By MarEx 2015-04-26 16:55:27
By Thomas Bennett, L.L.B.
Somalia remains a failed state. Poverty, the absence of enforced law, and psychopathy masquerading as a just cause foment an environment where money for gain, or money to finance terror, means that piracy in the Indian Ocean has not gone away. What started in the Somalian North as a tax on shipping is a continuing threat to global trade.
Still, piracy has abated. Nation states have acted. Armed guards have helped. The threat has been contained, or has it? It is a brave shipping company that sends an unprotected crew through the high risk area of the Indian Ocean. And if the rationale for piracy remains, then piracy remains. Somalia, lawless as it is, will wait.
Western powers will not finance armed forces to patrol the Indian Ocean indefinitely. The maritime industry will price the risk according to the threat. The probability of piracy has diminished. The business of maritime security must adjust. As the perception of threat falls, so will the cost of protection. Competition will force prices down and many armed security companies will not survive. Some will merge. Consolidation is inevitable. Or so it seems.
Maritime security is still big business. We estimate that total revenue in the Indian Ocean is $400 million a year. The supply chain ranges from nation states to former servicemen, maritime agents and legitimate dealers in arms. All vested interests. All of whom take their piece of the whole. Today, prices for transits on vanilla routes are so low that it is hard to discern how a profit is achieved. If there is no more profit to be had, then competitive tension is designed to push all but a few players in this market to mutually assured destruction.
Regulation? Not Really
Gifting weapons to non-state actors is not without precedent. This gift does, however, breach most political theory as to who should have the right to bear arms. Regulation is and was inevitable. Law only works when it is applied to all; and regulation – the benchmark against which the use of lethal weapons is measured – should have the force of law. It does not.
ISO 28007 has not worked. Some have it; some do not. There are many buyers who do not require it. There are many sellers who do not bother. BIMCO’s recent endorsement of ISO 28007 may help. It may be too late. Buying patterns are entrenched. Too many stand outside Anglo-centric regulatory initiatives. It is easy to do so, legally and practically. As former Royal Marines increasingly price themselves out of the market for guards, a once Anglo-centric market along with its regulatory attire becomes increasingly irrelevant.
ISO 28007 may remain the standard for some. Edicts from the UK may be the benchmark for others. But economics is forcing this marketplace to change. There is a very long tail of buyers who have little time for edict, and an equally long tail of sellers who go along.
Who does, who can, police this market? Flag states perhaps. Yet the paradox of policing a market that pays well usually results in piecemeal regulation at best. After all, piracy is a diminishing threat – no vessels have been taken within corporate memory. So why change? Qui bono?
What of littoral states – those adjacent to High Risk Areas? Again, there are economic imperatives at work. Nation states and their agents do well out of maritime security. There is no overwhelming rationale for change.
What of Sri Lanka, the UAE and Oman? Sri Lanka’s place in maritime security is channelled through Avant Garde Maritime Services (AGMS) under a public private partnership with RALL, a government-owned business. AGMS is being critically evaluated by the new government. The suggestion is that the Srisena government will change the way it regulates how weapons and men are distributed to passing vessels, in which case AGMS may lose control. But Sri Lanka will not. Pre-AGMS, weapons were held on land and disseminated by the Sri Lankan Navy. Fees were paid. The state took control then; it may do so again.
As to Oman, or the UAE, or indeed any of the littoral states adjacent to the outflow of the Red Sea, there seems to be little real appetite to manage the risks attached to having floating armories within sight. Floating armories are, of course, in international waters, and the UN Convention on the Law of the Sea makes a fist of keeping these states away. However, one need only ask what Her Majesty’s government might do if there was a floating armory bobbing about within sight of Plymouth.
Which brings us back to regulation and market forces. Consolidation in the maritime security sector is inevitable. Or is it? It should be. Any standard business textbook on strategy will tell you that a market with multiple competitors will shrink to but a few. In a shrinking market, consolidation pressures are more intense. Companies will merge in order to marshal forces. Bankruptcy will emerge where sale, merger or deep pockets are absent.
Consolidation? What Consolidation?
Consolidation has not happened. Why? Some have tried to diversify (PGI). Some have gone bump (GOAGT). Some have divested then gone bump (Drum Cussac). Some are grabbing market share (Ambrey). Others do what they do well (Diapolous). The long tail? All are out there, with shrinking margins, taking risks, fighting to the death.
And it is, perhaps, in this last phrase that the clue to this market is apparent. We have seen at first hand how former soldiers start companies in the space and trade their fighting spirit from the military to the commercial. The enemy bears a different name. And absent commercial experience (which most do not have) the strategic confusion amongst alpha males in charge of such companies leads to a community of egos who cannot see the benefits of cooperation in a disparate market. Who, after all, if two companies merge, is going to step down and be subservient to the other? Better to die trying than take orders from someone else.
