Last week, I started a series entitled Critical Thinking, as a response to a general proliferation of buzzwords in reference to private security companies(PSC): mercenaries, (lack of) accountability, oversight, incentives, cost-effectiveness, vetting procedures, contracting issues and many others.
Today’s post discusses the financial value that contractors bring to a conflict or post-conflict environment. Because of the financial strains for any organization – be it a nation-state, international organization, business firm, news agency, NGO and so forth- to develop internal security capabilities on a long term-basis, money-wise it may make more sense to seek options in the private market. Thus, cost-effectiveness is one of the big-cards the industry is relying on. However, as more contractors have been involved in scandals regarding overcharging practices, bribery and bid rigging, this cost-effectiveness claim has been disputed by many. There are several reports trying to asses the validity of the claim and depending on who is writing it, the results vary. It seems common sense that when a news agency goes in a conflict area, it is cheaper to hire a private security company for protection and later write an article on how bad the industry is rather than start training security officers yourself.
The “Let’s” section
Honestly, let’s cut them some slack. Any company that operates under similar contracts has incentive to cheat. This problem is inherent to the business sector since the beginning of trade. Just because they are PSCs, it doesn’t mean that the problem is in any way less or worse of a problem. But in the business world, this risk is mitigated by proper oversight and right drafting of contracts. So who is it then actually to be blamed for, the contractor or the beneficiary?
Let’s go on even further with our critical thinking. Is this the proper question we have to ask ourselves? Is cost the ultimate concern when operating in such a touch, challenging area? I say it is not. I say that value is the ultimate concern. Value is a function of cost, availability, quality and speediness. The easy deployment of private security companies (PSCs), the high professionalism of their employees (MPRI is boasting that it has more Generals per square meter than the Pentagon), the updated technologies and services they can provide, make the matter of cost almost irrelevant. Not to mention, the value added by their low political cost.
Let’s look at some additional variables, like insurance premiums that PSCs pay. What do you think happens when PSCs encounter more and more casualties? Their premiums go up, decreasing their expected rate of return and lowering their profits. Let’s go even deeper…what do you think happens when for example, PSC’s employees don’t benefit from immunity from the laws of the host country? Yes, insurance premiums go so high, that the PSC has two options only: either doesn’t bid for a contract, or it charges more. Who ends up paying the bill? The tax-payer!
Let’s also talk about risk mitigation in conflict-affected areas. Now, it is almost a cliche to say that investments in post-conflict environments are mandatory for reconstruction. But how do you attract FDI? Here is a little finance lesson about companies and the way they decide which projects to undertake. When capital budgeting, companies care about two things: the expected future cash-flows from the project, and the cost of capital to finance that project. The cost of capital is a function of different variables, one of which is risk. The presence and availability of services that PSCs provide significantly decrease business risk, making projects much more attractive to investors and increasing the opportunities for attracting the much needed capital. Furthermore, by partnering with the private sector, public risk insurance mechanisms like OPIC and MIGA, can help spread out this risk even further.
And lastly, next time we do a project on the cost-effectiveness of contractors, let’s add these variables in.