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The Next Military-Industrial Complex, Part II: Global Business and National Security

December 14, 2017

In the future, the American defense establishment’s engagement with the private sector will vary with the mission. The arms-length procurement requirements of a dedicated industrial base for big-ticket weapon systems are different from the requirements of frenetically paced software development through co-investment. In turn, sovereign “joint venturing” abroad through private enterprise can help solve thorny security issues or facilitate diplomatic openings. However, such relationships nevertheless morph because private and public-sector interests differ, especially when it comes to allocating risks and rewards.

Part One of this series explored the idea of governments seeking to ride the “coattails” of private investment to tap that sector for customized commercial solutions to security problems. Part Two examines ways in which these public-private partnerships can go wrong. Historically, governments have grabbed private coattails for too long, failed to recognize they were there for the grabbing, or left them twisting in the wind. This article draws lessons from disparate case studies ranging from Pakistani fertilizer sales, to bunkering facilities in Aden, to insurance payments to the North Korea government. Examining how failure triumphed in the face of opportunity in each case helps those contemplating a closer sovereign-private security relationship to better understand when and how to embrace these ties.

Lesson One: Afghanistan and Pakistan — When to Let Go of Private Sector Coattails

Riding the coattails of private enterprise does not always work out. Part One used the example of Saudi Arabia’s venture capital community seeking to identify and develop emerging technology to customize a viable weapon tracking solution for the Kingdom. This effort failed because there was no investment suitable to private capital requirements. When public and private interests diverged, the government was left with an unfilled need, which it did not seek to fill through sovereign investment.

A partial legacy of that omission was the failure to develop unconventional armament tracing technology in the United States.  Later, suitable tracking technology was unavailable for use when the United States needed to stop Pakistani fertilizer from fueling Afghan IEDs, which generated the vast majority of American casualties this past decade. Despite U.S. pressure, the Pakistanis did not solve the problem of weaponized fertilizer. Over time, the Afghani and Pakistani governments tried a number of responses, ranging from bans on possession of ammonium nitrate fertilizer in Afghanistan, to more limited bans  in certain districts of Pakistan, to seeking to block shipment across the border from Pakistan which was facilitated by dyeing the products to make them more visible. Sovereign intervention also prompted the manufacturer’s “voluntary” temporary removal of ammonium nitrate products from hundreds of distributor shelves in the frontier border area.

But the agricultural communities in these tribal areas depended on chemical fertilizer for their livelihoods. When up to two-thirds of the population of Pakistan’s Federally Administered Tribal Areas was “food insecure,” dramatically reducing crop yields by at least 50 percent from fertilizer bans was more than just “collateral damage.”  Compromising that society’s ability to feed itself became a matter of “collective punishment” through application of a colonial legacy criminal code. Yet, while legitimate shopkeepers went out of business, the fertilizer smugglers thrived. In an area where hunger was no stranger, the government not only impacted food supply, but further exacerbated the issues with occupation-style military and relief operations.. So went the war to win minds and hearts for years, especially in the tribal areas.

These coercive measures were not viable or sustainable security solutions for Pakistan. They were impelled by the United States after use of its existing technology to identify the IED chemical signature to track the manufacturing source in Pakistan. Interdiction efforts followed, leading U.S. Senator Bob Casey to call in 2010 for a tracking system that would chart the course of ammonium nitrate from manufacturer to distributors to buyers. But he only proposed numbering each bag sold. While some proposed adding radio frequency based identification tags for tracking product distribution, similar to what the Saudis had contemplated years earlier, the approach was rejected. In this case, the government became so fixated on the wrong private-sector solution that, when it floundered, it found itself without many options.

Imagine instead if the Saudis had asked the U.S. Defense Department for assistance with its tracking problem before the turn of the century. Imagine the American response: “We will help, including tasking our venture arm with identifying and developing suitable private technology. By the way, we expect you to co-invest in subsidizing the military development effort.” Sovereign funding in lieu of the private capital market could have followed, much like later U.S. Energy Department subsidization of Tesla and by other public entitles for related Elon Musk ventures. Yet because of a public-sector failure to invest in a suitable military tracking solution, it remained newsworthy last year that nearly eleven tons of ammonium nitrate was intercepted and seized by Pakistan on the Afghan border, which physical inspection revealed to be hidden under fruit crates.  In contrast, thanks to privately funded development, today we can track the delivery status of parcels to our homes from our phones.

