How Somalia’s Pirates Make Money

This video is sponsored by Skillshare. The first 500 people to use the link in the
description get their first two months free. This is the TI Europe, one of the four largest
ships in the world. And here’s a banana for scale. At 380 meters long, or twelve hundred feet,
it’s 41% longer than the Titanic, but still shorter than Titanic. In this business, efficiency is everything
and every dollar counts. A ship made with twice the steel has much
more than twice the capacity, with roughly the same size crew. Bigger boats, therefore, cost only a little
bit more and yet make a lot more money. So, here we are, with supertankers that can
hold three million barrels of oil. Which, at today’s going price, makes the
TI Europe a $174 million target for pirates. Last year, an attack was reported every other
day, in some of the busiest, most well-patrolled routes, like the Gulf of Aden, the Singapore
Straight, and the coast of Malaysia.

But these are not parrot-wearing, sword-carrying
outlaws. Today’s pirates operate a carefully-planned,
well-executed business – with investors, a stock market, chain of command, and experienced
negotiators. All without the help of LinkedIn. Every part of an attack is a fascinating lesson
in economics. And with profit margins of over 30%, even
Apple should be jealous. Somalia is, by almost every metric, one of
the hardest places to live on Earth. Its now three-decade long civil war has not
only led to drought and famine, but also left the country without a unified, central government. To the north are the independent but unrecognized
states of Somaliland and Puntland. In the south, control is split between the
federal government based in the capital, Mogadishu, and large, terrorist factions. This makes building infrastructure like schools
and hospitals extremely difficult. Which, in turn, makes building a formal economy,
nearly impossible. The result is a 55-year life expectancy, one
of the lowest in the world, and a GDP that makes Ghana and Madagascar look rich. While next-door Ethiopia makes money growing
coffee, potatoes, and cereals, Somalia is not so lucky.

Only 1.8% of its land is arable, compared
to half of India, or 34% of Germany. Its two climates are hot and really hot. But, it does have one thing going for it:
the longest coastline of any country in Africa. Fishing should be a huge source of income. But, you guessed it, there’s a catch. Foreign companies noticed the country seemed
a little… preoccupied at the moment and probably wouldn’t notice if they dumped
toxic waste in its waters, killing thousands of fish in the process.

Those that survived are now caught illegally
by foreign fishermen, who steal $300 million worth every year, leaving Somalia with only
a small share of its own tuna. So, just to recap: Somalis are given little
education, face a constant threat of violence, have nearly zero healthcare, and a per capita
GDP of… keep scrolling… $104, or twenty-eight cents, per person, per
day. The average ransom, on the other hand, is
2.7 million, so piracy is not exactly a tough sell. It all begins by identifying a target. The ideal victim comes from a rich country,
is traveling slowly, and near the coast. Or, in the case of luxury cruise ship Star
Breeze which was attacked in 2005, all three. The next step is financing. A single attack may cost $30,000 up-front,
which is already a lot, but especially in Somalia. So the risk is usually spread between 3-5
investors who buy shares in an informal stock market.

Now comes the attack. With one, large mother ship, anywhere between
4 and 20 pirates follow their target up to 800 miles off the coast. Once they get close, they switch to one or
two small chaser boats, and use rope and ladders to board the ship. Of course, the crew is trying to speed up,
or change directions, and fight back, but they also know they’re no match for the
AK-47s, rocket launchers, and desperation of the pirates.

The crew is gathered together, and their communications
destroyed, making the ship go dark. The next step depends on their business model. In areas like South East Asia, the goal is
often stealing oil, selling it to anyone smart enough not to ask why it’s so cheap. But here, in Somalia, pirates rarely touch
the cargo. The crew is, by far, the most valuable thing
on board. They steer the ship to a nearby port, where
the most tense part of the operation begins.

With only one buyer and one seller, almost
none of the rules of a normal negotiation apply. Neither party has all the information and
both have great incentive to lie. The owner of the ship wants to appear poor,
driving down the ransom. The pirates, meanwhile, need to seem rash
enough to deliver on their threats and yet patient enough to wait for a deal. Because, the clock is ticking. As time goes on, the value of the ship and
its cargo goes down, and the average ransom generally goes up. Talks, therefore, can last three, four, five
hundred days, all spoken through a translator, often with several different negotiators.

If the owner has Kidnapping & Ransom Insurance,
negotiations are made by a professional, who reduces the chance of death from 9% to just
two. But companies aren’t allowed to say they
have insurance. In fact, many corporate travelers don’t
know they have K&R insurance. If they did, it would be invalidated. Because of the incentives, an agreement is
almost always reached. Pirates bring the crew up to the top deck,
confirming their safety. And then, a helicopter flies overhead and
drops a waterproof container full of cash. Finally, comes a pirate’s favorite job:
accounting. First, investors get their guaranteed cut
of at least 30%, The port, who looked the other way while they
parked the ship, gets 5-10%. And the rest is split between the attackers,
with a bonus of around $10,000 for being first to board the ship. This scenario plays out hundreds of times
a year, and costs shipping companies a total of 4.9 to $8.3 billion a year – including
security and insurance. Even just speeding up from 13 to 18 knots
costs an extra $88,000 in fuel, per ship, per day. And those costs are passed on to you and me. We all pay a hidden “piracy tax”.

So, what can be done? The obvious answer is fighting back. NATO’s Operation Ocean Shield greatly reduced
attacks from 2009 to 16 by patrolling dangerous waters. And any shippers now hire private security
companies to fill that role. But this creates a free rider problem, other
companies and countries benefit from that security without paying for it themselves. Likewise, everyone would be better off if
no one paid ransoms, but it’s always in each company’s best interest to pay them. All of these solutions reduce piracy, but
none of them solve it. For 30 – $75,000 per attack, there will always
be someone willing to take that risk, no matter how high it becomes. The only real solution is economic, giving
pirates alternative ways to make money. Rebuilding a country like Somalia is a major
undertaking, but giving locals new skills and new opportunities really is the long-term
solution.

And, that reminds me of a certain sponsor
of today’s video, you guessed it, Skillshare! What a coincidence! My new favorite Skillshare class is YouTuber
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As found on YouTube

How Somalia’s Pirates Make Money

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Modern pirates operate a fascinating, carefully run business. Understanding it can teach us a lot about economics.

This includes a paid sponsored promotion which had no part in the writing, editing, or production of the rest of the video.

Music by Epidemic Sound: http://epidemicsound.com

Full list of sources: https://pastebin.com/4bYG91YM
TI Europe footage: https://www.youtube.com/watch?v=S6jFCnj01bE
Some footage provided by Bigstock: http://bit.ly/bigstock-videofreetrial

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