Behind The Business Plan Of Pirates Inc.

Apr 30, 2009

Piracy off the coast of Somalia has become an international problem — and an international business. Navy SEALS rescued an American merchant captain earlier this month after Somali pirates raided the Maersk Alabama as it was making its way around the Horn of Africa to deliver aid.

But the issues 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."

Staffing Is Not A Problem

And like a cruise ship line, a piracy operation needs a crew. Somalia is an impoverished and largely lawless country with high unemployment. As a result, there is a huge work force looking for jobs.

Once the supplies and employees are ready, the piracy start-up is ready to launch.

But, Pham cautions, the pirates must choose their target carefully.

"Does it have any value? Who is the crew? Do they have any security onboard? Who owns the ship? All of those things have to be factored. This is a business decision, to seize a ship. Westerners command a lot more money than poor Filipinos, whose country and families don't have the money to ransom them," Pham says.

"A European is going to fetch you a lot more than a Filipino. No one is going to ransom an African. I'm being brutally frank, but it's true," he says.

Finding The Right 'Customer'

If the pirates have made "good" business decisions, they will soon successfully seize a ship — and have "customers" such as Per Gullestrup, CEO of the Clipper Group, a Danish shipping company. One of the company's ships, with its crew of 13, was hijacked last November in the Gulf of Aden.

When it happened, Gullestrup called the company's insurer, who wanted Gullestrup to pay a ransom and get the ship back — otherwise, the insurer would be stuck with covering a $15 million ship. Gullestrup's company could have tried to take the ship back by force, but that is usually when hostages get killed.

So the insurer put Gullestrup in touch with a professional ransom negotiator.

After three days, the pirates called.

"They introduced themselves, you know, 'My name is Ali; I'm your friendly pirate today' — not quite, but you almost got that sense. They're not making threats or anything. They're very polite in their whole demeanor," Gullestrup says.

They just politely demanded $7 million.

Just as Gullestrup had hired a professional negotiator, the pirates hired one, too — usually someone who speaks English well, often a lawyer. In this instance the pirates' negotiator — "Ali" — had spent 29 years in the U.S.

Let's Make A Deal

Ali gets a commission out of the ransom, so he has an incentive to drive up the price. Gullestrup laughed at the initial demand for $7 million, calling it "a fantasy number."

He says he never considered paying that amount, because it was "way, way, way above the market and way, way above what we knew was being paid for other ships and ... for similar hijackings."

So the pirates started high, Gullestrup started low, and the haggling began.

For a couple of weeks, the two sides went back and forth, simply restating their positions. Eventually, Gullestrup recalls, "We decided to say to them, 'OK, then there's nothing else to talk about, and we won't call you anymore, and you can call us when you are ready to reduce your demands.' "

Gullestrup says he wasn't worried about the safety of his crew because Somali pirates rarely threaten or kill hostages. The moment crew members get hurt or killed, the pirates lose their most important bargaining chip.

The pirates did eventually blink: But their demand was still much higher than the market rate, so Gullestrup and Ali did some more haggling and finally agreed on a ransom payment — somewhere between $1 million and $2 million (Gullestrup wouldn't give an exact figure).

Faxing Over The Details

The agreement was ironed out, and then Gullestrup literally faxed over the details to the ship. The money was loaded into duffel bags that were put into a watertight container, which was then flown over the hijacked ship and dropped into the water.

"They had a little boat, and they went over, picked up the container and brought it aboard the ship," Gullestrup recalls.

This, of course, is where the pirates settle up. Gullestrup says all the pirates who worked the hijacking showed up for payday. As a result, there were about 30 pirates onboard the vessel.

First, expenses such as food were paid. Then, the pirates paid themselves. Those who took a lot of risk got paid more.

Checking The Time Sheets On Payday

Gullestrup says they actually found time sheets onboard the ship after the pirates had left.

"We could see that there was a time sheet on a particular person who had been onboard and dates they had been onboard and so many dollars per day, and then a total sum on the time sheet," he says. The pirates, in effect, were clocking in and out.

From this and other ransom situations, here's a typical accounting for a piracy operation: About 20 percent goes to pay off officials who look the other way. About 50 percent is for expenses and payroll. The leader of an attack makes $10,000 to $20,000 (the average Somali family lives on $500 a year). The initial investor — who put in $250,000 of seed capital — gets 30 percent, sometimes up to $500,000.

Gullestrup's ship and crew were returned safely, although the pirates didn't actually want to get off the ship right away. That's because they were afraid of getting robbed by other pirates on their way back to shore, Gullestrup says, so he gave them a ride north, dropping them closer to home.

Fortunately, he says, he was going that way anyway. Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.

Transcript

ROBERT SIEGEL, host:

Ever since the Maersk Alabama was hijacked, our Planet Money team has been wondering: Is piracy a successful business model? So NPR's Chana Joffe-Walt set out to unpack the pirates' business plan.

CHANA JOFFE-WALT: It begins like everything else, with the money, the investor. Dr. J. Peter Pham at James Madison University says piracy financiers, they're usually ethnic Somali businessmen who live abroad, someone who might call his cousin in Somalia and say, let's put together a piracy business. I'll set you up with some seed capital - say, $250,000 or so - get you started. And then the cousin in Somalia, he goes out shopping.

Dr. J. PETER PHAM (James Madison University): You'll need some speedboats, you'll need some weapons and food for the voyage and all the…

JOFFE-WALT: And ropes and ladders.

