Friday, December 12, 2008

Quick Math For Anti-Piracy Operations [Update 3]

Observing the first phase of Operation Atalanta, I've run through some of the numbers to get a feel for the economic price taxpayers in the EU will be incurring to stem the tide of piracy in the Horn of Africa. Here's what I came up with:

Each group of ships involved will spend approximately 120 days on station and another 15 days transiting to and from the region. With 10 frigates, three smaller combatants, one support ship and a small staff involved, I estimate there are about 1750 sailors in the force. Picking an average cost rate of $40k per year in pay and another $10 per day in food, the personnel costs run approximately $28.4 million for each phase, or $85.1 million for the entire year-long operation.

Then, looking at fuel costs, a group this size will run through around 1,400 barrels of fuel per day while transiting and perhaps 800 barrels per day on station, which at $125 per barrel yields a cost of $14.6 million per phase and $43.9 million for the entire operation.

So, not even considering maintenance, ordnance, flight operations, logistics and port and canal costs, the starting point to estimate the cost of the whole operation should be around $129 million. Other costs associated with a heightened operational tempo could increase the cost by another $20 million or more.

As of the first part of October this year, pirates have collected an estimated $30 million in ransoms in 2008.

[Update] Looks like costs may be increasing by a factor of two:

The European Union is urging nations from outside the bloc to join the EU’s anti-piracy naval force off Somalia, the fleet’s commander said.

“We are in talks with countries that want to contribute that have the potential to double the size of the force,” Admiral Philip Jones said today at a news conference in Brussels.
[Update 2] Reader Antonio comments: Also in your comparison to the $30M in ransom they've collected, you also need to look at the increased costs of insurance for ships transiting the region, as well as the economic impact of some vessels taking other, slower routes. I'm sure there are a host of other second and third order effects making the $129M+ expenditure seem more reasonable than just accounting for $30M in ransom.

My response: There are certainly costs associated with increased insurance and delayed shipments, but the only estimate I've seen of costs to the shipping industry is in the $16 billion range. That was sourced to an industry group and seems enormously inflated to me.

With approximately 20,000 ships transiting the Gulf of Aden every year, that would mean an increased cost of $800k per ship. Considering the hijacking rate is less than one in 300 and traffic through the region hasn't dropped off significantly, I find it hard to believe a shipper would pay an extra $800k in insurance per ship to avoid a 0.3% chance of having to pay a couple of million dollars in ransom.

If the annualized payout rate is $36 million in ransoms distributed over 20,000 ships insured, one would expect insurance to go up by about $1,800 per ship plus costs to the insurance companies processing claims. So what other costs are shippers incurring that must total around $798k per ship to raise the total cost to shipping into the $16 billion range?

I suspect someone did some quick math of their own to influence policy makers by assuming every ship transiting the Gulf of Aden diverted in one way or another and every shipping company paid the increased insurance rates. If my assumption is true, the "garbage in, garbage out" principle applies.

I need to see the numbers and assumptions to thoroughly evaluate the claim.

[Update 3] After doing a little research, the $16b claim seems to be sourced to Singapore's Deputy Prime Minister Tony Tan, quoted in a 2004 Foreign Affairs article by Gal Luft and Anne Korin, titled "Terrorism Goes to Sea".

Stefan Eklöf, a research fellow, Centre for East and Southeast Asian Studies, Lund University, Sweden, also calls this estimate into question in his book, Pirates in Paradise, and concludes a more reasonable estimate of the cost of piracy is $70m to $200m (p. 100).

The Times reports the average insurance rate for ships transiting the Gulf of Aden is $9,000, which is a more reasonable figure.

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