Some Highlights From This Interview

… How did you come to this interest?

I actually first started looking at private military firms back almost a decade ago, when I was part of an assessment team that went over to Bosnia after the Dayton Peace Accords there. And we were supposed to look at the military situation on the ground, whether the war could restart up again when you had all these American peacekeepers there.

And who were you with at the time?

I was with an organization called International Peace Academy, which is a think tank that's affiliated with the U.N. And so we were looking at the military balance on the ground.

And one of the things that was striking, that was on everybody's lips there, and everybody was concerned about and surpris[ed] by, was that you had an American company made up of ex-colonels, ex-generals, etc., that was training one of the sides during the cease-fire period. And the result was that, arguably, the balance of power was being shifted in the entire region. It was being shifted by a company. And that was something that all of the way we understood war, the way we understood military strengths and etc., [we] just simply couldn't even comprehend. It didn't fit the model. …

What has been the growth rate, pattern and the scale and size of this industry?

You're talking about an industry that really didn't exist until the start of the 1990s. And since then, it's grown in size, in monetary terms to about $100 billion worth of revenue a year. In geographic terms, it operates in over 50 different countries. It's operated on every single continent but Antarctica.

It operates in poor states, rich states -- you know, the Saudi Arabias, the Congo-Brazzavilles. It operates in superpowers like United States -- we're the largest client of that industry; the Pentagon's entered into over 3,000 contracts with it in the last couple years -- to weak states, failed states, Sierra Leones, Liberias, Afghanistans of the world.

You can also think about it in terms of the wars that it's affected. It's been present in pretty much all the major wars we think about -- the Iraqs, etc. -- and many of the minor wars that most folks haven't even heard about that take place in these areas. They were operating in Sudan before most people even paid attention to it because of Darfur.

Another way to think about it has been the money that's been made in this industry. If you had owned stock in these companies on 9/11, the rest of your portfolio outside this industry went down. Most people's stock went down. On average, these guys went up 50 percent. A couple of them double, tripled, so it's been a pretty good payoff.

And the result has been like any other new industry, almost like an Internet-like boom, is that some of these companies have literally exploded in size and new companies have rushed in. And the big boys have also come in. So you've seen a lot of mergers and acquisitions.

And a good example of that in terms of this Internet-like boom is the story of a company like Custer Battles. Custer Battles was a small company, less than 10 guys, based, if I'm recalling right, in Rhode Island. Less than 10 guys, less than a million dollars' worth of revenue.

After 9/11, [Custer Battles] starts up, works in Afghanistan, then works in Iraq. In the course of a year, it goes from 10 guys to more than 1,400 guys in the field, from less than $1 million in revenue to more than $100 million in revenue and as such is featured on the cover of The Wall Street Journal, gets pictures in BusinessWeek, etc.

And of course the parallel to the Internet boom is that now you're starting to see kind of the revenge of the bean counters, and the knuckle draggers are being dragged down by the accountants. And so the same company that's had this boom is now facing issues, looking at its accounting. It's being investigated by the U.S. military for overbilling, for creating fake subsidiaries, for charging for things that weren't there. It's being sued by all sorts of different entities for cost overruns, all sorts of things.

So what you're seeing is this industry literally growing up in front of us, and developing and maturing, and at the same time we're watching all the growing pains happen. What's scary about this is that we're not talking about lemonade stands and the growing pains that come with that. A lemonade stand would face problems if it went from one to 100. We're talking about military entities, businesses that are providing military services. So when things go wrong, they can go quite wrong.

What caused the growth?

There's really three things that came together, three underlying forces that led to this industry. One is changes in the market of security itself. You have the Cold War end, and that affects the supply-and-demand forces for security. Basically, you have smaller national militaries -- 6 million soldiers are downsized in the course of this, so that not only opens up the labor market, but also means these militaries are intervening into less and less places. The superpowers aren't going into places like Sierra Leone anymore, or in Liberia, etc.

Some of these militaries literally disappear overnight. And so then it dumps a mass of surplus weaponry onto the market. The East German military, for example, literally had a yard sale. And so you could go out and buy high-level military equipment as a private buyer. You could get a T55 tank for less than you would pay for [an] SUV.

But specifically, why the growth of contracts with the U.S. military?

Yeah. So basically, you have smaller professional militaries -- that's on the supply side; and then on the demand side, a greater demand, ironically.

