Analysis: Understanding the piracy problem

AT Kearney's Dan Starta shares his thoughts on this grave issue.
Logistics, ANALYSIS


By: Paul Ash

The term Pirate is today often associated with the illegal use of another’s intellectual property. However, no such revision of the word need take place off the economically destitute coast of Somalia, where the marauding of shipping vessels continues unabated well into the 21st century; this, despite increasingly protective measures taken by shipping companies and government agencies alike.

Between US$5.6 and $12 billion was lost by the international economy in the 2010-2011 period because of piracy in and around the Gulf of Aden - a trade route connecting Europe, Asia and the Middle East.

The alternative to travelling through this region would be rounding the Cape of Good Hope; however, vessel costs can exceed tens of thousands of dollars each day and thus, despite piracy, the Gulf of Aden remains the optimal trade route for most ships.

So, Logistics Middle East Magazine sat down with Dan Starta, managing director and partner at AT Kearney and co-author of a recently released report titled, Managing Supply Chain Risk: Understanding Piracy Threat, to get a full overview of what has become an issue of grave concern for this industry.

The report, launched jointly with Gulf Petrochemicals and Chemicals Association (GPCA) at the fourth GPCA Supply Chain Conference in May, stresses that piracy is not something restricted to the Somali Coast. In fact, Starta believes the increase in the number of attacks near the coast of Oman should not come as a surprise.

“I think what you’re starting to see is a shift in tactics to where the opportunities lie. I think the one thing that we’re consistently seeing is that the pirates can sense and respond to the changes that are made,” says Starta. “We’re starting to see that pirates have increased their range across the region. So their moving up to the coast of Oman is not a surprise,” he adds.

Brief History of Somali Piracy

Since the end of the Barre regime in 1991, Somalia has become a requisite incubator for organised crime, the rise of vicious war lords, religious demagoguery and inefficient marine eco-management. With the civil war came the dissolution of the Somali Navy and the already adjunct military forces; this in turn left both land and water unprotected. Since the advent of the second phase of the civil war in the early 21st century, piracy has been on the rise. A number of military and naval personnel are suspected to have, along with frustrated farmers and disenfranchised fishermen, joined forces to become what we refer to today as Somali pirates.

According to Wardher News, the ‘official’ newspaper of Somalia, up to 70 per cent of Somalis support piracy as a legitimate defence of their state’s autonomy. The pirates prefer to be known as, badaadinta badah or Saviours of the Sea, further concretising their coastguard-like status among the majority of the local populace.

About 35 million tonnes of toxic waste has and continues to be dumped in Somalia’s waters, on her coast line and inland, by foreign waste disposal companies, according to the Ecologist. The country has abnormally high incidences of chronic illness related to exposure to toxic chemical waste – including nuclear waste disposal.

The country also loses an estimated $450 million as a result of illegal fishing by foreign nations - European and Asian fishing trawlers poaching from Somalia’s unguarded waters. In comparison, pirates demand about $200 million annually from ransoms, according to the report.

However, Starta believes it is wrong to pinpoint the blame on only these two issues as the reason for piracy. “There are more fundamental issues at play in the economy of Somalia than just waste dumping. You have to get into the internal security, you have to get into the court systems and you have to get into the economic opportunities that are far more expansive,” he says.

Costs involved

Costs to the industry can be broken down into two categories, namely, microeconomic and macroeconomic. The microeconomic effects are the direct costs to the industry, for example: the damage to ships, loss of goods, late delivery, ransoms and high insurance figures.

The macroeconomic effects extend to a loss of direct foreign investment, food price inflation and potential political unrest and conflict on the ground in affected areas.

A lot of the cargo ships attacked carry food, often perishable products, in which case the entire stock is lost or significantly slowed from reaching its destination. When this occurs, food prices in the country destined for despatch may rise. But, due to the global economic downturn and regional instability, the macro-effects are difficult to determine accurately.

