The impact of piracy on maritime trade and fishing industry - Research Paper Example

?The impact of piracy on maritime trade and fishing industry (insert Abbreviations IMB - International Maritime Bureau FDI - Foreign Direct Investment GAO-Government Accountability Office Abstract At the close of the year 2010, there were at least 600 seafarers who were captives of pirates in international waters (Bowden et al, 3). Piracy is a crime that without doubt has far reaching effects on one of the largest trade transport network. It is clear that a lot of money is lost as a result of piracy but the question that begs is, exactly how much is lost? According to Bowden (2), piracy costs at least seven billion dollars a year although the figure could go even up to twelve billion. We are all affected by maritime piracy whether directly or indirectly. In fact, even the countries that contribute to piracy like Somalia still face the negative impacts of piracy. For starters, there is a huge humanitarian crisis in the region as a result of the hijack of ships. Most of the ships that are hijacked are often taking food and medical supplies to hunger stricken people in Somalia and other neighboring countries in the region. Preface Sea transport is the leading in freight and cargo hauling across nations. In fact It is estimated that maritime trade accounts of at least 80 percent of the world’s trade. This is one of the oldest forms of transport but it has consistency grown over the years. Maritime transport has in fact doubled every decade ever since the Second World War. The onset of a globalised market has been one of the main catapults that has steered maritime transport to the position it enjoys today. In recent yeas however, one of the oldest crimes against this mode of transport has revived and increased steadily. Piracy is now threatening this trade especially in the horn of Africa where pirates operating from Somalia have perfected the art of hijacking ships. Since sea transport is very important for all of us, there is a need to compute just how much piracy costs the trade instead of dealing with mere estimates. Organizations have tried doing some research aimed at getting the most reliable estimates but the hugest challenge has been gathering of reliable data owing to logistical challenges. There are a variety of scholars that have done an analysis of the costs of the maritime trade. However, they have not looked at both sides of the coin. The most commonly computed cost of piracy in maritime trade is the cost of the cargo that is lost together with the ransom fees that are paid t the captors I order to release the crew and the ships. However, there are many other costs involved that need to be considered as well. This paper will start by looking at the primary effects of maritime piracy but it will also go a step further and discuss the other secondary effects of maritime piracy that have been largely ignored by many people. Past initiatives There have been some initiatives in the recent past that were geared at trying to compute the cost of piracy on maritime trade. The most notable of these are Peter Chalk’s RAND institute in collaboration with the International Maritime Bureau which together put a rough estimate in the range of one to six billion dollars per annum (Chalk, 12; Rosenberg, 222). However, most of the studies have concentrated on the first order costs of piracy namely, the ransoms that have to be paid to free the captives, security mechanisms that have to be beefed and the increased naval costs. However, there are not many that have considered the secondary costs which could be even higher, Secondary costs of piracy includes the inflation on commodity prices as well as the international investment in regional economies among others. The bottle necks in computing the real cost According to a recent actuarial scientific study on maritime trade and piracy, the challenge to the actuaries involved in pricing maritime insurance products is considerable…information about the attacks issued by shipping owners is often vague. Understandably, shipping owners don’t wish to encourage further acts of piracy, but without knowing the full details we cannot come up with the true cost (Sanders, D. et al. 56). Apart from the logistical challenges involved in the trade, there is also the issue of divergent views between organizations and government on the cost of the trade. One of the studies actually reveal this contention since it points out clearly that a New York specialist in maritime trade said that piracy is actually not a big issue since insurance covers it. On the flip side, a New York attorney said that maritime piracy is putting too much pressure on the economy especially at times when inflation is at an all time high following the economic down turn. One industry consultant begs to differ with the shipping expert since he argues that even if insured, insurance still does not pay for all the costs incurred thanks to piracy (Sanders, et al. 36). Data limitations are the greatest bottleneck in assessing the cost of piracy. There are many articles and papers on the issue of piracy but few have comprehensive reliable data. In fact, Bowden et al (6) reviewed at least three hundred and fifty different articles on piracy and could still not come up with any data that was factual. Most are based on conservative estimates. Another significant challenge is in the fact that the IMB is the body that is mandated with the elephant task of providing information on piracy in maritime trade. This is a challenge since piracy is bigger than one organization. In fact, IMB is limited in the sense that there is a limit on the number of piracy attacks it can document. This means that many more attacks are left undocumented by the body that is supposed to feed us with information on such things (Bowden et al, 3). Another real challenge faced in the computation