I posted some of this stuff about the CBO awhile back, and I wanted to bring it up again because Serviam did an outstanding job of sifting through this thing. To me, this is the other reality that the new administration will be facing. The poor economy right now will certainly dictate our choices in defense procurement.
We are cost effective, and in this ‘long war’, any and all ways to save money do so will weigh heavy on the minds of the decision makers. I also find it disturbing that Congressman Henry Waxman and his committee was so faulty in their findings. Perhaps they need be investigated? I am all about accountability, but I also want that investigation to be unbiased and honest.(right….-LOL) –Head Jundi
Congressional Study: Private Security Contractors Are More Economical
From the September/October 2008 issue of Serviam.
By Serviam staff
A new study by the Congressional Budget Office (CBO) finds that private security contractors in Iraq are indeed a quality, cost-effective alternative to uniformed military personnel.
The CBO study, released in August, supports contentions by the private security contractor (PSC) industry that the taxpayer receives better value when the government contracts private security companies to protect diplomats and VIPs in Iraq.
The CBO is a nonpartisan office of Congress that studies budgetary matters. The report, titled “Contractors’ Support for U.S. Operations in Iraq,” was authored by CBO National Security Division analysts Daniel Frisk and R. Derek Trunkey.
Critics have long urged that uniformed military troops perform mundane security functions like static defense of embassies and other diplomatic outposts and personal security details to protect diplomats, aid workers, intelligence officers, and visiting lawmakers and staff from Washington.
Last year, Serviam published its own study, giving a side-by-side cost comparison between an active duty E-6 with 10 years’ experience in the military and a private security contractor with similar military skills. The study, published in September 2007, showed how the uniformed soldier’s cash and noncash compensation exceeds the total compensation of a PSC (see sidebar). The study did not include the added costs to the taxpayer of infrastructure and other expenses to support the soldier, such as the fact that soldiers are paid whether or not they are working, whereas PSCs are paid by the day.
The CBO study is different from but consistent with that Serviam report.
“Private security contractors, or PSCs (also referred to as private security companies), protect people and property in Iraq for U.S. agencies, the Iraqi government, and private businesses, namely, other contractors working in Iraq. Virtually all PSCs in the Iraq theater work in Iraq. They provide personal security details for high-ranking officials, security escorts for government and contractor personnel, security for convoys and at fixed sites, and advice and planning related to security,” the CBO stated.
“CBO estimates that total spending by U.S. agencies and U.S.-funded contractors for private security services ranged between $6 billion and $10 billion over the 2003–2007 period. Between $3 billion and $4 billion of that spending was for obligations made directly by the U.S. government for private security services in Iraq. The government’s obligations for those services have amounted to roughly between $500 million and $1.2 billion annually since 2005.”
So what does this mean for military planners, peace operations professionals, and the taxpayer? That’s been a tough question, especially when the most published figures are based on false assumptions and politicized data.
CBO Finds Critics’ Analysis to Be Flawed
“A widely reported aspect of private security contractors is the perception that PSC personnel cost significantly more than equivalent military personnel,” the CBO study says, citing a study by Joseph Stiglitz and Linda Bilmes that estimates the total cost of the war in Iraq.
However, the Stiglitz-Bilmes study is seriously flawed. The CBO quotes directly from a grossly inaccurate statement: “In 2007, private security guards working for companies such as Blackwater and DynCorp were earning up to $1,222 a day; this amounts to $445,000 a year. By contrast, an Army sergeant was earning $140 to $190 a day in pay and benefits, a total of $51,000 to $69,350 a year.”
The CBO analysts discounted the Stiglitz-Bilmes data. “Those figures,” the CBO said, “are not appropriate for comparing the cost-effectiveness of contracting the security function or performing it using military personnel. The figures of $1,222 a day represents the contractor’s billing rate, not the amount paid to the contractor’s employees. The billing rate is greater than an employee’s pay because it includes the contractor’s indirect costs, overhead, and profit.
“A better comparison would involve estimating a soldier’s ‘billing rate’—the total cost to the government of having a soldier fill a deployed security position for one year. Further, contractors generally bid various numbers of personnel in different labor categories, so focusing on a single labor category—such as security guards—gives an incomplete picture of the total cost of providing security. A better comparison would also reflect all types of personnel as well as nonlabor costs (such as vehicles and other equipment) that a security contractor includes in its bid.
