Somali pirates are earning as much as 157 times their country's national average wage, making piracy a highly lucrative business in this East African country, a new study has revealed.
A pirate can earn up to $79,000 (Dh290,129) a year — a stark contrast to the $500 average annual income in Somalia, according to a report titled The Economics of Piracy: Pirate Ransoms and Livelihoods off the Coast of Somalia.
The study, conducted by economic and political intelligence consultancy Geo-policity, highlights the costs of piracy to the global maritime shipping industry and the benefits to the financiers who back the illegal operations.
Somali piracy cost $8.3 billion in 2010 including the ransom payments, insurance premiums, re-routing vessels, naval presence, prosecution of pirates and deaths of hostages and crews. Costs are projected to increase to more than $15 billion by 2015 given the rebound in maritime trade, the geographical expansion of piracy attacks and the use of more sophisticated tactics, the study says.
An emerging industry that benefits pirates, financiers, sponsors, private security and insurance companies, the total income of pirates ranged from $75 million to $238 million last year and this could rise to a whopping $400 million by 2015.
With loot to be claimed on the high seas, there are an estimated 1,500 pirates and their ranks are expected to swell by 200 to 400 new pirates a year. This means another 600 piracy incidents could threaten international waters by 2015. Pirates are part of a long and complex ‘piracy value chain' that includes sponsors, pirates, support crew, labourers, accountants, drug dealers, engineers, arms suppliers, government officials and money transfer operators.
Insurance companies and private security firms have emerged as among the main profiteers in this situation.
"Being a pirate is a very risky business, yet in a fragile state with an ineffective government, financing piracy is relatively risk-free over the longer term," said Peter Brookfield, managing editor of Geopolicity.
"The worst scenario for a financier is that he loses his boat and equipment. The worst scenario for a pirate is death."
Piracy will continue to grow because of the profits it generates for pirates in a fragile state where there are few legal job alternatives — unless the costs of being a pirate begin to outweigh the benefits, the study says.
"By accounting for the risk of being killed, injured or imprisoned, and the cost of each of these, we find that people engaging in piracy have made the right decision, financially anyway. The costs of being a pirate are very low. So much so, that when compared to the next best alternative, which is living in poverty, the potential costs of being a pirate are a lot lower than the benefit arising from not being a pirate. Our analysis indicates that the ratio of the costs of being a pirate to the benefits of living a life of poverty is between 1:4 to 1:8. By increasing the chances of death, injury and imprisonment, while increasing the standards of living of Somalis, the number of pirates will begin to drop. As it stands, the numbers suggest that pirates are perfectly justified in what they are doing, financially anyway, and the number of pirates will continue to grow," said James Lloyd, an economist with Geopolicity.
Incidents of piracy are set to expand substantially beyond Somali waters given the rising income disparity between pirates and non-pirates, Brookfield said.
For the shipping industry this means shouldering a growing burden of costs.
Insurance premiums for shipping companies with vessels operating through the Gulf of Aden rose by 30 to 40 per cent in 2009 and 2010, Farah Ali Juma, minister of finance of the Puntland state of Somalia, told reporters at a recent counter-piracy conference in Dubai.
Maersk Line, one of the biggest global shipping lines, expects its piracy-related costs to double in 2011 to $200 million covering insurance premiums, hardship allowances and re-routing vessels away from high-risk zones in the region, according to its chief operating officer.
However, the cost and benefits for merchant shipping, insurance companies, navies and private security firms exceed the ransoms and revenues earned by the pirates and their benefactors, the study shows. Pirates receive only 30 per cent of the ransom money while the rest goes to financiers, sponsors and other collaborators. "With much of this money going into expanding piracy operations, piracy is without a doubt a growing market. For pirates who were once fishermen, piracy has now become the alternative livelihood of choice," Brookfield said.
About 40 to 50 per cent of the ransom money is transferred out of Somalia using informal money transfer systems, which makes it hard for financial tracking, the study stated.
It estimates the success rates of piracy at between 22 to 40 per cent, a threat to the 22,000 ships and 30 per cent of the world's oil supplies that pass through the Gulf of Aden.
Why is piracy a big problem in Somalia
Somalia is a fragile state whose regime fell in the early 1990s. The origins of piracy can be traced to the social, political and economic unrest of that time. With the collapse of the state, no president to take over and the disintegration of the national army, political fragmentation followed. Various self-governing regions emerged with no central authority. In the absence of an army and central government, some Somali fishermen assumed the role of guarding their coast from illegal fishing and dumping, eventually resorting to piracy for a living.
"But resolving piracy is not solely a Somali problem, with financial backers and profiteers found in countries across the world," according to the Geopolicity report.
Who are the pirates
Johnny Depp may have portrayed a romanticised image of the leering yet loveable pirate, but the reality in Somalia is much harsher.
The pirates are ex-fishermen and ex-militia, many of them just teenage boys whose livelihoods were destroyed by the illegal dumping of toxic waste and illegal fishing by foreigners, said Farah Ali Jama, finance minister of Somalia's Puntland state. The pirates began as vigilantes fighting against these activities but later started kidnapping the ships and crew for ransom to earn a living.
"It has proved to be an attractive, though risky, alternative for some impoverished young men who have few if any options to a legal livelihood," according to the US Department of State.