of maritime piracy is the difficulty in disaggregating of the piracy effects from the other financial and political instability issues. Disaggregating of piracy and other economic variables like FDI, commodity inflation and tourism is anything but easy. Piracy often happens in impoverished countries that are also politically unstable so analysts are forced to only estimate or sometimes even speculate on the independent impact of piracy. Another important factor is the global economic recession. It is not easy to tell whether the change in ship activity is as a result of the inflation or as a result of piracy (Bowden et al, 3). The Direct Economic Costs of Piracy a) Ransoms The most notable increasing cost in maritime piracy is the increasing cost of ransom. The Somali pirates have been especially notorious in this since they have the advantage of an unstable political environment. The pirates that operate in other regions have often just stolen the cargo in the ship and let the voyagers continue unharmed. In November of the year 2010, the greatest ransom on record was paid by Korea to the Somali pirates in order to release the oil tanker they had hijacked. It was a total of 9.5 million dollars in ransom money. 2010 was a year that paid ransoms were at an all time high. The year began with a ransom of seven million dollars which was paid in January to the pirates that had hijacked the Greek vessel. It was a tradeoff for the Greeks since the vessel was shipping oil that was worth 192 million dollars (BBC News). In years prior to this, like in 2005 for instance, ransoms averaged around 150,000. However, by the year 2009, the ransoms had escalated to 3.4 million dollars but in 2010, ransoms were doing an average of 5.4 million (Baldauf, 29; Payne, 34).It would appear that the more nations pay ransom, the more pirates keep demanding. In fact, the total cost of the problem of ransoms can arguably be said to be half of the entire cot of piracy. Computing the total cost involves considering the physiological costs of the victims, the costs incurred repairing the vessels, and most importantly, the costs incurred during negations. Negations are increasingly becoming lengthy over time since pirates have decided to raise their ransom with every new ship they hijack. Pirates are now holding their captives for longer as they maintain a hard-line position on the amount they have put on the table. In 2010 for instance, captives were held for an average of one hundred and fifty days (Baldauf, 123; Payne, 34). The ransoms are often delivered via helicopter or private planes. This is another cost that is brought in inevitably. Needles to say, there is a lot of money that is lost when the ship is hijacked and stays for over one hundred days without continuing with business activity. If the cost of hiring a ship on charter is fifty thousand dollars a day, then it means that holding the ship for two months would cost the owners up to three million in charter fees alone (Payne, 35). b) Insurance Since piracy is on the increase, all lead insurers have had no choice but to increase the premiums of maritime insurance. This is especially of the vessel passes through troubled waters like the horn of Africa. Maritime insurance falls in four broad categories; kidnap & ransom, cargo, war and hull insurance. War risk deals with the loss incurred if the ship is passing through a war one. For instance, the Gulf of Aden has been termed as one of the war risk areas (Bowden et al, 10). The cost of war risk insurance has grown considerably over the years with an over 300% increment in less than a decade. Initially, it only cost 500 dollars for one ship per trip. However, these costs have now escalated to 150,000 dollars per one ship per trip. Lately, regions that are pirate hot spots are now being classified as hot spots (Bowden et al, 11). The kidnap and ransom insurance takes care of the costs of ransom and injury of the crew. However, this does not include cargo in the event of loss. Nonetheless, some maritime insurers are now offering cargo insurance and kidnap and ransom as one package. Cargo insurance deals with reimbursement of costs incurred due to damage of cargo and all kinds of loss. This has also significantly increased by up to 100% following recent pirate activity. Lat but not least, hull cover all damages that might have come to the ship during the voyage. Sometimes, ships get damaged during hijack or sometimes due to turbulent weather. As piracy keeps rising across the globe, it can only be said that maritime insurance will continue to be a lucrative business for the insurance firms since they will keep hiking premiums citing risks involved. c) Re-Routing The threat of piracy has led the shipping companies to think of alternative safer routes. This is a cheaper option in the sense that the risk of hijack and ransom will be averted which would otherwise cost the company a lot of money. For examples most ships now avoid the sea route that takes them through Gulf of Aden or the Suez Canal and instead route through the longer passage of Cape of Good Hope. While this is safe option for the maritime trade, the truth is the costs are much higher and the voyages take longer since the routes are longer. A case in point is AP Moller-Maersk which is Europe’s largest shipping company. It has chosen to re-route all its ships to safer routes. Routing a vessel via this longer route adds an additional 2,700 miles to the voyage. This means more money will be spent on the fuel as well as other maintenance cost k\like upkeep for the crew. It is also known that the average revenue of Egypt’s Suez Canal has significantly dropped in recent years. This is mainly because of the rerouting of vessels that used to dock there. Of the 20% decrease that Egypt has experienced in maritime trade, it can safely be assumed that 10% is as a result of the global financial crisis while