07/25/2012 11:35 am ET Updated Sep 24, 2012

The Devil Is Always in the Details

There is good news and bad news for the private military and security contracting industry and both are contained in a single sentence, i.e., "The implications of outsourcing security services to private agencies are not a priori positive or negative." That is the main takeaway from a newly released report by the Centre for European Studies (CES), established in 2007, a think-tank linked to the center-right European People's Party.

The report author, Nikolaos Tzifakis, a lecturer in the department of political science and international relations at the University of Peloponnese finds, that when it comes to the utility of using PMSC the devil is always in the details, or, as he puts it, "Ultimately, everything boils down to the way public and private actors deal with the questions of 'when' and 'how' to go about contracting out security services."

This is a sensible way to think about an emerging industry, as opposed to accepting clichés regurgitated ad nauseam regarding the presumed cost-effectiveness of the private sector or its inherent nimbleness compared to the alleged ponderousness of the public sector; especially when you consider, like it or not, that the industry, despite the occasional flaming screw-up, like the current debacle involving G4s's contract for the Olympic London Games, is a growing one.

In the report, "Contracting Out to Private Military and Security Companies," Tzifakis notes that the global financial crisis of the past few years has not slowed down the growth of the private security service sector, especially in emerging economies.

The global security service market was worth $138.6 billion in 2007 and was estimated at $152.5 billion in 2009. The future of the sector looks very bright despite the decision of the United States Department of Defense to gradually reduce its reliance on support service contractors to pre-9/11 levels. According to Freedonia, the global market for private security services will continue to grow at 7.4 percent annually, reaching $218.4 billion in 2014.

Note that the above projections see expansion despite the fact that U.S. has largely withdrawn from Iraq and is disengaging from Afghanistan. Likely, it is only a matter of time until Bank of America and Goldman Sachs starts investing in the PSC sector. And when that day comes they will find a very diverse industry, encompassing "both local, small-sized enterprises and multinational giants listed on international stock exchanges."

Think companies like DynCorp or Academi (formerly Blackwater) are the powers? Forget about it.

Among the PSCs, G4S, the sector's largest corporation, operates in more than 120 countries and has more than 625,000 employees. It proudly claims to be the second-largest private employer in the world. G4S had annual revenues of £3 billion in 2004; the rapid growth of its operations during the following years led to an increase in its yearly turnover to £7.4 billion in 2010. Securitas, the second-largest PSC in the world, operates in 45 countries and employs more than 280,000 people. Securitas offset the slowdown of its operations in North America in 2008-9 (due to the economic recession) by consolidating its position in other regions. In 2009-10, Securitas expanded its global presence, acquiring 30 smaller companies in both developed and emerging economies.

Overall, the PSC sector has become so important that in states as different as the US, the UK, India and Bulgaria, the number of PSC contractors is much greater than the number of employees in the respective state security agencies.

And the above figures do not include subcontractors, who frequently blatantly and egregiously exploit third country nationals -- or what industry politely euphemizes as labor cost differences -- or offshore subsidiaries.

One of the delights of reading Tzifakis's study is the section (starting on p. 25) where he examines many of the claims made by industry and thoroughly debunks many of them. I don't have the space here to go through all of them but consider this:

Contract oversight is additionally complicated by the imperative of avoiding any disruptions to the supply of services in the critical domain of security. A good case in point is what happened in 2004, when a US Army contracting official who was overseeing the implementation of the KBR contract in Iraq determined that the corporation had not provided credible data or records for expenses of more than $1 billion. The army officer decided to withhold 15 percent of payments and the performance bonuses (2 percent) until the company properly justified the expenses. KBR argued that if it did not receive full payment, it would have to cut back on services. The US Army subsequently removed its contracting officer from the case and replaced him with a private consulting firm, RCI Holding Corporation. The latter overlooked the DoD audit and deemed that the KBR spending was justified.

His observations regarding industry efforts to supposedly improve the oversight and accountability over private security providers are also entertaining. Take the International Code of Conduct for Private Security Service Providers. Hundreds of companies have signed it since it was signed in November 2010.

Interestingly, the signatory companies agreed to establish an external independent 'governance and oversight mechanism' that would certify compliance with the Code of Conduct and would audit and monitor their work in the field. However, the code underscores that it does not create any legal obligations for the signatory companies. In addition, nothing compels all PMSCs to accede to the code. Certification by the governance and oversight mechanism will certainly enhance the credibility of a private security service supplier. Yet lack of certification will not necessarily push a company out of the market if it offers adequate services at very competitive rates. Therefore, the industry's own code of conduct cannot provide a realistic alternative to the necessary regulation at both the national and international levels of the operation of PMSCs.

Evidently, the ICoC, to paraphrase Captain Barbossa of the Pirates of Caribbean: The Curse of the Black Pearl movie, is more of a guideline than an actual rule. Welcome aboard the Black PSC, Miss Turner.

Despite these and other trenchant criticisms, Tzifakis does not see the situation as a zero-sum choice between the public or private sectors. He sees the potential for partnerships between governments and PSCs. But to do so the state will need to step up to the plate to allow the private sector to be all it can be. That is not so difficult to accept; after all it is what the U.S. is now doing with the financial services industry in wake of the recent financial meltdown of the past few years. For example:

First of all, supply should not be allowed to determine its own demand. It should not be possible that the same companies (or their affiliates) that take part in the collection, analysis and assessment of intelligence information on imminent threats then be tasked with the implementation of recommended security policies. In addition, states should always request competitive bids and strive to obtain more than one offer. Competition should be allowed to work. What is more, states should think twice about contracting out services to corporations that enjoy a monopoly in the market.