This paper, based on field research, documents which features of business work in fragile states and how they operate in regard to strategy, contract enforcement, and other aspects of firm behavior for several areas: Somaliland, nominally part of a federation coming out of three decades of almost continuous conflict; the eastern Democratic Republic of Congo, an arena of long-simmering conflict made worse by the effects of the fierce Mount Nyiragongo volcano eruption of 2002 that leveled one-fifth of the city of Goma; and South Sudan, a new country that at the time of writing is still struggling with protracted civil war.
By Victor Odundo Owuor
FIRM BEHAVIOR IN FRAGILE STATES:
The Cases Of Somaliland, South Sudan, and Eastern Democratic Republic of Congo
Victor Odundo Owuor
As the author of this report, I would be remiss in not recognizing the significant contribution of several people in the compilation of this document. The report has been greatly enriched by the internal and external reviewers’ suggestions and recommendations for ways to improve the early iterations of the manuscript. Special mention goes to Mike Eldon of The DEPOT, and Victor Rateng of Twaweza East Africa, as well as my colleagues within the OEF Research program. Deep gratitude is also expressed for the contacts who gave me access to interviewees and provided useful background knowledge in the three jurisdictions. Singular recognition is given to Victor Gatonye Kariuki of Savannah Trading and Emmanuel Odhiambo of Songa Ogoda Associates for multiple South Sudan contacts; Muse Awale, Abdikarim Gole, and Shuraako country staff; and Sibo Mihure and Mathews Okomo for assistance in eastern DRC. The design and layout is by Andrea Kuenker and Timothy Schommer, One Earth Future.
TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION AND PROJECT OBJECTIVE
CHAPTER 2: RESEARCH CONTEXT
Overview of Somaliland
Overview of South Sudan
Overview of the Democratic Republic of Congo
CHAPTER 3: METHODOLOGY
CHAPTER 4: RESULTS AND DISCUSSION OF INTERVIEWS
Eastern Democratic Republic of Congo
Comparisons Across the Three Jurisdictions
CHAPTER 5: IMPLICATIONS OF FIRM BEHAVIOR
International Development Agencies
CHAPTER 6: CONCLUDING THOUGHTS REFERENCES34
APPENDIX A: BUSINESS IN SOMALILAND
APPENDIX B: BUSINESS IN SOUTH SUDAN
APPENDIX C: BUSINESS IN DRC
Fragile states continue to garner international attention. The urgent need to address problems and dangers arising from state fragility is driven by a concern for two main imperatives. First, there is global pressure to alleviate the suffering of people living in fragile states—the overwhelming majority of whom remain exceedingly poor and subject to unbearably unequal and poor service delivery. Second, fragile states, by acts of commission, transmit external shocks such as terrorism, maritime piracy, human trafficking, and other dark network activity to the rest of the world. Therefore, the need to overcome state fragility cannot be ignored, especially by international development agencies, central governments in fragile states, and international businesses interested in enterprise with these jurisdictions. One way in which state fragility can be addressed is through understanding how the business sector conducts its activities in fragile states.
This paper, based on field research, documents which features of the institution of business work and how they operate in regard to business strategy, contract enforcement, and other aspects of firms’ behavior. The study was conducted in three fragile jurisdictions: the eastern Democratic Republic of Congo (DRC), an arena of long-simmering conflict; Somaliland, nominally part of a federation coming out of three decades of almost continuous conflict; and South Sudan, a new country that at the time of writing is still struggling with protracted civil war. While there is considerable literature, especially by the World Bank, on “The Ease of Doing Business” as well as “Enterprise Surveys” for territories including the mentioned jurisdictions, the literature on the behavior of firms in fragile and conflict-affected states remains scanty. This paper will provide some clarity on emerging issues in this field. The nature and form of business institutions as accepted in the Western world largely does not exist in the eastern DRC, the Somali peninsula, or South Sudan.
The case study therefore seeks to answer two primary questions: What strategies do companies use to conduct business in the eastern DRC, Somaliland, and South Sudan? And what are the implications of firm behavior in these three jurisdictions? The specific study findings about how firms have structured themselves and how they negotiate challenges in the prevailing environments in these jurisdictions are captured by seven broad strategies:
- the use of family savings and internally generated funds for firm growth;
- where and how foreign workers are deployed;
- the role of local partners;
- the place of religion;
- the choice of products and services on offer;
- how payments are received and handled; and
- dealing with state agencies.
The findings, analyses, and implications of this study should be useful to international businesses and multi-lateral organizations planning to be engaged in or currently in such an arena, and to regional governments interested in overcoming state fragility.
INTRODUCTION AND PROJECT OBJECTIVE
Fragile states have attracted considerable global attention in recent years, and not without cause; many problems and dangers arising from state fragility continue to dog the global community. Most failed states are poor, and subject their residents to poor service delivery and unequal distribution as well as weak governance. Fragile states suffer from several constraints, including “weak institutions, lack of trust in government, and legacies of abuse by economic actors or rebel leaders content to use or at least tolerate conflict and violence to meet narrowly defined goals.” The people in fragile states live in territories that lack authority, legitimacy, and the capacity that those in modern states almost take for granted. The lack of capacity to advance development in various fragile states presents grave challenges to the international world order.
Fragile states can also by acts of commission transmit external shocks to the rest of the world. One such external shock is the phenomenon of maritime piracy off the coast of Somalia that has until just recently led to massive losses in the global shipping industry. The need to overcome state fragility is clearly a crucial issue that the global community, especially international developmental agencies, central governments in fragile states, and international businesses interested in enterprise within these jurisdictions, can no longer ignore. This paper is an effort to provide some clarity to these players.
There is no clear dividing line between institutions that are strictly ‘formal’ on one side and entirely ‘informal’ on the other, because formal institutions always depend on non-legal rules and inexplicit norms in order to operate.
An ongoing challenge for actors in countries coming out of lengthy periods of conflict and instability is creating institutions that function well. For the term “institutions,” reference is made to Geoffrey Hodgson’s 2006 definition, “the systems of established and embedded social norms that structure social interactions.” The norms include rules, which in this context are understood to be socially transmitted and customary normative injunctions to “in circumstance A, do B.” This definition recognizes that there is no clear dividing line between institutions that are strictly “formal” on one side and entirely “informal” on the other, because formal institutions always depend on non-legal rules and inexplicit norms in order to operate.
The creation of institutions should be followed by the process of improving them to a point where they meet the expectations of the international community. This is particularly necessary in the economic institution of the marketplace, or the arena where business conducts its activities. The economic institution of the marketplace encourages and regulates production and distribution of goods and services. Policymakers and foreign investors recognize that market-oriented reforms and privatization can go a long way towards helping fragile states move towards meaningful engagement with the global community. The conventional view is that these reforms typically only work in these fragile economies if they are supported by well-established governance institutions. It is not in doubt that institutions that provide dependable property rights, manage conflict, maintain law and order, and align economic incentives with social costs and benefits are the foundation of long-term growth. It has therefore not been lost on policymakers that growing sustainable business in fragile states is a very promising pathway to overcoming the ills of fragility. The institution of business is essential to lifting people out of poverty more rapidly and with longer investment horizons than aid agencies can. Business does this through improving employment opportunities, education programs, infrastructure development, health programs, supply chain practices, and payment of taxes. In fragile states, the myriad problems encountered in building effective institutions are felt in all aspects of everyday existence, including those that define business. A business entity, at its core, is basically an arena where the exchange of goods and services (and the preparation thereof) occurs between willing buyers and sellers, under mutually acceptable terms. In the Western world, these transactions are invariably supported by legal institutions.
It has not been lost on policymakers that growing sustainable business in fragile states is a very promising pathway to overcoming the ills of fragility.
However, for countries coming out of periods of prolonged conflict, it is not always necessary to replicate Western-style state institutions from scratch. In the case of the Somali peninsula, for instance, though the prolonged turmoil and conflict have made the country a threat to itself, its neighbors, and the wider international community, alternative forms of justice, business, education, and local politics have endured and even burgeoned. For the Western world, well-functioning market systems mean that information flows smoothly in any transaction, side-effects for the mentioned transactions through third parties are minimized, and competition that enables the same is fostered. In fragile countries, it may be possible to work with such alternative institutions as may be available and build on them to suit given needs. To do so, policymakers and investors must have a good understanding of how various institutions of governance work in fragile states and how they interact with each other and the state (however imperfect the state’s systems are). This project is an effort to advance the aforementioned cause within the business realm. The settings for this study are Somaliland, the eastern Democratic Republic of Congo (DRC), and South Sudan, all three of which are components of jurisdictions that are consistently labeled as extremes in multiple indices of state fragility.
This paper is an effort to document which features of the institution of business work and how they operate in regard to business strategy, contract enforcement, and other aspects of firm behavior for several areas: the eastern Democratic Republic of Congo, an arena of long-simmering conflict made worse by the effects of the fierce Mount Nyiragongo volcano eruption of 2002 that leveled one-fifth of the city of Goma; Somaliland, nominally part of a federation coming out of three decades of almost continuous conflict; and South Sudan, a new country that at the time of writing is still struggling with protracted civil war. The nature and form of business institutions as accepted in the Western world largely does not exist in any of these three jurisdictions. Therefore, the project seeks to answer two primary questions:
What strategies do companies use to carry out business in the eastern DRC, Somaliland, and South Sudan?
What are the implications of firm behavior in these three jurisdictions?
A casual reader of this report may, however, ask how this particular work differs from two initiatives of the World Bank: the “Doing Business” report and the country “Enterprise Surveys.” This paper and its questions attempt to address issues not directly tackled by either project. The Doing Business reports from the World Bank assess eleven elements of each country’s policies that relate to non-state-owned firms, including starting a business, trading across borders, dealing with construction permits, enforcing a contract, and paying taxes. The measures for each of the eleven elements are created by experts (invariably lawyers or accountants) rather than firm representatives in each country. These experts are asked to estimate the typical time and cost it would take a hypothetical domestic non-state-owned firm with between one and fifty employees operating in the largest urban center to comply, based on the assessment of the respective country’s formal regulations. The Doing Business report therefore provides raw data for each country as well as rankings across countries to create an overall “Ease of Doing Business” ranking. The Enterprise Surveys, on the other hand, do not try to measure what should happen as a result of the given policies and regulations, but rather what happens in practice. The World Bank’s Enterprise Surveys gather responses using random samples from registered large businesses in the country’s main urban centers that are either domestic, foreign-owned, or state-owned enterprises. The interviews ask owners and senior managers of these firms how long it takes to get various regulatory procedures done and how much they cost.
