The Business Model of Somalian Pirates (audio)

NPR contributor Chana Joffe-Walt produced a great piece for Planet Money which analyzes the economic model behind the pirates of Somalia (and other locales.)

[I]ssues of criminality and the potential for violence aside, a closer look at the "business model" of piracy reveals that the plan makes economic sense. A piracy operation begins, as with any other start-up business, with venture capital.

J. Peter Pham at James Madison University says piracy financiers are usually ethnic Somali businessmen who live outside the country and who typically call a relative in Somalia and suggest they launch a piracy business. The investor will offer $250,000 or more in seed money, while the relative goes shopping.

"You'll need some speedboats; you'll need some weapons; you also need some intelligence because you can't troll the Indian Ocean, a million square miles, looking for merchant vessels," says Pham, adding that the pirates also need food for the voyage -- "a caterer." Yes, a caterer.

"Think of it as everything you would need to go into the cruise ship business," Pham says. "Everything that you would need to run a cruise ship line, short of the entertainment, you need to run a piracy operation."

Listen: PLANET MONEY - Behind The Business Plan Of Pirates Inc.

• [dainel]

  The reason kidnappings on land does not work very well is because when you show up to get the money, the cops nail you. It’s not that it’s difficult to kidnap anyone. There are easy targets everywhere. The problem is collecting the money. I wonder why a similar situation does not occur at sea.

  Gullestrup even gave them a ride home, dropping them off closer to their home. Once they were off his ship, why didn’t the navy pounce on them?

  We can alter the economics of piracy so as to make it not worthwhile. If the low-ranked pirates who actually board the ship usually escape, plenty of people would be willing to take the job. If they usually get captured or shot, people will be less willing. Those who remain will demand higher pay. If many of the “operations” end up failing with the money not reaching the masterminds, it will become a nett loss, and the financiers will go away.

  About 20 percent goes to pay off officials who look the other way. What officials? Somalia has a government? US$250,000 in seed money sounds a bit high to me. A couple of boats and guns couldn’t cost that much.

  The mention of caterers and cruise ships makes me wonder how accurate the story is. Pirates do not live like passengers on luxury cruise ships. They use little boats with big engines, and store their food in dirty pots. We’ve seen those videos on TV. Think “poor fishermen”.

• [mutuelle]

  I believe too that $250,000 is exagerated for this type operation. But beside the ethique, just for fun this is really funny!

• [Anonymous]

  Whats up with the spam “dont click here” crap?? some sort of new you tube spam stuff? Has the vid been compromised?

  • [Antinous / Moderator]

    They’re links to the HPHBP trailer on YouTube. We’ll try to find a clean copy.

• [Jack’s Smirking Revenge]

  So i’m not the only geek who listens to that Podcast?!

  Sweet!

  However, the criminal sectors of a society that are successful seem to follow a “corporate model”.

  The drug world for example.

  A “manager” checks on the blocks that are filled with expendable dealers or “workers” that produce a profit that they only get a small portion of.

  Those “managers” report to “corporate” who pays them top dollar to manage the lower-level people while making orders with “suppliers” and figuring out ways to expand their “company” to snuff out the competition and maintain dominance of their business.

  And, like in the business world, those at the top get the most while those at the bottom get just enough to buy the pointless crap that makes them “feel” rich.

  Wonder if there’s a TED Spread for the Drug Business.

  “Interest rates stay the same today between The Yakuza and The Italian Mafia, but the main drug cartels are reporting that their bonds are still safe for investment…”

• [Anonymous]

  The somali pirates may not have need of a caterer, but the need to cater to their hostages. For the pirates to be paid they need to keep treating the hostages well and that includes getting them food.

  In Eyl, one of the towns where they anchor hi-jacked ships off of, there has sprung up an big catering business. So don’t dismiss the caterers just yet.

• [Anonymous]

  This reminds me of an episode of ‘ReBoot’ where Dot encounters some pirates and has a detailed discussion with them of the economics of their profession.

• [axl456]

  i love ike xD

• [sg]

  Just by coinkydink, we published an article last week at The Legality about the criminal laws that might apply to piracy. Not, you know, internet piracy, but the guys-with-guns-and-boats kind of piracy, like Xeni’s talking about here.

  If you’re into that sort of thing, check it out: Analog Piracy in a Digital Age

• [phisrow]

  Hmmm… Sounds like we know who to actually bother going after.

  I’m all for defending ships under attack, by force(including lethal) if necessary; but going after scrawny, expendable teenagers in skiffs is ultimately a sucker’s game. Tracing the money transfers back to a few of these expat “businessmen” and giving them a taste of court. Now that is something worth doing.

• [skylark]

  I’m no fan of pirates (unless they have a good song) but shooting blokes on speedboats, or even arresting the money men behind them, is only addressing the effect, not the cause. The cause is the desperation of millions of people, starving to death while their corrupt governments crash and burn. Piracy and kidnapping are going to keep spreading and getting worse until wealthier nations step in and save poor nations from failing.

• [jjasper]

  J. Peter Pham at James Madison University says piracy financiers are usually ethnic Somali businessmen who live outside the country and who typically call a relative in Somalia and suggest they launch a piracy business. The investor will offer $250,000 or more in seed money, while the relative goes shopping.

  Yes, clearly this is just poor people taking power into their own hands. Poor people with $250k in start up money. I wish I was poor like that.

• [blackanvil]

  The reason that pirates are not, by default, killed out of hand is that once one side starts killing, most likely the other will follow. From the insurance and shipping companies POV, this would be really, really bad. So, rather than deal with pirates by killing them outright, they negotiate in order to ensure that ships and crews are returned intact, rather than people killed and ships/cargo sold or scuttled.