To the men who patrol it every day, the stretch of highway from the international airport to downtown Baghdad is the most dangerous street in the most dangerous city on Earth. Nothing reflects the perils of Iraq's brutal insurgency more powerfully than a journey along this treacherous stretch of road to the centre of the capital.

In one four-month period earlier this year it was the scene of 150 attacks. The US Army is forced to move people along it at night in steel-clad buses, with no lights, escorted by armoured Humvees and with helicopter gunships clattering overhead to reduce the chances of suicide bombers or sniper fire killing them.

I last made the eight-mile journey more than a year ago. It was when there were suicide bombings and roadside explosives, but before kidnappings and throat-cutting made the capital of Iraq a world of horrors. It was possible then to roam the streets relatively freely, to travel unprotected in an ordinary car with Ali, my brave Iraqi colleague, and to enjoy a bottle of red wine and traditionally cooked mazgouf fish from the Tigris river in a pavement cafe.

Now, on my return visit, I eye the streets through the bulletproof glass of a purpose-built, heavily armoured white Land Cruiser, a reinforced steel box. It is preceded and followed by two more armoured Land Cruisers (known as gunships) equipped with light machineguns.

Next to me in the back seat is a man with a tanned, confident face and intense eyes staring out of the window. He is cradling an American M4 automatic rifle, has a Glock handgun strapped to his hip and is constantly looking for any suspicious activity.

My companion is Lieutenant-Colonel Tim Spicer, former Scots Guards officer and Falklands war veteran. Spicer, who is 53, made national headlines in 1998 when his private military company Sandline International was accused of breaking UN sanctions and selling arms to Sierra Leone. He was labelled a notorious mercenary by the press and the Establishment. They sought to turn him into an outcast. In the end, Spicer believes he was vindicated by a parliamentary inquiry that found that Foreign Office officials had known in advance about the arms shipment. Today his involvement in murky wars in Africa is history. Sandline is defunct. Spicer now heads Aegis Defence Services, created in 2002, a powerful British risk-management and private security company, or PSC. Its London headquarters are almost bang next door to New Scotland Yard; it has a former chief of the general staff on its board and has landed a whopping contract with the American government to run security operations to aid American authorities in stabilising Iraq. In a significant development for the future, the UN also hired Aegis to run security for this month's referendum and end-of-year elections. Spicer has hired nearly 200 expatriate bodyguards and 1,000 Iraqis for the task. That the security of UN staff organising Iraq's critical elections should be put in the hands of a PSC is a highly significant development. Formerly, many UN officials equated them with mercenaries. Iraq has forced a UN change of heart. Spicer believes there is a template here for future UN-PSC co-operation in world trouble spots.

Aegis, together with the more than 50 foreign security companies licensed to operate in Iraq, is the new face of warfare. For as the western world's armed forces have shrunk from government defence cuts in the post-cold-war era, the business of war has been progressively privatised. Nowhere more than by America in Iraq, where the overstretched US military has had to hand over tasks it would normally perform itself to these PSCs.

Historically, there is nothing new about the military's use of private contractors. But Iraq has seen the subcontracting-out of war on an unprecedented scale. Whereas in the first Gulf war there was one private contractor serving on the ground for every 50 American soldiers, it is estimated that there is now one contractor for fewer than 10 servicemen, probably saving the Americans the cost of fielding an entire extra division, according to Spicer.

The truth is that the US can no longer manage a war like Iraq without private contractors. Its military has shrunk from 2.1m to 1.4m since the end of the cold war, creating a severe shortage of manpower in wartime.

The American forte in warfare is firepower. But in Iraq, the tradition of fighting through the massive deployment of troops and armour which had applied since the second world war went out of the window. The American defence secretary, Donald Rumsfeld, argued for "invasion lite" where air power, information dominance and speed would favour a small, agile force packing a big punch.

He was proved right with his "shock and awe" campaign. A small American force quickly overwhelmed the Iraqi army and captured Baghdad. But the 140,000 uniformed American troops who remain behind have proved insufficient and inadequate to deal with the explosive complexity of the post-invasion period. The Americans have found using PSCs is convenient, affordable and apparently effective.

The threats these foreign security companies are asked to meet, however, provide a grim summary of the dangers American and British forces still face 2½ years after President Bush declared the main fighting in Iraq over. A typical PSC contract says they have to be prepared to deal with all manner of dangers: vehicles containing explosive devices, improvised explosives planted on roads, direct fire and ground assaults by upwards of 12 personnel with military rifles, machineguns and rocket-propelled grenades, indirect fire by mortars and rockets, individual suicide bombers, and employment of other weapons of mass destruction in an unconventional warfare setting.

These PSCs saturate the highways of war-torn Iraq, their armoured Land Cruisers and Chevrolet Suburbans packed with armed men brandishing rifles to clear traffic in which a suicide bomber may be lurking out of their way. They are doing one of the most dangerous jobs in the world: escorting convoys, guarding diplomats and officials, and protecting infrastructure from attack.