This particular report differs from the two just-mentioned World Bank initiatives in that it focuses on what strategies businesses employ to tackle the challenges firms face in the three jurisdictions that were the focus of this study. The behavior is studied through the institution-based view of the firm. The institution-based model of the firm captures the complex and rapidly changing relationships between organizations and the environments in which they operate. In this perspective, institutions are independent variables for which the dynamic interaction between the institutions and organizations produce outcomes as a result of strategic choice. Specifically, strategic choices are not only driven by industry conditions and firm capabilities or characteristics, but are also a reflection of the formal and informal constraints of a particular institutional framework that business managers confront. In other words, “institutions directly determine what arrows a firm has in its quiver as it struggles to formulate and implement strategy and to create competitive advantage.” The ability of the respective countries’ firms to work with these formal and informal institutions, aptly described by the metaphor “the rules of the game,” enhances their ability to adapt to the changing environment in each of the three jurisdictions. This report is thus an effort to document what these rules are and how firms in the three jurisdictions interact with these rules, which because of their differences in form are for the most part considered to be a given—and therefore “invisible”—in the West.
institutions directly determine what arrows a firm has in its quiver as it struggles to formulate and implement strategy and to create competitive advantage.
This report adds valuable knowledge to an area still very much suffering from a dearth of information. While the role of the private sector in promoting growth and poverty reduction is a vast, complicated, and important topic, the extant literature is largely silent on the specifics of business behavior in fragile states. The World Bank is notable for the two studies mentioned, but there is clearly a missing link in the overall body of literature regarding firm behavior in these jurisdictions. A typical inquiry in this space is exemplified by the work of Tairu Bello dealing with combating unemployment hurdles in fragile sub-Saharan African economies using the experience of Nigeria. The Bello paper unpacks the factors leading to unemployment and offers policy recommendations for addressing high unemployment levels in fragile sub-Saharan African economies. The policy recommendations include the institutionalization of federalism and resource ownership, the restructuring of the educational system, and the establishment of an enabling business environment in Nigerian ecosystems. Other papers, like the works of Tilman Bruck et al., tackle when the private sector is beneficial to country growth as an alternative to official donor assistance.
One of the more comprehensive studies on the role of the private sector in achieving donors’ desired development outcomes within least-developed countries is the inquiry by Canada’s Standing Committee on Foreign Affairs and International Development, a committee of the House of Commons. The report focuses on conditions necessary for achieving desired outcomes in poverty reduction in low-income countries rather than just fragile states. The Canadian study found that alongside high rates of private investment, key ingredients for sustaining high growth in these countries include openness to trade, labor mobility, technology transfer, and high rates of public investment in infrastructure, education, and health. The report also surmises that some business sectors (e.g., agribusiness and light manufacturing) are more likely than capital-intensive industries (e.g., mining) to reduce poverty.
A slightly closer inquiry on the behavior angle is the Save the Children survey done in 2014. The survey found that to harness the power of the private sector in least-developed Indo-Pacific countries, business maximizes its development impact through three principles: do no harm by complying with legal and social obligations; reorient strategies towards creating products, services, and inclusive value chains that improve the lives of the poorest; and advocate by championing new practices and public policies that support development. In the Save the Children study, the list of countries that comprised low-income Indo-Pacific nations included Afghanistan, Bangladesh, Cambodia, North Korea, Myanmar, and Nepal. Other than Afghanistan, none of the listed countries are in the immediate band of ranking for state fragility shared by the three jurisdictions of Somaliland, South Sudan, and the eastern DRC. Again, while not restricted to the most fragile states, the Save the Children study is largely normative in its overview of business conduct in least-developed countries. Its primary purpose was to identify areas that government, civil society, and business need to pursue in order to make a valued contribution to development. The findings of the Save the Children report, though not directly tied to the present study, are relevant to this firm behavior in fragile states project. This firm behavior project builds on these previous inquiries and tackles the angle of the “what” and the “how” of business conduct—neither of which are adequately dealt with in the mentioned studies. It is expected that the study findings will be of interest to business, academia, developmental bodies, governments, and other policymakers tasked with coming up with private-sector-led strategies that promote post-conflict reconstruction in fragile states.
Somaliland, South Sudan, and the eastern DRC share some noticeable similarities. Because of their fragile state, each of the three jurisdictions is “particularly susceptible to crisis associated with government failure to provide security and economic opportunity to a significant proportion of its citizens.” For all three, while the governing authorities have some presence in the major urban areas such as Hargeisa and Garowe in Somaliland, Juba and Nimule in South Sudan, and Goma and Bukavu in the eastern DRC, large tracts of the respective jurisdictions remain lawless. The three also neighbor relatively stable countries: Djibouti and Ethiopia for Somaliland, Uganda and Kenya for South Sudan, and Rwanda and Tanzania for the eastern DRC. The three different cities from which research information was obtained are also in close proximity to the border crossings into the more stable neighboring countries, but because they are also major focal points for economic activity in the respective jurisdictions they provide a good representation of business conduct in the three fragile states.
Overview of Somaliland
Following a sustained period of violent conflict, Somaliland (see map below) declared its independence from Somalia in 1991. Somaliland, with its advantageous location on the Gulf of Aden, acts as a gateway to Ethiopia and the Horn of Africa. The establishment of the region now called Somaliland goes back to the latter days of the nineteenth century, when an 1897 treaty between the British, Italians, and French announced the creation of a British protectorate known as British Somaliland, while the French got Djibouti and the Italians claimed what is now Somalia (then known as Italian Somaliland). The British ruled the protectorate until 1960, when the Horn of Africa, like much of the African continent, was swept by the independence movement.
The establishment of a single, united Somalia then became the focus for leading Somali politicians. This unitary state was to incorporate all five historically Somali areas; namely Djibouti, Somaliland, Somalia, the Ogaden region in Ethiopia, and Kenya’s North Eastern Province. To date, this union is still represented by the five-pointed star on the national flag of Somalia. Cracks quickly emerged in this union that could not rope in two jurisdictions—Ogaden and Kenya’s North Eastern Province. Feelings of marginalization and discontent, especially after former president Mohamed Siyad Barre took power in 1969, drove the formation of the Somali National Movement (SNM) that began as an initiative to reform the national government but later morphed into a separatist movement seeking secession for the northwest region (present-day Somaliland). The movement was formed in April 1981 by a group of Isaaq emigres living in Saudi Arabia, and among its first declarations was an announcement in London, at the end of the same year, that the rebels wanted to overthrow Siyad Barre’s dictatorship. It subsequently began a series of operations against the government forces in northern Somalia, none of which, however, significantly weakened the government’s control of the region. The sustained rebel activity did, however, bring world attention to the plight of residents of northern Somalia and the harsh security measures under which they lived.
The SNM launched an offensive in May 1988 that led to the deaths of some 50,000 civilians at the hands of Siyad Barre’s forces. The deep feeling of collective punishment and grief was a major factor in positioning the SNM to later overrun the national army and take charge of Somaliland as Siyad Barre’s regime fell. Soon after, a Grand Conference of Northern Peoples composed of religious figures, clan elders, rebel leaders, business leaders, and other representatives of society convened in Burao and issued a May 1991 declaration of independence from Somalia and the creation of the Republic of Somaliland. The jurisdiction of Somaliland is now a model of relative peace and stability in a region largely devoid of both. There is, however, some tension and uncertainty surrounding Somaliland’s relationship with the federal government that sits in Mogadishu. The federal government of Somalia continues to assert its theoretical sovereignty over the whole of Somalia, a position largely ignored by Somaliland.
Private Sector Activity
Somaliland’s frontier economy boasts an active and relatively successful business segment that demonstrates the entrepreneurial spirit for which Somalis are well-known. Its main cities are Hargeisa, a dusty and sprawling community of some 800,000 which also serves as the financial capital and main seat of government; Berbera, the port city on the Gulf of Aden; and Burao, a central city that is fairly flat with a semi-desert landscape traversed by the seasonal Togdheer River. All three cities have been built with limited outside aid since the fall of Siyad Barre, and have grown considerably due to diaspora investment flows and people moving in from rural areas. While Somaliland remains probably the least-recognized self-declared independent state in the world—even more so than Taiwan and Western Sahara, which have also declared independence—a lot of economic activity takes place there.
This is especially the case when compared to regions in the Somalia federation. Somaliland enjoys strong cultural and trade links with the Persian Gulf nations, and exports live camels, sheep, and goats to the Gulf States as well as all over East Africa. In return, Somaliland receives all manner of goods and services, from logistics to automobiles, bottled drinks, apparel, construction items, electronic goods, and processed foods— some of which come as food aid.
Somaliland also hosts an array of widespread, fairly reliable, and among the world’s cheapest mobile telephone networks that enhance economic opportunity. With the presence and facilitation of Dahabshiil—the Hargeisa-based money transfer service provider that employs the “Hawala” system— Somaliland absorbs nearly $1 billion in annual diaspora remittances. These remittances feed a predominantly consumer economy and further boost domestic investment. The number of foreign investors remains very small, but it is growing. Perhaps the largest single foreign investment since 1991 came from the Djibouti-based conglomerate the Osman Guelle Farah group, which in early 2012 invested $17 million to establish a Coca-Cola franchise and bottling plant an hour’s drive from Hargeisa. The plant is located in an area with substantial underground water. The business is called Somaliland Beverage Industries, and it relies on Coca-Cola’s marketing clout to push its sales of soft drinks and beverages in Somaliland, Puntland, and Galmudug.
Overview of South Sudan
The country that is now called South Sudan (see map below), is the outcome of a 2005 agreement that ended Africa’s longest-running civil war. The two-decade-long war claimed the lives of 1.5 million people and displaced more than 4 million. The 2005 agreement was signed by the then-leader of the Sudan People’s Liberation Army (SPLA), John Garang de Mabior, who died in a helicopter accident while visiting Uganda shortly after that. John Garang remains a revered figure in the nation and is universally acclaimed as being the father of South Sudan.