The U.S. military, for example, has shrunk by 35 percent since the Cold War. At the same time, it's now deployed all over the world, overextended. And so you have a gap between supply and demand, and contractors rush in to fill that gap.

The second thing that's happening is warfare itself is changing through this period. At the high intensity of warfare, we're pulling in more technologies. But the difference is it's civilian-based technologies this time; it's off-the-shelf technologies. The military's not the one developing like they did back in World War II. The military's the one buying it from the civilian market, things like IT technology, and they're bringing in the civilian technicians to operate it.

The opposite level, the low-intensity level of warfare, you're seeing messier conflicts. You're seeing a morphing between warriors and civilians. You're seeing wars with warlords, child soldiers, drug cartels. And so this put together is you're seeing a morphing between the warrior and the civilian. That's what this change in warfare that's happening [is], and contractors are part of that. They're both a symptom and a cause and a result.

The final thing that's happening that's important to talk about is a change in thinking. You have a privatization revolution going on right now, where all sorts of things that we used to look at as being in the public domain -- prisons, garbage collection, schooling, postal services, security in the domestic sense -- all that's being turned over to the private market. And the military was really the last frontier of that. It was the monopoly of the state. And we're seeing that monopoly broken. And it's about a change in thinking.

It's interesting that it was Secretary of Defense Cheney under [George] H.W. Bush that begins this process of downsizing. Is it a miscalculation on the part of the Pentagon, believing that, in fact, the military would not be in demand?

I think you could describe it that way, but an understandable miscalculation in that everyone looked at this idea of a peace dividend at the end of the Cold War and really didn't look at what did it all mean. Where are more conflicts going to bubble up? And some people said, "Yeah, there are going to be more conflicts." But at the time, a lot of these people argued, well, you know the old claim [about Bosnia] from, like, Secretary [of State James] Baker, "We don't have a dog in that fight," and that we could somehow stand aside from them.

And the reality is that we couldn't, both for strategic reasons, but also just for public reasons. We, as a people, don't like to watch massacres and genocides happen. ... [T]he Pentagon in terms of civilian leadership, but also in terms of the military leadership, looked at a lot of these missions as things that they didn't want to do and did their best to avoid them. And the result is, when they happened, we weren't properly prepared in terms of equipment training, etc., doctrine, but also, in terms of pure manpower, to deal with them. ...

Rumsfeld arguing that we can transform the military into a more rapid deployment force, if you will, that we can move with smaller numbers of troops -- is that all driven by the decision to downsize the military?

It's part and parcel of it. You can't have one or the other. It's both a vision of warfare that in many ways is correct, that you need a military that's more agile and is more technological.

But the other half of it is that they're only looking at the part of the initial fight. They're not looking at what follows. And that's really the lesson that came out of Iraq, is that you have to look at a war comprehensively, because the result is you never fight wars as you want them to be; you've got to deal with them as they are.

And the contractor story that comes into this is that contractors have been more than willing, more than happy, to pick up the pieces afterwards, to be the ones when the military goes: "You know what? Gosh, we've got all these things that we've been handed to deal with. We don't want to do them. We don't have an ability to do them. Who will do them?"

We also face the problem of, well, the allies that we thought were going to come along and help us, that would handle these dirty jobs like they did in the Balkans or the like, they're not here anymore. What do we do? Contractors are there, and you can see why they would be certainly happy to, because it's been a great business deal for them.

In addition, there's a notion that privatization is not a bad thing in wartime.

I think that's part of it. Now, the challenge is that we've looked at privatization as something if you can do it, you should do it. That's been the mantra in the privatization discussions across government.

That is actually the wrong lesson if you look at the lessons of outsourcing within regular industry, what corporations who have thought about outsourcing -- they say: "No, it's not just if you can do it, you should do it. It is first decide whether you should do it or not. Decide whether it's appropriate or not. Decide whether it's part of your core mission or not. If it's not part of your core function, then it's OK to outsource it. And if you're going to outsource it, do it in a way that will save you money," all these sorts of things.

The problem is the Pentagon picked up the wrong lessons from the regular business. And the result is sometimes they've outsourced things that infringed upon the core function of the military. And that's when you see all these kind of questions of accountability, all these kind of questions of how the heck did we get contractors in that role, where it's not only the public that's surprised, but people in the military themselves who are surprised and offended by it.

