Why do pirates still exist?

Pirates

If you’re like me, you think three things when hearing about pirates off the coast of Somalia. The first is “Yarrrrrr, Matey!” The second is that nobody should pay those guys because they are essentially extortionists. The third is that it sounds like they’re making some decent money during a pretty bad economy. It can’t be that hard to obtain the necessary job skills. All I probably need is an AK47 and nothing to lose.

Well, I learned that I was wrong from a podcast by NPR’s Planet Money. Chana Joffe-Walts’s interviews revealed why piracy pays. The reason it works is because pirates have financial backing and a sound business plan.

Why pay?

The basic reason pirates get paid is that targets are picked well, making the financial decision relatively simple. Pirates take ships that are associated with countries that have no other option. If a shipping company doesn’t want to pay, it has to convince a navy to deal with the pirates. Otherwise, the shipping company has to pay the ransom if they want their ship and crew back. A dead crew brings a PR mess that costs money. There’s also the basic fact that they don’t want to keep buying ships or pay for the cargo on the ship. And would you, as a customer, ship freight with a company that doesn’t recover the goods you gave it?

We saw what happens when pirates choose a ship from a country that has a navy. The Maersk captain and crew were rescued because the US was willing to use its military might. All in all, a pretty terrible decision by the pirates. Pirates get paid only when it’s the cheapest option for the company. And usually that’s the case because they get inside information.

The Costs

I really did think piracy was 20 guys with guns, a boat, and no better options. However, these guys need much more. First, they need a financial backer who can pay off officials, foot the bill for supplies, and even provide a little bit of training at pirate camp. Yeah, pirate camp. All this costs $150-250K.

Officials are paid to turn a blind eye or provide intelligence. After all, the sea is quite large, if you haven’t looked at a map recently, and not every ship has value. If pirates take a ship that has no value to people or people can’t pay, they’ve wasted their time. Pirates also like to know who owns the ship and the origin of the crew and contractor to prevent having to deal with navies. They like to know what kind of security the ship has, if any. All of this information can make their jobs easier, but this intel costs money.

Supplies are probably the most obvious expense but possibly underestimated expense. They include a big boat to launch smaller faster boats, guns, and catering. Yes, catering. If you are on a ship for a month or two, a supplier drops by with food and supplies that you need. The podcast pointed out the fact that pirates need everything pretty much what Royal Caribbean needs to run a cruise ship minus the entertainment. That’s not cheap. As for entertainment, what’s more riveting than a hostage standoff at sea?

The next expense is personnel. Bodies aren’t hard to find when unemployment is as high as it is in Somalia, but bodies have to be trained. It’s hard to swing on ropes from one ship to another when there are no sails and masts like Pirates of the Caribbean. The pirates are actually attacking in small boats, way below the deck of the ship. And they have guns, which not everybody knows how to use. To recap, pirates have to drive a boat, board a huge ship, and, at the very least, look menacing with a gun. I can’t actually do any of these, and I’m pretty educated. I was considering piracy as a backup career, but now that I know camp is involved . . .

The Benefits

The negotiations are surprisingly civil. The pirates aren’t driven by ideals, so they don’t want to kill anybody. That means it all boils down to price, like buying a car. In the example on the podcast, the pirates called up, introduced themselves, and started at $7 million. The guy negotiating pretty much laughed and came back with the lowball offer of $300K. After a couple weeks, they were offering $5 million and $400K, at which point, the shipping company walked away, just like a car deal. The pirates called back a couple weeks later and eventually both parties settled on a price in the range of $1-2 million.

Once the price was settled, the company faxed the terms to the ship, which actually included filling up the tank with gas, and the money was dropped from the air in sealed bags. They also included a money counter to help the pirates count it. Once the pirates took their cut, you may think they’d just leave, but a few actually wanted rides up the coast. You may also think the shipping company would tell them to get out, but they obliged the pirates and dropped them off somewhere up the coast. After getting the ship back, the company found timesheets. It looked like the pirates were keeping track of their hours. The pirates actually came across as a pretty organized group conducting a pretty civil transaction.

Everybody on the pirate side makes a pretty penny. The backer takes about 30% of the total, which is about 1 to 2 million dollars. That means he makes can pretty much double his money for a few months worth of work. 20% goes to pay off officials. The rest is for paying off personnel, which includes the guys that take the ship, the guys that guard it, the negotiator who has probably spent a good amount of time learning English in the US, the caterer, and everybody behind the scenes. The guys that took the ship can make around $10K. The guards usually net around $1K. Considering that the average family in Somalia lives on $500, it’s great pay for a couple month’s work. That’s good living for two to ten years.

At the end of the day, you have unwilling “customers” called shippers paying a “company” that employs pirates and has a monopoly on the merchandise: the hijacked ship. I think it's unfair to draw any comparisons between pirates and cable or utility companies . . . but mostly because it sounds like the pirates are competent and relatively cordial.