Following a referendum on the desire to secede, South Sudan gained independence from Sudan on July 9, 2011. At the time of writing this report, South Sudan was made up of the ten most southern states of the former territory of the Republic of Sudan. South Sudan is bordered by Ethiopia to the east, Kenya to the southeast, Uganda to the south, the Democratic Republic of Congo to the southwest, the Central African Republic to the west, and the Republic of Sudan to the north. The population of South Sudan comprises some 60 different ethnic groups. Unlike its now northern neighbor, South Sudan has citizenry who mainly follow traditional African religions and the Christian faith instead of being exclusively Muslim. The country of approximately 12 million people spread over 239,000 square miles has English and Arabic as its official languages. Juba Arabic, Dinka, Luo, Murle, Nuer, and Zande are also widely spoken. The main urban centers are Juba, the capital and largest city; Bor; Bentiu; Malakal; Wau; Rumbek; Yambio; Akobo; and Nimule. The main geographic feature is the White Nile, which crisscrosses the country. It flows in from Uganda at Nimule and out into Sudan a little after Kodok while also traversing Juba, Bor, and Malakal. Though South Sudan is blessed with abundant natural resources, the country is poverty-stricken and has little infrastructure development. Electrical power is provided mostly through diesel generation, and the country’s paved road network barely approaches 160 miles. Subsistence agriculture provides a living for the vast majority of its population.
The country’s 2011 independence was followed by a short period of relative calm. After a year of independence, border skirmishes and disagreements with Sudan over the oil-rich region (the Heglig Crisis) were only resolved when a peace deal was reached in June of the same year stipulating how the oil exports would be handled. In December 2013, the new country became engulfed by a civil war that has since displaced at least 2.2 million people and killed many thousands. Overnight, the country that was brimming with promise became a tragic story of what can go wrong in young and poorly governed multi-ethnic jurisdictions. The civil war broke out after the president, Salva Kiir Mayardit, sacked his cabinet and accused Vice President Riek Machar of planning a coup to take over. This turn of events set off a cycle of retaliatory killings splitting the landlocked country along ethnic lines. The civil war morphed into a chaotic melee between splintering militias whose allegiances to any of the original protagonists shifted constantly. Disputes took different undertones, with land and cattle also being major sources of strife apart from the initial political conflict. The worst days of the civil war were marked by reported rights violations by both sides in the conflict. Reports also acknowledge that at the height of the conflict, children were murdered or recruited into militias and women and girls were abducted and used as sex slaves, in addition to the multiple ethnic massacres and attacks on aid workers. Following a series of failed meetings, the warring sides signed a peace deal in August 2015 to end the civil war—under the threat of United Nations sanctions for both sides. A key feature of the peace deal was that Kiir would remain president while a representative of the Sudan People’s Liberation Movement-in-Opposition (SPLM-IO), initially assumed to be Riek Machar, would take up the deputy presidency.
Private Sector Activity
The effect of all this turmoil so soon after independence is that apart from the tragic loss of tens of thousands of lives and a high number of internally displaced people, up to 6 million people (half of the country’s population) have a critical need for food aid while 1.8 million children and adolescents are out of school in a country that has almost come to a standstill. Because of the turmoil, private sector activity during the time of the interviews was at its lowest level since the young country got independence, and a lot of the optimism from the first five years of this young nation had substantially eroded. The bleak business environment restricts individual firm activities through several channels. In particular, the indirect costs of poor infrastructure, regulatory challenges, foreign exchange shortages, heightened insecurity, and low productivity have reduced incentives for business owners and prospective entrepreneurs to continue to engage in economic activity. The situation has been further worsened by the fact that key South Sudanese institutions including the ruling party (the Sudan People’s Liberation Movement), the legislature, the judiciary, the police, and civil society, faith groups, and business interests are deemed inadequate to face the challenge of maintaining an environment that allows the 2015 peace agreement to take hold. Fighting has continued despite an August 2015 peace deal, with at least 19 having been killed in an early 2016 incident in Malakal when government soldiers were reported to have participated in the attack on a UN-protected camp that houses more than 50,000 internally displaced people.
While it is mostly the northeastern states that have seen the worst of the brutality during the civil war, states in the southwest of the country, such as Western Equatoria, had also just descended into lawlessness around the time the interviews with business firms took place. At the time of compiling this report, there were press reports of tangible rapprochement by the leading representatives of the two factions in the conflict. On paper, the war is supposed to be over between warring factions SPLA and SPLM-IO. However, there is still lingering bitterness and political animosity from supporters of President Kiir and the now-replaced former Vice President Machar. The peace expected after the signing of the August 2015 agreement is still tenuous, and therefore it has been proposed that the best way forward for South Sudan is the establishment of an international protectorate in the form of an “internationally managed transitional authority” to bring renewed stability to the young country.
Overview of the Democratic Republic of Congo
The focus for this project was on the eastern Democratic Republic of Congo comprising the two provinces of North Kivu and South Kivu, but the history of this region cannot be separated from that of the entire country. The DRC (see map below), formerly known at different periods of its history as the Congo Free State, the Belgian Congo, Congo-Kinshasa, Zaire, or simply the Congo, is a vast country with immense natural resources that has had a long and tortured past. This nation is approximately one-quarter the size of the US and is bordered by Angola, Burundi, the Central African Republic, the Republic of Congo (Congo-Brazzaville), Rwanda, South Sudan, Tanzania, Uganda, Zambia, and a small sliver of the South Atlantic Ocean. The country traces its history to the thirteenth-century rise of the Congo Empire, a territory that encompassed parts of modern-day Angola, western Congo, and the regions around lakes Upemba and Kisale in Shaba. The Dutch, British, Portuguese, and French merchants in the sixteenth and seventeenth centuries used Congo intermediaries to engage in a lucrative slave trade.
In the late nineteenth century, Belgium’s King Leopold II set up a private venture to colonize the Congo, a choice that led the Belgian government to take control of the Congo Free State because of the inhuman treatment that many Congolese were subjected to. With the winds of the independence movement blowing across much of Africa, the Congo attained independence in 1960 when Patrice Lumumba, the leader of the left-leaning Mouvement National Congolais party, won the parliamentary elections and became the first prime minister of the Democratic Republic of Congo. Civil war broke out soon after, and amid the violence and political unrest, Lumumba was arrested by forces loyal to his then-chief of staff Joseph Mobutu and subsequently executed by Belgian-led Katangese troops in 1961.
The fragmentation of the country was brought to an end when Mobutu Sese Seko (formerly called Joseph Mobutu) seized power in 1965 with financial support from leading Western powers that were averse to the leftist ideology pursued by Patrice Lumumba and others among Mobutu’s opponents. Mobutu’s three decades of exceedingly corrupt dictatorship lasted through 1997, when rebels ousted his regime and Laurent Kabila became president. In 2001, Kabila was also assassinated. The country degenerated into further turmoil, leading to the 1997–2003 civil wars that drew in nine neighboring countries, twenty armed groups, and many UN peacekeepers. By some measures, the country’s web of intermingled conflicts has been responsible for the deadliest humanitarian crisis since World War II. According to one study by the International Rescue Committee, an estimated 5.4 million people died as a result of the conflict and the related humanitarian crisis between 1998 and 2007 alone, mostly due to nonviolent causes like diarrhea, pneumonia, malaria, and malnutrition.
In 2006, the country held its first free elections, and Joseph Kabila, the son of Laurent Kabila, was declared the winner of the run-off vote. Joseph Kabila secured a second term in 2011 and continues to enjoy the support of Western governments (that are not, however, happy with him seeking a third term) along with the support of neighboring governments, such as those of Angola and South Africa, and multinational mining interests that have signed lucrative mining deals under his regime. The country has not known a sustained period of peace since its independence. Corruption has also continued to be widespread and poverty levels remain exceedingly high in spite of the vast natural resources. Pockets of the jurisdiction are still subject to the actions of marauding armed groups. The situation is particularly dire in the east, where there are active militia groups of various persuasions, of which the Democratic Forces for the Liberation of Rwanda (FDLR)—a primary remnant of the Rwanda Hutu rebel grouping—and sympathizers of the M23 Movement (Congolese Revolutionary Army) are probably the most well-known. The leaders of the M23 Movement officially signed a peace declaration with the DRC government on December 12, 2013, though issues of legal accountability for their rebellion against the DRC administration remain. As a consequence of all these conflicts, the DRC’s eastern region is the base of the largest UN peace-keeping force in Africa. MONUSCO (the UN Mission to the Congo), based in Goma, is unique in that it is the first offensive UN peacekeeping force authorized by the UN Security Council to neutralize armed groups, and is officially known as the UN Force Intervention Brigade.
As a result of its location, the DRC, which is traversed by the equator, experiences high amounts of precipitation which sustains the vast Congo rainforest, which is second only to the Amazon in size. The tropical climate has produced the Congo River system that dominates the economy and provides means of transportation. The country’s terrain is composed of a vast central basin in a low-lying plateau and higher ground in the southern and eastern areas, of which Pic Marguerite on Mont Ngaliema (Mount Stanley), at 16,899 feet, is the highest point. A little over 10% of the country’s landmass is used for agriculture.
The DRC continues to face environmental problems, including extensive wildlife poaching, water pollution, deforestation, soil erosion, and unplanned mineral extraction. The poaching menace, especially the poaching of elephants from the vast Garamba National Park in the northeastern DRC, has reached unenviable proportions and is reportedly conducted by rebel groups, renegade soldiers, armed cattle herders, Sudanese Janjaweed members on horseback, and even helicopter gunmen reportedly affiliated with regional military forces. A lot of the environmental damage is also attributed to the activities of the large refugee population engaged in some form of agriculture but also in deforestation and the mining of minerals. As mentioned, the DRC is endowed with substantial quantities of precious stone, industrial minerals, rare earth, petroleum products, and vast reserves of exotic forests. Even though the DRC is blessed with vast natural resource wealth, estimated at upwards of $24 trillion, systemic corruption and lack of infrastructure from as far back as the first year of independence combined with the instability and conflict over much of its post-independence history have denied the citizenry the benefits of this wealth. The eastern part of the country has been and continues to be particularly badly affected by this conflict.