Ultimately, governments’ failure to fund in place of the private sector resulted in a gap in military tracking capability. Compensation for this took the form of a coercive approach that tied up the Pakistani and Afghan private agricultural sector at great political and human cost. But there was a further price tag, as the next section illustrates.

Lesson Two: Afghanistan and Pakistan — The Failure to Ride Private Sector Coattails

In the absence of militarily customized distribution tracking technology, the United States spent tens of billions on Mine-Resistant Ambush Protected vehicles as part of a herculean development and procurement effort. Additional funds paid for everything from bomb resistant underwear, to ground penetrating detection radar and robotic surveillance equipment — all while hundreds of millions of dollars in annual aid supported Pakistani interdiction efforts. No one questions doing what was necessary to protect troops (and civilians), but with a resistant populace and sovereign and huge financial costs, other privatized solutions could have been explored more fully.

Perhaps the most effective and cheapest IED countermeasure proved to be simply paying for “transit rights” to the local powers in Afghanistan, when local business culture mores permitted. A companion path not taken was to seek supply control in the border region by either purchasing the two factories involved or securing the “master” distribution rights to the area through a legitimate or front company.  In combination these approaches would have been far cheaper, more direct, and potentially more effective in controlling disruption of enemy supply. Moreover, these commercial approaches would not have come at the political cost of a continuing US threat to withhold aid necessary to extract Pakistani and Afghani cooperation, the price for which was paid in draconian remedial measures imposed on their Puhktun populace.

Whether a comparatively inexpensive commercial solution could have been accomplished privately or covertly is debatable. Any resistance by factory ownership might have been tempered by the factories’ vulnerability to gas supply interruption. If ownership resisted relinquishing commercial control, a masked cyber engagement to disrupt the ordinary ebb and flow of fuel could have prodded ownership to change its mind. Tightening fertilizer supply by calibrated reduction might then have helped drive a wedge between farmer and militant over access — a fight the militant would likely win because of the power of the purse or its “taxing” authority. Yet, the cost to the militants’ base of support from such direct competition could be disgruntled farmers or a hungry populace blowing the whistle on the militants, as the peoples of the FATA do stand up for themselves where their core values and basic economic interests are challenged.

At bottom, the failure to exploit more sensibly the public/private commercial relationship to control IED supply may have harmed security as much as the initial failed reliance on private investors to develop customized tracking technology. Sovereigns have to learn when to let go of, and when and how to take advantage of, private enterprise’s coattails in pursuit of security.

Lesson Three: Yemen — When Government-Backed Private Commercial Stabilization Efforts Fail

In Yemen, the Saudis provided another model of private investment-based stabilization efforts impacting security interests. In the 1990s, after a Saudi-backed faction lost a civil war in Yemen, some Saudis with family connections on that side of the border found commercial opportunities there. The Saudi government consented to these private, commercially-based stabilization efforts, believing Saudi business development that raised the standard of living in Yemen would mean more people would be on their side the next time a political reordering occurred — and there was no doubt there would be a next time.

Armed with opportunity and sovereign support from both sides of the border, a large Saudi private equity fund targeted investment and project finance in Yemen. That money was quite material given Yemen’s gross national product at the time. Development opportunities were presented, evaluated, and pursued, and there was significant Western interest in the infrastructure and other developmental projects.

Only one component was missing from the equation of opportunity plus political support plus funding to yield sustainable development and enhanced political stability: security, for the tribes and political factions did not disarm. Unlike other warring societies where excess military equipment was largely sold off after the fighting ended, in Yemen the armed status quo prevailed – in part because there was no assurance that the material benefits of the development would be equitably spread across the society.

