Calculating the Cost of Piracy

total-pie_graphOn April 9, Oceans Beyond Piracy released its third annual Economic Cost of Somali Piracy (ECoP) Report at the Danish National Museum in Copenhagen. The launch included a panel discussion including representatives from the Danish Shipowners Association, EUNAVFOR, Oceans Beyond Piracy, and BIMCO. Ambassador Thomas Winkler of the Danish Foreign Ministry and Mohamed Osman, Director of Somaliland’s counter-piracy force, also spoke at the launch.

As the lead author of the report, ECoP kept me away from CHO for a while, so while I’m glad to present some of its findings here, I’m looking forward to returning to some more regular (and more legal) posts in the future. Rather than going into each of the nine cost sections in detail – which can be done easily by reading this two-page summary and slightly less easily by reading the entire report – I will instead focus on the report’s central economic and thematic findings.

The biggest takeaway from the 2012 report is that the overall cost of piracy fell from around $7 billion in 2011 to around $6 billion in 2012. Unsurprisingly, this bottom line figure is the one that has been carried the furthest by the mainstream media.

The key drivers of the decreased costs was a sharp reduction in the cost of evasive measures such as increased speeds and re-routing, which fell by 43.3% and 50.2%, respectively. These decreases were due to a combination of methodological changes and a decreased proportion of ships acceding to the voluntary guidelines laid out in the industry best management practices, version 4. The cost of ransoms and insurance also fell, reflecting the decreased number of attacks and hijackings seen in 2012.

Although many cost factors dropped from 2011 to 2012, one that certainly did not was the cost of private armed security, which rose a staggering 80% when controlling for the number of transits through the Indian Ocean. However, OBP utilized automatic identification system (AIS) data to revise its estimate of the number of annual commercial transits through the Indian Ocean to 66,612 from the 42,450 estimated in 2011. All told, the cost of armed guards rose to $1.34 billion from the $530 million reported in 2011. This change was driven by a doubling in the rate of armed guard use, which was in turn the result of clearer flag state laws regarding the use of armed guards and the continued effectiveness of armed security teams.

Lamentably, there was no change in the proportion of dollars spent on short-term mitigation versus long-term prevention, with 99.5% of funds spent on the former and 0.5% spent on the latter.

The short-term/long-term dichotomy is even more striking in light of the drastic reduction in reported incidents of piracy, which resulted in a fairly dramatic increase in the “per incident” cost. In 2011, $28.60 million was spent per pirate attack. In 2012, $78.66 million was spent per attack, a 175% increase. Put another way, $42 dollars was spent fighting piracy for every dollar spent on a 2011 ransom payment. In 2012, that proportion was up to $186 in prevention for every $1 in ransom. These ratios suggest that the international community would do well to increase the economic efficiency of piracy suppression and devote a portion of those savings to a long-term solution on the shores of Somalia.

In closing, it should be noted that the World Bank released a report two days after the launch of ECoP entitled The Pirates of Somalia: Ending the Threat, Rebuilding a Nation. The report concluded that between 2005 and 2012, piracy has cost the world economy around $18 billion per year (+/- $6 billion). Much has been made (paywalled) about the divergence between our findings and those of the World Bank. However, in my opinion at least, the results are not at all incompatible. Our report only focuses on the costs spent by those directly involved in combatting piracy, while the World Bank’s methodology seeks to capture the full spectrum of costs, most of which are picked up by the general consumer in the form of barely-noticeable price increases. It is therefore unsurprising that the World Bank’s figure was significantly higher than that from ECoP.

I would highly recommend the World Bank Report, as well as ECoP, to anyone interested in developing a fuller picture of the global fight against maritime piracy.

Book Review: The Pirate Organization – Lessons from the Fringes of Capitalism

The Pirate Organization_Cover_Harvard Business Review Press

What do the following have in common: the pirates of the high seas, the pirates of the radio airwaves in post-World War II’s Britain, as well as modern day internet cyberpirates and DNA bio-pirates? and how do they affect capitalism?

In “The Pirate Organization – Lessons from the Fringes of Capitalism”, Rodolphe Durand and Jean-Philippe Vergne take us beyond the traditional idea of pirate as solitary anarchists hunting down capitalism and argue that they all share a consistent series of traits, roles, tactics and goals which bring them to organize into groups, ad hoc communities where “alternative norms of social interaction and economic exchange are designed” and ultimately spread across a broader social realm. More importantly, despite their shorter life-expectancy, these “pirate organizations” manage to profoundly alter our society, particularly through their impact on today’s capitalism, driving its growth and evolution.

