Meeting the challenge of promoting pro-poor investment in Somaliland

Promoting investment presents its own set of challenges, but a flexible approach adapted to Somaliland’s circumstances and culture has a good chance of success

A tradesman arriving at the Port of Berbera on the Gulf of Aden will have to pass through a gate marked by a bright sign saying ‘Enter’ and emblazoned with the flag of Somaliland. The entrance is an apt symbol of the fledgling state’s desire, with an acutely Somalilander twist, to attract foreign and diaspora businessmen and their capital into the economy.

As the international community increasingly turns its gaze to the Horn of Africa, this desire is beginning to gain some traction, and development agencies are increasingly eager to capitalise on investment flows for the sake of pro-poor growth. But will Somaliland’s way of doing business turn out to be sufficiently compatible with what investors and the development community seek?

A frontier economy

To many the idea of economic activity and investment in such a place may seem anathema. Somaliland is arguably the least recognised, self-declared independent state in the world and is known more for its tempestuous neighbour to the South (of which it officially forms a part) than for any of its own qualities.

However, as is so often the case in the Somali arena, the reality differs somewhat from perception. Given the region in which it lies, its recent history of violent conflict and the complete lack of recognition that followed its declaration of independence from Somalia in 1991, Somaliland can boast an active and successful business community embodying the entrepreneurial spirit for which Somalis are known. It enjoys a lucrative trade in livestock with the Gulf, exporting live camels, sheep and goats from all over East Africa by the million every year. With its advantageous location on the Gulf of Aden, it acts as a gateway to Ethiopia and the Horn of Africa for the exchange of all sorts of goods and services, from logistics to bottled drinks, electronic goods to food aid. In the field of telecommunications it hosts an array of widespread, reliable and cheap mobile phone networks that enhance economic opportunity. Furthermore, via global financial firms such as Dahabshiil it absorbs an impressive $800 million annually in diaspora remittances which feed the consumer economy and boost domestic investment.

The economic opportunities are also not to be sneered at. As a frontier economy with slack capacity for investment, Somaliland presents a high risk, high return profile for those investors willing to try their luck. Recent exploration points to the imminent discovery (risks notwithstanding) of sizeable reserves of oil and gas, and sectors such as fisheries, consumer products and food processing are all relatively untapped. These will be aided by improving infrastructure links by land to Ethiopia and by air from Hargeysa airport (currently being rebuilt with money from the Kuwait Fund for Arab Economic Development).

A small but growing number of investors, mainly from the diaspora but also numbering amongst them those from further afield, are making their first, tentative moves. Early in 2012 a Djibouti-based firm (Somaliland Beverages Industry, part of the Osman Guelle Farah Group) invested $17 million in a Coca-Cola franchise and bottling plant – the largest single investment in Somaliland since 1991. UK-based investment fund Invicta Capital and Jacka Resources, an Australian firm, are currently preparing an investment in oil exploration and development. Two further investment funds, based in the UK and Kenya respectively, are considering their options, and Chinese ICT giant Huawei is actively involved in the expanding mobile market.

Investment promotion, Somaliland style

The government is keen to capitalise on these inflows and to attract more, for purposes of fostering economic growth and poverty reduction as well as of encouraging private capital to foot some of the bill of the ambitious National Development Plan. This is doubly appropriate.

Not only can investment create jobs and development but also, with the dispersed nature and limitations of state authority in Somaliland, non-state actors (whether private actors or communities) have traditionally taken responsibility for providing services such as healthcare, education, power and roads – areas that in the Western model are habitually consigned to the state. In this context the private sector has a unique and influential role to play.

In keeping with the government’s commitment, a host of investment promotion measures exist, from the foreign investment law which was passed in 2004 and creates incentives and mechanisms to bring in and protect investors to the ongoing reform of tax policy and the new investment climate unit within the Ministry of Commerce. Efforts are afoot to establish the foundation for commercial banks to operate via the central bank act passed in April 2012 and the forthcoming commercial banking bill. The National Development Plan also contains a raft of instruments to support the private sector, such as the drafting of a private sector development strategy that will include amongst other things a public-private partnership platform and further plans for business environment reform.

However, investing in Somaliland predictably presents, as the complement to high returns, its own set of risks, challenges and complications. Many of the problems that a tentative investor would face will be familiar from other frontier and fragile economies. Most business happens on an informal basis, the legal and regulatory framework is unpredictable and inadequately implemented and enforced, and information asymmetries abound. In addition,

infrastructure and skills levels are low and, perhaps not surprisingly, accessing insurance is by and large prohibitively expensive.