the remaining ten percent is as a result of the piracy aftermath spots (Bowden et al, 13). d) Deterrent Security Equipment As Bowden et al (16) points out, some ship companies have resorted to safeguarding their vessels from pirate attacks. This involves equipping the ships with security equipment as well as security personnel n order to avert any possible pirate attack. While it might not be easy to get the exact number of ships that are resorting to this, it is obvious that most companies that have to continue via the unsafe routes have to prepare for defense. This makes it possible for these companies to maintain their sea routes however volatile they are. Needless to state, this has huge financial implications for the companies involved. e) Naval Forces There has been a need for the nations of the world to come up together to fight piracy. Every country is affected whether directly or indirectly. At present, at least twenty seven countries are up in arms in a bid to combat the pirates. The biggest three initiatives by naval forces are the operation Atlanta, Combined Task Force, and Operation Ocean Shield. Indecently, all these are aimed at the horn of Africa to deal with the Somali pirates. Operation Atlanta was jump-started in the year 2008 by the European community block and the main purpose originally was to ensure safe transit of world food program shipments. NATO also came up with operation ocean field. Its main objective was to protecting all shipping activity in the volatile Africa Horn. As the name suggests, combined task force is an amalgamation of the navies of different countries to achieve the same goal. All these naval operations account for at least forty three ships operating in the Somali region alone. If the estimates of GAO are anything to go by, a naval ship costs approximately 82,794 dollars per day of steaming. Assuming that the 43 vessels are in full steaming all year round, it would imply that the total exercise is costing at least 1.3 billion dollars per annum. These costs do not even include the administrative costs that have to go along with any naval operation. Addition of all these miscellaneous costs would bring the total cost to approximately two billion dollars per annum (Bowen et al, 17). f) Prosecutions As far as international law is concerned, piracy is an offence that any country can prosecute. This does not depend on the availability of direct nexus. Since most countries in whose waters piracy is practiced have no preosecuational ability, the international community has been forced to lend a hand in kind to help the countries in the region to prosecute pirates if caught. In the recent years, countries like Seychelles and Kenya have signed memorandums of understandings with USA, UK, Australia, Canada as well as Denmark. These countries have agreed that they will help prosecute pirates if they are given the resources they need to carry out the trials (Bowen et al, 19). The process of increasing the capacity of prosecution in countries is an expensive affair. For instance, the UNODC (United Nations Office o Drugs and Crime) got a grant of ten million dollars from the European Union to go towards piracy legislation and prosecution. Most of these resources have been used in the building of prisons to lock up those found guilty of piracy. An example is the Shimo la Tewa prison in Mombasa Kenya (Bowen et al, 19). Secondary (Macroeconomic) impacts As literature on maritime trade reveals, most studies have just focused on the primary impacts of piracy on maritime trade. However, there are other impacts that might be secondary but still worthy of mention since they change the landscape of maritime trade to a great extent. For instance, even though piracy is a bad thing for the economy, there are still some nations that profit out of it albeit indirectly. When there is heightened piracy within a region, economic investment is often diverted form that region to another region. The new region can therefore be aid to be a beneficiary of the vice. Let’s look at some of the secondary effects of maritime piracy. a) Regional Trade Ban Ki-moon is on record saying that “Piracy… has had an immense impact on the economies of East Africa and also the wider world (Horseed Media).” The impact that piracy has had on regional trade is huge. As the cost of doing business increases due to the risks involved, investors usually have no option but to look for other places to invest. The trade routes that have been used over the years are abandoned as vessels look for safer ones. This in conjunction with the global economic crunch makes the problem of economic impact of piracy on local economies even worse. The cost of trade is not just escalated due to the hijacking of ships alone. However, there is the general perception by investors that a certain region is too volatile and unstable for investment. Ion addition, insurance costs escalate and this makes the few companies who still risk maintaining the business in this regions spend more. The cost is inevitably passed down to the consumer. This is the trickle down effect that ultimately makes business expensive for everybody in the region. An example is the Kenyan shipping industry which has suffered heavily from piracy activity. According to the Kenya Shippers Council, the piracy in the horn of Africa costs the Kenya maritime industry a lot since it escalates the importation costs by a whopping 23.8 million dollars per month. The exportation cost is also inflated by at least 9.8 million dollars monthly. The price of the goods imported as well as imported will therefore have to go up to cover this extra costs (Bowden et al, 18). Fishing as a sector has also suffered greatly due to piracy. Fisherman fear venturing into deep waters where there is plenty of fish citing insecurity. This leads to a scarcity of the produce and as the law of supply and demand dictates, the prices