“The pirate organization is a social group that controls people, resources, channels of communication, and modes of transportation (for people, goods, capitals, or just information). It maintains trade relations with other communities, other groups, sometimes other states, and often legitimate companies. To reach its goals, it develops new strategies that favor speed and surprise. Its goal is to adapt and improvise, to develop the appropriate means to deal with its enemy. In order to protect itself, it operates from hidden locales outside a sovereign territory. To grow, it appeals to a desire for discovery; it seeks to control parts of a territory and claims certain rights to it. To attract recruits, it plays up its outsider status, and it makes change seem possible.  As long as the state strengthens its hold on norms, the pirate organization is ensured a flood of new members who feel marginalized by society.”

The Pirate Organization explores the quasi-symbiotic, often conflicting relationship between the pirate organization and capitalism. It takes us on a journey through unchartered territories, be it the high seas, the radio waves or internet and DNA. From the advent of the sovereign state to globalism, piracy has proven to be a transcendent force and the pirate organization has thus become a necessary counterpart to capitalism.

“Are pirates simple bandits or counterfeiters? Enemies of humanity? Defenders of a public cause? Agents of capitalist normalization? Oftentimes, they are all those things together.”

The Pirate Organization does not attempt to trivialize piracy or portrait pirates as heroes of our society acting as seeming iconoclasts of the wrongs of capitalism. It focuses on those pirate organizations pursuing novel, at times radical, values which impact on the norms of a society. Thus, it excludes modern day Somali pirates, in light of their violent banditry and merely profit oriented business model. The opposite interpretation, however, could also be true. Albeit unwittingly, pirates in Somalia exposed a lacuna in the implementation of the Convention on the Law of the Sea and in the framework for the prosecution of piracy at the national level. They drove the international community, in attempting to mitigate piracy impact on global trade, to initiate a comprehensive process of judicial reform and inter-state cooperation.  They also confirmed the frailties of failed States and their effect on local communities which will hopefully encompass more inclusive social and economic reform at both the national and international level. In the words of the authors, “piracy is not random. It is predictable. And it cannot be separated from capitalism”.

Piracy: Declining in the Gulf of Aden, Rising in the Gulf of Guinea

We are pleased to welcome Milena Sterio as a contributing author to Communis Hostis Omnium. She is an Associate Professor at the Cleveland-Marshall College of Law, where she teaches international law and international criminal law.  She has published numerous articles on the topic of maritime piracy, and she frequently lectures on this topic.  She is a member of the Piracy Working Group, an expert think tank founded by members of the prominent non-governmental organization, the Public International Law and Policy Group.  In her capacity as Piracy Working Group member, she traveled to the Seychelles and to Mauritius, where she consulted with local prosecutors and judges on best strategies toward successful national piracy prosecutions.

A crew member prepares to board a tanker that was hijacked by pirates in Benin on 24 July 2011. Photo: IRIN/Daniel Hayduk

Maritime piracy in the Gulf of Aden and elsewhere in the Indian Ocean appears to be on the decline.  In 2012, only 35 piracy attacks took place, compared to 163 attacks in 2009.  As of January 2013, Somali pirates were holding 4 large ships with an estimated 108 hostages.  In the past, the pirates had held dozens of ships and several hundred hostages at one time.  Some news reports indicate that many Somali pirates seem ready to abandon this once lucrative criminal endeavor.  Last year, Mohamed Abdi Hassan, a high-profile Somali pirate, was quoted as saying “I have given up piracy and succeeded in encouraging more youths to give up piracy.”

This decline in piratical activity off the east cost of the African continent is most likely due to several factors.  First, the Gulf of Aden and other waters of the Indian Ocean have been more heavily patrolled by joint maritime forces of several nations, including European Union and NATO-led fleets.  The presence of naval forces in these waters has deterred some pirates from attempting attacks on merchant ships.  Second, many merchant and passenger cruise ships sailing off the east coast of Africa have been staffed with armed security guards.  Statistics show that no successful pirate attack has ever occurred against a ship protected by armed guards.  Third, Somali pirates seemed to engage in the crime of piracy because it represented a lucrative business opportunity, which posed minimal risk and promised tens of thousands of dollars in financial gains.  Today, piracy is a more risky endeavor, because of the presence of naval fleets in the Indian Ocean as well as armed guards aboard ships.  Thus, Somali pirates may seem willing to abandon this criminal enterprise in order to possibly explore other kinds of opportunities.

Yet, although piracy seems to be declining off the east coast of Africa, the opposite is true for the west coast of the African continent.  Piracy in the Gulf of Guinea, home to major oil-producing states such as Nigeria, Angola, Equatorial Guinea, Gabon and Ghana, has been on the rise.  34 piracy incidents were recorded between January and September 2012, up from thirty in 2011. Togo reported more attacks in 2012 than in the previous five years combined, with three vessels hijacked, two boarded and six attempted attacks.  Piracy has also been on the rise in Benin.  In addition, Nigeria reported over twenty attacks in 2012.  And on February 3, 2013, a French oil tanker was reported missing off the Ivory Coast; according to the International Maritime Bureau, the ship was probably pirated off the shores of Nigeria.

