Stat CRUNCH:
Analysis
Can We Ever Assess the True Cost of Piracy?
Oceans Beyond Piracy Shows Tenuous Grasp of Math and Facts
Oceans Beyond Piracy 2011
Oceans Beyond Piracy 2011

Well, the Oceans Beyond Piracy (OBP) crew is at it again. The SS OBP ship is captained by 62-year-old yogurt and real estate tycoon, Marcel Arsenault, and his team of academics have once again sought to assess the economic cost of Somali piracy.

Arsenault must be commended for the $15 million he has put forward to fund the project, but Somalia Report believes it is important to examine some of the report’s myths and inaccuracies, particularly given how widely the figures are regurgitated in international media and other working reports. Last year, Oceans Beyond Piracy estimated the cost of piracy at between $7 billion and $12 billion. The statistic was widely cited as the official figure for the cost of Somali piracy, despite the fact that it was also widely criticized for inaccuracy. This year, OBP have refined their model and calculations, and now claim that the cost in 2011 lies in the more specific range of $6.6 - $6.9 billion. Again, the international media has accepted the cost at face value, and few have thought to ask just how they came up with this number. OBP even held a mixer in London during which they stressed the importance of "media messaging" to fight piracy. It is hard to navigate exactly where the SS OPB is sailing to or what fuels their ardor.

We applaud and encourage OBP to continue and refine their “Economic Costs of Somali Piracy” report, but it must be seen as a work in progress (as they rightly concur). Their latest paper has improved markedly on last year’s, largely due to constructive and detailed criticism on the part of those in the know, but significant flaws remain.

There have been much better papers on the cost of piracy like the 2009 attempt by Dr. Helen Bendall to calculate the effects of piracy on shipping. The shipping industry is not only healthy but rapidly growing trillion dollar a year plus sector. The shipping industry has grown or prospered since the advent of piracy in 2005. Leaping from 25000 to 35000 billion tonnes/miles. Shipping has only declined as an industry between 1978 and 1983. The maritime industry employs over a million sailors, 50,000 registered ships and carries 90% of the world's trade. Between 5 to 6 million containers are being transported at any given time. The Maritime business is big business.

Piracy is still a tiny line item in the maritime shipping cost calculations. The costs of piracy is not even close to the costs of port theft, bad weather or fuel. Back In 2003 the National Cargo Security Council estimated that between $10 and $15 billion dollars were stolen around ports...just in the United States. Theft of cargo while en route on land is between 5 and 30 Billion dollars, often an inside job. Even the insurance cost of I0,000 containers per year (27 per day) being lost at sea falling overboard due to rough weather outranks the impact of pirate ransoms.

Costs that are then passed on as quoted rates or surcharges. Currently the cost to ship a 20 foot container from South Africa to East Africa will have a $100 or a $300 TEU surcharge. The Suez canal can lose revenue due to diverted ships but then generates a profit to the oil company when extra fuel is used. Fees for insurance, security, hardening and higher fuel costs will be penciled out against rerouting and a profit generated by all concerned.

All of these transportation cost that will be built in to the consumer price usually in a surcharge and will generates a profit to the shipping company. If the costs prove to high, shipping will move to air or land, once again with a profit involved.

Even the math and research used everyday to calculate shipping costs and risk (land, air or sea) by the shipping industry dwarfs the effort that went into this paper.

Accurately assessing the global cost of piracy is an almost impossible task, but OBP gets started on the wrong foot by failing to distinguish “costs” from “profit.” Had the Colorado-based organization made this simple decision they would have discovered that there are enough "profits" or "taxation thereof" made from piracy insurance, anti- piracy business and piracy mitigation to easily fund the demise of piracy.

Can We Trust the Numbers?

Simply put, no. The way statistics are used in the report demonstrates a lack of understanding of the maritime, security and piracy industry; the OBP approach lumps together government costs (absorbed by taxpayers), elective insurance costs (passed on to the consumer) and opportunity costs (such as the predicted decline in tourism in Kenya), as being equal as costs. But with the counter-piracy industry booming along with surcharges and pass alongs for piracy related costs. Shouldn't inflow be deducted from costs? If OBP did this, piracy would appear as a profit center that benefits numerous people, corporations and regions, including Somalia. As Robin Hood might say, "Redistributing wealth in a more efficient manner."

