Bad Idea: Overpaying for Cocaine
Cocaine is an expensive drug to acquire. Surprisingly, the price of cocaine for consumers in the United States has been a sure bet in terms of price consistency for decades. While even the cocaine trade has fallen victim to supply chain fragility, as a result of the coronavirus pandemic, all indicators point to a rapid return to normalcy in the domestic market. But another group within the United States acquires cocaine as well and consumes none of it – the American taxpayer. Only their price is not quite so consistent. The Department of Defense (DoD), alongside the U.S. Coast Guard, seizes enormous quantities of cocaine in transit to the United States each year. Eye-catching headlines like “USS Sioux City Interdicts Over $20 Million Worth of Cocaine” might leave the impression of a stinging blow to cartels, but these numbers differ sharply from traditional battle damage assessments. They use a hypothetical, and somewhat nebulous, street value based on what the cocaine would have sold for if it made it all the way to the U.S. and through a serpentine network of local distributors and dealers into distinct markets. They also neglect the reality of the cocaine profit chain, which doesn’t see the bulk of those profits return to either Andean cartels or Mexican drug trafficking organizations (DTOs).
Perhaps most importantly, those attention-grabbing numbers neglect the fact that cost matters in other ways. Operating the U.S. Navy and Coast Guard platforms that seize cocaine — Littoral Combat ships, Arleigh Burke-class Destroyers, advanced aircraft, and Coast Guard Cutters amongst others — comes at a very high cost. While shipbuilding budgets draw the better part of policymakers’ attention, the increasing cost to operate and sustain the fleet poses the most significant budgetary challenge. Those costs are expected to grow to $55 billion each year under current plans and up to $130 billion a year if fleet expansion plans remain on track. Opportunity cost matters too; every time a Navy asset deploys in support of maritime interdiction, it isn’t available to support pacing threats in other regions. The current tri-service maritime strategy, Advantage at Sea highlights that “We cannot operate everywhere, at all times, with equal effectiveness” and stresses the prioritization of future warfighting readiness over near-term demand.
There is also the nearly $750 million that the DoD allocates to counter-narcotics support annually — funding everything from joint task forces, like the Joint Interagency Task Force South (JIATF-S), to support partner nations engaged in interdiction operations.
Assessing the “cost” to interdict each kilo of cocaine isn’t a critique of maritime interdiction. It is an important metric to guide policymakers in a time of increasingly constrained resources. Cocaine has a fairly fixed value at its point of origin and how much above this value DoD is willing to pay in operational readiness is an important question; but a more nuanced analysis might also help budget planners and policymakers weigh the benefits of assigning particular units to this mission. The April 2020 Enhanced Counter-Narcotic Operation in the SOUTHCOM area of responsibility brought a more concentrated force of sophisticated units to the fight – but can they actually seize enough cocaine to justify their increased daily operational cost?
Valuing Future Worth and The Geography of Profit
Headlines like “USS Wichita Busts $12 Million Drugs in Caribbean Sea” and “Coasties intercept ‘narco’ sub carrying $165M in cocaine” rightly celebrate the tactical successes of ship and crew, but they also raise questions about why seizures of this scale seem to have no impact on cocaine prices in the United States or in the drug cartels themselves. In highlighting the effectiveness of the increased regional capabilities during the Enhanced Counter-Narcotic Operation, former Defense Secretary Esper noted: “We denied nearly $2 billion in drug profits, increased our targeting of known smuggling maritime events by 60% and neutralized dozens of members of transnational criminal organizations…”
Estimating the value of the illicit narcotics industry is notoriously difficult, but many estimates put total profits for the U.S. market at something akin to $39 billion a year. Shouldn’t cartels be hurt by consistent multi-billion-dollar inventory losses? The challenge is that these figures are based on potential profits in the U.S. market even though the loads are often seized near the point of origin. The difference is sharp – though a kilo of cocaine might retail for $29,000 in the U.S. its value to the cartels at point of origin is likely closer to $2,200 –as much as a factor of ten. Even estimating potential profits is difficult as factors like purity, addition of adulterants, and quantity purchased all impact the final price – a review of recent press releases on seizures points to amounts ranging from $30,000 per kilo to $70,000 per kilo all being used. But none of these figures captures the true impact on either Colombian cartels — for whom the value of inventory lost was vastly lower — or Mexican DTOs, who have only lost potential profits and not tangible resources or investments.