Then you get into the whole separate question, just separate from that, which is has it saved us money or not? And that's the irony of it.

How much of a debate is there inside the military over whether or not the participation of private contractors is appropriate or not?

... [I]n the mid-90s, it was, "Well, we're not comfortable with it, but we need these guys." And that was because they were in roles like logistics, and the military was being downsized at the moment. And there's kind of a "What are we going to do?" attitude.

Iraq, though, has really brought it to a head, and you're starting to sense a backlash from the military. There's still that sense of "We are overstretched, and what would happen if they weren't there?" But there's also a bubbling resentment in terms of these guys are in roles that are inappropriate, be it -- you know, you had military interrogators getting quite upset that we had contract military interrogators at Abu Ghraib prison. It was not only sort of a professional issue, but also for these guys, that was the Super Bowl, and someone else was invited to go do it.

You've got soldiers in the field who are uncomfortable with being out there, and then having a bunch of contractors drive through who are also armed, but outside the chain of command. So you're a military officer, and you're responsible for a sector, and yet you've got armed units coming through your sector, getting into all sorts of trouble that would happen in this kind of area, and they're not part of your chain of command, and that you can't order them to do anything. You don't know if something goes wrong with them, but you do know that you're obligated to go out and rescue them, even though they're not part of it.

Contracting officers are getting a little bit upset because they're having to deal with more and more and more of these contracts, and there's less and less and less contracting officers who are supposed to be overseeing it. One of the guys I spoke with was in charge of contracting for Operation Enduring Freedom. He was based in Pakistan at the time, and he was saying: "Look, I'm supposed to be responsible for overseeing all these contracts. I'm spending all my time signing new contracts to fill new needs. I don't have any time to go back and see what's happening with the old ones. And then when things go wrong with it, who are they going to blame? They're going to blame me, but even though I'm only one person." So you're starting to see that.

And what's happening now within the military is they're putting together an entire new doctrine, entire new package of rules and regulations as to how contractors are supposed to be used. ... [C]ontractors should not be in essential roles; contractors should not be armed: These are the rules that the military's coming up with. The problem is that that's slapping in the face of the reality of how they're being used.

How can you have security contractors, military contractors that aren't armed?

That's your problem, is that you have a doctrine that says, "Don't put them in essential functions and functions that will affect whether you win or lose the war." Well, if you've got them in areas like obvious ones, like guarding your key installations in a combat zone, guarding the most important American leader on the ground in Iraq, but also --

Jerry Bremer.

-- Jerry Bremer, but also in areas like running your logistics, which sounds to the armchair generals like something that doesn't matter. But logistics, as one soldier put it, it's the difference between getting a bang and a click when you pull the trigger on your gun. It's about moving ammunition and gasoline to soldiers; it's about soldiers getting fed.

If your truck convoys don't move, your operation fails. So even something like the Halliburton program is essential to winning or losing wars. So that's a problem in terms of what we're doing versus the doctrine. The other part is armed roles.

How are you going to get soldiers to join an all-volunteer force if they're going to go back to the roles of potato peelers or truck drivers or convoy guards?

That goes to this question of deciding what are essential functions and what are not, figuring out what can you live with and what can't you live with. And it may very well be that you decide in certain areas and certain operations it's completely appropriate to outsource your logistics.

There was really no controversy about this during the operations in the mid-'90s, for example, in the peacekeeping operations in Bosnia, Kosovo, Somalia, you name it. It was also not much controversy in terms of certain of the roles within Afghanistan, because the point was that you brought in the logisticians who were outsiders once the combat died down. You weren't putting them into areas where your force was dependent on them. And if things crashed ... you had a military element to bring them in.

Iraq was a different story, because they advanced it from being just about getting the troops more meals and showers to literally movement of things like gasoline and ammunition. And also you have a combat environment there, where there is no frontline, where it's not a peacekeeping operation; it's a daily occurrence of violence. The person, the trucker in the field, is under just as much threat as the soldier in the front. There's really not that front. So that's a challenge. ...

The other contradiction is in terms of the Army. The military has a whole set of doctrine that says one of the reasons you don't put [civilians] into combat roles is you don't want them armed. And it's not only because of what it means for soldiers and what it means for the clashing professional identities, but there's also some very clear legal reasons about it. It's one of the ways that you avoid these civilian contractors being labeled as mercenaries. ...