Much of the report’s accounting of insurance costs is based on hypothetical figures. That is not research but rather speculation passing as fact. The words “estimations” and “hypothesize”, overrun the paper, as much of the required information is simply unavailable – insurance brokers are not in the business of passing on this sort of information, and so the figures used are based solely on estimates. It is important, therefore, that the final ‘cost’ as an intellectual entertainment and perhaps an attention-getting stunt.

The OBP report also appears to ignore fundamentally important costs. When it comes to prosecutions, the OBP includes the costs borne in Asia, North America, Europe and Japan, but not Somalia, Kenya and the Seychelles (major pirate prosecution and imprisonment centers), because “much of these costs are covered by funding from UNODC Counter Piracy Programme, as well as other international funding mechanisms”. The cost assigned here, therefore, is a paltry $16.43 million. But what about the costs from those “international funding mechanisms”?

Somali Pirates In Kenya

The most anemic category is the $21.3 million directed towards counter-piracy organizations, attributed to bloated bureaucracies, working groups, UN agencies and - bizarrely – their own expenses in preparing the report. No mention is made of efforts made inside Somalia and by neighbors like the UAE to actually battle piracy on land. Those numbers would be even more minuscule when compared with industry costs and profits, but once again, hardly straightforward additions. The economic impact on the donor nation, in terms of job creation, for example, would have to be assessed.

The sacrifice of math for methodology is demonstrated by the massive over and underestimations of certain costs. The report includes the complete administrative and operational costs of Task Force 150, EUNAVFOR and NATO’s efforts, much of which would be by active navies in other regions, and so cannot be solely attributed to the scourge of piracy. The report includes the $2.7 million donated to assist improvements in Somaliland and Puntland’s prosecutorial capacity. This is deemed a 2011 ‘cost of piracy’, but it is much more than that. Capacity building projects such as this one are broader in their scope than simply aiding in the prosecution of pirates, and the full scope of the funds are linked solely to piracy in this report. There is no mention of the ambitious UAE-funded Puntland marine police force, the Somaliland Coast Guard, the Mogadishu Navy and other indigenous maritime security efforts.

Tourism Trip Ups and Real Estate Fantasies

The case study assessments of the cost to regional economies, too, are far from thorough. The damage to Kenya’s $800 million a year tourism industry seems to be based on little more than a finger in the air. “Between $129 and $795 million lost in tourism revenue, and 3% and 20% of tourism jobs lost.” The truth is that tourism revenue to Kenya "soared" 32% in 2011. Oops. A grade school teacher would have sent this paper back for fibbing.

Using the creative methodology of making things up and roping in every available cost the authors could have found some argument to include the entire cost of the Kenyan invasion (estimated at KSH200 million, or $2.5 million per month); some might say this was partly due to those kidnappings on Kenyan soil, some of which have been subsequently linked with pirate gangs.

Kenya is a particularly complex case, as much of the pirate money feeds into the economy. Although tales of the Nairobi and Mombasa property boom being funded by pirate cash are grossly exaggerated, significant sums have been invested in Kenya, and cannot be ignored. But once again, establishing the ‘cost’ is difficult - a pirate dollar invested in a real estate project generates returns, tax revenue and local jobs. In other words piracy generates profits not costs.

Oil and Slippery Numbers

MV Irene SL
MV Irene SL

The argument for the threat to oil shipping is significantly flawed. This report estimates that there is a $5 billion threat to the UAE’s petro business. They completely forget to mention that the last time a UAE ship was nabbed at dusk, it was rescued by commandoes and on its way by the time the sun came up. It is hard to see how this is a cost.

The ‘costs’ attributed to the Irene SL hijack are also simplistic. While the ransom paid was the highest to date, at $13.5 million, profits, too, were made. The vessel was carrying $200 million worth of oil. In those two months of captivity, the value of oil increased from $100 per barrel to $111 per barrel. Upon release, the value of the cargo had risen by $22 million, outstripping the ransom cost.