There was no sovereign intervention to solve that security problem. Instead, the U.S. government endeavored to “prime the pump” commercially, such as through establishing the U.S. Navy’s Aden bunkering facility. That project, like others, suffered from the same security disability, with the resulting USS Cole bombing the most visible scar.  Yet there was a red flag about the Aden facility’s vulnerability: The winning bid to service it was well below that of the other competitors, resulting in concern that the bidder might be a front or incompetent. At any rate, the facility — servicing ships that launched cruise missiles at al-Qaeda camps in Afghanistan — would be a logical target. The rest is history, with the unsuccessful attack on the Sullivans followed by a successful attack on the Cole. U.S. defense officials nevertheless maintained that the attack was unforeseeable, and the Navy concluded the incident could not have been prevented.

After the USS Cole attack, Western companies with the know-how needed for developmental projects pulled out, and the Saudi investment fund unwound. In the ensuing years Yemen never again had another chance at meaningful development. Its people were not lifted out of abject poverty, and instead continued to fight for survival, too often with rifles in hand.

Whether Yemen’s descent into chaos and conflict, and its transformation into a base for international terrorism, could have been avoided is another unanswered question left for historians. But clearly the privately financed commercial approach to stabilize development failed due to a lack of security. How will private capital and commerce respond to a post-conflict call for “partnership” ringing out of governmental halls in the future?  Today’s security planning should be informed by this past context so that America’s national security interests are not put at risk again by future sovereign neglect, whether Yemen’s or its own.

Lesson Four:  North Korea — When Not to Let Go of Private Enterprise’s Coattails

Involving private investors and global businesses to help solve security problems, including political openings or stabilization efforts, has many Western precedents and perils. Consider the Six Party Talks with North Korea beginning in 2003. In an effort to encourage a diplomatic opening, increased Western business with North Korea was allowed, but without adequate sovereign controls. One area that was opened was insurance, which is vital for conducting maritime trade.  Insurance syndicates were permitted to reinsure North Korea’s national carrier, and claims emanating from there. The result reflects what happens when sovereigns sacrifice the very commercial openings they created when they perceive that private interests could endanger their political/military openings.

One problem with sovereign reliance on private business is that left unrestrained, the latter almost inevitably leaps at the chance to make large profits — even in a place like North Korea. Another factor haunting the relationship is the private dispute resolution process. Forum selection and governing law clauses in commercial contracts often get short shrift in negotiations, since there is no desire to blow up a potential deal over a hypothetical future dispute. International reinsurance syndicates evidently paid little attention to such clauses when North Korea’s national insurance company was permitted to seek deals, all the while displaying a tantalizing willingness to pay higher than market premiums. It was the Western reinsurers, however, who ultimately paid a very high price for neglecting the hard currency funding sought by the North Korean regime, allegedly through illicit activities.

It was not exactly a closely guarded secret then that North Korea significantly financed both its continued existence and its WMD program through illegal commercial activity, ranging from counterfeiting U.S. currency to drugs and cigarettes. But physical smuggling by the regime was more challenging and risky than creating insurance paperwork. After all, an insurance claim is not that difficult or resource-intensive to create if one intends to defraud. Add to that equation the insurer being the National Insurance Company of North Korea, and a highly efficient North Korean court system applying North Korean law (pursuant to the reinsurance contract) to bless a favorable judgment on the underlying claims — well, it seems some rather creative workers imagined the possibilities. All that would be left to chance was enforcing the North Korean judgments in Western courts to grab private assets in payment.

Initially the claims were not extraordinary, as North Korea probed the enforcement system. Confidential settlements kept things quiet. Then the big dollar disasters struck. For example, in 2005 a helicopter —carrying a woman pregnant with triplets and in need of an emergency C-section — encountered technical difficulties and crashed into a government warehouse, which happened to be holding about $60 million worth of goods in UN aid.

It’s tempting to say that you cannot make this stuff up, but as it turns out, perhaps you can. The woman miraculously survived, the babies were delivered without incident, and in, another miracle, the photos of the warehouse fire appeared to show little or no debris — perhaps because the building had been emptied of the goods prior to staging the crash. Re-insurers contended the North Korean regime kept the $60 million in aid and yet claimed it as a fire loss from the crash.