Problem is, you've got contractors in quite clear roles where that clashes with that doctrine. You don't hire someone to escort a convoy through an insurgent territory and say, "Well, it's an extraordinary situation, and it's only for self-defense." No, the very function that you're hiring them for mandates that. ...

What have we learned from the Fallujah incident of March 31 [in which four Blackwater contractors were killed by insurgents]?

Oh, gosh. There's layers. It puts contracting front and center. It puts it in people's consciousness. The Fallujah incident is striking because it takes something that most people didn't even know existed and puts it out there on the headlines. ...

The military gets upset about Fallujah because they had a strategy for that sector, particularly the Marines, who have not been using contractors the way the Army has. They had a strategy for that sector, and it was kind of a kill-them-with-kindness strategy.

A hearts-and-minds strategy.

Yeah. They have a contractor convoy that is not within their chain of command, and is, in fact, not even something that they hired, come through their sector for whatever reasons. And this is a question that actually the courts will decide. Goes into a dangerous area, the contractors get killed, the Marines don't even find out about it except by watching TV. They see it on TV.

And so then the political decision is made. You've had these Americans killed there. They weren't American soldiers, but they were American contractors. They're brutalized. It's a matter of national pride, etc. And so the Marines have to go in there. They go hard. Things don't go all that well. You have a cease-fire that blocks in.

Unfortunately, we turn it over to a Republican Guard general to run Fallujah. Fallujah becomes this hotbed of insurgents, and the Marines have to go back again in November. And literally it's house-to-house fighting.

Wasn't it going to happen anyway? I mean, wasn't Fallujah going to blow up some way or another?

That's one of these what-ifs. No one can answer. Fallujah -- the Marines might have succeeded with the hearts and minds, or it might have completely failed, and they still would have had to go in house to house. No one knows.

But what we do know is if you're writing the history of the Iraq war, you cannot write it without a chapter on Fallujah, and you cannot write it without talking about the role of contractors and the decisions that contractors made. And that's a sea change with any other war.

Now, there's other parts of the Fallujah story that come out that are interesting to look at. Looking at this series of decisions that happened there, one of the Marine officers said from that happening, regardless of whether they were right or wrong, if they'd a been a Marine and those four guys had been killed, somebody would have been court-martialed. Somebody would have had to be held accountable, even if they'd done right or wrong.

Well, they're not military folks. They're not in the chain of command. And so we go to, well, who has been punished? Who has been held accountable for that? Well, so far, no one.

But what's interesting about this industry is because you don't have the rules and regulations there, it's not just a question of accountability, but now Fallujah has brought it to a story of liability. How do you decide liability in this new industry?

So the family members of those four guys that were killed are now suing the company, and they're suing it in a North Carolina court for breach of contract. They're saying the company broke the contract. In the contract that they signed, there were certain things that were supposed to be met.

The contract said, for example, they were supposed to have a minimum of six guys in each detachment and three guys to a vehicle. And they meant that to be important because you needed two guys in the front and one guy to look out the back. They also said they needed up-armored vehicles; they needed a certain amount of training, certain amount of weaponry. And so the families are saying, "Well, actually, look, there was only four guys there, and their vehicles didn't meet -- " and all this sort of thing. So the families are saying they broke the contract. …

The military's not going to decide this issue. At the end of the day, this was a contract between Blackwater and some employees and a Kuwaiti company. It has nothing to do with the U.S. Marines. They have no interest in it. You're not going to have a court-martial decide liability reasons. …

These contract officers are there in order to peruse the contracts in order to make sure that things like violations of contracts don't occur, correct?

Mm-hmm.

What happened in Fallujah?

Well, the first part of the problem is contracting officers often are not there. They are often not in theater, and also not on site traveling along with these guys. And … often the contracts themselves are not ones that the contracting officers are looking over. The story of Fallujah is a sort of interesting illustration of that in that [the] great origin point of that was a contract between the Army Corps of Engineers and the Halliburton Company to do logistics for the military in contingency operations. Wasn't even specific to Iraq.

It was the LOGCAP [Logistics Civil Augmentation Program] contract.

Yeah, it's called LOGCAP. LOGCAP goes from Halliburton to its KBR [Kellogg, Brown and Root] division. It's a huge, multibillion-dollar contract. … Then it goes down to layers and layers of subcontractors to American companies. Then it goes to a German company, a Cypriot company. Then it goes to a Kuwaiti company, mainly because you've got to base it in Kuwait.

