where local firms might be able to substitute, at least partially, for international firms. Security services are not capital intensive and personnel can be trained relatively quickly relative to other professions, such as electricians or plumbers. But the majority (66%) of those providing contracted security services in Iraq circa 2009 were third country nationals, that is, persons from countries other than Iraq and the United States. Only 28 percent of contracted security services were provided by Iraqis. Similarly, Iraqis performed only 14 percent of what the U.S. military terms "base life support" activities, such as food service and laundry. While local firms may have the capability and capacity to provide a greater share of security and life support services, physical security once again becomes a limiting factor. Increasing the use of local firms for on-base services must be balanced with the security concerns associated with using host-nation personnel in positions with easy access to U.S. personnel.

Still, even with that limitation acknowledged there are still problems with using foreign PMSC. Remember that industry advocated often argue that one benefit of their use is the money they inject into host nation economies by employing locals. But the report found that a barrier to the effective use of wartime contracting in expeditionary economics:

Involves the capability (or lack thereof) of local firms, and the ability of U.S. contracting officers to direct funding to these firms. One report lamented, "International partners spend billions on construction contracts in Afghanistan. However, little of this money gets to Afghan construction firms, with the majority siphoned off[emphasis added] through contracts with foreign companies.

It is true that local-first programs, such as Afghan First and Iraqi First, aim to stimulate local business activity by increasing the opportunities for local firms to compete directly for wartime contracts. The Iraqi First program, for example, awarded more than $6 billion in contracts to more than 4,400 different Iraqi companies. But a lack of human capital can present intrinsic problems:

There remain fundamental limits to the use of host-nation firms. Even if contracting agencies are knowledgeable about the capabilities, capacity, and loyalty of local firms, these companies may not be able to fulfill many of the contracts needed to support a large-scale stabilization force. The Afghan Director of the National Electrical Authority, speaking about the weakness of the Afghan private industry, declared, "We [Afghans] are not Germany after WWII - with an educated class who is ready when the capital comes." A relatively weak and underdeveloped indigenous private sector limits both the amount and types of wartime contracts that can be awarded to local firms.

Jake Cusack and Erik Malmstrom, two former military officers, conducted a thorough assessment of the Afghan private sector. While their report showcases the potential of several Afghan industries, it also casts doubt on the ability of indigenous firms to execute large wartime contracts. They note that only 26 percent of the Afghan population is literate, and they list the occupations that Afghan businessmen find to be in short supply: architects, engineers, managers, plumbers, and electricians. Afghan businessmen, these former officers write, view these shortages in skilled labor as a major constraint.

A final problem is corruption.

A final key factor limiting the effectiveness of wartime contracts for reconstruction is corruption and absorptive capacity. According to Transparency International's Corruption Perception Index, over the past decade the United States has attempted to rebuild a private sector economy in two countries that rank among the most corrupt in the world: Afghanistan ranks 176th out of 180 surveyed countries while Iraq is tied for 178th. Corruption in Iraq and Afghanistan has dramatically shaped U.S. wartime contracts over the past decade and prevented the effective employment of U.S. contracting dollars. The Commission on Wartime Contracting estimated that some $30-$60 billion dollars, roughly 15 to 30 percent, has been lost to waste and fraud in Iraq and Afghanistan over the last ten years.

I suppose that one might be tempted to say that PMC stands for Private Military Corruption but is just too easy a joke.

Nevertheless the authors do think it is possible that expeditionary contracting could pay off in the future, if changes are made.

For example, the security problem described above is further complicated by the fact that the lack of economic reconstruction contributes to the deterioration of the security environment, creating a vicious, destructive, and self-rein-forcing cycle that is difficult to break. The key is to avoid becoming entangled in this cycle from the beginning.

In hindsight, the Iraqi State-Owned Enterprises may have provided such an opportunity. Keeping existing firms operating and their workers employed following a shock to the economy, such as regime change, should be a priority, even if these firms may be inefficient in the short term. State-owned enterprises and the employment they provide could serve as the economic base necessary to maintain stability or arrest the deterioration of the security environment, both of which are critical for enabling other reconstruction efforts.

Furthermore, in a recommendation which should bring tears of joy to all the politicians who clamor for cutting wasteful government spending the authors write that:

Moreover, if the U.S. military is to use money as a "weapon system," as current doctrine suggests, it must develop a robust method of "battle damage assessment" for that weapon system. When employing a kinetic weapon, for example, one would naturally try to assess whether or not the weapon hit the intended target before continuing to fire the same weapon in at the target, or to employ it against similar targets. Likewise, the military should evaluate the impact of using wartime contracts to promote stability and economic reconstruction as these contracts are being used. Otherwise, commanders may simply continue throwing money at the problem in the hope that something eventually works--much like continuing to fire in a given direction hoping that you will eventually hit a target.

Here is hoping that the PMSC industry makes a successful transition from the Ghost of Contracting Past and avoids the Ghost of Contracting Yet to Come.