“CBO performed such an analysis, comparing the costs of a private security contractor with those of a military alternative. That analysis indicates that the costs of the private contractor did not differ greatly from the costs of having a comparable military unit performing similar functions. During peacetime, however, the military unit would remain in the force structure and continue to accrue costs at a peacetime rate, whereas the private security contracts would not have to be renewed,” according to the CBO.
To compare the costs of PSCs and a U.S. military alternative, the CBO analyzed contracts between Blackwater and the State Department from June 2004 to June 2005. Contract terms vary in the work performed and the qualifications of personnel, so the CBO cautions that “the Blackwater contract is not necessarily representative of other security contracts.”
Blackwater’s personnel requirements are so stringent, and strictly laid out in a massive State Department contract, that the company is believed to pay top dollar for experienced special operations professionals and others from all four military branches and elite police special weapons and tactics (SWAT) units. The company has a remarkable 100 percent success rate in defending its protectees in Iraq.
Even with the costs of its higher-quality security personnel, Blackwater provides the taxpayer with a cheaper security solution than the military in Iraq, according to the CBO.
“Nearly 80 percent of personnel on the Blackwater contract were bid as ‘protective security specialists’ (PSS) and billed at $1,222 per day, or $1,325 in 2008 dollars. The contract included other types of personnel—those who supervise the PSS (such as project managers and detail leaders) and those who support their activities (such as administrative personnel and emergency medical technicians). Blackwater bid 314 operational positions and 7 positions in project management and administration but did not propose to fill every position every day; the contract would deliver 189 full-time equivalent (FTE) operational personnel. The contract also included about $1.7 million to lease nine personnel carriers (vehicles) and provide spare parts. Other equipment costs were not shown explicitly but were presumably rolled into the labor rates. Finally, the contract included about $2.1 million for insurance, yielding a total cost of $99 million for the 189 FTEs for one year (in 2008 dollars, and excluding aviation support, which CBO did not analyze).”
Military Comparison
“To compare the costs of private security contractor personnel (PSCs) and military personnel, CBO assumed that an equivalent U.S. military force would be composed of units of light infantry (units not equipped with heavy armored vehicles). Using infantry as a substitute for PSCs is supported by the fact that U.S. Marines have traditionally provided infantry personnel to guard U.S. missions overseas; since 1986, however, private companies have been allowed to compete for security contracts,” the CBO report said.
“The differences between Marine and Army infantry units would not be relevant for performing a security mission; CBO assumed that the Army, because of its greater size, would be more likely to provide units to replace PSCs.
“Typically, an Army unit would not be organized in the same way as a contractor’s workforce. To calibrate the two, CBO identified a hypothetical Army unit that could deliver roughly the same 189 FTEs as Blackwater. The precise mix of personnel in the two workforces would differ because Army doctrine implies support elements in different proportions than those observed in Blackwater’s contract. Delivering 189 FTEs would require about one-third of an Army light infantry battalion—a rifle company plus one-third of the battalion’s headquarters company. The headquarters company would include not only command elements but also medics, scouts, snipers, and others who functionally correspond to some of Blackwater’s specialized personnel,” the CBO continued.
CBO Cost Analysis
“CBO included three types of costs in its analysis: military personnel costs, operating costs, and equipment costs. The military pay rates ($140 to $190 a day) correspond to cash pay (basic pay, subsistence and housing allowance, plus a federal tax advantage because those allowances are not taxed) but exclude noncash benefits, such as free health care for military families back home, and deferred benefits, such as pay and health care for those who receive military retirement benefits,” according to the CBO.
“Cash pay accounts for about half of total peacetime compensation for typical enlisted personnel. CBO therefore roughly doubled cash pay when estimating annual personnel costs for the Army to perform functions in Iraq and then added the costs of providing special pays to deployed soldiers,” the CBO said. Those special pays are Hostile Fire and Imminent Danger Pay of $225 a month, Hardship Duty pay of $100 a month, and for soldiers away from their dependents, $250 a month in Family Separation Pay.
