The Economics of Somali Piracy

On May 5, 2009 the MV Victoria was sailing off the Gulf of Aden with a shipment of rice destined for Saudi Arabia when it was seized by Somali pirates. The crew of 11 Romanians then endured 75 days in captivity. After tense negotiations between the pirates and shipping company the shipping company agreed to pay a $1.95 million ransom (which was delivered by airdropping a package into the sea.)

So what did the Somali pirates do with that sum? A new report from the UN shows how the pirate business model is evolving into a very complex system.

Pirate finances are usually managed by a ‘Committee’, who organize an operation and are responsible for managing all the costs. The Committee members usually consist of a chair, the two principal investors, the commander of the sea-pirates and the commander of the terrestrial guard force. The Committee is supported in the financial aspects of its work by an accountant who is usually rewarded with a share equal to that of a guard.

Ransom payments must cover two types of expense: the ‘cost’ of the operation and the ‘profit’. After a ransom drop, pirate leaders deduct the operational expenses or ‘cost’ from the total amount of ransom, before distributing the remaining money or ‘profit’ to participants in the operation. The profit is generally lower than the cost and is divided between the investors (30%), the guard force (30%) and the sea-pirates (40%).

Operational cost
The ‘cost’ of an average pirate operation typically includes the following:

– Committee members: usually 5 persons who collectively receive 5% of the total ransom amount for their work in the Committee, in addition to the return on their
investment;

– Provisions for pirates and crew, both on board the hijacked ship and onshore, including food, drink, clothes, qaad, vehicles, equipment, weapons, outboard engines, fuel, etc.

– Shahaad: a Somali social obligation to share wealth, whether in cash, or by showing generous hospitality, estimated at as much as 20% of the total ransom amount;

– Somali cook(s);

– Accountant(s);

– Logistics coordinator;

– Interpreter or negotiator

– Payoffs to other local militia groups (to date only in Harardheere)

– Pirate leader and investor.

– Variable cost, paid back at up to 300% of cost. Off duty expenses like cigarettes, phone cards and prostitutes are usually not included in the ‘cost’.

– 2 shares equivalent to a guard force share

Profits
Investors in an operation share roughly 30% of the profit, according to their individual contributions. The remainder of the profit is distributed in the form of ‘shares’ to the participants. An individual can play multiple roles in an operation, organization and therefore collect multiple shares or fees.

The report goes on to detail how pirate leaders are also active investors in the Khat business. Khat (or Qaad) is a mild stimulant, grown regionally, that may or may not have addictive qualities. What’s more, young pirates addicted to Khat incur huge debts to pirate investors in order to keep up their habit. Indentured Piratude?

A large proportion of the ransom money is invested by pirate leaders in the ‘qaad or ‘miraa’ trade through Somali businessmen in Nairobi. Aircraft that fly qaad from Kenya into Somalia often return to Nairobi with cash — an important channel for piracy proceeds to leave the country.

Pirate leader Mohammed Abdi Hassan ‘Afweyne’, for example, is said to run such a business for the piracy network in Harardheere/Hobyo.

Most young pirates chew qaad as a way of passing the time, staying alert and socializing with their fellow pirates. They may spend weeks or months trying to hijack a ship, guarding the crew on board a hijacked ship, or providing protection onshore. Since few can afford the daily consumption of qaad for such extended period, qaad is usually provided to them on ‘credit’ by the pirate leaders, investors, and businessmen who control both the pirate network and the qaad business. Accounts are meticulously recorded, and the return for the qaad suppliers is huge, especially because they may charge the pirates as much as three times the market prices for qaad bought on credit.

In practice this means that a pirate pays up to US$150 for one ‘kilo’ of qaad, which normally sells for US$50 on the streets of Harardheere.

The symbiotic dynamic between piracy and the qaad trade clearly offers some pirate leaders a way both to invest their proceeds and to generate additional profits, which can be invested outside Somalia.

So how much does this cost the shipping company? As mentioned earlier, the MV Victoria paid a $1.95 million ransom. But that was only represented part of their losses from the 75 day ordeal. Again, from the UN Report:

The MV Victoria hijacking is illustrative of the costs typically associated with an act of piracy. The total cost of the MV Victoria hijacking represents €3,219,885.80, which are broken down as follows:
Direct costs of the hijacking

-Company costs (travel, communication, hotel, meetings, etc.)
– Cash stolen by the pirates on board the hijacked vessel
•-Communications from the vessel
– Lawyers
– Private security risk company (negotiations, ransom delivery, debrief etc.)
– Ransom payment
– Charter of a tug boat after the hijacking
– Port and agent’s fees
– Repairs (hull, machinery, equipment, computers, etc.)
– Medical costs

In the case of the MV Victoria, these direct costs amounted to €2,585,161.27.

In addition, the shipping company suffers the indirect costs deriving from the loss of hire of the vessel. In the MV Victoria’s case these involved 141.5 days, corresponding to a total cost of €634,724.53

All in all, this is a very profitable business — with a lot of stakeholders making a lot of money. For example, the report finds information about a shadowy freelance translator/negotiator that reportedly pulls in $500,000/ year.

The good news, such as it is, is that the Al Shabaab militant group–which is currently preventing humanitarian relief from reaching famine stricken areas in southern Somalia– is not directly involved in the piracy business. The report shows that their main source of income is extracting rent on the export of charcoal and import of sugar.

Still, relief vessels have been attacked in the past. (The Maersk Alabama, for example, was carrying World Food Program aid.) As the international community ramps up its effort to confront the famine crisis, the international community ought to remain vigilant against these threats. By Mark Leon Goldberg: UN Dispatch reported.