When it comes to businesses, fortunes are always at the mercy of chance. This is the reality Raju Malde, a director at Pwani Oil, one of Kenya’s biggest oil and fats manufacturers, is grappling with.

The profitability of his company is facing one of its worst threats with a surge in freight costs as shippers factor in charges arising from piracy on the Indian Ocean. While Somali piracy has been around for some time now, the real cost of the menace is emerging with a new report that breaks down the total price of piracy to businesses — estimating it at Ksh50 million monthly for shippers. The world, business executives said, has been so preoccupied with how piracy got to its current levels that it has not noticed how much economic pandemonium the crime is causing countries.

“Freight costs have definitely gone up,” says Mr Malde. “The shipping lines are now charging a fee they are calling piracy risk surcharge, which is $10 on freight, and another $3 on insurance.” (READ: Freight forwarders turn to air cargo as shipping costs bite)

Mr Malde said that the bulk of their imports consist of palm oil from Indonesia, which they import by the tonne. “The piracy has had the impact of reducing our margins, and we are also passing the extra costs to the consumers.”

A new report by the One Earth Future Foundation, shows shipping companies are paying roughly $5,000 a day for a four-man armed team, on duty for four to 20 days to protect their vessels in the vital waters off the East African coast and through the Gulf of Aden.

The stretch — where more than a third of the world’s traded goods cross — is the most vulnerable to Somali pirates, meaning increased level of piracy pose a grave threat to international business.

Humanitarian agencies like the World Food Programme, too, have been affected. “Our ships have had to have military escorts from the EU and Nato,” says Challiss McDonough, WFP’s senior spokeswoman for East, Central and Southern Africa. “It’s not just the WFP, other humanitarian agencies have had to employ military escorts.”

Timothy Kimani, clearing and forwarding director of Siginon Freight Ltd, says that ships are reluctant to call at the port of Mombasa, and security is one of the major reasons why.

“The surcharges were not there before the piracy started. If you are a big importer bringing in about 6,000 containers every other month, you can see the impact,” he says. “The extra fees pay for security on board the ship, marine patrols and other efforts to prevent hijackings.”

A new report says that international shipping companies are paying more than $50 million a month for security on board their ships plying the coastal waters off the Somalia coast.

Shipping companies pay roughly $5,000 a day for a four-man armed team, on duty for four to 20 days to protect their vessels in the vital waters off the East African coast and through the Gulf of Aden.

More than a third of the world’s traded goods cross the East African coast, the stretch of sea most vulnerable to Somali pirates. A sizeable percentage of cargo comprises oil from the Middle East, particularly Saudi Arabia and Iran.

According to the Security Association for the Maritime Industry, which represents 120 armed security outfits, more than half of which are British, many ships now employ private security companies as protection and this fledgling industry pulls in $52.2 million a month from an estimated 1,500 escorted journeys.

The vast majority of the estimated $7 billion spent last year in combating piracy was related to recurring costs associated with the protection of vessels — costs which must be repeated each year. This is in sharp contrast to the $38 million spent for prosecution, imprisonment, and building regional and Somali capacity to fight piracy. Average ransoms increased 25 per cent from approximately $4 million in 2010 to $5 million in 2011. Although the total cost for ransoms was $160 million for 2011, money collected by pirates represents a mere two per cent of the total economic cost.

“The human cost of piracy cannot be defined in economic terms,” said Anna Bowden, the report’s author. “We do note with great concern that there were a significant number of piracy-related deaths, hostages taken, and seafarers subject to traumatic armed attacks in 2011. This happened in spite of the success of armed guards and military action in the later part of the year.”

However, there are signs that efforts by the shipping industry and governments to combat the threat are having an impact. According to a report by the One Earth Future Foundation, the number of hijackings attributed to Somali pirates fell 36 per cent last year.
There were a record 237 attacks – up from 212 in 2010 – during 2011 but the proportion of successful attacks fell – only 28 vessels were captured, compared with 44 in 2010.

But this success comes at a significant price. The total cost to the global economy of the piracy off Somalia was over $6.5 billion last year and the $160 million shipping companies paid in ransoms was outstripped by the far bigger sums they spent on preventing attacks.

Shipping companies spent $1.1 billion on security equipment and armed guards and a further $635 million on insurance, according to the report. Their crews also received an extra $195 million in pay for the risks of operating in the highest-risk area.

