Paying the Pirate's Price

Do the economics of piracy demand the privatization of the sea?

Veronique de Rugy from the July 2009 issue

At the beginning of April, after a vessel was captured off the Somali coast, the military liberated the crew by storming the boat and killing two of the pirates. While the crew was saved, the ship’s captain was killed in the attack, leaving behind a wife and a 3-year old son.

That’s not the story you heard? That’s because you’re not French. While the story of the Maersk Alabama and the Navy SEAL operation that freed its captain were gripping American attention, the French were focused on the drama unfolding upon the Tanit, a 40-foot sailboat on an around-the-world voyage. When it became clear that negotiations for the crew’s release had come to an impasse, French commandos moved in.

The French government had warned the skipper not to proceed into the Gulf of Aden, where piracy has increased dramatically during the last four years. But the captain chose to ignore the advice. He apparently was chasing a dream to drop out of commercial society and would not be dissuaded.

Most piracy, by contrast, stems from very material dreams, on the part of both the pirates and the plundered. All affected parties are looking to make a living and constantly calculating the most efficient means to do so.

While tourists occasionally have fallen victim to piracy, most hostages are crew members on commercial ships. This is no surprise. According to a 2008 RAND study, the main factor behind the re-emergence of old-style piracy has been a massive increase in commercial maritime traffic. Combined with the large number of ports around the world, this growth has provided pirates with a wide range of tempting, high-payoff targets. And as more seaborne commercial traffic passes through narrow and congested maritime chokepoints, the ships must reduce their speed to ensure safe passage, heightening their exposure to interception and attack.

No one has bested the 18th-century pirate Bartholomew Roberts’ pithy summation of why piracy exists: “In an honest Service, there is thin Commons, low Wages, and hard Labour; in this, Plenty and Satiety, Pleasure and Ease, Liberty and Power; and who would not balance Creditor on this Side, when all the Hazard that is run for it, at worst, is only a sower Look or two at choaking. No, a merry Life and a short one shall be my Motto.”

The time and place may have changed, but Roberts’ reasoning still holds true. Like Roberts in the 18th century, Somali pirates have little to lose in the 21st. Their country is wracked by chaos and poverty. It is also adjacent to one of the most heavily traveled shipping lanes in the world; 20,000 ships a year pass through the Gulf of Aden. Ransoms for crews can be as high as $3 million. The International Maritime Bureau counted 111 pirate attacks off Somalia in 2008, a threefold increase over the previous year.

For Somalia, piracy is an economic boon, benefiting both the pirates and the economies of the areas in which they live. Somali pirates made an estimated $30 million to $150 million in ransom in 2008 alone. Through purchases of homes, cars, clothes, food, and other amenities, this money ends up boosting the regional economy as well. Just as certain Caribbean ports of call catered to the needs of 17th- and 18th-century pirates, so do certain spots in Somalia cater to the needs of contemporary pirates. The port of Eyl, the Tortuga of Somalia, is booming. It’s even rumored to have restaurants dedicated to feeding hostages.

While it’s pretty clear why some Somalis would become pirates, it might not be as obvious why shipping companies respond the way they do to the pirate threat. Despite increased piracy, the shippers seem to carry on heedless of the danger and without exploring alternative possibilities.

For instance, commercial ships don’t have to go through the Gulf of Aden and around the Horn of Africa. They could avoid the area entirely by going round the Cape of Good Hope. But this route adds 20 days to the trip and brings on many new expenses, which are particularly problematic if competitors keep taking the old short cut.

Even in known pirate waters, commercial crews are rarely armed. Some say the reason is that the varying port laws make it difficult to carry weapons aboard ships. Others argue that pirates are more merciful to unarmed crews than they would be to those packing heat. There’s some truth to both arguments, but the chief rationale for remaining unarmed appears to be more economic than legal.

Overall, the International Maritime Bureau estimates the cost of piracy to the shipping industry to be anywhere from $1 billion to $16 billion per year. That is hardly prohibitive when measured against the annual value of maritime commerce, which in 2005 (the most recent year for which we have reliable figures) totaled $7.8 trillion.

Interestingly, as piracy has become more profitable in recent years, its overall lethality has dropped. That too makes economic sense. George Mason University economist Peter Leeson, author of The Invisible Hook: The Hidden Economics of Piracy, explains in an email: “Since wantonly brutalizing captives would have undermined their ability to make profits, 18th-century pirates typically refrained from doing so. Some crews went as far as to enshrine rules prohibiting prisoner mistreatment in their articles. The Somali pirates seem to have realized the benefits of such rules for their bottom line as well. At least one Somali pirate ‘code’ regulating the treatment of prisoners has been found, and several Somali pirates have claimed that it’s a universal rule among them not to harm innocent sailors they overtake.”

So while piracy may be on the rise, it still falls under the standard costs of doing business that have existed since man first started shipping goods by water. The world’s navies have effectively been tasked with protecting cargo and rescuing crew members.