will eventually go up. This may be bad for the consumer but on the flip side, the fishing industry benefits since they fetch better prices for the fish they haul in. Apart from fishing, some countries economy is at a near collapse since the oil industry is threatened. Nations that deal with oil trade like Nigeria have experienced the impact of piracy since the costs of doing business has greatly increased for them. It makes it almost impossible to compete with other nations who produce oil and are not at the risk of piracy as much as they are. In fact, it is estimated that oil business in Nigerians has experienced a twenty percent decline in the last few years. This is because at least 100,000 barrels of oil are stolen by pirates every day in Nigeria alone. This means that piracy has cost the Nigerian Economy at least 400 billion dollars in the last five decades (Bowen et al, 20). b) Food Price Inflation It is estimated that forty percent of all attacks have been on general cargo ships. These are the vessels that are responsible for transportation of the staple food stuffs of the world like rice and other grain produce. Some of these are lost to temperate while others are delayed from reaching their destinations. Others get damaged before they reach the final destination. This has made the cost of food stuffs to escalate in price. Piracy often comes from impoverished nations. This is the main reason why the food price inflation has huge impacts on the people of the region. For instance, half of the food that Somalia consumes is imported mostly in the form of relief aid/ the hijack of vessels results in huge humanitarian crises in these regions. One Somali business man that deals with importing of foodstuff, reportedly said that ships were now refusing to carry their cargo since they were being targeted by pirates It is feared that the inflation of food prices could ultimately lead to public riots and increase the conflict (Bowen et al, 20). C) Reduced Foreign Revenue The goal of any business venture is to make profit. It therefore makes no sense to many companies to keep doing business in an environment where the cost of business is too high due to insecurity especially if there are other alternate markets. There has been a massive exodus of businesses from the troubled Horn of Africa route. The Suez Canal has lost millions in foreign revenue as a result. The other way by which foreign exchange is lost is tourism. When tourists hear of the kidnappings, they often fear to travel to these places. Countries like Egypt and Kenya have greatly suffered due to a reduction of tourists visiting them since maritime piracy increase in the horn of Arica. The tourists that used to like cruising to Mombasa can no longer do so since the ships are avoiding that route fearing hijack by the Somali pirates. Seychelles has also seen great reduction on boat charters as well as other kinds of tourism. The tourists have looked for other alternative destinations that pose a lesser risk to them and their loved ones. Kenya, a country that relies heavily on tourism for foreign exchange, has seen a decline of tourism by almost 95% in recent years according to estimates given by the Kenya Tourism Board (Bowen et al, 20). Conclusion The study has mainly focused on the horn of Africa because that is where most of the piracy comes from. Maritime piracy has huge economic ramifications not only on the company or the nation affected but to the entire global economy. We are all affected whether directly or indirectly. In fact, even the countries that contribute to piracy like Somalia still face the negative impacts of piracy. For starters, there is a huge humanitarian crisis in the region as a result of the hijack of ships. Most of the ships that are hijacked are often taking food and medical supplies to hunger stricken people in Somalia and other neighboring countries in the region. Piracy has made it impossible to reach these people in good time and some have even dried of starvation while ships carrying tons of food meant for them are idling in the hands of pirates as they slowly negotiate the ransom. The impact is also felt in all nations of the world as they major world economies have not only lost millions of dollars following ship hijacks, but they have also spent even more money trying to secure the troubled sea routes. Maritime transport has no substitute. Ships can carry tons of goods over longer distances within a short time. It is the best way to interconnect the different continents of the world. This is way even after the threats of ship hijackings, the trade still goes one. Needless to say, there have been efforts to secure ships as well as look for alternative routes in order to continue with the trade without mishaps. We can only hope that the naval operations in the risky sea routes will eventually bear fruit and rid the waters of piracy. . Works Cited Baldauf, Scott. (2010) Somali pirates fight over record ransom, Christian Science Monitor. Brown Journal of World Affairs. 16(2):123-165 BBC News (2010). Somali pirates receive record ransom for ships' release. 6 Nov., 2010. web. 23 March, 2012. http://www.bbc.co.uk/news/world-africa-11704306. Chalk, Peter. (2008). The Maritime Dimension of International Security: Terrorism, Piracy and Challenges for the United States, New York: The RAND Institute Horseed Media. Somalia Pirates’ Success Rate Rises, Stunting East Africa.3 Nov, 2010. Web. 23 March, 2012http://horseedmedia.net/2010/11/page/20/ Sanders, David. et al. (2010). Marine Piracy, The Actuarial Profession, New York, 2009 Rosenberg, David. The Political Economy of Piracy in the South China Sea, in Elleman, B.A, A. Forbes, & D. Rosenberg (eds). Piracy and Maritime Crime, Naval War College Newport Papers, Newport: Naval War College Press, 2009. Payne, C. (2010) Piracy Today: Fighting Villainy on the High Seas. Wall St Journal, 7(12):34-42 Read More