Military costs skyrocket in light of the fact that up to twice as many personnel are required to do a single job. “The Army’s goal is to have two units at home station (that is, in the rotation base) for each unit deployed overseas,” according to the CBO report. “The time at home lets units recuperate from their deployment, reconstitute personnel and equipment, and train for their next deployment. The Army, however, has not been achieving its rotation goal. CBO previously estimated that the ratio of units at home station to units deployed was 1.2 as of April 2007 (just before the ‘surge’ of U.S. forces in Iraq), and the ratio has averaged about that value as far back as 2004.
CBO Traces Misinformation to Waxman
How did serious academic analysts find such faulty information on which to build what the CBO considers flawed conclusions? The CBO says in a footnote that Stiglitz and Bilmes apparently based their inaccurate figures on “a memorandum to members of the House Committee on Oversight and Government Reform, Additional Information About Blackwater USA (October 1, 2007).”
That committee is chaired by Congressman Henry Waxman (D-Cal.), who has stated his intention to put Blackwater out of the government contracting business. Waxman held at least two hearings to discredit Blackwater at the request of a California trial lawyer who stands to make millions from suing the company. A letter from the trial lawyer, Daniel Callahan, to House Speaker Nancy Pelosi and Waxman shows the cause and effect. The Waxman committee staff intentionally set out to discredit Blackwater and PSCs in general to undermine the stability effort in Iraq, making headlines with misleading information that subsequently wound up in otherwise credible academic studies. The minority staff director of the committee denounced the Waxman staff report as so partisan and unfair that he refused to give customary bipartisan support for the report’s alleged findings.
It is extremely rare for the Congressional Budget Office to discredit the memorandum of a sitting congressional committee chairman.
“To capture the costs of maintaining a rotation base for infantry units assigned to provide security in Iraq, CBO analyzed two cases: Case 1 adds the cost of 1.2 soldiers at home for each soldier deployed; Case 2 adds the cost of 2.0 soldiers at home. CBO included only peacetime costs for soldiers at home station, not wartime special pays,” the report continued.
“Operating costs would be paid out of the Army’s operations and maintenance (O&M) appropriation. CBO estimated O&M costs separately for the deployed unit and for the 1.2 or 2.0 units at home station. Finally, CBO assumed that equipment for the deployed unit, and its counterparts at home station, would have a useful life of 20 years. Thus, CBO amortized one-twentieth of the total equipment cost for a single year’s operations,” according to the report.
Comparison of Estimated Costs
“CBO estimated the Army’s total costs at $88 million to maintain 1.2 units at home station and $110 million to have 2.0 units at home station for each deployed unit,” according to the CBO report. “Those costs bracket Blackwater’s total cost of $99 million to perform the same security function.
But at the end of a conflict, the private sector solution becomes a big budgetary bargain. “The costs of the two organizations would be different in peacetime,” the report continued. “The Blackwater contract would not have to be renewed once the Iraq conflict ends, except possibly for a small retainer to allow Blackwater to maintain a capability to meet the demands for security in a future conflict.
“The Army units would stay in the force structure, though they would accrue costs at a peacetime rate without the wartime special pays or the elevated rate of O&M spending. CBO estimates the Army’s annual peacetime cost at $60 million to maintain 2.2 units (where ‘unit’ again represents about one-third of an Army light infantry battalion) and $82 million to maintain 3.0 units. During peacetime, however, the Army units need not devote themselves to security missions that parallel Blackwater’s contract,” said the CBO. “Army infantry units can serve many other functions in peacetime or in other conflicts.”
In which case, of course, security contractors would be needed again.
And what if the Army scaled up to maintain a permanent security force to replace private contractors? A big front-loaded payout would be required. The CBO analysts said, “If the Army added infantry units to its force structure, and particularly if this analysis was scaled to replace more than a single private security contract with infantry units, a large up-front outlay would have to be made to initially equip those units. CBO reports instead the recurring annual amortization to equip the units.”
Real Savings Are Much Bigger than CBO Concludes
Real PSC cost savings are probably far greater than the CBO indicated. For example, as noted above, CBO did not calculate the tangible and very expensive costs of noncash benefits to soldiers, including free health care for family members and the massive deferred benefits of pay, pensions, and health care for military retirees. PSCs generally do not receive such benefits.
Serviam Figures, Reviewed
Serviam’s cost comparison from 2007 included compensation that the CBO report did not calculate.
Our comparison was based on the net cash and noncash compensation of an active duty E-6 with 10 years of active duty service, instead of the CBO’s much less qualified, and consequently much cheaper, E-4 infantry corporal with only three years of military service.
