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.