Private Sector Activity
To understand business in the eastern DRC, one has to appreciate the threats that prevail in the region, especially in Goma. The largest urban center in the eastern DRC, Goma— which derives its name from the Swahili word for “drum,” due to the rumbling of the volcano—was until the early 1990s a pleasant lakeside border town and hub for small-scale trade with neighboring Rwanda. Yet following the 1994 Rwandan genocide, when more than one million refugees crossed into the DRC in less than a week, security began to deteriorate. Interspersed among the many arriving Rwandan women, children, and elderly were thousands of armed militiamen and members of the defeated Rwandan army. In an effort to feed their families, many turned to banditry, stealing livestock, uprooting farmers’ crops, and killing anyone who tried to stop them. Although the war officially ended in 2003, scores of rebel outfits are still active today, and large swaths of Congo’s east remain beyond the complete control of state authority. Goma, which was occupied by Rwanda-backed Rally for Congolese Democracy rebels between 1998 and 2003, when a peace agreement integrated them into the national government, has seldom been the epicenter of violence, frequently serving instead as a place of refuge for residents of the region’s more embattled towns and rural areas. Still, awash with weapons and patrolled by corrupt, underpaid, and often predatory security forces, the city of one million is anything but safe. Security has reportedly gotten worse since late 2012, when another Rwanda-backed rebellion, the M23 Movement, occupied and then abandoned the city. A major source of security problems are the more than one thousand former inmates who escaped from Goma’s squalid Muzenze Prison when the prison guards, fleeing the rebels, abandoned their posts. Many of these prisoners are reported to have reverted to their previous banditry and rule large swathes of the area.
Then there are Goma’s threats from nature. The presence of Nyiragongo, which is characterized by unusually fluid magma and fissures that extend directly beneath the city, has led some to call Goma an “African Pompeii” in the making—a place that one day may well be wiped out entirely. According to the chief geochemist at the Goma Volcano Observatory, Goma has grown far too big to be destroyed by a single eruption. Still, he says, much of the city remains highly vulnerable—not only to future lava flows, but to the effect that an eruption could have on the large quantities of methane and carbon dioxide gases present in the waters of Lake Kivu. Since 1986, when Cameroon’s small, gas-rich Lake Nyos experienced a sudden release of carbon dioxide asphyxiating more than 1,700 people, scientists from around the world have closely monitored the unique biochemistry of Lake Kivu. Although most believe it will take at least a century for gas quantities in the main body of the lake to reach a point of saturation— and therefore imminent risk of catastrophic release—there are fears that lava flow interacting with the lake’s gas-rich deep waters could trigger such an event much sooner. These concerns are especially elevated in the Gulf of Kabuno, a shallower, semi-detached embayment at the lake’s northwest area, just 15 miles from Goma.
Such threats of geography notwithstanding, Goma today is in many ways undergoing revival. The author of this report took an extended tour of the city of Goma accompanied by knowledgeable local guides. Goma’s main boulevards, which were reportedly littered with trash and barely passable just a few years ago, are now smoothly paved and are bisected by neatly manicured and pedestrian-friendly roundabouts. The runway of Goma’s airport, which was partially destroyed by volcanic lava in 2002, was in the final stages of renovation during the 2015 visit. In the third quarter of 2015, Goma airport became an international gateway, accommodating the city’s first international commercial flights to Addis Ababa, Ethiopia, via Entebbe, Uganda, on the Ethiopian Airlines carrier. In recent months, the city has also hosted multiple cultural festivals organized to promote peace in the region, featuring internationally renowned artists and other maestros from across the African continent. Driven by demand from the town’s large number of foreign-aid workers and the presence of MONUSCO, the United Nations’ 15-year-old, $1.4 billion-a-year DRC peacekeeping mission, a host of new upscale hotels, restaurants, and cafés have sprouted in the past year, including the town’s first boutique bakery and pastry shop.
CHAPTER 3: METHODOLOGY
The writer was the principal researcher and author of this case study. As discussed in the introduction, the topic dealt with by the research questions has not been adequately covered in the extant literature. The case study is just one of many ways of conducting social science research. It is, however, particularly apt for this project because of the arena under examination and the questions under investigation. Typically, case studies are the preferred method when 1) the “how” and “why” questions are the ones being investigated; 2) the investigator has little control over events; and 3) the focus is a contemporary phenomenon within a real-life context, such as firm behavior. In this method of social science inquiry, the richness of the “behavior of firms” and the extensiveness of the real-life context require the investigator to cope with a technically distinctive situation. The case study research method works around the problem of having more variables of interest than data points. To address this challenge, the most accepted case study tactic and the one deployed in this project is to use multiple sources of evidence in a manner that encourages convergent lines of inquiry and triangulates the data for an informed analysis.
The case study protocol’s multiple sources of evidence for this project included interviews, direct observations, documents, and archival records. For the project, the most important use of documents and archival records was to corroborate interview responses. The list of documents included websites of organizations being studied (when available), YouTube links, published annual company statements of accounts, media briefings, and other documents that may have been otherwise “put in cold storage.” The project is a three-case (country) study. There were four main criteria for selecting the cases. First, access to the three countries’ businesses was possible using local contacts. Second, the geographic proximity of the three jurisdictions played a role. Third, the cases were deliberately selected because though they represent extreme fragility, they also offer contrasting situations which may or may not result in direct replication, subject to the findings. Fourth, they were chosen in the belief that all other things being equal, they were likely to yield the best information for settings similar in context. It was expected that for this design, if the subsequent findings supported the projected contrasts, the results would represent strong study findings that could inform policy for fragile states such as the three chosen territories.
Throughout this project, the objective was to collect data about actual firm behavior in the three jurisdictions. This objective differed from the typical survey objective of capturing only perceptions, attitudes, and verbal reports about events and behavior (rather than direct evidence about behavior). This report was therefore a result of face-to-face interviews that included four broad, semi-structured questions. The focused interviews were open-ended and assumed a conversational manner. The resulting data collection was not routinized. In addition to data obtained from the interviews and available documents, the opportunity for direct observation was also pursued. This was germane to the project because observational evidence could be useful in providing additional information about the subject of firm behavior. Given that the areas of interest were not purely historical, some relevant behaviors were available for observation. Observations ranged from firm set-up, office meeting proceedings, staff conduct, business transactions, adjacent sidewalk activities, factory/shop floor layouts, and condition of buildings and work spaces, to mention but a few. At a minimum, these observations added new dimensions for understanding the context of the behavior being studied. In summary, the use of multiple sources of evidence represented by interviews, documents, and direct observations established concurring thought, and hence study findings that were more convincing than those derived from interview responses alone. The triangulation of data sources enhances the trustworthiness of the author’s generation of meaning through patterns and themes.
The approach to the analysis of all this information allows for the identification of patterns in respective jurisdictions and the pulling out of differences from all the qualitative responses that can inform policy.
The report represents findings from the interactions with area businesses between June and September of 2015. Initial access to respondents came from three prearranged contacts in Somaliland, two in South Sudan, and one in the eastern DRC. Subsequent interviews were either the result of these contacts and the author’s direct efforts or a snowball effect resulting in the combined interviews detailed in the appendices. The businesses that were targeted were registered and primarily domestic non-state-owned enterprises. For ease of grouping, the businesses were loosely categorized along the industry groupings used by the US Small Business Administration. The first question dealt with the firm, its size, history, and operations. The second sought a list of challenges or obstacles the firm faced in its operations. The third asked for a detailed description of how it tackled the challenges and obstacles mentioned. Finally, the fourth question presented to the business owner or senior manager asked for the respondent to project how the firm would be three years down the road. The database of formal responses for each jurisdiction is captured in sufficient detail in the appendices for the reader and other investigators to review the evidence directly and not be limited by the author’s findings and conclusions. The approach to the analysis of all this information allows for the identification of patterns in respective jurisdictions and the pulling out of differences from all the qualitative responses that can inform policy. In some ways, this project has an element of the World Bank Enterprise Surveys in that it involved face-to-face interviews, but unlike the Enterprise Surveys, it did not discriminate against type or size of business. The Enterprise Surveys are only directed at “large” businesses (those with at least 10 employees). To recapitulate the project focus and methodology: while the Doing Business report approach to assessing business climate spotlights the de jure processes that form part of firm operations, and the Enterprise Surveys address the de facto practice, this study goes further to tackle a gap in the literature and brings to light the strategic decisions, tactics, and rules of the game behind business practice in the jurisdictions.
One major challenge faced in collecting information was the time constraints of owner-managers. This was especially limiting due to the almost complete involvement of these individuals in the daily operations of their firms. With interviews mainly taking place during working hours, interruptions made the sessions stretch much longer than they otherwise would have. One can, however, argue that conducting interviews in such settings allowed for a more objective view of firm behavior. The lengthy interviews did create a situation where there was little opportunity to achieve even greater numbers of respondents.
A second challenge arose from language barriers. While the majority of respondents in Somaliland were fluent English speakers, this was not always the case in South Sudan and the eastern DRC. Wherever possible, the author used the services of translators who were fluent in Somali, Juba Arabic, French, and Lingala. There were also a number of moments in the eastern DRC when the interviews occurred in Kiswahili, a language in which the lead researcher and author of this report is also fluent. This study recognizes that the use of translators may be limiting in that some of the information obtained might be incomplete. It is also possible that sensitive topics could force respondents to withhold relevant details in the presence of fellow countrymen. Every effort was made to truthfully capture the views of the respondents in spite of these language challenges.
A third challenge was security. While movement with area-based persons allowed for vetting of the business owners and enabled initial access to firm representatives, the interviews were not always well-received. This can be explained by the fluid and delicate security situations in South Sudan (and the eastern DRC, to a lesser extent). There were many business representatives who were approached who declined to talk, fearing that information given may ultimately become available in some form to the area’s security apparatus. It should also be noted that a few suspicious and aggressive security personnel from one of the jurisdictions subjected the author of this report and his area contacts to a few hairy moments. These moments were eventually resolved and questions arising from the suspicions were answered to the best of the author’s ability. In spite of this security challenge, a concerted effort was made to reassure the respondents of the integrity and utility of the research project.
RESULTS AND DISCUSSION OF INTERVIEWS
Having examined the background to and objective of the case study in the introductory chapter, the research contexts in chapter two, and methodology in the third chapter, this fourth chapter presents the preliminary findings, which address firm behavior in the three jurisdictions. This chapter addresses the first of the two primary questions: What strategies do companies use to carry out business in the eastern DRC, Somaliland, and South Sudan?
While the subsequent chapter addresses the dominant qualitative findings of this research which answer the “why” question, this chapter provides a foundation for those discussions by presenting a comprehensive review and analysis of the responses obtained, documents read, and observations made during the case study. This chapter answers the “what” and the “how” questions as they relate to firm strategy and business behavior.