But should the world’s navies be responsible for protecting shipping? It’s not clear they even can. As Michael Mullen, the chairman of the Joint Chiefs of Staff, told Good Morning America in April, “There are actually 16 nations who have naval vessels out there, and it is a tough area. It’s a tough problem. It’s a big area, over 1.1 million square miles, four times the size of the state of Texas. And it’s a going business for the pirates.”

Comments

Mike|6.15.09 @ 12:20PM|#

Well, here's a perfect test for any anarchists wanting to see if anarchy actually works. Set aside certain parts of the ocean as "undefended territory" where laws don't apply and navies won't help you or hinder you. Then see if ships end up preferring this or waters subject to regular maritime law.

|6.15.09 @ 12:22PM|#

Letters of Marque and Hanging on the High Seas are all we need. All merchant ships should be armed. And any merchant ship should be empowered to shoot any pirate on sight or hang/shoot on the high seas any pirates they capture. It is strictly economics. Right now the risk is low and the reward high so people become pirates. Change that equation and piracy goes away.

|6.15.09 @ 12:26PM|#

You don't even need Letters of Marque. Those of for empowering your people to raid the commerce of other nations.

You just need to legalize self-defense on the high seas. Let the merchants go armed, and empower the captains to dispense summary justice on pirates. Problem solved.

The Navy can get involved if it wants; I got no problem with the Navy's historic role in suppressing piracy.

|6.15.09 @ 12:28PM|#

"All merchant ships should be armed. And any merchant ship should be empowered to shoot any pirate on sight or hang/shoot on the high seas any pirates they capture."

You left out Keel-hauling.

Kreel Sarloo|6.15.09 @ 12:41PM|#

"You left out Keel-hauling."

Not to mention sodomy and the lash.

Lashing sodomite|6.15.09 @ 12:46PM|#

Kreel, you say that like those are bad things.

|6.15.09 @ 12:47PM|#

Retail outlets in the inner city face, and live with, the threats of armed robbery and shoplifting. They hire private security, install cameras, place merchandise and cashiers behind bullet proof glass barriers to minimize the losses. Often they arm themselves. They of course can't eliminate the losses and those extra precautions and inventory shrinkage raises the prices for anyone who shops there.

I don't propose they quit their efforts and I certainly don't propose that the cops just say, "You're on your own. It costs too much to protect businesses that choose to locate in crime ridden areas".

Merchants should arm themselves and there exists plenty of ex gunner's mates to provide shipboard defense (they have shipboard firefighting and basic seamanship skills as well) if a company wishes to pay them what they are worth.

One of the reasons that navies have existed for thousands of years is to plunder the enemy and protect their own from being plundered. I've no problem with the Russian or Iranian navies intervening to protect their own shipping from piracy and I demand that the U.S. government protect U.S. flagged shipping from piracy as well.

For those merchants registered in Panama or Liberia, they are free to call on Panamanian or Liberian navies as appropriate.

Some of the rescue attempts will result in the death of merchant sailors and some property losses are to be expected.

C'est la vie.

|6.15.09 @ 12:57PM|#

"You left out Keel-hauling."

...and monkey knife fights.

"Ain't so pretty now. Are you?"

|6.15.09 @ 12:57PM|#

J Sub D,

You are correct, navies should also deal with pirates. In the end we have taken a simple problem and made it insolvable in the name of the rule of law. Amazing.

|6.15.09 @ 1:27PM|#

I think it would be great if the merchant fleets of the world would cover their own security costs instead of leeching off the tax payers for their own protection.

International trade is subsidized by the governments of the world and makes a mockery out of free enterprise.

Let's see how cheap it is to make iPods in China when Apple and Maersk have to pay for their own protection.

mark|6.15.09 @ 1:36PM|#

David, you're on the right track but the main subsidy is in the form of the Fed/Treasury monopoly on money. I wonder how much manufacturing would have gone to China if the U.S. had to settle its accounts in gold.

SpongePaul|6.15.09 @ 1:39PM|#

a few 50 cals on each merchant ship with 4-5 armed gaurds outta end the piracy

gimlet|6.15.09 @ 1:50PM|#

"You left out Keel-hauling."

Just geld every captured pirate and then throw them back.

Bob Barker\'s Ghost|6.15.09 @ 2:33PM|#

"Just geld every captured pirate and then throw them back."

And remember to spay or neuter your pirate.

|6.15.09 @ 2:48PM|#

Good article, the piracy problem is certainly an interesting one. It is easy to say 'arm the ships' and much more difficult to actually implement it. Training would be the main issue, you can't just hand someone a machine gun and tell them to defend the boat.

I recently ran across this video, which is a good introduction to the situation and country:
http://www.newsy.com/videos/poverty_politics_and_pirates

Somalia needs to be re-built from the ground up; until then the piracy will continue. Too bad there aren't more Robin Hoods anymore; while piracy is wrong it would be nice to at least have something positive come out of this unfortunate situation.

