WHEN the Japanese Government donated 23 electrical transformers to Iraq last October as part of the effort to rebuild the war-torn country’s infrastructure, it faced a problem — how to keep the units from becoming terrorist targets during delivery.

The lorries carrying the massive transformers could travel at only 2mph on their journey from Baghdad to sites throughout northern Iraq, so insurgents would know exactly when and where to plan a strike.

In previous conflicts, the military would have undertaken the protection of such a convoy, but a remarkable transformation is taking place in the American and British Armed Forces, as operations such as this are being outsourced to private contractors.

As the US Defence Department and the Ministry of Defence (MoD) try to focus their smaller, post-Cold War resources on fighting, other operations have been privatised. This has led to a burgeoning industry in which private security companies (PSCs) run by former elite soldiers are winning contracts to provide everything from base security to the protection of diplomats and convoy escorts. In the case of the Japanese electrical transformers, ArmorGroup International, a British company, provided the protection.

Several of the convoys came under fire from insurgents during the operation. ArmorGroup’s employees engaged the enemy in skirmishes before getting the civilian contractors away from the action. Once the insurgents had fled, the teams returned to the transformers and completed the delivery of all 23.

ArmorGroup, which is listed on the London Stock Exchange, said this week that it had won a contract from the Foreign and Commonwealth Office to train Iraqi police officers. The huge number of contracts being handed out in Iraq has created a boom in business for PSCs, and numerous small companies have sprung up.

British-run PSCs have done particularly well, as they are highly regarded for the training and competence of their staff and management.

The size of the PSC market is difficult to determine, but an estimated 10,000 to 30,000 private security contractors are thought to be working in Iraq. At a conference of British PSCs last month, delegates said that the industry had increased about tenfold over the past decade and was worth about £1.8 billion a year.

The total defence outsourcing market is estimated at about $100 billion (£53 billion), with about 40 per cent of this coming from the US Defence Department. Companies such as ArmorGroup, which have operations around the world, are benefiting, with sales rising from £60.7 million in 2003 to £128.2 million last year.

The other big British PSCs are the Olive Group, which appointed Lieutenant-General Sir Cedric Delves, the former commander of the SAS, as a director last year, Control Risks Group, Hart, Erinys and Aegis Defence Services.

Lieutenant-Colonel Tim Spicer, the former commander of the 1st Battalion Scots Guards and chief executive of Aegis, said at a recent conference: “The Government needs PSCs because we have the capability to act with speed and are comparatively cheap, compared with deploying an army. We can also go places where a uniform would be unacceptable.”

Many small PSCs were launched in the early days of the invasion of Iraq, when it became clear that the Defence Department and MoD would concentrate on fighting and not on providing the infrastructure needed in a theatre of conflict. Many of the companies have merged or been bought by bigger players, but there are still enough PSCs in Britain for the industry to set up its own trade association, the British Association of Private Security Companies (BAPSC).

Its director-general is Andrew Bearpark, who was Margaret Thatcher’s chief of staff in the 1980s, and the association has spent the past 18 months developing a code of conduct.

The industry is painfully aware that it operates in dangerous areas where there is little or no rule of law. Companies are working to ensure that their armed employees do not exploit this vacuum by moonlighting in criminal enterprises.

The Foreign Office has drafted a list of potential rules to govern the PSC market, The Times has learnt, but the industry believes that self- regulation will work better.

American companies in the field, such as Dyncorp, tend to be regarded as PMCs — private military companies. They provide the United States with additional war-fighting capability, while the British companies focus on security and protection. To outsiders the distinction may not be clear, because the employees of both carry automatic rifles, have body armour and wear the almost-mandatory wrap-around Oakley sunglasses. However, PSCs are at pains to point out that they are not involved in conducting warfare and reject the allegation that they are modern-day mercenaries.

The security industry wants to get away from the image of its employees as “dogs of war” who prop up African tyrants or overthrow governments. Critics point out that although PSCs distance themselves from this sort of mercenary activity, the industry contains people who have been accused of such activities in the past. Colonel Spicer, for example, was involved with Sandline International during the 1990s, when its interventions in Papua New Guinea and Sierra Leone were criticised.

Sandline ceased to operate in 2004.

One reason that PSCs want to introduce self-regulation is that the bonanza in Iraq is coming to an end. Colonel Spicer said that business in Iraq was like a slowly deflating balloon as America prepared to withdraw. The PSC industry believes that it can do more work for industry, particularly oil, gas and mining businesses. With many easy-to-exploit reserves exhausted, companies such as BP and Shell are venturing into more hostile environments and are recruiting PSCs to ensure that their managers and engineers are not kidnapped or their equipment destroyed.

Blue-chip companies will not do business with renegade security firms and the PSCs are getting their house in order to tap into this growth market. In a dangerous world, former soldiers are finding their skills in high demand and this is opening up new business opportunities to them.