This is dangerous. In a poorly policed market, where the trade is civilians offering protection through resort to lethal force, a race to the bottom will result in cut corners. From four to three, from two to one guard on a vessel – a poorly trained guard at that. Economics and ego will force lip service to safety and the very reason guards are on vessels in the first place. Lose (no profit). Lose (no safety).
A Solution? What Solution?
Is there a solution that offers shipowners respite from this worst of all worlds and offers the maritime security community respite from itself? There is. The answer lies in economies of scale. It lies in better logistics. It lies in cooperation and, sometimes, in merger or sale. The market has already found the answer. Unfortunately, in its present guise it is illegal and politically untenable.
The model is this: Put a cheap guard on a salary, put him on vessel after vessel with a kit box, and float him around the Indian Ocean for a couple of months. Avoid land, make fleeting visits to floating armories, and you have a highly efficient business with very high gross margins. Once a guard’s salary and costs are paid, the additional revenue is all gravy.
There is value in this (idealized) model. Most maritime companies do not have the infrastructure or the client base to support it. Instead, margins are decimated as a result of flights, agents’ fees, weapons’ storage costs, floating armory charges, transfers, daily accommodation costs and hotels. If the next transit is a week away, profit may be lost altogether trying to keep guards in theatre. Profit will be lost sending them home. Weapons could be in the wrong place. Kit may be travelling in the wrong direction. Clever logistics management may help. But, fundamentally, a maritime security business trading on increasingly paper thin margins has to find efficiencies to survive.
Unless, of course, it has that critical mass of men, equipment and transit volume. If it has, then clever logistics and financial modelling are key. Critical mass is an absolute. And if critical mass is not an option, common sense, clear strategic thinking and sound commercial management should force decent maritime security companies to find partners to buy or merge with.
Get it right and profit will increase as logistics, financial modelling, economies of scale and buying power combine to force gross and net margins up. Get it wrong and bankruptcy or closure looms. Many maritime security companies understand decent logistics, efficiencies and the bottom line. But they have not the client base to action it. Instead, it is actioned in a piecemeal way. It is actioned in an illegal manner. This has led to the sharing of men and, in particular, weapons. Sharing weapons is illegal, it is politically charged, it is extremely dangerous.
Weapons for Hire – The Beginning of the End
Although no one has an absolutely precise figure to hand, we believe that there are at least 40,000 licensed weapons floating about or stored, ready for use, in the Indian Ocean. They sit on floating armories, adjacent land or are in theatre under use. These weapons are not tracked on a real-time basis. Companies are only put to proof when asked. In other words, regulation requires the sector to know what weapons they have and where they got them from.
Under UK law, weapons cannot be leased, or licensed, or ‘lent.’ Heavy sanctions wait for those companies that do. But the congruence of economic necessity and piecemeal regulation (many maritime security companies have nothing to do with the UK) means that weapons are passed between companies and used on a mate’s basis. For some, if weapons are not shared, the efficiencies that the smaller companies need to survive through sharing will be lost. It is beg, borrow or go bust.
Weapons swapping, sharing, hiring and licensing – it all leads to the same thing. It is not politically sustainable for enough arms to service a third world army to be bobbing about the sea with little idea as to who has what. The UN has taken notice, the U.S. State Department has taken notice, the EU has worked it out and the British Foreign Office has been briefed.
Unless the gift of allowing private citizens to bear arms is to be taken away (or managed) by nation states once again, sensible actors within the maritime security space need to consider how best to service their shareholders and maximize profit in a highly responsible manner – merge, consolidate, sell. Choose economies of scale, clever logistics, astute modelling and commercial cooperation. There really is no alternative.
Weapons cannot and should not be traded at armories or elsewhere. It is the beginning of the end. Equally, shipowners and charterers need to utilize their power and refuse to partake in this race to the bottom. It is, after all, the preservation of the safety of their men that is the end-game. And those that advise the maritime sector – its trade associations and the professional services who have done so well over the last five years, have to stand up for corporate social responsibility.
We live in dangerous times. Somalia remains a failed state. Terrorism is prevalent in theatre. Meaningful regulation is piecemeal. Profit is being decimated. Corners are being cut. Weapons may start to go missing. There is a choice, a viable commercial solution for maritime security companies facing home truths. They must take it before it is too late. – MarEx
Thomas Bennett LLB MSc (Oxon) is the owner of VHenry & Co. and VHenry & Co. Limited. The former is a legal practice, the latter an advisory business, each specializing in the needs of the security sector. firstname.lastname@example.org
The opinions expressed herein are the author’s and not necessarily those of The Maritime Executive.