ROBERT SIEGEL, host:
Ever since the Maersk Alabama was hijacked, our Planet Money team has been wondering: Is piracy a successful business model? So NPR's Chana Joffe-Walt set out to unpack the pirates' business plan.
CHANA JOFFE-WALT: It begins like everything else, with the money, the investor. Dr. J. Peter Pham at James Madison University says piracy financiers, they're usually ethnic Somali businessmen who live abroad, someone who might call his cousin in Somalia and say, let's put together a piracy business. I'll set you up with some seed capital - say, $250,000 or so - get you started. And then the cousin in Somalia, he goes out shopping.
Dr. J. PETER PHAM (James Madison University): You'll need some speedboats, you'll need some weapons and food for the voyage and all the…
JOFFE-WALT: And ropes and ladders.
Dr. PHAM: And all that, yes. The caterer to the…
JOFFE-WALT: Did you just say caterer?
Dr. PHAM: Yes. Everything that you would need to run a cruise ship line, you know, short of the entertainment, you need to run a piracy operation.
JOFFE-WALT: And just like a cruise ship line, you need a crew. Somalia, being a country where there's lots of unemployment and poverty, there's a big workforce to choose from. So you got your boats. You got your crew. Your piracy start-up is ready to launch to seize a ship. Now, Dr. Pham cautions, you can't just choose any ship. You've got to be strategic, got to ask questions.
Dr. PHAM: Does it have any value? Who is the crew? Do they have any security onboard? Who owns the ship? This is a business decision, to seize a ship. Westerners command a lot more money than poor Filipinos, whose country and families don't have the money to ransom them. No one is going to ransom an African. I'm mean, I'm being brutally frank, but it's true.
JOFFE-WALT: So you make your crude business decisions, work your model, and you successfully seize a ship. Suddenly, you have customers, customers like Per Gullestrup. He's the CEO of a Danish shipping company called Clipper Group, and he had a ship hijacked last November in the Gulf of Aden. When it happened, Gullestrup called his insurer right away. And the insurer, he really wants Gullestrup to pay a ransom to get the ship back. Otherwise, the insurer is stuck with covering a $15 million ship. Gullestrup could try to take the ship back by force, but that's usually when hostages get killed. So the insurer hooks Gullestrup up with a professional ransom negotiator. And then they all just sit, waiting to hear from the pirates. After three days, they finally call.
Mr. PER GULLESTRUP (CEO, The Clipper Group): They introduce themselves, you know, my name is Ali. I'm your friendly pirate today - not quite, but you almost got that sense. I mean, they're not making any threats or anything. They are very polite in their whole demeanor.
JOFFE-WALT: They just politely demanded $7 million. Just like Gullestrup had hired a professional negotiator, the pirates, they hire one, too, oftentimes lawyers.
The guy who called himself Ali, the pirates' negotiator, he had spent 29 years in the U.S. And Ali gets a commission out of the ransom, so he has an incentive to drive the price up. He tells Gullestrup $7 million, Gullestrup laughs at that figure, calls it a fantasy number. He says he didn't even consider it.
Mr. GULLESTRUP: Never. Never. Because that was way, way, way above the market and way, way above what we knew was being paid for other ships and other incidents.
JOFFE-WALT: When you say it was way above the market, above the market for hostage payments.
Mr. GULLESTRUP: Exactly, for similar hijackings.
JOFFE-WALT: The pirates were starting high, Gullestrup started low, and the haggling began, which strangely sounds a lot like buying a car.
Mr. GULLESTRUP: We went back and forth for, if I recall, one or two weeks, just restating our position. They restated their position. And then we decided to say to them, okay, then there's nothing else to talk about, and you can call us when you are ready to reduce your demands.
JOFFE-WALT: It's like you're on that sales lot buying your car, and you're thinking, okay, I need to walk away for them to bring it down.
Mr. GULLESTRUP: Exactly, exactly, exactly. And then you're waiting for the salesman to call you and give you a better offer.
JOFFE-WALT: Gullestrup might sound heartless here. I mean, we are talking about 13 innocent lives captured off the coast of Somalia. But he wasn't worried about the safety of his crew because the moment anyone on the crew gets hurt or killed, the pirates lose their most important bargaining chip. And the pirates did eventually blink. They called with a better offer. It was still much higher than the market rate, so Gullestrup and Ali, they did some more haggling, finally agreed on a ransom - somewhere between $1 million and $2 million; Gullestrup wouldn't give me an exact figure. And then Gullestrup just faxes over the details. Seriously, he faxed it to the ship, and then headed to the bank with duffel bags, got $1 million to $2 million in U.S. cash, put it in a watertight container, flew over the hijacked ship, dropped it in the water.
Mr. GULLESTRUP: They had a little boat, and they went over, picked up the container, and brought it aboard the ship.
JOFFE-WALT: This, of course, is where the piracy business becomes cash positive. Gullestrup says all the pirates who worked his hijacking, they all showed up for payday. So there were like 30 or so onboard all at once. They paid off the expenses, like food first, and then they get paid. If you took a lot of risk, you get paid a little more.
Mr. GULLESTRUP: And we actually found time sheets onboard the ship after they had left the ship. We could see that there was a time sheet, particular persons who had been on board on so many dollars per day, and then a total sum on this little time sheet.
JOFFE-WALT: So they were clocking in and out?
Mr. GULLESTRUP: As far as we could see.
JOFFE-WALT: Here's basically what we know about how pirates divide up profits from this and other ransom situations: About 20 percent goes to pay off officials who look the other way. About 50 percent is for expenses and for payroll. So if you're leading the attack, you can make 10 to $20,000. And that's really good pay. The average Somali family lives off $500 a year. And then that initial investor, the one who put up his quarter million of seed capital, he gets 30 percent, sometimes $500,000 - also really good pay.
Gullestrup's ship and his crew were returned safely, although the pirates actually didn't want to get off right away. They were afraid of other pirates, that they'd get robbed going back to the shore. So Gullestrup gave them a ride up north, dropped them closer to home. Fortunately, he says, we were going that way, anyway.
Chana Joffe-Walt, NPR News.
SIEGEL: Chana is part of NPR's Planet Money team, which covers economic issues from piracy to Ponzi schemes, all at npr.org/money.