Fishermen have become scared of venturing from their local harbours, some taking other forms of work. Not only are food, fishing and oil industries affected by piracy, but so, too, is the tourism industry.

Starta believes it is fundamental that companies factor these additional costs into their short to medium term planning strategy. “I think the businesses in the region certainly need to plan for the factors that are in effect today.

“Whether it is increased insurance protection, potential delays to their shipment or additional defensive measures that need to be placed on vessels, they’re going to add an increased cost and/or potentially cause delays from a shipping standpoint. So I think in the short to medium term, businesses need to plan for that, because it could have an impact on moving their products to the rest of the world.”

“Insurance is where all the costs come together from a vessel standpoint. But there are costs such as upgrading the boats: we’ve seen everything from people putting real protections on and also dummy protections, just to serve as a warning. And then we’ve also seen military flotillas come on the scene, and the organising of convoys. There’s the registration process on vessels and also tracking of vessels. There’s now almost a whole eco-system in the economy that has evolved around anti-piracy protection.”

Where do we stand today?

Sheikh Sharif Sheikh Ahmed, the president of the Transitional Federal Government of Somalia and his representatives have revealed at the Second UAE Counter Piracy Conference last month that his government was making progress in tightening control of the coastal regions of Puntland.

The incidence of successful pirate attacks has fallen from 45 in 2009 to 24 in 2011. However, according to the European Union Naval Force and Combined Maritime Forces, quoted in the AT Kearney report, “as of April 23, 2012, nine vessels and an estimated 229 hostages are under capture by pirates.

“It’s nice to see that those efforts look like they’re starting to take hold. On the other hand, the economic situation has not changed. So what you’re starting to see as well is, to some extent, increased ransoms and also a shifting of tactics,” says Starta.

“So I certainly don’t think the problem has gone away. I think it is maybe a larger bandage that has been applied in the past, but I still think there’s considerable risk in the region from piracy.”

Pirates also seem to have become wise to coalition forces’ plans and have incorporated the use of hostage ‘mother ships’ as one of their new strategies. The ‘mother ship’ uses hostage crews to sail, while towing multiple pirate skiffs. This strategy extends the pirates’ reach as well as the frequency of potential attacks. In some cases pirate vessels have even been spotted as far as the coast of India. This system makes it harder for naval forces to assess situations at sea, and leaves greater areas of water unmonitored.

When asked if a ground-led intervention would solve the problem, Starta shakes his head. “The question is: what would you attack? These are villages. These are, while sometimes well-organised, also highly fragmented groups. So there is no central authority necessarily that you could go in and take out, that’s going to fix the problem.”

What does the future hold?

Starta believes the problem should be tackled holistically: “I think it has to be addressed from the economic standpoint and, especially in the short term, from the defensive positions. So, until you start addressing the fundamental economics, you can ramp up the defensive posture, you can ramp up the costs on that, but it will never fully get rid of the problem until you start to deal with the socio-economic issues associated with the eastern coast of Somalia, or the eastern coast of Africa in general.”

Things may be changing for the better in Somalia, though. According to a recent New York Times article by Jeffrey Getteman, Mogadishu is rapidly evolving into a place of hope rather than despair. Returning business acumen, a dedicated police force and growing African Union presence in the region seem poised to sully the continued growth of pirate initiation and, hopefully, give the government the encouragement it needs to make dedicated reparations to the war-torn region a reality.

But, ultimately, the problem of piracy is a socio-economic one and better governance and control on the ground is needed if ever an end to this modern day scourge of piracy is to be achieved. A multi-faceted response is essential if the problem is to be tackled successfully. In a country where one is fortunate if one earns $500 per year, the allure of piracy can be difficult to resist.

There remain no quick fixes, however. Through media exposure, multilateral co-operation at sea and a dedicated approach to rebuilding Somalia’s infrastructure, pressure continues to mount against pirates, taking us closer to the goal of re-establishing a safe and secure trade route in the region.

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