Nevertheless, shipping experts say the fall in Somali pirate activity in the past year is down to increased use of security companies as well as better on-board security and counter-piracy navy patrols.

With the international naval task force being reduced and trade volumes at sea set to grow the security business is likely to continue to expand.

“There are rich pickings to be had, some of the big maritime security companies have improved their turnover by 350 per cent in the last year,” Mr Cook said.

However, concerns persist about the regulation of security companies and the conflicting rules they operate under.

A leading international seafarers union has called for “clear and unambiguous” guidance on the issue of the use of force by armed guards on ships traversing the Gulf of Eden and the East African coast who are attacked by Somali pirates.

Some countries allow ships that bear their flag to use private security, while many others do not. Some ports and territorial waters bar them outright.

Nautilus, a London-based union representing seafarers from a number of nationalities recently gave evidence to a UK parliamentary report which urged the British government to “assess the risk that private armed security guards and possibly the master of ships on which they operate, might face extradition to another state following an incident involving weapons, particularly where that state may not be able to assure a fair trial.”

The 72-page report said that “guidance on the use of force, particularly lethal force, is very limited and there is little to help a ship’s master make a judgement on where force can be used.”

Committee chairman Richard Ottaway said that “the question anyone would ask is that if a private armed guard onboard a UK flagged vessel sees an armed skiff approaching at high speed, can the guard open fire?”

Mr Ottaway said that governments must “provide clearer direction on what is permissible and what is not.”

It also describes the continuing piracy off the Somali coast as a “major concern” and expresses reservations over the decision of the UK government to outlaw ransom payments to the pirates.

At any one time, there are an estimated 240 armed security outfits off the east coast of Africa. Some follow scrupulous procedures over weapon procurement and use. But others buy and transport arms illegally and their crews later dump munitions overboard.

Already there have been reports of shoot-outs at sea and fishing boats attacked in error, industry officials said. “Everybody in the maritime industry is petrified of a Blackwater-type incident, a shooting that ends up on YouTube,” says Peter Cook, director of the Security Association of Maritime Authority, told the UK’s Financial Times newspaper.

Sami is formulating a code of conduct for its members and members of the industry say they are keen to see one set of global rules that would apply throughout multiple jurisdictions.

“We need to make sure everyone operates to the same standards,” says Barry Roche, managing director of the UK’s Protection Vessels International, the world’s largest supplier of such guards.

The International Maritime Organisation, a UN agency, last year asked flag states to determine their own policy on whether ships bearing their flag could carry private arms.

But this has given rise to what maritime lawyer Stephen Askins, who has dealt with 30 hijacked vessels to date, calls “a patchwork” of rules.

Nautilus fears that the UK government’s decision on ransom payments which has been echoed by other western nations may well “make it more difficult for shipping companies to secure the safe release of their crews.”

The UK report also questions why so little is known about what happens to ransom payments which topped $135 million in 2011.

Britain is criticised for being “disappointingly slow to take action on financial flows relating to ransom payments, particularly given the information that could be available from British companies involved.”

Pottengal Mukundan, director of the International Maritime Bureau said the decline in hijackings at the end of 2011 was a result of action by international navies stationed in the area.

“This year we had a very large number of pirate action groups taken out by the navies,” he said. “Before, they were able to mount these repeated attacks.”

Meanwhile, Britain insists that the international community must act to tackle the causes of poverty in Somalia if piracy is to be defeated.

UK Secretary of State for international development Andrew Mitchell said efforts aimed at gripping the issue had failed over the past two decades and “a new, stronger international approach” was top on the agenda at a high-level conference in London on Somalia last week if the world is to tackle both the root causes and effects of the problems the country faces.

The conference aimed to agree on a series of practical measures to support Somalia in seven areas: Security, political process, counter-terrorism, piracy, local stability, humanitarian and international co-ordination.

Mr Mitchell said Britain will increase its own aid efforts focused on the underlying issues affecting the region over the next three years as part of its ongoing aid programme, including more police training, a tougher judicial system and jobs for young men.

Aid projects focused on resolving local conflicts and strengthening the police are expected to double next year with more done to make district authorities more accountable and able to deliver basic services.

Alongside this, support for job creation and economic development will also double, creating 45,000 jobs across Somalia by 2015.

Unemployment and extreme poverty are believed to play a key part in young men turning to piracy, crime and extremism.