These young men are merely pawns in a dangerous international game, politicians say.
"People out of Somalia made this an industry. They are using Somali boys for ill-gotten gains. The boys are just sidekicks, toys," Mohammad Abdullahi Omar, Somali Minister of Foreign Affairs, told Gulf News.
An estimated 1,500 pirates terrorise Somalia's coast. The London-based International Maritime Bureau (IMB) reports that pirates hijacked a record 53 ships and 1,181 crew members in 2010, most of them in the waters off Somalia.
There are four main known piracy gangs operating in the trade route linking the Red Sea to the Mediterranean Sea via the Suez Canal as of 2008, according to the IMB: The National Volunteer Coast Guard (NVCG) that specialises in intercepting small boats and fishing vessels on the southern coast; the Maraka Group; the Puntland Group of traditional Somali fishermen operating around Puntland, and the Somali Marines who are the most powerful and sophisticated of the gangs with a military structure led by warlord Abdi Mohammad Afweyne.
A piracy-based economy
As a booming business, piracy is creating wealth for a country with no central government, bringing income to formerly destitute villages and building an economy of sorts — but at the cost of crumbling clan traditions.
Coastal villages make money by feeding the pirates and hostages while they wait for the negotiations to end, the wives of pirates receive compensation before their husbands venture on a mission, local negotiators are paid to bring the ship owners to pay ransom by air-drop at sea or land and financiers invest in pirate crews who head out to capture the vessels at sea, accoring to research.
"Pirate financiers will spend as much as $30,000 on a pirate group that ‘hunts' in the Indian Ocean and upwards of $10,000 on pirates operating in the Gulf of Aden. And to protect themselves and their operations, pirates pay local militias (guns for hire) as much as $10,000 per month to protect them from sub-clan rivals or external threats," said Rudolph Atta Allah, chief executive of White Mountain Research, in a paper titled ‘Pirate financing: Understanding and combating a complex system'.
The ransom money is a major source of wealth. The coastal villages around Haradheere, a piracy stronghold, receive about 5 per cent of the total ransom payments simply for allowing the ships to anchor there.
Although piracy has created an informal economy in Somalia it is not a sustainable activity as pirates are employed for just a couple of months at a time, said Farah Ali Jama, finance minister of Somalia's Puntland state.
The negative impact from this illegal economic system is dramatic. With their new purchasing power, young men are indulging in social taboos — including alcohol, drug abuse, prostitution and increased violence — while disregarding local customs and guidance from elders, Atta Allah notes. "The sum total of this predicament is contributing to the country's deeper slide into chaos and disaster."
How do you negotiate and deliver a pirate ranson?
Pirates in Somalia are reeling in a fortune by hijacking ships and demanding huge ransoms to release them and their crews. Since January 2010 Somali pirates received about $75 million to $85 million in ransom payments, according to estimates by the US Department of State.
The mechanics of the transaction are complicated and risky, so how do you negotiate and deliver a pirate ransom in the 21st century?
From the involvement of international crime syndicates to how the ransom is paid, the deal plays out like a Hollywood action movie.
Behind the scenes is a rich investor, usually from Europe or the Middle East, financing the piracy operation, Mohammad Abdullahi Omar, Somali Minister of Foreign Affairs told Gulf News.
They buy food, drugs, resources and equipment for the pirates, according to Professor Muhy Al Deen Ali Yousuf, Chairman of the Somali Committee to Combat Piracy.
Other players include prominent business and political figures with assets in the fishing industry who provide ‘seed money' for the pirate groups to function, senior government officials who give political protection, arms dealers and suppliers of the stimulant khat.
An intricate network of supporters and guides provide them with information on incoming ships, he said.
After boarding the chosen ship, pirates make contact with the owners either through the crew members or important documents onboard with their information, said Omar. The talks are mostly by satellite phone or even text messages. Usually pirates hire a middleman, someone they can trust, to negotiate the ransom with the owners, he added.
The ship owners hire a professional negotiator and after some haggling hand over the money. This is often done by a private security firm hired by the owners.
In the most popular scenario for the exchange of money, "sacks full of cash in dollar bills" are dropped onto the ship by helicopter, said Omar. Sometimes the security company hires a tugboat from the Kenyan port of Mombassa or the Kenyan capital Nairobi, to sail further north into Somali waters and deliver the cash aboard the hijacked ship.
The average ransom paid per incident now reaches $4 million to $9.2 million, according to the US Department of State. This is a dramatic increase from the first payments of $50,000 made in 2005 by a fishing company to pirates from the Haradheere area.
However, not all this money ends up in the pirates' pockets. A UN Security Council report released in 2008 revealed how the ransom spoils are divided. It shows that pirates involved in the hijacking get only 30 per cent. The investors get the lion's share of 50 per cent, ground militia controlling the pirates' home base receive 10 per cent and local officials the remaining 10 per cent.
What happens to the money after it is delivered is more of a mystery. For one, the hawala — an informal money transfer system based on word of honour and unregulated by banks —makes it difficult to track a paper trail, Farah Ali Jama, finance minister of Somalia's Puntland state, told Gulf News.
One possibility is that the pirates pose as traders and launder the money in neighbouring GCC states, which are major trading hubs, he added.