We also calculated substantial noncash benefits to active duty personnel, such as 30 days’ paid leave per year and family health care and family housing; and deferred benefits like retired pay accrual, Veterans Administration (VA) compensation and pension, VA health care, and health care accrual. The CBO did not.
As a result, we tallied the annual net cash compensation of an E-6 to be $69,340, versus $95,700 for the security independent contractor—a stark difference in pay. When noncash and deferred benefits are included, the pay ratio becomes inverse.
Noncash benefits of health care, installation-based benefits, subsistence in kind, family housing and barracks, education, and other benefits total $22,765 for the active-duty E-6, and zero for the contractor.
The deferred benefits listed above add another $34,629 a year for the E-6, and again, zero for the contractor.
Total annual compensation for the E-6—the amount the taxpayer pays—is thus $126,734, versus $95,700 paid to the contractor, who has to pay the health, food, housing, and retirement expenses from his pocket, and usually has to pay federal taxes, as well.
Second, the professional qualifications of Blackwater security personnel are much higher than the notional Army equivalent in the CBO report. CBO cited State Department standards that require security personnel to have at least one year of protective experience, and presumed that the typical soldier in the Army protective battalion would be a corporal, an E-4, who would have served at least three years in the military. Blackwater personnel on the State Department security contract in Iraq and elsewhere tend to be older, more mature, and with much more discipline and specialized experience than an average Army infantry corporal. The company says that most are veterans of special operations units, including Navy SEALs, Army Special Forces, and Marine Recon, as well as police SWAT teams. They also tend to be almost twice the age of an average corporal, between 36 and 42 years old, demonstrating superior leadership skills.
Industry officials say Serviam’s calculation based on the compensation of an Army E-6 with 10 years’ experience is more accurate than the CBO’s assumption of an E-4 corporal with three years in the military.
The 20-year amortization of military equipment is unrealistically optimistic, security industry experts tell Serviam. Trucks and sport utility vehicles simply do not last that long even at home in peacetime conditions. Hard training wears out weapons and gear. Hostile fire destroys some of the most expensive equipment—helicopters— which are uninsurable in war zones. Blackwater has lost at least three helicopters in Iraq so far in its security detail. Iraq’s infamous desert dust grinds down equipment further. Much of the gear needs to be replaced within two years, not 20.
Finally, the tooth-to-tail ratio is not calculated in the CBO report: the cost of all the administrative, support, and backup personnel to keep a single shooter in the field.
Serviam found the Defense Department tooth-to-tail ratio to be between 1:8 and 1:12 or one “tooth” for every 8 to 12 “tails,” while the private security ratio was inversed: 20 “teeth” for every “tail” (see “What an Agent Costs the Taxpayer,” May/June 2008, pp. 28-29).
Even so, the CBO analysis shows that PSCs are an equal or better value to the taxpayer than uniformed military personnel in providing security functions in Iraq, and they keep the troops where they belong: in the field, fighting the enemy, and working on peace operations with the local people.
Serviam Figures, Reviewed
Serviam’s cost comparison from 2007 included compensation that the Congressional Budget Office (CBO) report did not calculate.
Our comparison was based on the net cash and noncash compensation of an active duty E-6 with 10 years of active duty service, instead of the CBO’s much less qualified, and consequently much cheaper, E-4 infantry corporal with only three years of military service.
We also calculated substantial noncash benefits to active duty personnel, such as 30 days’ paid leave per year and family health care and family housing; and deferred benefits like retired pay accrual, Veterans Administration (VA) compensation and pension, VA health care, and health care accrual. The CBO did not.
As a result, we tallied the annual net cash compensation of an E-6 to be $69,340, versus $95,700 for the security independent contractor—a stark difference in pay. When noncash and deferred benefits are included, the pay ratio becomes inverse.
Noncash benefits of health care, installation-based benefits, subsistence in kind, family housing and barracks, education, and other benefits total $22,765 for the active-duty E-6, and zero for the contractor.
The deferred benefits listed above add another $34,629 a year for the E-6, and again, zero for the contractor.
Total annual compensation for the E-6—the amount the taxpayer pays—is thus $126,734, versus $95,700 paid to the contractor, who has to pay the health, food, housing, and retirement expenses from his pocket, and usually has to pay federal taxes, as well.