Paying off the pirates

By Nick Holland
Business reporter, BBC News

Piracy off the coast of Somalia more than doubled in 2008

Dealing with piracy can be an expensive business.

Ransom demands can vary from anything between $1m (£600,000) and $3m.

They almost always get paid.

But the financial costs of securing the release of a ship and its crew go way beyond just paying off the pirates.

Triple the ransom demand and you are getting close to what the total bill can come to. What does the rest of the money get spent on?

Anybody whose ship is hijacked is going to need the help of a professional negotiator to deal with the pirates.

They do not come cheap. The going rate is between $2500 to $5000 a day.

In the grand scheme of things that is not a huge amount.

Dangerous work

But it starts to add up when you consider negotiations often last two to three months.

A full military escort by the Yemen navy currently costs $50,000 for three days Nick Davis, chief executive of Aden Group Tranists

The phone bill for that length of time can get pretty expensive too.

Negotiations between the two sides are done using satellite phones which are more costly than normal land lines.

Charges of $40,000 to $60,000 are not uncommon.

"The pirates are quite clever. The satellite phone they use is also the one that is on the vessel. So it is not up to them to pick up the cost," says Guillaume Bonnissen, who specialises in insuring maritime companies against kidnap and ransom.

Once a ransom price has been agreed, someone has got to actually go and deliver the money.

It is dangerous work and private security firm will charge anything between $250,000 and $500,000 to do the job.

Lost revenue

Parachute is considered the safest way to deliver the ransom

The current favoured method of "making the drop" is to charter a plane and parachute the money in a container onto the deck of the ship.

Security firms say the expertise to make that happen is costly.

So too is the expense of insuring themselves in case they mistakenly plunge the money into the ocean.

But despite the obvious hazards, it is thought to be less risky than delivering the money by boat.

"When you deliver it by sea you need more armed people on board because there is a risk of being attacked by more pirates which actually happened on a few sea drops that were done," says Mr Bonnissen.

On top of all this there is the amount of lost revenue while the vessel is out of action to consider.

They can go the whole way round the bottom of South Africa.... but that is an expensive decision to take." Roger Middleton, Royal Institute of International Affairs

Rising insurance costs

"The average ship of the type that are being hijacked, are going to be losing charter value of anywhere between $20,000 and $100,000 per day," says Nick Davis, chief executive of Aden Group Transits, who provide security for merchant ships in the area.

Then there is the cost of employing international lawyers who make sure whatever deal is done with the pirates does not break any legal rules.

I have been told that this is almost always a six figure sum.

Of course the majority of cargo ships sailing around our oceans do not get boarded by pirates.

But the increase in levels of piracy does mean insurance costs have gone up.

By how much depends on the size of the vessel and an assessment of whether it is sailing through risky waters.

32 ships hijacked in 2008 in Gulf of Aden out of 25,000 sailing the route

But the average premium to sail in areas where pirates are known to be active seems to be around $25,000 to $30,000 per journey.

In the case of the Gulf of Aden, simply avoiding the area by sailing a different route does not necessarily save money.

Private military escort

"They can go the whole way round the bottom of South Africa but that adds a couple of weeks to the journey time, which means more fuel and longer delivery time. It's an expensive decision to take," says Roger Middleton an expert on piracy at the Royal Institute of International Affairs.

And as he points out there are pirates off the east coast of Africa too, albeit it fewer of them.

For added peace of mind there is the option of hiring a private warship to watch over your vessel.

"A full military escort by the Yemen navy through the Gulf of Aden currently costs $50,000 for three days," says Mr Davis.

His company rents patrol boats off the Yemen navy and passes the cost onto merchant ship owners who are prepared to pay for the service.

"If you are hijacked you are going to have a bill of not less $5m... So that is a pretty small price to pay for guaranteed security," he adds.