pirates of somalia: ending the threat, rebuilding a nation

Using the parameters adopted earlier, the analysis assumes that all capital is lost when the entire crew is lost at sea, for which there is a 5 percent probability; there is a 15 percent probability the pirates will bring back a ship and the financiers earn a return; and there is thus an 80 percent probability the pirates will return empty-handed. In the last case, it is assumed that investors on average lose half their capital.

The annualized return on start-up capital should be at least the equivalent of 427 percent if an attack is successful. On the assumptions given, a risk-averse financier will be willing to invest a small proportion of his total assets into equipping a piracy mission for a return of this magnitude (see Annex 7.C). Accounts of actual returns to investors vary widely because they are not paid a fixed return but a proportion of the ransom. SEMG (2011) reports that investors get 30 percent of the ransom after all costs have been covered and that generally the majority of the ransom is taken up by costs (including bribes, provisions, wages of cooks and accountants, and logistics support). Somalia Report (2011) gives 15 percent of the final ransom as going to investors, which is consistent with SEMG (2011) if half the total ransom is taken up by costs. In Table 7.2 the total capital cost of a pirate operation is shown to be about US$400,000; with a 15 percent share investors would get the market return if the total ransom is US$2.6 million. Since 15 percent of the 2011/2012 average ransom of US$4.9 million would be US$735,000, on average investors would get more than the market return on their capital. However, the contributions of lead investors go beyond the financial resources they provide; their social and political connections will help make an operation feasible, and this political capital will be rewarded appropriately, possibly showing up in higher rates of returns on their financial contributions.