Out of the 50 businesses approached, 33 (66%) were willing to talk and share their strategies and experiences. Their responses are documented in Appendix A. The responses were mainly from owner-managers, except for 6 who were represented by senior personnel. The responses included those of representatives from business collectives, educational institutions, and security organizations. The targeting of owner-managers reflected a conscious decision to record more autonomous decision-making and true representation of firm behavior. The firms varied in size, complexity, and length of operations. Of the 33 businesses, only 12 had been in existence for more than 10 years. The rest started operations in the last decade, some as recently as 2014. Firm size varied from fewer than 15 employees (42.4 %) to as many as 400, for the two largest firms in the interviews (Mansoor and Telesom). Only 2 of the 33 organizations (6%) were headquartered outside of Somaliland. All but 6 of the interviewees (81.8%) were returning diaspora who had undertaken different ventures abroad. The businesses were male-owned and operated except for 5 (15.2%) that were run by women. The firms can therefore be characterized as mainly early- to middle-stage developing (rather than mature) small Somaliland businesses operated by returning male diaspora.
Overall, this analysis found a number of specific key findings about how firms structured themselves and negotiated around business challenges.
Internally Generated Funds
Firms rely on informal investments from family members and internally generated funds for development rather than on loans. Of the firms talked to, 22 of the 33 (66.7%) indicated that their starting-up process and all continued growth since have been the result of internally generated funds. Funds generated and retained within the business are used to finance ongoing development and expansion. For those few firms that had received outside funding in the form of grants, the sources included the Somaliland government (1), Dahabshiil credit (1), Shuraako intermediation efforts (6), the World Bank (1), and financial institutions of a neighboring country (2). Because of the use of internally generated funds, establishments such as Summertime Restaurant, the Royal Mount Hotel, and Mansoor Hotels were in operation in spite of the unfinished structures on their respective premises. Somaliland businesses’ using predominantly organic development has a logical basis: the use of internally generated funds for operations should not be a surprise in light of the challenges that Somaliland continues to face in developing a fully operational banking system.
Shari’a Compliant Operations
Firms base their business operations on Islamic principles. All 33 organizations stated that their transactions were based on conservative Islamic thought, and their approaches to pricing, credit, and hours and days of operation were tied to the faith. As the proprietor of refuse-management firm KEEPS asserted, the Somalis are primarily Sunni Muslims of the Shafi’i and Sufism jurisprudence. According to their tradition, their ultimate ancestors were of the Qurayshitic lineage of the Prophet Muhammad. Except for a small number of urbanites influenced by higher education, all citizens of Somaliland belong to one of the following four brotherhoods or clans: Qadiriyyah, Salihiyyah, Ahmadiyyah, and Rifaiyyah. As Muslims, they adhere to Shari’a law whenever it does not conflict with local customary law. During Ramadan, which occurred during a large part of the interviews, the author observed that all businesses were closed at significant prayer times. Food service, for instance, was provided after “break of fast” in the restaurants such as Summertime and Royal Restaurant and Lodge, while the Mansoor Hotels left a very skeletal staff to provide meals to non-Muslim patrons. However, no food of any kind was served during key moments of the religious obligations.
Prominence of Trust in Business Transactions
With a high level of interpersonal trust, Somaliland businesses are less inclined to rely on elaborate safeguards for specifying, monitoring, and enforcing agreements.
Firms acknowledge the prominent role of trust in business transactions. All 33 entities explicitly stated or alluded to the significant place of handshakes and gentlemen’s agreements in their transactions. For the Mansoor Hotels, the second-largest private employer in Hargeisa and the other cities in Somaliland, the proprietor mentioned that as a large cash-handling establishment, it uses gentlemen’s agreements to meet most guest obligations, supplier dues, and government requirements. This is surprising in light of the complexity of some of the agreements. For example, Mansoor contracts may detail rules and responsibilities to be performed, specify the quality of products to be delivered, negotiate the delivery place and time, decide on procedures for monitoring and evaluation, and, most importantly, agree on outcomes. With this high level of interpersonal trust, Somaliland businesses are less inclined to rely on elaborate safeguards for specifying, monitoring, and enforcing agreements. The businesses affirmed that when there is a high level of interpersonal trust in business transactions, it is most likely that parties to the transactions will obey the terms of agreement. For these Somaliland firms, infrequent breaches of the agreements are dealt with by brotherhood set-ups, if and only if no settlement was reached prior to clan involvement.
Internally Generated Energy
Firms pursue their own options for energy generation in order to confront the significant electrical power deficits. While the majority of the businesses, comprising mainly the smaller firms, relied on the independent power producers like Mansoor Power for their energy needs, the 12 more-established firms (36.6%) had their own generators and solar panels to meet their energy requirements. These firms view the high costs and unavailability of electricity as a major bottleneck. Somaliland has what are among the highest electricity charges in the world. Independent power producers (IPPs) like Mansoor Power who also generate their own power using diesel generators levy $1 for one kilowatt-hour of electricity. The supply from these IPPs, according to the firms interviewed, can be erratic. It therefore makes sense for firms that can afford the initial investment to have their own power sources. The installed capacity of the generators seen during the interviews ranged from 1 MW to 50 MW (for the Toyota auto dealership and AADCO Printing respectively). As mentioned by the executive of PKF, an advisory and accounting firm, there is a distinct negative to Somaliland firms generating their own power. Even though in-house generation meets an immediate need, it adds to the capital and operating expenses of the firms and blocks the benefits of the economies of scale that Somaliland businesses would like to obtain.
Firms in the jurisdiction use strategic alliances with firms and organizations out of Somaliland. The use of these alliances is reportedly driven in part by the lack of international recognition that Somaliland continues to face and the ensuing challenges this situation brings to business operations. The alliances were defined in terms of the firms voluntarily partnering with external entities to combine value chain activities, architecture, and supply chain strengths for the purpose of increasing individual and collective firm value-addition. Of the 33 firms, 14 (42.4%) indicated that they formed strategic alliances with larger foreign organizations in order to achieve their objectives. These ranged from guarantees of quality products to access to new markets to knowledge transfer and capacity development. The firms with these strategic alliances included businesses in agro-processing (Rahiq Gums and Resins), retail (Sacadadiin), education (Admas and Hargeisa universities), professional firms (PKF and Sagal Jet), auto trade (the Toyota dealership), manufacturing (AADCO), and energy (Golis). The nature of alliances ranged from a variety of arm’s-length contracts for the majority of cases to joint ventures for three firms (PRS, PKF, and the Toyota dealership).
Employment of Foreign Workers
Firms extensively use foreign workers to counter significant manpower deficits. Of the 33 firms, 23 (69.7%) stated that they employed multiple foreign staff members for critical duties, including chefs, bakers, accountants, lecturers, engineers, mechanics, administrators, machine operators, tailors, telecommunication experts, skilled construction workers, and IT professionals. For some, such as AADCO, PRS Security, the Toyota dealership, Sagal Jet, PKF Consulting, Dil Bakery, and Tayo Uniforms, the foreign workers occupied strategically vital positions and were also spoken with for this report. As a result of a lack of skilled and trained personnel, businesses in the area reported that they are forced to hire expatriate staff, especially from Kenya, Ethiopia, South Africa, and Bangladesh. The PKF and PRS executives explained that a big reason for this state of affairs is that the region’s education and training institutions do not meet industry requirements. The education institutions still need to do a better job helping people acquire the proper skills. The few training institutions that do exist lack the resources to keep up with demand. To compound the problem, while Somaliland has a handful of university-level colleges, there is a dearth of middle-level institutions. In addition, the programs available in the university colleges, as Dr. Gass of Hargeisa University asserted, do not offer much by way of practical experience. This challenge is one that the two university colleges interviewed are trying to address with the just-started efforts towards establishing industry linkages.
All 33 organizations indicated that they primarily use the mobile telephone money transfer platform Zaad to recharge airtime and pay salaries, bills and other small transfer obligations when cash is not utilized.
Firms transact in cash, in light of the absence of formal banks as they are known in the West. All 33 organizations indicated that they primarily use the mobile telephone money transfer platform Zaad to recharge airtime and pay salaries, bills, and other small transfer obligations when cash is not utilized. Zaad is a proprietary service of Somaliland Telesom, and in many ways, mirrors the more widely used M-Pesa of Safaricom in Kenya. To register a Zaad account, the declared mobile phone user must visit an official Zaad office and submit four passport-size pictures and other identification in order to be given a unique four-digit number that activates the account. All 33 firms interviewed also stated that they maintain deposit accounts with the leading Hawala institution, Dahabshiil.
A Developing Taxation System
The payment of taxes by Somaliland firms is still a “work in progress.” Because of challenges with staffing, government agencies are ill-equipped to carry out audits, so tax obligations are the result of self-declarations and flat fees. The adoption of this taxation model by business and government means that not all business entities are covered and many smaller firms have no reason to pay more than the regular registration fees. The current taxation system only came into being in 1999, after a lengthy period of ineffectual tax administration amidst the turmoil. The tax revenues are still relatively low, even by sub-Saharan African standards. According to official Somaliland data and a recent World Bank study, tax collection barely exceeds 8% of GDP.
Low Web Presence
Firms do not transact online. While 5 of the firms (15.2%) have some form of online presence (Facebook, and web pages in various stage of development), it was noticeable that none of the businesses carry out transactions online. Orders are either made in person or over the phone. Even relatively bigger firms like Mansoor Hotels take bookings on the phone or through local contacts who visit the establishment when services are required. Many of the author’s interviews were interrupted by order-taking, especially over the phone. Upon the author inquiring of the proprietor of the ladies’ lingerie shop why there is so little web presence, she mentioned that cost is a motivating factor. Given that the businesses are mostly young, they intend to remain lean until they have generated enough resources to drive online business. Besides, internet connectivity is not as advanced as it is in neighboring Kenya, nor are financial institutions set up for online business. She also mentioned that Somaliland’s Telesom charges are among the lowest on the African continent, making mobile telephone usage so prevalent.
