Translogistics

In 2010, at the height of the Somali high seas piracy, piracy earned itself a place amongst a litany of reasons why Ugandans had to pay extra costs for imported goods. Shippers, insurance agencies, underwriters, crews, cargo owners and ultimately the importing companies all complained about piracy especially in the popular Gulf of Aden and the Red Sea.

The reasons were plain simple: The cost of insuring against the pirates, the extra cost of container demurrage resulting from vessel delays, charges by the shipping company for ransom paid to retrieve the container and so on. According to a report by One Earth Future Foundation, Somali piracy alone cost about US$ 6.9 billion in 2011 owing to ransom, security and insurance costs, re-routing charges as well as labor and prosecutions.

Uganda s most vital shipping routes for her exports and imports all rely on the pirate infested Gulf of Aden. 61.9 percent of Uganda s imports are from Asia and Middle East while 13 percent are from Europe. 22.8 percent of exports go to Europe and 15.8 percent go to Asia and the Middle East. Any interruptions in the Gulf of Arden would therefore deal a blow to the import and export trade.

But today, almost a year since piracy was dealt a big blow by a combination of multi government patrolling initiatives by navy forces, as well as onboard defense mechanisms, but you won t hear the businessmen talk about how this will translate into reduced costs. They have since moved on to other things. According to the European Union Naval Force, Somali pirates hijacked 46 ships in 2009 and 47 in 2010.

In 2011, pirates launched a record number of attacks 176 but commandeered only 25 ships, an indication that new on board defenses were working. In 2012, pirates hijacked just five ships. The International Maritime Bureau reports that in the first nine months of 2012, there were 70 Somali attacks compared with 199 for the corresponding period in 2011. And from July to September, just one ship reported an attempted attack by Somali pirates, compared with 36 incidents in the same three months last year.

The obvious expectation from a consumer therefore would be that such a massive reduction in piracy would translate to an ease in the cost of commodities. This however has not been the case. Kampala City Traders Association Chairman Everest Kayondo explains to the CEO Magazine that some factors are motivators of cost of commodities while others are not.

Piracy has negative impacts on businesses but it is an exogenous factor meaning the likelihood of it happening or not does not mean that the cost of your commodities will go down because for some reason your goods were not captured. It is not often factored in when determining the cost of commodities, Kayondo explains.

The fact that piracy has come down to a record low therefore does not necessarily mean commodity prices will come down because piracy is just one of many factors influencing the same. Kayondo says the effects of piracy are what may cause an increase in the cost of importing goods because factors such as delays and extra charges from the shipping and insurance companies definitely affect business.

He also says that most of his organization s members do not insure their goods due to skepticism over whether the insurance companies will pay out in case goods are not only captured by pirates but in case of loss or demurrage.

I find that most of my members have no confidence in the insurance sector yet they occasionally witness challenges when it comes to delays caused by piracy meaning that by the time a ship is rescued the goods are already expired or the market demand has changed. Piracy, had emerged as a stumbling block to traders since consignments take long to be delivered yet the business runs on borrowed money leading to repossession of collateral from banks, he says.

Kayondo adds that the piracy scourge affects the economy more than it affects the cost of goods because government is forced to use extra resources to ensure exports and imports are protected while importers have to factor in the cost of doing business which is usually hard hit by freight costs, insurance charges, tax and time spent in transit.

Ronald Kanyerezi, a manager in charge of commercial projects, quality and strategy at Three Ways Shipping Group says that although piracy does not affect freight companies directly, it has a direct impact on the company s customers with the uncertainty of whether their goods will reach on time.

There is the insurance aspect of the international business which means that goods that were previously not considered high risk now require piracy insurance because chances of losing the shipment are very high yet the shipping company will not compensate the importer, he says, adding: Piracy coming down changes the dynamics in that there is increased security hence importers will take minimum marine insurance without additional charge risk as well as slightly lower costs of shipping, he says.

He however agrees that the cost of commodities may not directly come down owing to a reduction in Piracy. Most of our customers hit by piracy did not necessarily transfer these costs to their customers at the time so piracy is a small determinant to cost of commodities as business owners absorb that cost themselves, he notes.

Biggest real threat to import & export

He however says that the biggest cost driver for the import and export business is the disorganised Mombasa to Kampala route. A container will cost between US$1,500 and US$ 1,800 to Mombasa by sea from the Far East but it will cost between US$ 3,000 to US$ 3,600 to transport it from the port of Mombasa to Kampala.

This is because a ship will usually bring in over 500 containers at once which means the cost is shared but once on the road, they are transported one container at a time, Kanyere explains. Additionally, there are weigh bridges, border charges and bad road conditions to deal with which shoots up the shipping cost to over US$ 5,000 even to the tune of US$ 15,000 depending on the kind and quantity of goods being imported.

Piracy is a mitigatable risk meaning it can be prevented by insurance if the importer appreciates the need for it but issues with delays at the Mombasa port, inefficiency of the system, lack of infrastructure and global market trends, these directly impact the cost of commodities, says Kanyerezi.

Kassim Omar, the chairman of Uganda Clearing Industry and Forwarding Association says that hidden costs imposed by the shipping companies and other players in the logistics chain, make an already bad situation worse.

The hidden costs which include (EMF) Equipment Management Fee a cost imposed on every transit entry unit cleared on the East African cost, In Transit Fee (ITF) as well as Deliver Order Fee (DOF which has gone up from US$ 5 to US$ 60 and US$ 100 have remained as a result of ignorance on the part of the business community doing business within the international trade framework, Omar says.

He says that these costs were initially, attributed to piracy but have continued to be imposed long after piracy has ceased being a major contributing factor. There should have been a downward trend in the cost of doing business and cost of commodities but these still remain high. Overall, hidden costs constitute between US$ 600 to US$ 1,000 per container thus compensating for other costs that may have been eliminated as a result of a decrease in piracy, he says.

Hunter Hunted: A joint strike force attacks pirates at sea in the Gulf of Aden

Kanyerezi says that although piracy is on the decline, it is not yet time to celebrate, saying that international navies should maintain their presence in the high seas for the foreseeable future so as to deal piracy a permanent blow.

As of 30 September 2012, suspected Somali pirates were holding 11 vessels for ransom with 167 crew members as hostages on board. In addition, 21 kidnapped crew members were being held on land according to the International Maritime Bureau.