The German company being ESS [Eurest Support Services]?

Yeah, I think so. Yeah.

And then ESS being incorporated in Cyprus.

Yeah.

And then it goes down to a Kuwaiti company, which is Regency [Hotels].

Regency. So it goes [through] all these layers of subcontracts. … And then, finally, from Regency in Kuwait to Blackwater. Then Blackwater hires these individuals to work for it. That convoy goes through a Marine sector. So the Marines there had absolutely nothing to do with the signing of that contract at the start, nor any of the stages of it, all the way to the Kuwaiti company, nor to the decisions as to how that contract would be made, how it would be carried out. …

So what kind of oversight do we then have of the contract between Regency and Blackwater?

It doesn't look like there was a high level of oversight. But I think what is most interesting about it, not in terms of the financials of it, is that the substance of this contract -- it is a contract between two private business entities, and yet it has scads and scads of things that are militarily relevant.

It's basically a business contract that's going into great detail about how a quasi-military operation would be carried out, things like the level of training that's needed, the type of weaponry, the type of equipment. And the same thing is repeated in terms of the contract between the company and the individual employees.

So you have business entities deciding military matters in a contract environment, and that's the whole contradiction here in terms of how you deal with the accountability of it. But also, how do you deal with the liability of it? Because the military isn't deciding things that are militarily important, and we can see just how by the way it played out in Fallujah.

And what kind of reaction has there been within the military? Have you had conversations? What kind of reaction have you come across?

… On one hand, a lot of the soldiers in the field look at some of these operators within them and say: "These guys are really talented. These guys are ex-Special Forces guys." A lot of the younger soldiers look up to them and say, "Look at the amount of experience they have." They also sometimes really like the equipment they have that might be better than the equipment that the soldiers have.

Sometimes they also look at the people and say: "Wow, there's a lot of cowboys here. And there's actually a lot of people who we're surprised are here." And they're pitching themselves as being all-American Special Forces, but you know what? There's a lot of these guys from other countries there, not just other NATO allies, [but] countries all over the world.

And some of them are a little far away from actual training. …

That's the other part of the story is in terms of some of the people look at it as a tragedy, and yet there's other people within the military who are facing this issue of retention. How do they keep their most talented soldiers within? And they're starting to point to that incident as an example of something they can tell their people who are thinking about going down that pathway as a "what might happen to you."

Cautionary tale.

And not in terms of "You might be killed," because all these soldiers know they face that risk any time, but in terms of "Look who you will be surrounded by if you're in our unit. … In our unit, we've all trained together; we all know each other; we all trust each other." It's sort of the band-of-brothers mentality. …

And I should add, you can also see it in terms of how the bodies were treated afterwards. The decision for those contractors in Fallujah was to let the Iraqi National Police go in and recover those bodies of those contractors. Can we ever imagine a scenario where we would have let police go in and recover the bodies of Marines, or something like that? The Marines would have gone in and got them. So that's that kind of story that people within the military are putting out there.

At the same time, it's important to note that there are other incidents with that same company where the military looks with great respect at what they did. Just a couple a days later there was a battle in another city where --

Najaf.

-- in Najaf, where Blackwater personnel defended a U.S. government facility from literally over 100 attackers. They kept alive a U.S. Marine who'd been wounded there. They brought in their own air support.

And afterwards, the top U.S. general toured the site with all the media, pointing to it as this great victory, talking about the men being here as heroes, and forgot to mention, conveniently, to the media that the men who had fought that battle were contractors. But the people in the military do know it. …

There's also the Good Friday incident in which some KBR convoy is being protected by the U.S. military, gets attacked, and the drivers start to flee the country. Are you familiar with this?

Yeah. And it points to sort of a broader challenge of what happened during that period. With any type of outsourcing, if you're hiring a plumber or a lawyer, you face what are called contractual dilemmas. You face what happens when you turn over a job for someone else to do for you. And it's not only things like "What are they going to charge me? How do I know whether they're going to do a good job or not?" but also, you lose control over the job itself, and you have to figure out what happens if they fail in that job or they leave that job.

In the military realm, that's particularly important, because it's not just a broken toilet. It's supplies don't move; people's lives are at stake.

People don't get fed.

Exactly. And so in the whole period of this, you have the Fallujah uprising. You then have the uprising in the radical Shi'a sectors; the Mehdi army goes. And so, literally, the convoys stop moving, and several of the private military companies basically decide to, quote, "suspend operations."

