Security Firms Divided over How to Succeed in the Anti-Piracy Business

Article excerpt

Security contractors continue to search for a winning business model in the increasingly competitive anti-piracy industry.

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Within the grand scheme of global security threats, pirates are specks of dust. But over the past several years, successful ship hijackings have begun to take a toll on the world's economy as Somalia-based pirates have expanded their area of influence beyond the East Coast of Africa, analysts said.

Pirate activity in the Persian Gulf area alone cost the maritime industry between $6.6 billion and $6.9 billion last year, said Rick "Ozzie" Nelson, director of the homeland security and counterterrorism program at the Center for Strategic and International Studies.

Piracy peaked in 2011 in the area extending from the Red Sea to the North Indian Ocean, with attacks against 544 ships, CSIS estimated.

Security firms have rushed to capitalize on the shipping industry's rising fear of pirates. Approximately 200 to 300 companies today specialize in protecting commercial ships and oil tankers from pirates. At least half these firms are based in the United Kingdom.

The anti-piracy business is not like most other private-security markets. One of the largest U.S. military and State Department security contractors, Blackwater, tried to make a run at the maritime security escort business. In 2007, it purchased a retired naval vessel, the 183-foot McArthur, and offered it for anti-piracy services. In the absence of customers, the company shut down the venture within months.

Industry analysts have blamed Black-water's failure on the company's tainted reputation in Iraq and Afghanistan, but they have also noted that maritime security poses unique challenges for any security firm. Anti-piracy escorts charge for a service that many countries' navies and coast guards provide for free. Naval warships and trained military crews are ship owners' preferred anti-piracy weapons.

Naval vessels, however, are becoming rare luxuries as countries cut hack on military spending and pirates continue to extend their sphere of operations.

Hiring armed crews today is the most economical option for shippers because there is so much competition for the business, said Michael G. Frodl, head of C-LEVEL Maritime Risks, a consulting firm. Guards can cost anywhere from $40,000 to $50,000 for a 10-day trip. After the 2008 global economic meltdown, many shipping and insurance companies began to feel pressure to cut costs. The downturn made the competitive security industry even more cutthroat. "The private security industry is being pressed by ship owners," said Frodl. Companies in Abu Dhabi now are hiring retired military personnel from low-wage Asian countries as security guards for oil tankers, he said. "The industry is turning into a Wal-Mart."

For many shippers, the cost of security is becoming an unaffordable burden. Ships can choose to take detours to avoid the more dangerous waters, but that drives up fuel costs. Today, some type of security aboard is a must for any ship that transits the waters off East Africa, the Persian Gulf and the North Indian Ocean. This maritime danger zone encompasses an area four times the size of Texas.

The shipping industry and insurers continue to debate whether there is an alternative to hiring armed guards. Mackwater's misfortunes have not deterred others from venturing into the private security escort market. The latest entry is a U.K. startup called Convoy Escort Program, or CEP, which is backed by international shipping insurers JLT and Lloyds of London underwriters Ascot. CEP reported it has raised $40 million, and is recruiting investors to meet its $70 million estimated cost to build a private navy for anti-piracy work. Another firm, Typhon, has secured Asian financiers to launch a similar "close vessel protection" service.

U.S. security experts have cast a skeptical eye on private navies. …