report - Oceans Beyond Piracy

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THE ECONOMIC COST OF SOMALI PIRACY, 2012 Introduction Around 2005, Somali pirates began hijacking commercial vessels transiting near the Horn of Africa at an alarming rate. A combination of geography and a lack of economic opportunity on shore led thousands of Somalis, most of them young men, out to sea to engage in the world’s oldest international crime. In keeping with maritime piracy’s international character, a truly international and diverse community of stakeholders – including individual governments, regional organizations, intergovernmental organizations, the shipping industry, and members of civil society – sought to stem the crisis. Over the next several years, these stakeholders employed measures ranging from naval patrols to vessel selfprotection to prosecuting pirates captured at sea in hopes of suppressing pirate activity. For the first several years of the international effort, the ultimate outlook remained unclear. In fact, pirate attacks and hijackings steadily increased from 2005-2011, with the number of hijackings peaking in 2010 and the number of overall attacks peaking in 2011. It was in the pinnacle year of pirate hijackings – 2010 – that OBP released its first Economic Cost of Piracy report. In that first year, OBP used a series of informed estimates and publicly available information to conclude that maritime piracy cost the global community between $7 and $12 billion. In 2011, OBP honed its methodology and gained increased access to industry and government insiders, which resulted in a narrower and more rigorous estimate of $6.6 - $6.9 million. The year 2012, however, saw a sea change in the global response against maritime piracy. Between naval operations, improved international coordination, continued observance of industry best practices, and increased use of private armed guards, the number of hijackings dropped 50% from 2011, and attempted attacks fell by just over 70%. Thus the concerted, cooperative effort on the part of the community of stakeholders appears to have moved the global fight against maritime piracy out of the crisis management phase and into an era of reduced east African piracy numbers. This year’s Economic Cost of Piracy report continues to build upon the methodology developed since the 2010 report to once again calculate the cost of maritime piracy to the international community, concluding that piracy cost the global economy between $5.7 and $6.1 billion in 2012. Though the number of attacks and hijackings is down along with the cost of piracy overall, the outlook is not entirely positive. This is because the incidence of piracy fell much faster than the cost of combatting the problem. In fact, the cost-per-hijacking and the cost-per-attempt rose 68.6% and 199.5%, respectively, between 2011 and 2012. In 2011, $250.0 million was spent per successful hijacking. In 2012, that number rose to $421.4 million. ©2013 7 a project of One Earth Future Foundation
THE ECONOMIC COST OF SOMALI PIRACY, 2012 As one journalist put it, this discrepancy suggests that the pirates’ “effort to profit from their proximity to the world’s shipping is hugely inefficient.” 1 This observation strongly suggests that continuing with current approaches to counter-piracy efforts is economically unsustainable in what may be a new phase of reduced pirate attacks and hijackings. It is time to move away from short-term, crisis management approaches to piracy and towards a long-term, sustainable solution. Before undertaking the cost calculation for 2012, an overview of the scope of the costs studied and the methodology used to obtain the final result should be considered. Scope of Costs Studied ECoP 2012’s cost of piracy figure includes the first order direct costs of maritime piracy from the perspective of the international community at large. Where possible, it considers opportunity costs provided that they are significant and easily attributable to maritime piracy. The study does not consider investments made by those who finance pirate action groups. In considering which costs to include, ECoP seeks to avoid double counting and errs on the side of conservative cost estimates. The scope of ECoP is outlined in detail below: • First order: first order costs are distinguishable from second order costs because they are spent specifically on piracy rather than arising indirectly as a result of piracy. An example of a first order cost is a ransom payment, while second order costs include reductions in trade or tourism. • Direct costs: direct costs are costs that would not exist but for maritime piracy. The cost of ransoms, piracy-related insurance, security equipment and guards, re-routing, increased speeds, extra labor fees, and prosecution and imprisonment are all direct costs. • Opportunity costs: also included in the economic cost of piracy are opportunity costs, provided that they are significant and easily attributable to maritime piracy. These costs are those that would exist regardless of the presence of piracy, but would be put to other productive use. The cost of military operations and counter-piracy organizations are the opportunity costs included in ECoP’s final calculation. • No double counting: many of the costs of piracy are passed downstream from the party that incurs the cost directly to that party’s consumers. ECoP is cognizant of that fact and avoids double counting throughout the report. • From the perspective of the international community: it is a basic economic truth that one individual’s cost is another’s income. ECoP looks at the cost of maritime piracy from the perspective of the entire international community, excluding the gains to pirates and those who profit from piracy. The above costs are included in the ultimate calculation even though they could also be characterized as income from another perspective. • Exclusion of pirates’ costs: pirate action groups (PAGs) need fuel, food, fresh water, and khat, among other provisions, to conduct their operations. These costs are not included. • Conservative estimates: given incomplete information, when in doubt, ECoP errs on the side of a more conservative cost estimate. ECoP’s analysis is conducted this way for several reasons. First, ECoP seeks to provide information to relevant stakeholders and the public at large regarding the economic cost of the global response to piracy. As such, it aims to present information in a way promotes the efficient use of resources with an eye towards a sustainable a project of One Earth Future Foundation ©2013 8
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report - Oceans Beyond Piracy

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