And KBR decides to suspend deliveries.

… And what it is, is they do not leave the country. A couple actually do leave the country, but the vast number of them suspend operations, which is basically a euphemism for "We're not going out there until it's safer." And the result is that when the convoys don't move, it's actually quite important, even if they're civilians driving those convoys, because it's the stuff that's inside those civilian truck[s] that matters. And there were reports of supply shortages for U.S. forces in Baghdad because of that.

What that dramatizes, then, is the dependence on individual contractors who can, if they wish, leave their jobs at any time.

The challenge of this is that a contractor is not part of the chain of command and is not bound by the Code of Military Justice. And so to them, it is a contract.

Now, some of them may be bound by loyalty, patriotism, you name it. But we also have to remember that many of these contractors are not even American citizens. And the end result, at the end of the day, [is] they can decide to leave when and where they want. They can decide to leave if they get a better job offer by another private military company or by some other company back home. They can decide to leave, because you know what? They're just tired of this. Iraq is a grimy place. They can decide to leave if their wife has a baby and they want to go home and see it. These are all decisions that a contractor has the discretion to make that someone within the military does not.

And so what you've done is put a level of uncertainty into your military operation, and military operations are not a place that you want uncertainty.

So is there any upside to this? Are we saving money, as some claim?

The reality of this, and the irony of it, is that we often talk about it in terms of economic cost savings, but there are no proven economic cost savings. There is simply no comprehensive study that we can look at and say that it has proven to save us money. ...

It's really been about political cost savings. It's been about avoiding the hard choices that come with deploying military forces. And the way to look at this is the counterfactuals: What would we have done otherwise? We would have either had to expand the regular force -- it would have had to either be with regular forces, or it would have had to be with Reserves. That's also politically unpopular, because that's more families that are upset, brunt of the war, etc. Also takes place within a presidential campaign season. Or we would have had to have brought in allies. Well, that's difficult, because you would have had to make political compromises with those allies that we weren't willing to make.

Or you bring in contractors. And by the way, contractors come with the extra positive externality from the perspective of the client here that if contractors are killed, wounded or go missing, they don't go on the public rolls. And so when we talk about the cost, they don't count in the public discussion of it.

How many contractors have lost their lives in Iraq?

We do not have the exact figure because it is not tracked formally. The Pentagon not only does not know how many contractors overall are there; the Pentagon also does not know how many have been killed or wounded [in] Iraq.

So what we have to rely on are basically informal tracking mechanisms -- basically, reports from the field and press reports. When a contractor is killed, either a reporter in Iraq finds out about it, or their hometown newspaper covers it -- their hometown newspaper in Portland, Ore., their hometown newspaper in Fiji.

From that, we do know that a minimum of 250 have been killed. We can also extrapolate from that that probably about 800 to 1,000 have been wounded in action. Now, the way to think about that is to put it in a context. That means that more contractors ha[ve] been killed than the entire rest of the coalition combined; means more contractors have been killed than any single U.S. Army division has taken in terms of casualties. ...

After the Fallujah incident in April 2004, there's a move to coordinate better, to have some rules of engagement. Does anything really happen? ...

We developed the classic Kafkaesque solution, which is we have a problem of outsourcing and coordinating outsourcing, and that we've done too much outsourcing, and we don't have a control over it, so what would be the solution to it? Let's outsource the solution. And so we hire another company to come in and coordinate it. ...

So we hire another company. Then you get to the question of well, who do you turn it over to? Would you go out and find the most talented company that has years and years of experience of this, a company that knows the ground in Iraq well, knows all the players? Would you do that? Or would you hire a shell company that [is] not even on the list of recommended companies for Iraq that your own government is putting out and has never done this kind of work before? Well, we took the latter option and hired a company called Aegis, which was effectively a British shell company that was run by a fellow named Tim Spicer.

Now, what's interesting is Tim Spicer is a relative no-name in the U.S., but he's a huge name in the U.K. because he was involved in two major international scandals -- the arms-to-Africa scandal, which was this episode with his former company, Sandline, that was involved in some things going on in Sierra Leone, where they were hired there and in potential violation of arms embargos. And it was this whole mess, and nearly brought down Tony Blair's foreign secretary, [who] nearly had to resign over it. Careers were ended, all this sort of thing. So [Spicer is a] big name from that.