In this section of the report, the authors hypothesize that attacks on oil tankers will increase, as pirates realize their value. This is far from the case. While pirates are clearly aware that oil tankers are a good bet for a large ransom, they are opportunists. Pirates don’t target specific vessels, they head to the busy shipping lanes and attack what they can. It is a common misconception that pirates make use of the latest satellite navigation equipment to isolate attractive targets. They don’t have to; simply bobbing around shipping routes waiting for a low and slow is sufficient. That said, the report gives special thanks to Michael Frodl, a Washington-based ‘piracy expert’ and self-proclaimed advisor to the Lloyds Joint War Committee, who famously predicted that Somali pirates were in cahoots with the Tamil Tigers, and would expand their operations to the Malacca Straits ‘by late 2011 or early 2012’. We should perhaps be thankful for this oil tanker ‘insight’, it could have been a lot worse.

Piracy is Over, If You Want It To Be

Armed Security Guard At Sea
Armed Security Guard At Sea

The paper’s perspective on piracy needs to be refined: the authors’ view the epidemic from a 2010 lens, and focus little on the virtual bankruptcy of the piracy industry since the use of armed guards has become the norm. The change occurred throughout the course of 2011, yet this shift does not feature in the calculations.

Indeed, despite making reference to the fact that pirate successes declined significantly in the second half of the year, the report does not take this into account when assessing the implementation of BMP, a statistic that is subsequently used to estimate the number of vessels transiting the high risk area each year. Only in the second half of 2011 did the implementation of BMP gain major traction, with more and more ship owners hardening their vessels as the months wore on. The report uses the overgenerous estimate that 80% of vessels were compliant with BMP over the course of last year, however this does not take into account the growth in the rate of implementation.

Outlook for 2012?

Piracy will have even less of an impact in 2012 and already, armed security teams have thwarted virtually every pirate attack this year. The hijack of the MV Free Goddess, the first commercial vessel to be taken this year, served as a reminder to ship owners that yes, unprotected vessels remain at risk. But then again, ship owners run a tight ship on risk vs reward. The most expensive the cargo, the more likely that insurance and security will be included, so the vessels that pirates manage to successfully commandeer will be the less valuable, which will be reflected in the ransom figures.

The private security industry has perfected the business of counter piracy, and their presence in the region is unfaltering. Despite the plethora of counter-piracy approaches, as of yet, boots on deck has proved the sole guarantee of thwarting any hijack attempt. These companies are prospering, and they are not the only ones. As pirates collected $160 million in ransoms last year, the insurance industry collected $635 million in premiums. Toss in another $1.1 billion for security equipment and you have a hundred-fold industry benefit borne of fear. The counter-piracy industry will only continue to grow.

And therein lies one of the principal faults of the OBP report. While equating the “costs” of piracy with the profits made by the insurance and private security industry, lumping them for good measure with costs borne by governments and societies, the report fails to achieve what should be its true aim: assessing the cost of piracy to society as a whole. Such an approach would involve assessing the costs passed on to consumers, to taxpayers, and balancing these against the undeniable benefits accruing to the maritime industry, as well as to local actors benefiting from capacity building (and even international political recognition).

It’s an ambitious project, to be sure--but OBP is the one setting the bar, and it’s time to try and jump.

Where Can We Go From Here?

The report would benefit from measuring the economic cost of piracy against the cost of actually ending piracy. These academic papers are influential, and do have an impact on insurance costs and policy. With such significant resources at their disposal, OBP should take the next step and assess those longer-term costs required to actually end the pirate menace. What the report makes abundantly clear is that the counter-piracy industry is booming, and the funds directed towards efforts to deal with the root causes of piracy pale in comparison. Another report that seems to support blue sky math is that the UN now estimates that there are 3500 pirates currently at work in Somali. Wouldn't that work out nicely to an annual payment of around $1.7 million per pirate to retire using OBP $6 billion estimate?

To be fair the winds may be taking OBP towards more logical lands. At their recent press mixer author of the report OBP Program Manager Anna Bowden mentioned that “We have documented that piracy cost industry and governments almost $7 Billion last year – but the real story is that 99% of these costs are not invested in a sustainable solution and must be paid every year until the piracy threat is significantly reduced.”

She is not correct (there are a number of local multi- million dollar sustainable anti-piracy programs in effect in Puntland and Somaliland) but we don't want to dampen her enthusiasm.

So the question is. What has this costly report brought to the table? As of yet, not much more than an easy and inaccurate statistics for lazy journalists to tack onto news reports.