Hostile Takeovers or Good Corporate Governance?

Somali piracy has become a major news item, and most are blaming Somalia’s chronic anarchy. In truth, the pirates have become a highly organized business that originates in the stable civic society of Puntland in the north, not the chaos of the warring south.

Somali pirates who previously targeted small vessels have grown in sophistication and have now hijacked luxuy liners, container ships, and now supertankers.

Somali piracy has been headline news over the past half year. In April, pirates off the coast of Somalia took control of Le Ponant, a French luxury yacht. In October, the Ukrainian cargo MV Faina was captured, which included in its hold 25 armormed tanks. And earlier this month, a tanker carrying oil up to $100 million in value was hijacked off the coast of Somalia. Shipping “war insurance”—covered previously at CA here—is becoming expensive, as ships such as the Sirius and Le Ponant, previously thought to be beyond the grasp of pirates, are now seen as vulnerable. The range of the Somali pirates is growing as well. Until just last month, ships were thought to be safe if they kept 200 nautical miles from Somalia, but the Sirius Star was 450 nautical miles from the coast when it was hijacked in a lightening 16 minute takeover. Read how another tanker captain avoided capture with S-manuevers and other unpredictable navigation here.

Some analysts write fearful tracts that the pirates have links with terrorists and extremists, that the chaos is a direct result of international neglect of Somalia, and try to link pirates to the islamist insurgency that control much of the south or the recent terrorist bombings in Somaliland. This is nonsense. The origins of Somali piracy are not found in the southern half of the country, where a “transitional government” is dueling the Union of Islamic Courts with the half-hearted assistance of the Ethiopian military. Somali piracy originates in Puntland, a self-declared autonomous region of Somalia at the horn, hailed for years by policymakers as a model of a stable Somali state.

Taken from ethanzuckerman.com

Piracy has its origins in the organized communities of the Puntland coast. In the 1990s, a group of fisherman in settlements there banded together to prevent illegal fishing and the dumping of toxic waste off their shores. This harmless community action inspired many analysts to designate Puntland a model for Somali civil society. When some ships illegally fishing were boarded in attempts to police the region, the reward offered for the boats return was enormous—amounts that were many times the monthly income of entire villages. Piracy took off as an attempt to gain income from this type of civic policing, and slowly grew to what Kaplan called the “innocence” of piracy. It wasn’t long before the pirates became more ambitious, using the fishing boats they captured to hunt larger prey. And with the money that came in, small fishing towns were transformed into pirate havens. As responsible organizers, pirates have invested some of their profits back into the franchise, replacing barely seaworthy rafts with speedboats, AK-47s with modern arms, and GPS tracking systems to boot. The East African Seafarers’ Assistance Programme says there were just 100 Somali pirates in action in 2005, but there are now well over 1,000.

Professor Michael Weinstein, a Somalia expert in the political science department at Purdue University, accurately notes this history of this, but attributes the spike in attacks to a collapse of authority in the Puntland regime, with an administration “honeycombed with officials with links to the pirates.” But through reviewing all the reports on the ground, I see a different story—the piracy gangs are now fabulously wealthy and are enjoying a lifestyle beyond the wildest dreams of many people in East Africa that has given them what any rich businessman in a society enjoys—influence, protection, and power. Check out this report:

‘They live a high-profile life – driving luxury vehicles, using fancy mobiles and laptops, living in big, decorated houses, marrying beautiful women,’ says Dahir Salaad Musse, a businessman in the port town of Bosasso in the semi-autonomous northern region of Puntland… ‘Pirates are the best customers I have because they don’t bother bargaining like the others—they buy expensive shirts, trousers and aftershave,’ says Mohamed Ali Yarow, who owns a menswear store in Garowe. ‘Girls like to date pirates because they give them good money.’ Puntland officials, while trying to play down the popularity of the pirates, also admit that flashing the cash helps the gangs achieve acceptance.

Remarkably, hostages are treated well, with some pirates even setting up special kitchens onshore to cook western meals for their captives. Medical care available on the ship is not withheld to force the hand of parties that would pay a ransom. The Somali pirates are more businessmen that extortionists, and the strategy is paying dividends—according to a report by London-based think tank Chatham House, shipping companies have forked over US$30 million in ransoms to Somali pirates this year. Welcome to growth enterprise in the anarchic societies of the 21st century.

Analysts were right about Puntland’s organization, but they were wrong that Abdullahi Yusuf Ahmed, president of the transitional government and the former leader of Puntland, could spread the discipline of goverment and organization to elsewhere in Somalia. Instead, it’s become the parent of a business model that could be copied in other lawless regions of the world.