The Somali Pirate's Business Model

Last week, a group of investigators dispatched by the Security Council to Somalia released an exhaustive, 100 plus page report on arms trafficking, aid diversion, and other criminal activities in Somalia. So far, much of the press around the report has focused on allegations that World Food Program aid had been diverted to suspected militants. The report also provides evidence that Eritrea has been supporting Somali militants, raising the prospect that Eritrea will once again come under international condemnation.

I'll have much more to write about this report soon. In the meantime, I found this short explanation of the pirates' business model, tucked away in the report's annex, to be fascinating.

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 of 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.

Wonder if they teach that at Wharton?




http://www.undispatch.com/somali-pir...uisiness-model