Some Economics of Somali Piracy

Jeffrey Gettleman has penned a fascinating piece about the 388-day ordeal of two British sailors taken hostage by Somali pirates. Writing in the New York Times Magazine, he recounts how Paul and Rachel Chandler sailed off course between the Seychelles and Tanzania and found their sailboat boarded by ten pirates.

Their first order of business? Eating the Chandler’s cookies and using their shower. Piracy is not a glamorous occupation.

In addition to documenting the personal travails the Chandlers endured during their captivity, Gettleman also reports on the economics of the hostage-taking business. The payoffs, if any, come after months and months of negotiation. So pirates need credits and investors to cover operating costs:

In recent years, as ransoms have climbed, thousands of destitute, uneducated Somali youth have jumped into the hijacking business, and all anyone in Adado knew was that a young upstart named Buggas had taken the Chandlers to a desiccated smudge of a town called Amara, near the coast, and that Amara locals were backing him up. Local support is crucial, because holding hostages — especially for a long period — can become expensive. You need to keep them fed and most important, heavily guarded — so a rival pirate gang or Islamist militia doesn’t rekidnap them. Paul figures it was costing Buggas nearly $20,000 a month to hold them hostage: with around $300 per day spent on khat; $100 a day on goats; maybe a couple hundred more for tea, sugar, powdered milk, fuel, ammunition and other supplies. Then there’s payroll— in the Chandlers’ case, cash for the pirate raiding party and their 30 henchmen who rotated as guards on shore. On top of this come the translators, who charge a hefty fee to interact with the hostages and negotiate a ransom.

Pirates tend to operate on credit — borrowing all these resources from community members or other pirates, who will then get a cut, or in Somali, a sami, once a ransom is delivered. In Amara, rumors quickly began to fly that the Chandlers were rich — possibly even British M.P.’s — and were therefore the ideal sami opportunity.

“People were saying it would take just two months for a ransom and then they would get double,” Aden remembered. “They invest $5,000, they get $10,000 back. That’s a good return, right?”

According to lawyers who handle piracy cases, pirate translators tend to be educated men from within the community who work for several different pirate gangs and are typically paid a flat fee, which can reach $200,000 — they are essentially white-collar pirates.

Members of the British Somali community took an active interest in the Chandler’s plight and started leaning on folks back home to release them.

But Buggas and the gang didn’t budge. They needed their money. Their operating expenses were growing daily, and by this point they had many creditors — some of them heavily armed — who were expecting to be paid back.

… [But] Buggas was not actually in charge. … “He was working for three or four investors who were making the decisions.”

In many Somali piracy cases, a committee of investors or creditors fronts the cash for the piracy mission, and it’s up to the head gunman to deliver a tidy profit. But finally it seemed to dawn on Buggas and his creditors that they weren’t going to make much of a profit on this one. Stephen and Ali were negotiating a payment under a half-million dollars, all the Chandler family could afford and, for the pirates, a humiliating fraction of what corporate shipowners typically pay.

The whole article is worth a read, particularly for the description of the key role that Somalis in Britain played. And, of course, all the usual issues about the incentives created whenever ransoms are paid.

One thought on “Some Economics of Somali Piracy”

  1. I’m quite surprised that Wall Street has not yet made an effort to securitize this business opportunity. I’m sure a substantial business could be created by offering Collateralized Debt Obligations based on piracy and kidnapping. With proper leverage and derivatives this could become a several trillion dollar market in a matter of months.

    Perhaps it is a matter of honor among thieves.

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