At the end of 2010, around 500 seafarers from more than 18 countries are being held hostage by pirates. Piracy clearly affects the world’s largest trade transport industry, but how much is it costing the world?
Oceans Beyond Piracy has completed a study on the economic cost of maritime piracy. The project set out to analyze the cost of piracy to three regions: (1) the Horn of Africa; (2) Nigeria and the Gulf of Guinea; (3) the Malacca Straits. The focus has inevitably been on the costs of Somali piracy because this is the region where contemporary piracy is most highly concentrated and is the great- est source of current data and information. The project primarily analyzes direct costs, but also considers some secondary (indirect) costs and is designed to be a collaborative effort, and we welcome any data sources, com- ments, or other suggestions that interested stakeholders might have.
Over the past five years, ransoms paid to Somali pirates have increased from an average of $150,000 in 2005 to $5.4 million in 2010. The largest known ransom payment was for the South Korean oil tanker, the Samho Dream (pictured below).1 This ves- sel was ransomed for a record $9.5 million in November 2010. By the end of 2010, approximately $238 million was paid in ransoms to Somali pirates in that year alone.
Over 750 Somali piracy suspects have either been tried for piracy, or await trial in more than 11 countries. To calculate the cost of piracy prosecutions, we worked out the number of prosecutions held in three regions: Africa and the Indian Ocean, Europe, and North America. We have then multiplied this number by an ap- proximation of the average cost of prosecutions for piracy or simi- lar crimes in each region. The project estimates the cost of piracy trials and imprisonment in 2010 to be around $31 million.
Organizations Dedicated to Reducing Piracy
A number of intergovernmental organizations are dedicated to working towards a solution for maritime piracy. These funds rep- resent operating costs as well as established trust funds. The total budget of these organizations is around $24.5 million.
Shippers purchase four main types of insurance as indemnity against piracy: war risk, kidnap and ransom (K&R), cargo, and hull. The most significant increase in premiums has been in ‘war risk’ and K&R. The Gulf of Aden was classified as a ‘war risk area’ by Lloyds Market Association (LMA) Joint War Committee in May 2008, and is therefore subject to these specific insurance pre- miums. The Cost of Piracy Model calculates the additional cost of insurance to the shipping industry by using a lower bound esti- mate (10% of ships purchasing these insurance premiums) and an upper bound estimate (70% of ships). From these calculations, we estimate that total excess costs of insurance due to Somali piracy are between $460 million and $3.2 billion per year.
Re-routing Ships to Avoid Piracy
For some vessels, especially ‘low and slow’ moving ships, which are at the greatest risk of piracy attack, avoiding risk zones altogether may be a safer or cheaper option. Total excess costs of re-routing to those ships is estimated to be between $2.4 to $3 billion per year.
Deterrent and Security Equipment
Ship owners may attempt to protect their property and crew from piracy attacks by preparing their ships with security equipment and/or guards prior to transiting a high-risk zone. The total cost of this equipment is between $363 million and $2.5 billion per year.
Adding Up the Costs of Piracy
From the above calculations, the Cost of Piracy Project estimates the total cost of piracy in 2010 to be between $7 and $12 billion.