Economic impact of piracy

   Piracy worldwide costs the international economy $7 billion to $12 billion per year, according to a December study by One Earth Future Foundation, a non-profit organization that seeks to solve global problems through improved governance that incorporates the expertise of the business community and civil organizations.
   A more recent and robust study by economic intelligence firm Geopolicity placed the cumulative cost of piracy at $4.9 billion to $8.3 billion, and predicted the cost is likely to rise to more than $13 billion to $15 billion by 2015 as ocean trade grows and as pirates expand their circle of operation and employ more sophisticated tactics.
   From $460 million to $3.2 billion of the amount in the OEF study is for increased war risk and kidnap-and-ransom insurance premiums paid by the shipping industry. Insurance for transiting the Gulf of Aden, for example, has increased 300-fold in the past three years, from $500 to as much as $150,000 per voyage for a large tanker, while kidnap-and-ransom premiums have increased 10-fold. The excess premium on cargo transiting piracy regions is estimated to have increased by $25 to $100 per container in recent years and hull insurance covering the physical damage to the ship has doubled, according to various insurance companies cited in the study.
   Premiums have started to decline as insurance carriers compete to gain more share of the piracy market, it said.
   Another $2 billion is for the cost of naval operations off the coast of Somalia, including headquarters expenses for the three main task forces operating near the Horn of Africa.
   OEF estimates that total cost of rerouting slower ships around the southern tip of Africa rather than going through the Red Sea shortcut, via the dangerous Gulf of Aden, is $2.3 billion to $3 billion per year. The extra days at sea amount cause ship operators to lose about one round-trip voyage per year, which amounts to about a 17 percent reduction in delivery capacity.
   Ship owners and operators spend $363 million to $2.5 billion per year on security equipment and guards, it said.
   It costs Maersk Line Ltd., the U.S.-flag subsidiary of Danish shipping company Maersk, more than $1 million per year to deploy armed security guards for each vessel it operates in the East Africa region, Stephen Carmel, the company’s senior vice president, told researcher Charles Marts for a paper published last August.
   Officials at Maersk Line estimate that piracy will cost the parent company $200 million this year, up from $100 million in 2010.
   OEF and Geopolicity emphasized the figures are only an approximation of piracy’s economic impact, in part because gathering complete data about incidents is difficult, estimates are not based on any sound economic model and cost calculations are based on untested assumptions. Many ship owners are reluctant to report an attack because they fear bad publicity or don’t want their vessel delayed by an investigation, according to experts.
   The escalation in ransom payments — to $5.4 million on average — appears to be lengthening the amount of time seafarers are held hostage as their captors negotiate for more money, OEF said. The average length of negotiations has more than doubled to 106 days since 2009, with four ships held for an average of 150 days before they were released late last year.
   The total cost of ransom is about double the value actually paid to pirates if accounting for the costs of negotiations, psychological trauma counseling, hull cleaning and repairs for ship damage incurred during captivity, and the physical delivery of the ransom money, often by helicopter or private plane, according to the study.
   The opportunity cost of a vessel that is out of service is also very expensive. A cargo vessel chartered at $50,000 per day would lose $3 million if held for two months, according to James Kraska, a law professor at the U.S. Naval War College and ocean policy advisor to the Joint Chiefs of Staff. Writing in the Brown Journal of World Affairs last summer, he calculated the cost of negotiations to free a ship could run as high as $500,000 and physical delivery of the cash another $300,000.
   Including the knock-off effects of ransoms, the OEF estimates that about $830 million has been spent on ransoms during the past two years.
   Geopolicity projects that pirates’ ransom revenue will grow to $200 million to $400 million by 2015 as more Somali men consider piracy a viable profession. It estimated there are 1,500 active pirates off the coast of Somalia earning $168,900 to $394,000 over a theoretical five-year career. The average Somali by contrast can expect to earn $14,500 over their working life.
   Adm. Gary Roughead, head of U.S. Naval Operations, said in a Bloomberg interview that some ship owners appear willing to pay ransoms rather than higher insurance rates.
   The OEF said there are also indirect impacts of piracy on regional trade, inflation for food products delivered by bulk carriers that are frequent targets of pirates, tourism and revenues to regional governments. The group estimated that Egypt is losing up to $642 million per year in lost Suez Canal fees due to rerouting by 10 percent of the normal fleet that transits the waterway.