The business model of pirates

April 8, 2010


A group of investigators, named the Monitoring Group, that was sent by the Security Council to Somalia has released an encyclopedic, 110 page study of the criminal situation in Somalia. The media, however, has fanatically picked up on the diversion of food sent by the World Food Program from the needy to armed radical Islamist and corrupt contractors. Browsing over the report, however, I came across a short, rather interesting hidden explanation in the annex of the business model of the Somali pirates which is just remarkable:

A basic piracy operation requires a minimum eight to twelve militia prepared to stay at sea for extended periods of time, in the hopes of hijacking a passing vessel. Each team requires a minimum of two attack skiffs, weapons, equipment, provisions, fuel and preferably a supply boat. The costs of the operation are usually borne by investors, some of whom may also be pirates.

To be eligible for employment as a pirate, a volunteer should already possess a firearm for use in the operation. For this ‘contribution’, he receives a ‘class A’ share of any profit. Pirates who provide a skiff or a heavier firearm, like an RPG or a general purpose machine gun, may be entitled to an additional A-share. The first pirate to board a vessel may also be entitled to an extra A-share. At least 12 other volunteers are recruited as militiamen to provide protection on land if a ship is hijacked, In addition, each member of the pirate team may bring a partner or relative to be part of this land-based force. Militiamen must possess their own weapon, and receive a ‘class B’ share – usually a fixed amount equivalent to approximately US$15,000.

If a ship is successfully hijacked and brought to anchor, the pirates and the militiamen require food, drink, qaad, fresh clothes, cell phones, air time, etc. The captured crew must also be cared for. In most cases, these services are provided by one or more suppliers, who advance the costs in anticipation of reimbursement, with a significant margin of profit, when ransom is eventually paid.

When ransom is received, fixed costs are the first to be paid out. These are typically:
* Reimbursement of supplier(s)
* Financier(s) and/or investor(s): 30% of the ransom
* Local elders: 5 to 10 %of the ransom (anchoring rights)
* Class B shares (approx. $15,000 each): militiamen, interpreters etc.

The remaining sum – the profit – is divided between class-A shareholders.

Driven by an impressive success rate, the high profitability and relative low risks of piracy of the Somali coast has wielded a business model designed for the ages.

Do they teach that at Wharton?