In an equally enterprising claim, North Korean workers — whose average hourly wage is measured in cents — automatically had their lives insured for a million dollars when they bought a ferry ticket. Unforeseeably, of course, a full ferry sank with over a hundred souls lost — perhaps carrying people who had already died of starvation, or were executed political prisoners? And had the ship coincidentally outlived any useful purpose — other than to be sunk? Or was it genuinely a tragic occurrence where people died in frigid waters? In any event, a nine-figure claim resulted and re-insurers were not permitted to send divers to investigate the scene.

The English courts eventually had to take up the defense of the enforcement actions to these and other claims, ranging from train wrecks to mining disasters. An effort then ensued to brand North Korea as a “soprano” state whose judicial judgments should not be enforced. But difficulties in proof of fraud lead to compromise, with North Korean entities eventually receiving a payout of approximately 95% of the value of these and other claims, according to public reporting.

Such are the rewards for Western global business greed and stupidity, compounded by governments who were unwilling to block the resulting fund transfers for fear of derailing the Six Party talks. Consider that a year’s worth of coal exports from North Korea produced about 700 million dollars in hard currency, with reportedly 95% of the proceeds going to fund military and weapons programs. By comparison, a year’s worth of insurance claims produced a like amount in proceeds.

Although the U.S. government did block $25 million of North Korean regime money in Macau and labeled it a triumph that led North Korea back to the negotiating table, America’s security establishment largely sat on the sidelines, together with its allies, exercising a “hands off ” policy on the reinsurance claims. Left unaided in a fight over 30 times the trumpeted amount, with different interests at stake than those of governments, the private carriers settled. Meanwhile the governments continued to sit at the table with North Korea trying to block a weapons development program that may have been subsidized by a large Western cash infusion. Governments first let private enterprise loose in North Korea, then left it hanging rather than weighing in to help. Meanwhile, the talks collapsed for political reasons soon thereafter.  Given these lessons, what private businesses can be expected to “pay to play” in helping to reopen negotiations with North Korea the next time a sovereign invitation is extended?

Conclusion

As the national security establishment explores a renewed “partnership” with the private sector, past experiences reflect rather uneven bargains for both sides. On the one hand, sovereign assets or weapons, such as sanctions, may be holstered to serve policy goals, allocating the financial risk solely to the private sector. This was done in effect with North Korea and Yemen, even when the financial consequence may have been fueling the very adversarial activity that sovereigns sought to constrain.  On the other hand, private commercial endeavors may be as readily abandoned out of pecuniary interest, as with Saudi pursuit of tracking technology, or both unduly constrained and unused as in Pakistan, despite or because of continuing sovereign needs. Either way, the public/private relationship is a “limited partnership” at best, and ever the product of arms-length bargaining. Which side acts as the controlling “general partner” will be a function of interest and risk allocation in particular circumstances.

It is the limited shared interest that ultimately constrains the sovereign/private “partnering” effort today, and impacts tomorrow’s resulting security structure. This limit should inform the defense establishment as it seeks to transform “proof of concept” ventures like DIUx beyond a patchwork quilt built on episodic need into a coherent, networked security web. When and where there is sufficient commonality of interest, collaboration will follow with both emerging and developed private enterprises to tap their commercial know-how and capital investment appetites. As those interactions regain traction, a more equitable and effective foundation will emerge — one of solutions rather than casualties — to help sustain public/private pursuit of America’s 21st century national security interests.

 

Philip D. O’Neill, Jr. is an international arbitrator whose global international legal practice spanned over three decades. He taught National Security Law at Boston University Law School for many years, and also International Business Transactions at the Fletcher School of Law & Diplomacy. He is the author of two national security books published by Oxford. This article is drawn from a paper presented at and used in the curriculum for “Geo-economics and National Security” at the Naval War College.

Image: U.S. Air Force/Charles Rivezzo

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