The book Narconomics: How to Run a Drug Cartel summarizes this fallacy well:
“A steer has to be slaughtered, butchered, packed, shipped, seasoned, grilled, and served before it is worth $50 per slice. For this reason, no analyst of the beef industry would calculate the price of a live steer mooching around on the Argentine pampa using restaurant data from New York City.”
The other challenge inherent in using potential profits is the assumption that they translate to true losses to the cartels, but the United Nations Office on Drugs and Crime estimated that as much as 70% of the profits in the U.S. cocaine market remain with mid-level dealers in the United States.
Business Metrics as Better Battle Damage Assessments
Contextualizing this reality with the daily cost of operating a warship provides a different picture, one that calls for a different battle damage assessment-focused metric to evaluate cocaine seizures. Consider the 497 kilos of cocaine seized by the USS Sioux City that was valued at $20.7 million. Using figures that consider the actual cost to cartels at the point of origin, the true value of the seizure in terms of inventory lost was likely closer to around $1 million. Estimates place the annual operating cost of a Littoral Combat Ship at around $70 million, or $192,000 a day. While the details of the operation are understandably unclear, if the ship was in the region for just a week that would put the operational cost at close to $1.3 million – well above the value of the cocaine if it had simply been purchased with cash at this point in the value chain. This estimate doesn’t consider other assets that might have participated, the support of partner nations, or the command and control of the task force running the operation. Simply prorating and accounting for DoD’s annual counter-narcotic budget would push the cost per kilo seized vastly higher — as much as ten times the wholesale value — unless DoD executed several seizures during the same period.
While purchasing cocaine directly at a wholesale price is certainly not an option for the DoD, this analysis does point to an important consideration for strategists and policymakers. The addition of larger surface combatants to the region, alongside more sophisticated aircraft, does not necessarily translate to efficient benefits unless they can seize vastly more cocaine. This presents a case for using two business-oriented metrics as better guides for operational planning: (1) assessing the value of seized cocaine commensurate with its location in the value chain and (2) measuring the total cost per kilo acquired.
At present, determining the true cost per kilo in maritime seizures is difficult if not impossible as costs are distributed across multiple areas of DoD and the Department of Homeland Security. Businesses have long recognized the importance of cost analysis in determining the efficiency of operations. That is rarely possible in military operations that weigh the tactical and operational importance of a target rather than its monetary cost. But cocaine is a commodity with a well-studied value chain, and inventory loss might better capture the impact to cartels. It might also help identify exactly which organization(s) are being impacted. Valuing cocaine seizures by potential profit spreads impact over a vast group of organizations with disparate or even no tangible losses. The objective of maritime interdiction operations is to damage the cartels and criminal organizations, create a non-permissive environment, and potentially impact prices in the United States by making the product scarcer. Developing metrics that capture the cost per kilo of seizures might help identify the ideal assets to match to the mission while preserving readiness. For example, Coast Guard cutters are significantly less costly to operate compared to Navy destroyers, and they might present the greatest return on value while minimizing operational expenditures. There is a strategic consideration as well. The Honorable Robert Work’s recent article on the impact of a forward presence to Naval readiness notes that “Most important, the Navy must send a strong signal to the deckplates that sending forces on presence missions is subordinate to preparing for war.” Deciding which missions are worth the cost in readiness is a broader policy decision, but a minimum, these metrics might begin to capture exactly how much over-market value DoD “pays” for the cocaine it seizes.
The views expressed are those of the author and do not reflect the official position of the U.S. Navy or Department of Defense.
(Photo Credit: U.S. Coast Guard photo by Petty Officer 3rd Class Andrea Anderson)