The economics of not being kidnapped

Developing countries can often be conflict zones that pose real kidnap risks for foreign businesses and workers.

How do foreign companies and NGOs safeguard their employees from kidnapping in countries where abductions are common and expatriate workers are attractive targets?

Many firms and NGOs operate in areas where state law enforcement is non-existent, weak, or corrupt. How do you provide security for mining companies and oil wells, infrastructure projects such as pipelines, for adventurous tourists, reporters, and aid workers when state forces have limited power to protect?

The answer is that usually there are local power-brokers who could provide protection. Examples are traditional chieftains, councils of elders, Islamist militias, warlords, rebel movements, terrorists, or mafias. Anyone wishing to travel or operate in their territory will find it counterproductive, or prohibitively expensive, to challenge their power.

If you know who poses the kidnap risk, you are better off paying them not to kidnap your staff or their families in the first place. Similarly, for informal protectors it is better to attract business into their territory and thereby maximise their tax base – rather than putting off all risk-averse people and companies and squeezing a ransom out of the occasional adventurer. We know that in many countries locals unquestioningly pay the pizzo, tithe, la vacuna (the vaccine), lala salama (sleep peacefully) or whatever the local form of protection payment is called.

But how can a foreign firm, news corporation or aid organisation negotiate a protection contract with an armed group – especially one that may be in conflict with the host government?

What would be the damage in terms of a company’s reputation should such a deal come to light? Moreover, who will hold the protector to account if they take your money and then kidnap your staff anyway?

We need what institutional economists call a “self-enforcing contract”, where it is in the interest of both parties to keep their promises without third party enforcement. This generally requires long time horizons so that the protectors’ expected future income from protecting their customers is greater than the (one-off) pay-off from kidnapping.  You can see this working reasonably well for a long-term mining operation or oil well. The main issue is to ensure that rebels or other armed groups have clear incentives to provide effective protection – without appearing to be the direct beneficiaries of the arrangement.

In my book, I provide many examples of successful protection arrangements. In some cases, security guards and other personnel are hired from and maintenance contracts allocated to companies owned by local power-brokers. Other companies respond to security threats by providing local public services that raise the standing of local power-brokers in the community. Many “Corporate Social Responsibility” programmes look like they were specifically designed to create a steady stream of income conditional on the continued co-operation of local elites. Joint ventures are another way of incentivising local co-owners to maximise the profitability of local operations rather than undermine it. If these arrangements are well designed and closely monitored, they create strong incentives for the local suppliers of protection to stick to their side of the bargain.

But what stops the protectors from renegotiating the price and extorting most of the company’s profits? An interesting answer is that the companies’ bargaining position is vastly improved through kidnap and extortion insurance. The market for this type of insurance is dominated by Lloyd’s of London, where around 20 syndicates compete for business in this special risk class. When a protector turns rogue and starts kidnapping or extorting one customer, insurers co-operate: their associated security consultants can raise security alerts to pull out all other insured companies from the protector’s territory, too. If Lloyd’s comes to the view that commercial activity in a certain area is no longer “insurable”, then a company cannot fulfil its duty of care towards its employees. It’s time to evacuate expatriate staff – which will be efficiently arranged through the security consultancy. The credible threat of co-ordinated punishment mostly keeps the protectors compliant – and if not, they usually come to their senses fairly swiftly as their tax base collapses.

Market concentration and the outstanding information exchange within the tight-knit group of kidnap specialists also facilitates the protection of one-off business trips and short-term projects. Security consultancies associated with kidnap insurers create the necessary time horizons for self-enforcing contracts through facilitating repeat business – but with different customers over time. Unless you are looking for an implicit protection contract, most of the security advice looks innocuous. Stay at this hotel. Use this taxi company. Use this tour operator if you want to visit this temple. Here is a safe house with vetted staff. This company provides excellent guard services. Do (or don’t!) use this toll road. By directing a steady stream of customers to reliable protectors (and having a credible threat of redirecting everyone in case of a breach of contract) the incentive is to protect everyone.

Kidnap insurance with its stringent “best practice” guidelines and security advice thus facilitates surprisingly safe foreign direct investment, trade, reporting, research, and aid delivery in many unpromising security contexts.

Anja Shortland is the author of “Kidnap: Inside the Ransom Business

Anja Shortland

Professor in Political Economy

Anja Shortland is Professor in Political Economy at Kings College London. Before coming to King’s she worked as a lecturer in Economics at Leicester, a Reader in Economics at Brunel University and as a consultant to the World Bank. Her research is in the areas of institutional economics and the economics of crime. She works on the governance of tricky markets, such as hostages, fine art, and cultural property.