A Mix of Supply Chain Strategies
Firms use a mix of supply chain strategies. The 13 more-established firms (39.4%) had a mix of five approaches: negotiating with many suppliers (educational institutions), partnering with a few suppliers (Dil Bakery, AADCO, Telesom, PRS, and Tayo Uniforms), vertical integration (the Toyota dealership, Warsame Construction), a combination of a few suppliers and vertical integration (AADCO, Mansoor Hotels), and the use of suppliers on an as-needed basis (PKF). It is instructive to note the prevalence (at 38.5%) of the “few suppliers” strategy among the established companies. These firms sought long-term partnerships with dedicated suppliers who were expected to understand the broad objectives of the procuring firms. The use of vertical integration (developing the ability to produce goods or services previously purchased) is most noticeable in how Sagal Jet and Mansoor Hotels operate. The owner of the Mansoor Hotels said he believes that by taking charge of the provision of many of their goods through the development of company farms and other related subsidiaries, the group has a better handle on company costs, quality standards, and delivery needs.
Locals in Senior Positions
Finally, the 3 foreign-owned firms interviewed and operating in the jurisdiction all mentioned that a key strategy they employ is to have locals in senior positions to help them navigate the challenges of Somaliland’s bureaucracy. Unlike “fixers,” who are typically employed on an ad-hoc basis, these local contacts have a sense of permanency and may even be shareholders. This was especially apparent for PRS Security, where the local partner took up all corporate affairs duties. He dealt with licenses, permits, fees, and any requisition from the government. The local contact person is also expected to help resolve potential government complaints and violations that occur in the course of PRS Security’s work. He is also tasked with business development tied to government and local agencies. The PRS local person met by the author not only had a prominent role, but he reportedly had a stake in the revenue generated through his efforts.
Of the 48 businesses approached, 28 (58.3%) willingly shared their experiences and strategies. The reluctance to speak to the author was possibly explained by the tense environment that Juba was in and continues to face even at the time of the writing of this report. As mentioned in the country overviews, South Sudan’s latest conflict was still simmering and a fragile peace agreement was seen as tenuous during the time of the interviews. Many of the firms were initially suspicious of the researcher’s intention and it took a lot of explaining to allay their fears that information given was not going to adversely affect them later on. The firms interviewed included those in food service and accommodations, professional services, the auto trade, finance, grooming services, health, retail, manufacturing, and construction. All the firms interviewed had been in operation in South Sudan for less than 10 years. Unlike in Somaliland, the majority of the firms (85.7%) were owned by foreigners. The firms were overwhelmingly male-owned, with female ownership at 17.8% of the businesses interviewed (5 firms). Three of the firms (10.7%) were principally owned by returning diaspora. The firms can be best characterized as predominantly young, mainly foreign-owned, and male-run.
Specific findings about how firms have structured themselves and negotiated challenges in the prevailing environment are below.
Suspension of Operations
Firms readily suspend business operations as a coping strategy. This strategy was mentioned by interviewees from all but 8 of the representative firms in this jurisdiction (20 firms). For these firms, the “suspension of operations” because the business environment was no longer tenable was a survival tactic. While only 3 (10.7%) of the documented firms suspended operations on or around the time of the interviews, this strategy dominated the discussions, and many business owners (50% of those interviewed, or 14 firms) believed they were approaching a tipping point when they would have no choice but to suspend operations.
It is instructive to note that the 3 that suspended their operations included the young country’s only large manufacturing entity, South Sudan Beverages Limited (SSBL), a joint venture between the government of Sudan and SABMiller PLC. The brewer held pride of place because it signified a big break with the past when the jurisdiction was controlled by its northern Muslim neighbor and alcohol consumption was prohibited by the strict Shari’a laws. On attainment of independence, the interests of the majority non-Muslim population of South Sudan permitted the pursuit of a more secular path. A second company, SITICO Petroleum, also suspended operations in spite of its strong South Sudanese roots. While the firm is based in Kenya and has operations in four regional countries, the principal shareholder of the firm is South Sudanese but has spent most of his life out of the country.
Employment of Foreign Workers
Firms use foreign workers at almost all levels. Foreign workers in South Sudan come from Kenya, Uganda, and Eritrea, and to a lesser extent, India and the DRC. The majority of these countries shares a border with South Sudan or is one country removed (such as Eritrea). Unlike Somaliland, where the foreign employees were largely restricted to skilled positions, all the interviewed firms in South Sudan had workers in entry-level low-skilled positions through middle management and all the way to executives. The restaurants employed foreign workers to manage the establishments, bus tables, cook, clean, and provide entertainment. The multiple hotels visited were staffed with foreign workers at all levels. The supermarkets employed them as stockers, cashiers, and drivers. The construction companies had artisans, foremen, and engineers from neighboring countries. It was the same in the financial services firms, with banks and insurance companies bringing in staff members from their home countries for the skilled positions. At the time of the interviews, there was a governmental push to limit foreign employees to 20% of the workforce, but none of the businesses interviewed had reached that benchmark.
Foreign Exchange Constraints
Firms encounter substantial foreign exchange constraints in the formal channels and routinely seek informal sources to meet import needs. For the extreme cases of the organizations solely dependent on foreign exchange for goods, the 3 firms (SITICO, SSBL, and East African Brewery Limited) suspended operations on or around the time of the interviews. The other 25 tried to work around this situation by buying foreign currency from unofficial sources or charging for services in hard currency, especially the US dollar. In spite of the presence of multiple banks, the setting of government price controls that were at as little as 33% of black market rates meant that the country’s banks could not justify trade in foreign exchange, hence businesses enjoyed no formal sources of hard currency. Company operations were as a result severely hampered in a country where almost all goods (including fresh fruits and vegetables) are imported.
These currency problems affected product and service development strategies, especially in the construction, energy, food service, and accommodations sectors, to varying degrees. During the interviews, building projects stalled and the city of Juba was dotted with many unfinished structures. The most prominent was the UAP Equatoria Tower. For hotels, which Juba had some 200 of built during the boom years prior to the civil war, bed occupancy rarely approached 40%, except in the leading establishments like the New Lion International Hotel (NLIH) which were in close proximity to and obtained business from major embassies, multilateral agencies, and International Non-Government Organizations (INGOs) engaged in providing humanitarian services. But even these choice hotels faced daunting challenges in meeting their product and service development objectives. Design of services is even in the best of times challenging, because their services often have unique characteristics—more so NLIH and the Paradise Hotel and Restaurant, which primarily offer high-end food service. Hotels such as Paradise and NLIH reported that they believe in focusing on a strategy that a highly placed manager at NLIH referred to as the “moment of truth” when the relationship between the hotel and the customer is crucial. The moment-of-truth approach addresses customer satisfaction factors such as experience detractors, standard expectations, and experience enhancers. As mentioned by the general manager of NLIH, they have had to constantly review service decisions in light of ever-changing hard currency cash-flow changes and other negative market dynamics. They have little to no time for optimal testing of strategies that similar establishments employ in the more developed world.
“Facilitation Fees” and Bribes
Firms routinely settle “facilitation fee” requests. All but 5 of the businesses mentioned that they have had to deal with requests for facilitation fees or bribery from government functionaries. The requests come either during inspections by the local government and tax collection agencies when seeking government-mandated permits or registration documents, or when bidding for government contracts. At 82.1% of firms reporting the practice, this is a significant issue. Payment of bribes and facilitation fees is not only an inefficient use of company resources, it also has other socio-economic impacts on the South Sudanese firms. Engaging in the payment of these fees creates a very unfavorable business environment by encouraging the gaining of unfair advantages and anti-competitive practices among South Sudanese businesses. In addition to allowing organized crime to flourish, the honoring of these payments is one of the primary obstacles to the economic development of a country; it undermines the rule of law, weakens trust in public institutions, and challenges democratic principles. For the South Sudanese and others served by these establishments, consumer prices for goods and services may well be inflated. This is particularly challenging in a price-sensitive environment like that of South Sudan.
In addition to allowing organized crime to flourish, the honoring of these payments is one of the primary obstacles to the economic development of a country; it undermines the rule of law, weakens trust in public institutions, and challenges democratic principles.
Provision of Social Services
To address infrastructure deficits, especially for water and electricity, firms have had to assume responsibilities that should otherwise be handled by the government. The situation in South Sudan is a bit less developed than in Somaliland; there are no independent power producers. Because South Sudan is not on a power grid, firms employ their own diesel-fueled generators for electricity. All but 6 of the firms (78.6%) had their own power sources. The ones that did not either had power as part of the rental payments (4) or used lamps when it is dark. In terms of water, the majority (85.7%) said they receive water from tankers that source the product from wells just out of the Juba city boundaries. Three of the firms had their own boreholes. To its credit, the government of South Sudan has taken an interest in how these water needs are met and at the time of the interviews had just instituted price controls for the vendors of this precious commodity.
Locals as Silent Partners
Firms use a local person as a silent partner. The firms that were neither multinationals nor principally owned by South Sudanese nationals (42.8%) confided that in order to keep operating, they incorporated a South Sudanese person as a silent partner. This was done to ensure that firm operations continue even during the challenging times that the jurisdiction has been facing since the onset of the civil war. Unlike in Somaliland, this person usually has no visible presence in the business but plays a key background role in smoothing feathers when the need arises. This use of silent partners is also different from in the developed world, where the silent partner generally provides capital to the business. In the Western models, the silent partner works with a written agreement that includes an obligation by the active business owners to report decisions and progress towards meeting desired outcomes. The agreement also specifies a clearly defined and mutually acceptable exit strategy for both parties. The exit strategy details the complete financial terms and commitment back to the silent partner if a separation were to occur. In the South Sudan scenario, the silent partner remains associated with the respective firm until the business changes ownership or folds.
Firms prefer to use cheap substitutes instead of acknowledged brands. The 35.7% of firms specifically targeting customers at the lower end of the economy (which also comprises the bulk of customers in present-day South Sudan) reported the exclusive use of generics and other substitutes for brand-name products. The use of such products reportedly enabled them to deliver services and goods with pocket-friendly prices to South Sudanese customers. These businesses included Nellum Autospares, which supplied equivalent products from Vietnam, India, and China rather than brand names like Bosch and Goodyear to Peugeot, Honda, Toyota, and Nissan vehicles on South Sudanese roads. This behavior was also dominant in Life Start Clinic and Drugstore. The health establishment’s customer base is mainly composed of hard-pressed South Sudanese nationals barely able to pay for the pocket-friendly services offered by the clinic. The clinic’s owners also remarked that they assume a role beyond that of the typical health-service provider by promoting better hygiene standards among the populace as a way to control the easily preventable diseases that are so common in the jurisdiction.