The piracy model in the Gulf of Guinea resembles its counterpart in the Gulf of Aden in terms of the pirates’ modus operandi: in West Africa, pirates sail out to the sea on larger vessels but then launch attacks using smaller skiffs.  In addition, pirates in West Africa seem to be resorting to this crime because of factors similar to those that have existed in Somalia for several decades: insecurity, poverty, as well as a lack of education and employment opportunities.  However, while Somali pirates seemed mostly after collecting ransoms from shipping companies in exchange for the crew and cargo, pirates in West Africa seem more interested in keeping the cargo (mostly oil) of any successful hijacking operations, which they then sell on the black market.  Reports also indicate that pirates in the Gulf of Guinea are more prone to violence, and that they act in more brutal ways toward the captured crewmembers.  And because the Gulf of Guinea is a rich oil-producing region, its strategic importance, and thus the necessity of curbing the rising piracy threat, may be even greater than the piracy menace in the Gulf of Aden had ever been.

Unsurprisingly, like in the case of Somali piracy, the United Nations Security Council has become involved in finding solutions for this developing regional crisis.  On February 29, 2012, the Security Council adopted resolution 2039 calling on the Secretary-General to “support efforts towards mobilising resources following the creation of the regional strategy to assist in building national and regional capacities in close consultation with states and regional and extraregional organizations.”  Furthermore, on October 31, 2012, the United Nations Security Council, in resolution 2018, condemned all acts of maritime piracy and armed robbery at sea in West Africa’s Gulf of Guinea and encouraged states in the region to work together toward a comprehensive response to the menace of piracy.  The Security Council, in this unanimously adopted resolution, encouraged several regional organizations (the Council encouraged the Economic Community of West African States (ECOWAS), the Economic Community of Central African States (ECCAS) and the Gulf of Guinea Commission (GGC)) to jointly develop a strategy against maritime piracy.  Such joint strategy could entail the drafting of more comprehensive domestic laws which would criminalize piracy and armed robbery at sea, as well as the development of an information-sharing regional center.  Moreover, the regional anti-piracy efforts could include the development of domestic laws which would implement international agreements existing in the field of international maritime law.  In addition, ECOWAS, ECCAS and GGC could engage in bilateral or regional maritime patrols in the Gulf of Guinea, in order to ensure the safety of maritime navigation and thwart potential piratical attacks.  Finally, the Security Council urged member states of ECOWAS, ECCAS, and GGC to cooperate with other states, such as states where ships are registered, and states where victims or perpetrators come from, in the prosecution of pirates as well as of piracy facilitators and financiers, in accordance with applicable international law.   The Security Council thus encouraged all states in the international community to assist countries in the region in strengthening anti-piracy efforts in the Gulf of Guinea.

Like the Security Council, the Secretary-General, Ban Ki-moon, has also expressed his intention to focus on the piracy problem in the Gulf of Guinea, by deploying a United Nations assessment mission to the region in order to explore options on how to best address the problem.  According to the Secretary-General, piracy in the Gulf of Guinea could hinder economic development and undermine security in the region.

Within the next few months, the Security Council expects a briefing from Said Djinnit, the Secretary-General’s Special Representative and head of the UN Office for West Africa (UNOWA), on the Secretary-General’s semi-annual report, including an update on the Gulf of Guinea piracy problem.  The international community will have hopefully learned from the Gulf of Aden piracy epidemic, which seems to have been successfully curbed through coordinated international maritime efforts, that anti-piracy efforts in the Gulf of Guinea will similarly require international and regional strategy and a comprehensive anti-piracy plan.

UN Optimistic for Progress in Somalia – Looks to Increase Its Engagement

Later next week, the UN Security Council will resume its discussion on Somalia. Among the main issues will be the future of AMISON as well as the embargo on arms and Somali charcoal. Before the Security Council is also the Secretary General Report S/2013/69 pursuant to Resolution 2067 (2012) containing the Secretary General’s options and recommendations on the UN presence in Somalia. The Report considers several possible structural configurations for a future UN presence in Somalia further to the end of the political transition period and the development of the democratization process, including the setting up of a peacekeeping, peace-support or a peacebuilding institution, either in coordination or jointly with the existing Africa Union presence. While the possible establishment of a peacekeeping operation in the near future remains under review, the Secretary General currently favors an assistance mission located directly in Somalia that would integrate the functions of the UN Political Office for Somalia and the UN Support Office for AMISOM (UNSOA) but keep the UN humanitarian country team separate:

