Is piracy a successful business model?

Mike Schuler
Total Views: 17
May 1, 2009


The short answer is yes. Running piracy ring in Somali can prove to be a very successful and profitable business for everyone involved. A recent segment on NPR’s program “All Things Considered” takes a unique look Behind The Business Plan Of Piracy, Inc, by walking through the steps of a piracy ring startup.  Oddly, it’s not much different than your average small business owner looking to launch a coffee shop or boutique.

Like any business, what you need to start with is venture capital or “seed money”.  About $250,000.

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.”

The next step: finding employees. Fortunately, finding employees willing to work is an easy task in Somalia.

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.

However, in order to reduce risk and maximize your ROI, pirates must first identify their customers.

“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.

With all these factors considered, the pirate ring is ready to open their doors, hit the seas and seize a ship.  Before long, hopefully, they will have targetted their first customer and, if the pirates played it right, reeled them in.

“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.

Now everything is in place to start negotiating deals and bring in the cash.

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.

Ali gets a commission out of the ransom, so he has an incentive to drive up the price.

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

In bargaining a price for the ship and crews return, a couple factors have to be taken into account including market value.  What are similar ships going for in this market?  After the back and forth, both parties will eventually come to an agreement.

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.

Finally it’s time to 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.

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

The pirates, in effect, were clocking in and out.

Here’s how the a typical piracy ring’s books are broken down.

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.

Looking at piracy in this light, it’s scary how familiar it looks and even more scary how much sense it makes! A little bit of investment, willingness to take some risk, motivated employees, the right customers and a good salesman to close the deales.

You can read more on this at NPR’s All Things Considered HERE or LISTEN NOW.


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