Low Use of Professional Financial Services
Finally, the typical South Sudanese business, unless mandated by its country of domicile, shareholders, INGOs, or multilateral bodies from which it seeks business interactions, has been averse to using professional services like those offered by accountants, auditors, and financial advisors. In the course of the interviews, 12 firms comprising 42.8% of the businesses indicated that that they had not contracted external auditors. This was surprising given the number of registered accounting firms in Juba. The registered accounting firms interviewed, like Bailey Consulting Group (BCG) and Kamau and Associates, did indicate that their business was largely conducted with the humanitarian agencies and firms seeking contracts for which multiple years of audited accounts were a prerequisite before submitting bids. This request for audited accounts would also, at a minimum, be a corporate requirement for credit facilities in the multiple banks in the jurisdiction. The low use of professional financial services was echoed by Matku Engineering, UAP, and Tango Consult representatives. This state of affairs is also manifest in the very low uptake of insurance services at this point in the nation’s history.
Eastern Democratic Republic of Congo
Of the 39 businesses approached, only 13 (33%) willingly agreed to share their experiences and strategies. Another 10 did agree to talk on the condition of anonymity, but only to give generalities (from which the author of this report did derive useful information). In light of the recent conflict that had occurred in the region around the time of the interview and the suspicion that information gleaned from these interviews, especially those of a financial nature, could end up with government functionaries, this should not be surprising. The businesses spoken with included those run by Congolese citizens, multinationals domiciled elsewhere, and businesses operated by foreign citizens living in Goma.
The findings of the specific ways businesses structure themselves to negotiate around business challenges are below.
Firms pay particular and visible attention to security. All the firms interviewed mentioned that security was a primary concern, hence the presence of 14 security companies, including ones from as far afield as Great Britain, Belgium, Lebanon, and Kenya. Guns were openly on display, not only by members of the huge UN peacekeeping force but also by the large DRC armed forces contingent that has a base in Goma. Companies in the jurisdiction operate with security guards who control access to premises, especially in the more upscale establishments. At dusk, the city changes drastically: mobility is severely limited, and business owners move into their walled compounds. The business owners also mentioned that they rarely venture outside of Goma’s city limits without an armed escort because of the militia groups that operate in the countryside.
“Facilitation Fees” and Bribes
Firms expect to face and routinely settle requests for facilitation fees and graft demands from government functionaries. All the businesses talked to stated that they invariably face these requests, often in the form of multiple inspections, unexpected license charges, or just plain cash pleas. In practice, bribe payments are expected—all the firms interviewed stated that they know in advance about the bribes they need to pay to sustain operations, indicating that these additional costs are already factored into their cost structures. The business owners also reported that the judicial system is ineffective and has limited capacity for contract enforcement and conflict resolution. Business owners have little faith in this system, and believe that the court system is not fair, impartial, or uncorrupted. While the prevalence and scope of these requests for facilitation fees and bribes may seem alarming to readers, they are not surprising in light of the low and often delayed government salaries.
Firms reduce their tax burdens by maintaining an informal status. Eastern DRC businesses that would otherwise be seeking to transition from being micro-enterprises often consciously maintain their informal status. Other than multinationals, banks, security companies, a high-end restaurant, and a premier hotel, the bulk of the eastern DRC companies in this report are micro-enterprises. Unlike in South Sudan, these firms are owned and operated by Congolese citizens. While most micro-enterprises have authority licenses, not all of them comply with all of the tax and licensing laws. These business owners reported that they choose to remain informal not necessarily because of their inability to sort through the paperwork required to formalize, or due to the time or cost involved in registering, but because informality allows them to circumvent higher taxes and payment-seeking from inspectors and tax officials. In effect, they maintain their informality as a way to go around the perceived higher burdens that come with tax obligations. Conversations with Virunga Market merchants, two taxi operators, and the proprietor of a leading ethnic food outlet emphasized this behavior strategy. The visit also showed that most micro-enterprises in the eastern DRC are not “survival enterprises” managed by necessity-driven entrepreneurs, but rather are based in permanent structures with electricity and water hookups.
The sight of small Goma traders holding huge bundles of currency is not uncommon, but mobile money transfers through the three leading telecom providers will in time probably reduce the need for handling such bundles.
For eastern DRC firms, cash is still king. Business transactions are conducted in US dollars for establishments targeting the INGO sector and foreign nationals. For the typical Congolese person, merchant business is done using the Congolese franc, which at the time of compiling this report was trading at 985 francs to the US dollar. The sight of small Goma traders holding huge bundles of local currency is not uncommon, but mobile money transfers through the three leading telecom providers, Airtel Congo, Azur, and MTN Congo, will in time probably reduce the need for handling such bundles of local currency. At the time of the interviews, two of these three mobile telephone money operators (Airtel Congo and MTN Congo) had been levied with substantial fines for poor service by the DRC Regulatory Authority for Post and Electronic Communications. None of the establishments interviewed had a provision for working with credit card payments, in spite of the presence of several banks in Goma.
Immediate Payment of Goods and Services
Eastern DRC firms, unlike those in Somaliland, rarely grant credit. The business owners expect cash on delivery of services or goods. The only exception was the security firms that invoiced their clients, all of whom were INGOs, UN agencies, or reputable foreign bodies. Where, and if, credit is granted, as the representative of Magali Restaurant stated, it is on a case-by-case basis. All other merchants, such as traders in the Virunga Market, hardware shops, fuel depots, transport operators, hotels, supermarkets, butchers, and grooming outlets, demand immediate payment on receipt of goods and services.
Unlike in Somaliland and South Sudan, a foreign investor can officially establish a business without a local individual partner, though a small stake is designated for the government. The four security companies with foreign home-bases indicated that foreign investors can operate in the DRC either through establishing a branch or a local subsidiary. The individual business may be designated either a “Société en Commandite Simple” (SCS), a “Société Privée à Responsabilité Limitée (SPRL), a “Société par Actions à Responsabilité Limitée” (SARL), or a “Société Cooperative,” the first two being limited liability companies. For the SPRL category, shares are not freely negotiable, while SARL shares are, in principle, freely negotiable. Incorporation of an SARL requires a minimum of seven shareholders. Furthermore, incorporation of an SARL requires authorization from the Office of the President of the DRC. The Ministry of Justice is entitled to receive 1% of the original stock invested in the business by its founders. Some sectors, including mining, insurance, and banking, have different procedures for creating a company. The representatives of these sectors were not as comfortable as the security firms were with sharing their respective procedures for incorporation. The reader should note that the government has restricted one category of small businesses to Congolese nationals. This covers artisanal production sector activities, small retail commerce, small public transport firms, small restaurants, and hotels with fewer than ten beds. Despite the government’s restrictions, some foreign-owned small retailers, particularly Chinese, Lebanese, and Indian-owned stores, were visibly operating in Goma during the visit, implying that the restrictions may not be strictly enforced.
A Mix of Supply Chain Strategies
Eastern DRC firms use a mix of supply chain strategies. The interviewed businesses employed all five available approaches: 1) negotiating with many suppliers, hence playing one supplier against another (utilized especially by micro-enterprises in Virunga Market); 2) long-term partnering relationships with a few suppliers, as exhibited by restaurants such as Magali and the 14 security companies; 3) vertical integration, as demonstrated by the kombucha business and the boat transporter that made its own vessels; 4) keiretsu—a combination of vertical integration and having only a few suppliers, as employed by firms such as Au Bon Pain (which found that because items were being purchased from as far afield as Belgium, this model yields significant cost reductions, hence the bakery has started using goods from its own farm just outside Goma); and 5) the use of local suppliers on an as-needed basis, as exemplified by the supermarkets that stock almost only foreign products. The choice of supply chain strategy used in the eastern DRC depends on the industry sector, business size, and target markets. Micro-enterprises predominantly use many suppliers, with orders going to the lowest bidder, while the larger firms such as Luc Kivu Hotel are a bit more selective and frequently pursue vertical integration in order to handle their inventory and desired service standards. The business owners talked to indicated that breaches of supply agreements are not settled in the weak court processes, but mainly result in losses that have to be assumed by the procuring firm even as the supplier is blacklisted by the buying entity.
According to all the business owners talked to, land disputes remain a key driver of conflict in eastern DRC and hinder development across the jurisdiction.
Finally, firms refrain from investing in land outside of the Goma city limits. Land tenure is still a problem in the eastern DRC. The situation within the Goma city boundaries is being reviewed with government attention and ownership of parcels of land on which the businesses operate within the city being known. But outside of the city limits, there is an urgent need for reform. Among the businesses interacted with, only two had interests in farmland outside of Goma city limits, and in both cases these were plots of family ancestral land going back multiple generations. The business owners all stated that one of the big challenges for those seeking to use or otherwise invest in farmland is determining who rightfully owns the land, and even who is permitted to own the land.
The government machinery still does not have the capacity to issue certificates of land ownership, even as it sets new regulations. The most recent agricultural code, for example, limits foreigners’ share of DRC farmland investments to 49%. According to all the business owners talked to, land disputes remain a key driver of conflict in eastern DRC and hinder development across the jurisdiction. Disputes arise because of land grabs, particularly from the many displaced communities in the eastern DRC. These disputes have continued amid the wars of the past two decades. The business owners, therefore, have adopted a “wait-and-see” attitude, even as some of the more influential ones pressure the provincial government to secure, survey, demarcate, and provide land rights for areas no longer subject to rebel activity.
Comparisons Across the Three Jurisdictions
In reading about the strategies businesses employ, the reader will note that some findings apply across all three territories. The exercise of compiling that list offered much in support of this project’s initial objectives. The list captures valuable analyses and is important because it is only by comparing how firms tackle their challenges in the three jurisdictions that the reader can discern how firms behave in fragile states such as those depicted in the report. The analysis shows that the prototypical strategies firms employ in fragile states include the following.
Internally Generated Funds
Start-up and continued growth of firms across the three jurisdictions are predominantly the result of family savings and internally generated funds. This was especially the case for all women-owned businesses interviewed. The predominant use of internally generated funds for continued growth occurs in Somaliland, with no formal banking structures, and more surprisingly in the eastern DRC and South Sudan, where financial institutions do exist. While the entrepreneurs using savings to start their respective ventures should not be a surprise, the low penetration of banks (where they exist) to power the growth of interviewed businesses implies that the banks do not serve the same function they do in more developed jurisdictions. Banks are expected to act as financial intermediaries between entities with surplus capital and those with capital deficits. In the more developed territories, banks use the majority of customer deposits to lend to individuals and businesses in need of loans. When these loans are issued to businesses, they offer a well-acknowledged path to new investments, immediate expansion, and further growth. By relying on family savings and internally generated funds for development, firms in these fragile states have a much more challenged growth trajectory.
