Within the private military industry itself, the killings in Fallujah were shocking but not unexpected. As opposed to the first few months of the war, when contractor attrition was rumored to be as high as 30 percent (comparing quite poorly to the zero percent of U.S. soldiers that are able to decide to return home), those now going into Iraq know that it is an active war zone. Indeed, two contractors working for the Olive Security firm had been killed outside Mosul just days before the Fallujah incident, the main difference being that their deaths were not recorded on film. However, the Fallujah incident, followed so rapidly by the mass violence and the incidents in Najaf and Kut, caused most of the firms to reexamine their procedures, risk factors, and reliance on military support that may not be there. Christopher Bees, a director at ArmorGroup, says, "It'd be fair to say that anyone involved in the business in Iraq is bound to take a second look at what they do."

Disturbed by the upswing in violence and the lack of military backing and coordination, at least four military contractors (Halliburton, Triple Canopy, AKE and Control Risks) were reported by journalists and CPA officials to be reconsidering the extent of their presence in Iraq, and they suspended key parts of their operations as they waited for the situation to settle. However, most indicators are that Fallujah killings won't collapse the energetic PMF market in Iraq. The pay scale remains so high that those leaving will likely find ready replacements. In the days after the killings, I was contacted by two firms looking for advice on how they might crack the market, including one that had never operated in a war zone before.

So, while the boom for PMFs in Iraq certainly can't last forever, it bodes to be lucrative while it does. Duncan Bullivant of Henderson Risk notes, "I wouldn't give it more than another year at this level. The bubble will burst, but there's an immense drive to cash in while it lasts." U.S. plans for the transition to Iraqi sovereignty mean an even greater use of private contractors, such as a contract worth up to $1 billion to take over the responsibility for protecting the Green Zone, the four-square-mile area in central Baghdad where coalition officials live and work. Who knows, perhaps the PMF bubble may last longer than the dot.com one did.

The greater challenge looks to be how the broader business community responds to Fallujah and its aftermath. The cornerstone of the Bush administration's plan to turn the corner in Iraq is the transfer to local Iraqi sovereignty on June 30 and the simultaneous dump of some $18 billion in reconstruction contracts over the summer. It was hoped that the massive infusion of aid would draw in outside business and create an upsurge of employment that would dry out the insurgency.

But, instead, the Fallujah killings and the ensuing outbreak of fighting in six cities might have sucked the wind out of the corporate participation necessary to making the plan a reality. Those already on-site have restricted their movement and activity ("no go" areas have ballooned), while a number of other firms set to enter the country have cancelled. The head of the firm Meyer and Associates, which provides protection for a number of contractors, reports that "right now everything is at a standstill." Among the lesser-noticed victims of Fallujah was the Baghdad Expo, the largest conference planned by the Iraqi-American Chamber of Commerce. The meeting was to highlight business opportunities in postwar Iraq, with more than 200 companies scheduled to attend. The day after the killings, it was postponed.

So while the PMF industry has boomed, the accompanying investment needed to prop up the Iraqi economy has not (which could indirectly undercut the PMF industry in the long term). Companies know that the insurgents' strategy is to weaken the coalition by targeting them, and thus many firms are waiting on the sidelines for the situation to stabilize and a real, functional Iraqi government somehow to come into being. As one potential investor commented after a U.S. Commerce Department briefing on investment in Iraq, "The carrot that's being waved in front of everybody is that we should get involved on the ground floor. But this is below the ground floor. There are too many other markets now that are stable."

This reluctance derives from more than a fear of going into a war zone; rather, it represents real financial calculations. As the situation has grown increasingly dangerous, insurance premiums have skyrocketed. Because the Defense Department had no policy on it beforehand, Bunny Greenhouse, chief contracting official for the Army Corps of Engineers, relates that for contractors in Iraq as much as 40 cents of every dollar is spent on insurance. "Why are we paying 40 percent? That's unbelievable ... Nobody foresaw that we were going to be in this kind of dilemma." While Greenhouse is wrong --the experts on Iraq did predict the current turmoil, just as industry analysts pointed out the dangers of such poor planning -- the insurance problem is yet another illustration of the costs of an ad hoc approach to doing business in the realm of war.

In turn, security costs have escalated, which is a boon for the PMF industry, but not for the broader effort. Many construction firms, such as Washington Group International, now have to employ two security personnel for every one worker carrying out the actual contracted task. Just before Fallujah, Stuart W. Bowen Jr., the inspector general for the CPA, estimated that at least 10 cents of every reconstruction dollar in Iraq was spent for security, up from 7 cents in the fall of 2003. If the present spate of violence continues, industry insiders think it might grow to as much as 20 cents per dollar. As a point of comparison, security costs for oil operations in war-torn Colombia average about 6 cents per dollar.

These added costs mean that the reconstruction package funded by taxpayers may not go as far as hoped (Bowen contended that as much as $4 billion could be spent on security), perhaps requiring even more funding on top of the previous budget supplementals. Already, the CPA has had to transfer $184 million meant for clean-water projects, the kind of aid package that seeks to bolster local popularity, to cover spiraling security costs for its own installations. Additionally, these added costs mean that within firms' investment calculations, the threshold for turning a profit has been raised, further deterring outside investment. Bowen writes, "The inability to accurately predict the costs of security, including insurance, raises questions about the need for more funding -- Iraqi, donor, or U.S. -- to accomplish the reconstruction mission ... We are in this big gray area about how security concerns will affect reconstruction timelines."

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