Private security firms face mounting cost in Iraq

High price: Thomas Jaichner, an American private security guard killed by a sniper in 2005 in Iraq, pictured above left with an unidentified companion

For private security firms, the Baghdad bubble has burst. If it was ever easy to swagger into Iraq, look tough and casually collect juicy contracts for protecting government buildings and personnel, then those days are gone.

Rising costs, seemingly ever more vicious levels of violence and Iraqi fury at the behaviour of some contractors, has made a tough job worse.

In September, staff at America's Blackwater group shot 17 civilians dead in circumstances that remain under investigation. The incident, while not isolated, prompted a complete rethink of the strategy and demands of the various government bodies trying to do business in Iraq.

It also cemented the idea in the minds of some Iraqis that private security guards are soldiers from an unwelcome occupying force that needs to be turfed out before life can improve.

The Blackwater effect ran full speed into ArmorGroup this week, the listed security contractor that critics like to see as a war profiteer.

Of course, Armor didn't start the war any more than doctors instigate cancer, and the profits may turn out to be an illusion, but the company has always had somewhat of an image problem, however unfair this may be.

A profits warning arrived on Tuesday, leading to a near halving of the share price as punishment for what chairman Sir Malcolm Rifkind called a "deeply disappointing and frustrating period". Chief executive David Seaton was ousted - harsh, say industry insiders.

The problem is that customers are demanding ever higher levels of protection just as fuel, food and other costs rise.

For firms that agreed fixed term contracts such as Armor, margins are being suffocated and new deals put on hold while clients ponder whether to quit Iraq altogether.

All of this makes Richard Fenning, the chief executive of Armor's rival Control Risks grateful that his company is not subject to the vagaries of the stock market.

"I feel very sorry for David Seaton," he says. "This business is all about unpredictability. It comes in peaks and troughs. Arguably, this is incompatible with life on the stockmarket."

Fenning agrees that the boom is over, for now, but believes those firms that can stick out the lean times will be able to cash-in once the situation steadies and investment in Iraq's giant oil fields begins in earnest.

"There are now significantly smaller amounts of diplomatic and construction activity. But when the political situation improves, major investors will start to go in again," he says.

Fans of the war have been insisting that the coalition forces are on the brink of a great breakthrough for years. Fenning can't say when this will come, but insists it will.

"Wise heads will prevail. Capitalism will prevail," he says.

Fatalities among private security contractors have fallen since 2005 - although this may be mainly because there is less work around.

For now, Armor is in a fix. Christopher Beese, the senior director in charge until Armor finds a new chief, admits times are tough. "The costs of doing business are considerable and it is still quite difficult to raise prices," he says. "We have to tighten our belt and revise our original plans. Life is not as straightforward as it has been."

He denies that the firm simply underestimated likely expenses, underbidding for contracts that were always going to be loss makers. "People who say that don't understand the dynamics," he says. "The market in Iraq is growing and changing all the time."

Beese insists that opportunities remain, but Armor's very reason for existence is now its main problem.

Security firms live on instability, but when that reaches a certain level, it becomes near impossible to declare a strategy with a shelf-life longer than a week.

For the moment, Armor and the rest need to distance themselves from the rogues in the industry, and hope the storm passes before investors lose all confidence. As of yesterday, Iraq was still a basket-case and the shares fell again.

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