United Nations assistance mission. Under this option, a new United Nations mission would deliver political and peacebuilding support with a presence across Somalia. In terms of logistics support to AMISOM, a dedicated Deputy Special Representative of the Secretary-General for Mission Support would report directly to the Department of Field Support in New York on delivery of the AMISOM support package, in order to ensure efficient delivery to AMISOM. At the same time, she or he would report to the Special Representative of the Secretary-General on United Nations mission support issues and policy and political questions arising from the functions of UNSOA relevant to the mandate of the United Nations assistance mission. The United Nations country team would remain structurally separate, but would participate in enhanced mechanisms for strategic integration and operational collaboration, supported by an expanded office of the Resident Coordinator/Humanitarian Coordinator. The scope for full structural integration would be reviewed annually, on the basis of progress in the political, security and humanitarian situation. Criteria for this review would be developed by the Somalia Integrated Task Force. This option enhances the strategic integration of United Nations functions while preserving distinct reporting lines for different United Nations mandates at the current sensitive stage of operations. This option is recommended; (para. 75(c))

There are reasons to believe that the Security Council will endorse the Secretary General’s recommendations and the deployment of the new mission will commence soon. The fight against piracy remains one of the main area of focus. Resolution 2077 (2012) renewed the current anti-piracy operations for another 12 months. Worthy of note is also the Secretary General support for the creation of a maritime component for AMISOM to consolidate control over southern and central Somalia and contribute to the training and mentoring of the Somali coast guard and maritime police (para. 82). Undoubtedly, the current drop in piracy attacks in the region is among the major successes of the international community involvement in Somalia so far. In this regard, it is essential that the current piracy deterrence and prosecution efforts are further developed as a starting point to enhance Somalia’s overall security and justice sectors:

The improved security situation in Somalia should help in the fight against piracy by denying the perpetrators safe havens both on land and along the coast. I encourage the new Government to develop a comprehensive national maritime economic and security strategy and a supporting legal framework, including declaring Somalia’s exclusive economic zone, working closely with all stakeholders. The resources that the maritime environment brings would contribute to financing the changes that are necessary for Somalia to recover from the last two decades of conflict. In this regard and as part of the wider security sector support, assistance should also be mobilized and delivered to the justice and corrections services. I have emphasized that the international community must address the root causes of piracy — instability, lawlessness and a lack of effective governance in Somalia — and therefore continue to intensify its engagement to link the counter-piracy approach with development and State-building goals (see S/2012/783). (Para. 88)

The Report of the International Piracy Ransoms Task Force is Available

The International Piracy  Ransoms Task Force, established at the London Conference on Somalia, issued its final Report on December 2012. The objective of the Task Force, composed of representatives of 14 States, was “to develop a greater understanding of the payment of ransoms in cases of piracy, in order to put forward policy recommendations to the international community as to how to avoid, reduce or prevent the payment of ransoms. The ultimate goal of this effort is to reach a point where pirates are no longer able to profit from ransom payments and thus abandon the practice of kidnapping for ransom.”

The conclusions and recommendations of the Task Force, included in the Report, build upon the following main options to reduce and avoid the risk of ransom payments to pirates:

  • strengthen the co-ordination between Flag States, the private sector and military responders to prepare for potential hostage situations, in order to shorten the decision-making process during the narrow window of opportunity for intervention after a piracy incident;
  • develop a new strategic partnership between Flag States, the private sector and law enforcement agencies that brings together those tackling piracy and those subjected to it in a united effort to break the piracy business model. In particular, this partnership should develop a more co-ordinated approach to information-sharing which would greatly enhance the quality and quantity of information exchange both to reduce ransom payments and to provide evidence to pursue and prosecute all involved in piracy, from those directly attacking ships to the kingpins who direct this organised crime;
  • encourage the implementation of anti-piracy measures, including still greater compliance with industry Best Management Practice, under the leadership of flag states and supported by the private sector, including insurance companies, in whose interests it is to mitigate risks.

Among the main practical recommendations put forward in the Report are the consolidation of various regional information-sharing frameworks to achieve a “one stop shop” mechanism for the diffusion of relevant information in the immediate post-hijack phase; the conduct of ransom negotiations with the knowledge of relevant national and international authorities in order to foster mutual assistance between these and the private sector; and the development of a mechanism maximising the evidence-gathering process immediately after the release of the vessel or its crew for subsequent prosecutions.

In line with the Task Force’s objective, the 15 page-long Report focuses mainly on the establishment of broad policies to improve communication and coordination to prevent hostage and ransom situations in the future. Several of these policies have been already under discussion for long time and by a number of institutions involved in the fight against piracy. Hopefully, the issuing of the Report will provide for a swift implementation of these policies. Regrettably, the Report does not contain an analysis and more practical recommendations directly relevant to actual hostage-taking, vessels’ hijacks and, more particularly, ransom situations. Given the wealth of knowledge and the technical resources available to the Task Force and its member states, as well as other participants from the private sector, it would have been preferable to expand on the Task Force’s mandate to immediately initiate an information sharing and lesson-learned process relevant to these aspects of piracy ransoms.