Somali pirates will be back when they figure out their inventory management problem

Sunk costs.
Sunk costs.
Image: Reuters/Bundeswehr/Christian Laudan/Handout
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Piracy in Somalia is a business like any other, with the attendant problems: inventory management, human resources, legal. And, according to an analysis by the World Bank, it’s a business that could start heating up again after a brief hiatus.

The seizure and ransom of ships steaming toward the Suez canal has been lucrative in recent years, netting as much as $413 million in ransoms between 2005 and 2012, and costing as much as $18 billion in world trade every year, or a 1.1% value-added tax on all shipments near Somalia.

All that money has ramifications beyond Somalia: The year-old transition government and aid organizations are fighting efforts to bar money transmission to a country that depends on remittances from its diaspora, while pirate cash is financing businesses from Kenya, where it goes to grow the popular narcotic khat, to Dubai, where pirate cartels launder money by exploiting transfer price rules the same way major multinationals do.

Driven by endemic poverty, the collapse of the Somali state, a 20-year drought, and the over-fishing of their seas by trawlers from nations as far away as South Korea, potential pirates aren’t hard to recruit. They are paid between $30,000 and $75,000 each when a ship is successfully ransomed—typically, less than 0.025% of the whole haul—while the financiers earn the bulk of the money.

When pirate seizures peaked in 2009 at some 46 vessels—including the Hollywood-ready tale of the Maersk Alabama, which was briefly seized by pirates before US armed forces rescued the kidnapped captain—the international community decided to take action, stepping up naval patrols and coordination in the area; more vessels began carrying armed security guards. Pirate actions plummeted; there hasn’t been a successful seizure for over a year.

The pirates were victims of their own success in more ways than one. While the added attention attracted more law enforcement, their success in 2009 and 2010 left them with more inventory than they could effectively manage while engaging in lengthy ransom negotiations. “Increased stocks imply higher operating costs,” the World Bank notes, which include care and feeding of prisoners, paying pirates and paying off the local militia.

That’s why, even though pirates didn’t capture as many vessels in 2011 as they did in 2010, they made significantly more money. Having spent the last several years burning through inventory—even as ransom prices have risen to an average of $4 million—the pirate cartels could be poised for a comeback. “Considering the amounts already collected by pirate financiers until the end of 2012, pirates’ capacities to conduct operations are probably far from declining,” the report notes. “In that sense, the declining activity of pirates at sea may well be only a temporary break.”