And then [there was] another episode in Papua New Guinea, where his company was hired there to help fight in the civil war there, and local army mutinied and put Tim Spicer in jail. So this guy's a big name in Britain; we don't even know who the heck he is.

So who makes the decision to contract with him?

Well, the decision to contract this company was not made by someone who'd worked years and years in the industry, was not made [by] someone who had examined the situation tightly on the ground in Iraq. It was made by a little office in Virginia at an Army base there, and the Army Transportation Command. ...

So the general result is, first, the whole concept itself was quite insane: Your problem is outsourcing, so let's outsource a little bit more. And then, if you were going to do it, why not set up a process to ensure that the best rise up to the top, the most experienced, the ones who know the ground, etc.?

Well, let's erase all that and give him the benefit of the doubt. How well did they do at coming up with some rules of engagement, some rules of coordination?

Well, that company is not responsible for rules of engagement. It was responsible for coordinating amongst the different companies.

So it's going to be an über-security force [so that] the right hand's going to then know what the left hand is doing.

Yeah, that's the concept. ...

What was the response to Fallujah, and were the problems that surfaced in Fallujah addressed?

A lot of talk and still very little action. And we can really see that story repeated even worse when a little bit later, we get to the Abu Ghraib story, where again -- shock, surprise -- didn't even know that we had contractors in those roles. What are they doing? How could this have happened? And yet at the end of the day, we look -- "Now what's going on?" The exact same things.

And there's nobody held accountable that is a private contractor.

Yeah. And that's when we get to the broader issue of accountability, in terms of not only when mistakes are made, but what happens when crimes occur? And let's look at it this way: We've had more than 20,000 private military contractors in Iraq for more than two years. We have not charged one of them with a crime. So either we have found the Stepford village of Iraq where human nature has been surpassed, where not one crime has occurred, unlike within the regular military, [where] all sorts of crimes happen, unlike within regular society, [where] all sorts of crimes happen, but within the private military world, none must have happened over two years, or we have a problem. ...

We are, though, now in a position where it's not like we can institute the draft overnight. We were already facing problems with finding enough National Guardsmen or reservists to fill the gap, so we're stuck with this solution of using private contractors. So what do you do?

Yeah. The challenge is that the government has to start thinking like a smart client. It is entering into business with these guys. It's got to start thinking like a business.

It's also got to realize this is a new industry, and like any other new industry, you have to help regulate that industry. We've done it for other industries; we need to do it here. And so there's really four things that need to happen. First, we need to do some good accounting, figure out what is the scope of what's going on.

It is shameful that the Pentagon is hiring these guys and yet simply does not know how many it has hired. It does not know how many contractors it has working for it. That's absurd.

Well, isn't that partly because they hire so many subcontractors that they can't keep track of the number?

Yes. Any kind of good business would say: "You know what? Let's get our books in order." And one of the great things of getting your books in order is not only what it does for your public policy side, but then you can start making comparisons. ... You can say: "We paid this much for this guy here doing role A, and we're paying this much for this guy here who's also doing role A? That doesn't make any sense." You can start seeing whether you're saving money or not. You can start figuring it out. You can start catching these cost overruns.

Second thing you do is decide for yourself what areas are your core functions and what areas are appropriate to outsource. That's what any business would look at. That's a lesson from industry over the last couple years. That was a lesson from the Internet boom. A lot of these companies that over-outsourced at the end of the day didn't have much substance there. So the military needs to decide what's right to do for itself and what should contractors do, and then stick to that.

Then you get to the third thing, which is for the areas that you decide are appropriate to outsource, have a good competition. Treat it like a business. Ensure that you're getting the best price. Ensure that you have good management. Ensure that you have good oversight of these contracts. Ensure that, if they screw you, you screw them back; that is, if they overbill you, you fire them. And so you send a lesson out on the field. Treat it like Economics 101. Let the market work for you rather than having the market take you for a ride.

Then you get to the final thing, which is finally create some clarity to the legal structure here. Decide what are the mandates and regulations that you want to put in place, very basic things like, who can work for these companies? Who can these companies work for? What types of rules and standards do they have to meet in the course of their operations? ...

So OK, so we run all these things. Is a smaller military heavily dependent on the use of contractors a bad thing, or necessarily a bad thing?

It's not necessarily a bad thing. It may be the reality that --

After all these things you've said about it, it's not necessarily a bad thing?