Dr. PHAM: And all that, yes. The caterer to the…

JOFFE-WALT: Did you just say caterer?

Dr. PHAM: Yes. Everything that you would need to run a cruise ship line, you know, short of the entertainment, you need to run a piracy operation.

JOFFE-WALT: And just like a cruise ship line, you need a crew. Somalia, being a country where there's lots of unemployment and poverty, there's a big workforce to choose from. So you got your boats. You got your crew. Your piracy start-up is ready to launch to seize a ship. Now, Dr. Pham cautions, you can't just choose any ship. You've got to be strategic, got to ask questions.

Dr. PHAM: Does it have any value? Who is the crew? Do they have any security onboard? Who owns the ship? This is a business decision, to seize a ship. Westerners command a lot more money than poor Filipinos, whose country and families don't have the money to ransom them. No one is going to ransom an African. I'm mean, I'm being brutally frank, but it's true.

JOFFE-WALT: So you make your crude business decisions, work your model, and you successfully seize a ship. Suddenly, you have customers, customers like Per Gullestrup. He's the CEO of a Danish shipping company called Clipper Group, and he had a ship hijacked last November in the Gulf of Aden. When it happened, Gullestrup called his insurer right away. And the insurer, he really wants Gullestrup to pay a ransom to get the ship back. Otherwise, the insurer is stuck with covering a $15 million ship. Gullestrup could try to take the ship back by force, but that's usually when hostages get killed. So the insurer hooks Gullestrup up with a professional ransom negotiator. And then they all just sit, waiting to hear from the pirates. After three days, they finally call.

Mr. PER GULLESTRUP (CEO, The Clipper Group): They introduce themselves, you know, my name is Ali. I'm your friendly pirate today - not quite, but you almost got that sense. I mean, they're not making any threats or anything. They are very polite in their whole demeanor.

JOFFE-WALT: They just politely demanded $7 million. Just like Gullestrup had hired a professional negotiator, the pirates, they hire one, too, oftentimes lawyers.

The guy who called himself Ali, the pirates' negotiator, he had spent 29 years in the U.S. And Ali gets a commission out of the ransom, so he has an incentive to drive the price up. He tells Gullestrup $7 million, Gullestrup laughs at that figure, calls it a fantasy number. He says he didn't even consider it.

Mr. GULLESTRUP: Never. Never. Because that was way, way, way above the market and way, way above what we knew was being paid for other ships and other incidents.

JOFFE-WALT: When you say it was way above the market, above the market for hostage payments.

Mr. GULLESTRUP: Exactly, for similar hijackings.

JOFFE-WALT: The pirates were starting high, Gullestrup started low, and the haggling began, which strangely sounds a lot like buying a car.

Mr. GULLESTRUP: We went back and forth for, if I recall, one or two weeks, just restating our position. They restated their position. And then we decided to say to them, okay, then there's nothing else to talk about, and you can call us when you are ready to reduce your demands.

JOFFE-WALT: It's like you're on that sales lot buying your car, and you're thinking, okay, I need to walk away for them to bring it down.

Mr. GULLESTRUP: Exactly, exactly, exactly. And then you're waiting for the salesman to call you and give you a better offer.

JOFFE-WALT: Gullestrup might sound heartless here. I mean, we are talking about 13 innocent lives captured off the coast of Somalia. But he wasn't worried about the safety of his crew because the moment anyone on the crew gets hurt or killed, the pirates lose their most important bargaining chip. And the pirates did eventually blink. They called with a better offer. It was still much higher than the market rate, so Gullestrup and Ali, they did some more haggling, finally agreed on a ransom - somewhere between $1 million and $2 million; Gullestrup wouldn't give me an exact figure. And then Gullestrup just faxes over the details. Seriously, he faxed it to the ship, and then headed to the bank with duffel bags, got $1 million to $2 million in U.S. cash, put it in a watertight container, flew over the hijacked ship, dropped it in the water.

Mr. GULLESTRUP: They had a little boat, and they went over, picked up the container, and brought it aboard the ship.

JOFFE-WALT: This, of course, is where the piracy business becomes cash positive. Gullestrup says all the pirates who worked his hijacking, they all showed up for payday. So there were like 30 or so onboard all at once. They paid off the expenses, like food first, and then they get paid. If you took a lot of risk, you get paid a little more.

Mr. GULLESTRUP: And we actually found time sheets onboard the ship after they had left the ship. We could see that there was a time sheet, particular persons who had been on board on so many dollars per day, and then a total sum on this little time sheet.

JOFFE-WALT: So they were clocking in and out?

Mr. GULLESTRUP: As far as we could see.

JOFFE-WALT: Here's basically what we know about how pirates divide up profits from this and other ransom situations: About 20 percent goes to pay off officials who look the other way. About 50 percent is for expenses and for payroll. So if you're leading the attack, you can make 10 to $20,000. And that's really good pay. The average Somali family lives off $500 a year. And then that initial investor, the one who put up his quarter million of seed capital, he gets 30 percent, sometimes $500,000 - also really good pay.

Gullestrup's ship and his crew were returned safely, although the pirates actually didn't want to get off right away. They were afraid of other pirates, that they'd get robbed going back to the shore. So Gullestrup gave them a ride up north, dropped them closer to home. Fortunately, he says, we were going that way, anyway.

Chana Joffe-Walt, NPR News.

SIEGEL: Chana is part of NPR's Planet Money team, which covers economic issues from piracy to Ponzi schemes, all at npr.org/money. Transcript provided by NPR, Copyright National Public Radio.