True to form though, Somaliland presents its own set of characteristics. Firstly, the fact of its non-recognition considerably enhances the perception of risk and raises concerns about the long-term viability of contracts and investments. These are abetted by the uncertainty surrounding Somaliland’s relationship with Mogadishu, which continues to assert – in theory if not in practice – its sovereignty over the whole of Somalia, and Puntland, with which Somaliland is currently embroiled in a territorial dispute. Equally importantly, the lack of recognition prevents Somaliland from participating in international institutions, laws and norms, and thereby a host of associated services and benefits.

Secondly, the nation’s social and political structures have imposed their own distinct brand of doing business: embedded in these structures are the means to undertake transactions, build trust and mitigate business risk between the parties and allegiances involved. Through such means business takes place both within and across Somaliland’s clans and tends to span political and commercial interests. To ensure the safe transfer of goods, trade routes are by tradition jointly run by members of the clans through whose sphere of influence the route runs. Likewise, through traditional shareholding and equity structures (exhibited for example by Telesom and a number of large livestock players), different interest groups, whether based on clan, political affiliation or business interest, are brought into the fold as a means of both raising capital and providing insurance. Commercial disputes are more often resolved by reaching consensus within a private council than within a court of law.

Such distinct ways of going about one’s affairs may serve as a drawback or an advantage for investors depending on the circumstances and the inclination of the business in question. But, for a first-time investor unfamiliar with prevalent norms and practices, they will at the very least prove perplexing in their opacity, and may well be too much of a deterrent to proceed.

Thirdly, the bulk of economic activity is concentrated in a small number of sectors and dominated by a handful of large and well-connected players. The Indhadeero Group, for example, is not only the largest animal trader in Somaliland but also has businesses in light manufacturing, food retail and hospitality, whilst the group behind Daallo Airlines, an international airline based in Hargeysa, also owns firms in livestock and logistics. Such monopolistic tendencies hamper competition and new market entrants and weaken market governance.

Development agencies gearing up

There is of course a broader context to this story. Somaliland is a model of relative peace and stability in a region largely devoid of both, and this has not gone unnoticed in Western capitals. Create a stable political and economic environment, provide the infrastructure and regulation and make the market available, and – so the theory goes – investment will come. The jobs, consumer freedom and improved services that this investment will bring will provide a popular mandate for political stability, which will in turn attract further investment.

As a result, concomitant with increased international attention on achieving peace in the Horn of Africa, the world’s development agencies are gearing up their involvement in Somaliland. Roughly 60% of the UK’s development budget for Somalia is to be spent in Somaliland, and private sector development is a key focus within that envelope. DfID, the World Bank, the Food and Agriculture Organisation, world leaders at the London Conference on Somalia in February 2012, International Labour Organisation, USAid, the Swedish International Development Cooperation Agency and others are all poised, if not already active on the ground. The usual array of pro-poor activities is on display, from grants and training for small and start-up businesses to value chain and market development to investment climate reform. In addition to such mainstream activities, the British government is also supporting the Somaliland Development Corporation, a specialised public-private partnership between the Somaliland government and prominent British and Somalilander citizens, which is designed to provide a safe platform for international and diaspora investors to engage with Somaliland and overcome inherent risks.

In seeking to promote pro-poor investment, what should development agencies, in tandem with investors and the government, do in continuation of – and in response to – this trend of amplified commercial, political and international interest in Somaliland? The answer is a range of options drawn from the international development manual, all of which are applicable. On the supply side, they could continue ongoing efforts to reduce risk and improve Somaliland’s image abroad as an investment destination. They could subsidize inward-flowing funds and provide security for investors, thereby increasing the supply of capital and lowering its cost. On the demand side, they might work with Somaliland’s firms and value chains to increase the number and size of investment opportunities. Consideration of cross-cutting issues such as the quality of energy and transport infrastructure may also be necessary.

On a governance level efforts could be made to improve and, perhaps more importantly, enforce existing laws and regulations and to enhance the overarching (and sector-specific) investment climate. This could happen alongside moves to promote transparency and competition and establish a concrete basis for engaging with the government. On a political level, there may well be a need for a solid, long-term commitment from the government, backed up by development agencies, that Somaliland is open for business, together with efforts to allay investor worries about regional instability and national non-recognition.

However, as Somaliland presents its own set of challenges, so it must have its own set of solutions. Somalilanders everywhere have shown themselves to be adept at mixing their own tried and tested ways with Western norms, practices and appearances, dexterously bridging the interface between the two spheres of influence whilst maintaining one foot in each. As evidence, one need look no further than Dahabshiil in the commercial arena and at the set-up of the parliament in the political one. If the welcoming sign in Berbera is to have as many visitors as possible pass beneath it, investors and development agencies ought to follow suit.

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