Waterhouse|6.15.09 @ 3:51PM|#

If the idea of commercial ships paying for armed escorts manned by ex-pirates was successful, it would probably evolve into a system where the largest group of pirates levies "taxes" in exchange for not attacking ships and for protecting ships from smaller bands of pirates. That's basically how it worked with the Barbary corsairs, anyway.

And if it became organized enough, we could drop the scare quotes around "taxes", since the pirates would effectively be the government.

Kreel Sarloo|6.15.09 @ 4:22PM|#

"Kreel, you say that like those are bad things."

I didn't mean too. it's just hard to get the right nuance on the intertubular device.

It's probably because I left out the rum.

Sean W. Malone|6.15.09 @ 4:36PM|#

In a rare instance, that usage of "Robin Hood" would probably be correct... Always been a little pet peeve of mine that people fail to recognize the reason Robin Hood was good. He didn't rob anyone, he merely reclaimed what had been stolen. Somalians should do that too, but... alas.

|6.15.09 @ 4:41PM|#

First, merchants need to be able to arm themselves. Private security should also be allowed. Don't like mercenaries entering your port? Well, they can wait just outside the port. This will leave the merchant ship vulnerable, but they are still protected more than previously.

Then, reinstate the Letter of Marque and Reprisal. There is proof that some pirates are cooperating with and funding terrorists (if they aren't terrorists themselves). Send a couple carrier groups to the region and call it and expansion of the War on Terror. Issue a shoot on sight order for suspected pirates and watch the problem shrink.

|6.15.09 @ 11:03PM|#

The other week an Israeli private security team defended their private vessel by hitting the pirates with small arms fire (Israeli's don't take shit in any jurisdiction).

Its like 9/11, the attack could just have easily been stopped by a security guard with a glock than a huge war of liberation in the middle east.

Barry Parker / bdp1 Consulting|6.16.09 @ 6:57AM|#

These are excerpts from my article on piracy appearing in Lloyds Shipping Economist:


Anti-piracy efforts will present opportunities for entrepreneurs at the intersection of information technology and maritime security. The rhetoric about adding additional Naval assets to patrol impossibly large swaths of the Indian Ocean begs the question of how to harness requisite AIS and Long Range tracking (LRIT) devices on vessels. The strategy of transit corridors and organized convoys, has proven "successful" in reducing attacks in the Gulf of Aden with the Internationally Recommended Transit Corridor (IRTC). Perhaps industry associations might think how to mobilize their memberships to define additional corridors, handle the logistics of making up convoys, while liaising with insurance interests on economic incentives for participation.

In assessing the "cost" of piracy, the political rhetoric on shouldering costs suggests that fees for military presence (in the form of patrols or maintaining transit lanes) needs to be separated from the economics facing individual shipowners. Again, the information technology sector, which has changed the face of maritime security in recent years, can easily step into the breach, utilizing tools that provide interoperability between onboard tracking devices and information systems ashore. By interfacing with naval command centers instead of supply chain hubs, intelligence can be brought to the anti-piracy fight, making military capabilities far more efficient.

Schemes where user fees would be levied upon vessels, would also provide an opportunity for a savvy database tied to a tracking module and a state of the art billing system. If industry associations endorse the user fee approach, they would be the logical operators for such a system (perhaps in conjunction with War Risk underwriters). Where such fees are tied into the cargo interests, as advocated by the Nippon Foundation's Mr. Sasagawa., insurers of cargo would play a pivotal role.

James Christodoulou, an executive with Industrial Shipping Enterprises Corporation, owners of the Biscaglia (hijacked in November 2008 and released in January 2009) offered a personal perspective, in response to questions about the viability of user fees for correcting the situation in Somalia at the S & K seminar. He said, "When we go through the Suez Canal…charge me an extra 1%...to help clean up the problem."

Armed escort services are another potential business that could possibly flow out of the Piracy Crisis. At the S & K event in New York, a representative of a decades old maritime security consultant revealed that it was in the process of raising money for such a venture. One facet of his firm's proposed business model would be that use of an armed escort company, with refurbished oil crewboats, would be a condition for obtaining War Risk coverage.

And…new challenges:

In the background, a massive legal "bogie" is looming on the horizon. The very legality of paying ransoms is now coming under increased scrutiny. Though the subject is complex (and beyond the scope of this article), the inclusion of maritime piracy among activities defined as related to "terrorism" would make ransom payments illegal under several U.S. regulatory acts. S & K Partner Larry Rutkowski explained, "At present there are no regulations that prohibit payment of ransom to kidnappers or pirates operating in Somalia." Rutkowski, who was involved along with Bruce Paulsen in negotiations for release of the U.S. owned but foreign flagged tanker Biscaglia, then asked: "If we start bandying about the term 'terrorist' in the context of piracy, what is a U.S. owner to do?" Tough questions, indeed.

edna|6.16.09 @ 7:59AM|#

this is one of the few times when a sting operation would actually be useful. if one or more governments started sending decoy vessels with some real badass special forces, this also tilts the risk/reward ratio. "oops, that wasn't a good idea, rashid. rashid? rashid? what happened to your head???"

of course, arming crews and having a few badasses among them is still the optimum solution.