I'm not saying it is something that is inherently bad. It's that we've been quite stupid about it, and the result is we're paying the price for our stupidity.

These companies still have a different interest, though, than the government has.

You will still face some problems, but that policy, that going through that policy, helps you avoid a lot of them. So, for example, the issue of dependency: Well, if you've actually run it through your core function or not, you're only dependent on them on areas that you really don't care about. ...

Listening to you, it sounds like we're in the very early stages of this business, and where there's no consensus yet on what the appropriate use of these companies is.

Yeah. We're at the very early stage of a huge industry.

And it's here to stay.

And it's likely here to stay for at least the next several decades. ...

One of the inherent problems of this, when you outsource, is that the decisions over who was working in these companies -- and that is who are now your soldiers in the field -- is punted to someone else to decide. And the reverse of that is also true.

This is a market, an open market, and so the companies are the ones deciding who gets these military skills and capabilities. And so on the employee side, we have seen super-talented people working for these companies, some of the best soldiers in the world.

Former Navy SEALS, former commandos.

Exactly. We've also seen a number of people who either don't have the proper training or background to be there. ... There were reports of literally companies hiring bouncers to do security detail duties in Iraq. That's a training issue.

You got something against bouncers?

In terms of having them on the ground, carrying submachine guns that they've never learned how to use, out there getting into firefights that not only impinge upon that company but, by the way, impinge upon the entire U.S. military operation in Iraq?

These companies have training. They have training by former Special Forces.

We want people to our standards.

But what are our standards, is the question?

Yeah. It's a U.S. military operation. Let me get to the issue of background. Some of the people have completely clean backgrounds, and sometimes companies have let in people who have backgrounds that we would not want to be there. For example, one of the guys that was working for the companies was a former South African apartheid soldier. ... And it was not just simply that he'd fought in the apartheid regime; he had openly testified to the Truth and Reconciliation Commission that he had firebombed the houses of more than 60 political activists back in the day.

So this is a guy [who] had been involved in some things that we, as a nation, and certainly our military, would not look kindly on; had openly admitted to it. There was no dispute about it whatsoever. ...

Another example was there was a fellow who was an ex-British Army soldier who had been hired to work in Iraq. Sounds good, ex-British Army. There was a reason he was ex-British Army. He had been thrown out of the British Army and put in jail for cooperating with Irish terrorists. The British Army was certainly not happy to find out that he was in Iraq working as a contractor, carrying a submachine gun on the ground there and given a license to come in and out of their bases. ...

When you have four, five, six layers of subcontracts, what's that doing to the cost to U.S. taxpayer[s]?

I think if you or I looked at these numbers -- and that's the reason why we're not allowed to look at them -- we would find so much fluff within them, because remember, you've got at the employee level someone who's making anywhere from two to 10 times more than a U.S. soldier is making. And that guy is certainly not getting what the company is being paid.

And remember, that company is often three, four, five levels of subcontractors down. And each of those layers isn't taking it at a loss or isn't taking it at no cost. They're adding their own operating margin in there. And remember, all these companies are staffing up not only those operations, but the entire organization around them, the lobbying efforts around it, the marketing, the real estate, you name it. And so there's so much fluff built into this process that there's no way to argue that it's about cost savings. ...

Is the number of contractors growing in Iraq?

No, I think we've hit pretty much of a stabilization area.

So we've saturated the market.

Yeah, yeah. And what's going to be interesting is what happens when Iraq finally cools down. I think you're going to see some pretty fun things to watch in terms of an economic market, and you're going to see a lot of companies that were not diversified, so to speak, go under. You're going to see a lot of companies then quickly realize that they have to diversify and start to reach out and work in these other areas. You're going to see a lot of people go out of business.

And what you have to worry about is when you look at the history of warfare as a whole, when large wars end, you often see soldiers search out work in other areas, which helps feed conflicts in other areas. This goes all the way back from the Reconquista in the Middle Ages to after World War I. You could find former German Army vets fighting in China. After World War II, there [were] more than 75,000 SS guys fighting in Vietnam.

So every war creates its own mercenary class.

Yeah. And so that's what we have to worry [about], is that a lot of these new guys that have entered the market in Iraq may end up searching out work in other areas.

Because basically, they're not trained to do much else.

Well, or they've found that it's super-profitable.

And to their liking.

Yeah.