Employment of Foreign Workers
Firms in fragile states use foreign workers for skilled positions extensively. While the South Sudan business entities engage foreign workers at all levels, the eastern DRC and Somaliland ventures largely restrict these employees to skilled positions. These differences are probably the result of the development of legacy institutions. In the case of South Sudan, educational institutions were not operational during the 25 years of war prior to its 2011 independence. In the current environment—a just-ending civil war occurring so soon after independence— the country’s educational institutions remain severely challenged. The situations in Somaliland and the eastern DRC are somewhat different. The pursuit of education is a major plank of Somaliland’s development plans, and rudimentary schools, colleges, and universities are now found in large urban centers. For the eastern DRC, rudimentary schooling in main urban centers persisted even during the protracted conflict in the region.
The firms in these fragile states without exception still tie their business transactions to cash. Credit is rarely granted. Many, because of their apprehension regarding the fluctuating values of area currencies, prefer to trade using major foreign currencies, of which the United States dollar is the most prominent. While the South Sudanese government was at the time of the interviews trying to implement a government directive for firms to desist from pricing in foreign currencies, this regulation was still not widely adhered to. In Somaliland and the eastern DRC, major foreign currencies provided an important medium of exchange in formal establishments such as high-end hotels. Change for services rendered would frequently be given in local currency, especially in situations where the change was of modest value. The Somaliland firms were equally willing to price in dollars in the more prominent businesses. With this pricing approach, charges were also equated with the prevailing rates of the Somaliland shilling.
Mobile Financial Services
Closely related to the preference for cash transactions in these fragile states is the reach of mobile financial services. All three territories use mobile payments to settle major payment categories. Somaliland makes the most extensive use of mobile telephone transactions. These include person-to-person payments, wages, government-to-public payments, bill and formal obligation payments, and payment for goods and services. South Sudan was also at the time of the interviews incorporating M-Pesa and Airtel Money systems in settlement of bills. The same applied to the eastern DRC, though not with the deep penetration and reliability of Zaad in Somaliland. In the eastern DRC, the main mobile money systems are Airtel Congo, Azur, and MTN Congo.
Firms in fragile states aspire to control all facets of production and work towards this goal. Supply chain strategies used are a mix of the five acknowledged categories. For the more established businesses, pursuit of vertical integration appears to be an overriding objective. This should not come as a surprise, given the absence of structures and incentives to standardize services and products in fragile states. Not only is there not much of a manufacturing sector, but even for services, the quality of products varies substantially across and within jurisdictions. This pursuit of independence in production is at variance with the developed world, where the outsourcing of goods and services has been standard practice for quite some time.
Local Partners for Foreign-Owned Businesses
The role of foreign nationals who paired with local partners came up repeatedly. As a survival tactic, businesses with foreign ownership employ the strategy of having an influential local person either as a silent partner or an individual having official responsibilities that include corporate affairs. The former was evident in South Sudan, while the latter strategy was a feature of foreign-owned businesses in Somaliland. In both cases, these individuals shared in the profits generated by the businesses. The eastern DRC takes a slightly different approach: foreign businesses incorporated as SARLs have a designated percentage reserved for the government. Though not mandated by law, many eastern DRC firms work with influential local persons, even if not as widely as in South Sudan and Somaliland.
Religion and Business Conduct
All conduct in Somaliland, including in the business realm, is guided by the religious faith and tradition.
It is also important to note a significant difference among the three jurisdictions mainly revolving around how religion shapes business conduct in Somaliland. As a conservative Muslim jurisdiction, all conduct in Somaliland, including in the business realm, is guided by the religious faith and tradition. While business credit is widely granted, as explained, by vendors such as Mansoor Hotels, KEEPS, the Sacadadiin Group, and the Toyota dealership, the most obvious distinguishing feature of these transactions is the place of trust and the central importance of Islamic certification (Shari’a compliance) for contracts between the vendors and their customers. Unlike in the Western world, these contracts (sales, leases, and simple partnerships) are designed by individuals who make Islamic products that cater to the Somali market. They are guided by jurists or religious scholars who are familiar with medieval juristic texts (predominantly in Arabic) that determine the conformity to Islamic tenets of the contract terms. It is important to recognize that religion and custom in Somaliland are demonstrated by adherence to form and equality in the areas of ritual and transactions. Time and time again, the vendors stressed that they are guided by tradition in how they deal with their customers.
As the leadership of the PKF group explained, business transactions in Somaliland are not just driven by economic efficiency but also by prohibition. Prohibition relates to certain types of financial transactions, such as those that bear interest (Riba), promote gambling (Gharar), or exhibit price gouging. The prohibitions relate to trade in unbundled credit and unbundled risk, in that they leave customers vulnerable to excessive borrowing and exposure to excessive payment of misplaced premiums. The transactions must also be conducted in an environment where both parties in the transactions consent to the business engagements. It is important to note that mutual consent in business is derived directly from the Islamic holy book of the Quran, which states, “let there be among you trade by mutual consent.” The conservative Islamic faith practiced in Somaliland, and its contemporary jurist prohibition features with regard to arbitrage could be part of the explanation (together with the lack of an identification system and other supporting structures) as to why the insurance industry has not taken root in the jurisdiction. Conventional insurance is essentially trading in some form of the unbundled risk (of which gambling is the extreme end of the spectrum) that is prohibited under Gharar.
For the minority-Muslim South Sudan and the eastern DRC, the Islamic faith, while an important facet of the two societies, does not carry as much weight as it does in Somaliland. Other faiths, mainly Christianity, as well as African traditional religions and atheism, also guide how people relate. Though all four categories of faith are important, on their own they do not provide a strict roadmap for how businesses should operate in either South Sudan or the eastern DRC. What is clear, however, is that businesses in the two jurisdictions are pragmatic in how they tackle challenges to their operations and create value for shareholders. Pragmatism dictates that if need be, government officials are included in company shareholding; dollars are sourced from the black market; patents are overlooked; zoning laws are disregarded; clinics and pharmacies store only generics; and incentives are paid to government functionaries to speed up processes. While trust is often present among regular customers, as a strategy it is rarely possible in South Sudan, where the expected recovery from the civil war is still a long way off. It is also evident that because of the slow recovery from conflict, the base of the private sector in South Sudan is very small. Most businesses are barely getting by, if at all. The situation in the eastern DRC is a bit better. However, businesses in the jurisdiction, while relatively vibrant, also have to overcome many challenges. The area businesses such as KK Security Services, KAMI Humanitarian and Security Services (HSS), G4S Security, GSA Security, FIN bank, TMB Bank, Ecobank, Standard Bank, RAO Bank, BIAC Bank, SMICO Bank, Access Bank, Au Bon Pain bakery, and Luc Kivu Hotel are largely dependent on the humanitarian organizations such as MONUSCO and those engaged in resource extraction, evident in the large number of banks that seemingly operate mainly as deposit-receiving institutions.
IMPLICATIONS OF FIRM BEHAVIOR
In reviewing the strategies employed by firms in Somaliland, South Sudan, and the eastern DRC, it is abundantly clear and unsurprisingly so, that fragility, conflict, and violence are expensive—generating tremendous immediate, medium-term, and long-term costs relating to both human and financial resources. There are also less tangible, but equally critical, implications in relation to the weakness of the rule of law, increased transaction costs for businesses, and depleted human capital—all of which have substantial negative effects on the prosperity, equality, and achievement of sustainable development in the three jurisdictions. This is probably most evident in South Sudan and the eastern DRC, where because of ongoing or recent conflict, the instability and surge of internally displaced people has pushed INGOs to deal with unplanned and extensive human settlements. The research also provides insights into areas in which the condition of businesses in these fragile societies and how they operate can be improved, and where systems can be improved in the three jurisdictions. These insights are grouped for the three main target audiences of this report (as discussed in the introduction): international business, central governments, and international development agencies.
Working with Local Partners
As the cases of Physical Risk Solutions (PRS), Coca-Cola, and Toyota in Somaliland and South Sudan Beverages Limited, East African Breweries, and SITICO Petroleum in South Sudan show, foreign businesses investing in these fragile jurisdictions are advised to prepare carefully and work with good local partners. The same applies to the eastern DRC, where a host of “fixers” comprising individuals from local business, government, and media (journalists) help smoothen the tortuous paths. It is worth noting that the three businesses in Somaliland documented as using local partners report that this has led to successful investments by the mentioned multinationals. Like respondents such as the leaders of PRS indicated, in these fragile jurisdictions getting permits is hardly ever just a matter of producing the right paperwork. Even without inducements, it can involve haggling with government functionaries and politicians over lengthy periods of time. Foreign firms pursuing this alone would then be at a big disadvantage relative to local firms that have the connections to “navigate” the game and its rules. This is especially so given that submitting to shakedowns would expose Western firms to the risks of prosecution and hefty fines in their home countries following the passage of legislation that prohibits the payment of bribes in their countries of domicile.
The positive role of mobile telephony in promoting business in the three jurisdictions is remarkable. The technology usage is increasing rapidly and has spread to the most remote areas, including those where gums and resins are now being procured in the isolated highlands of Somaliland. However, it should be noted that the positive gains from the mobile telephone revolution are probably more skewed towards the more underprivileged in all three societies. Before the onset of the mobile telephone revolution, the underprivileged were more vulnerable to risks resulting from the lack of access to information. One such risk was the loss of catch by fishermen. With mobile phones, fishermen such as those who belong to Somaliland’s Abu Najib Fishing Company and the Barwaaqo Fishing Cooperative reported they can better find buyers and thus cut the time for bringing the fish to consumers, which in turn leads to better quality products and reduces the damage to the catch. In addition to the ease of doing business exemplified by Zaad services in Somaliland, mobile phone penetration has generated a plethora of other inclusive benefits. The way PRS, Tayo Uniforms, KEEPS, Rahiq Gums and Resins, Dalyit Dairy, Summertime restaurant, the Idris Ladies’ Lingerie shop, Golis Energy, and PKF in Somaliland; Dalbit Petroleum, Nelson’s Restaurant, Olive Restaurant, Matku Engineering, and other business in South Sudan; and the likes of KAMI HSS, KK Security, Global Guardian, Warrior Security, and Luc Kivu Hotel in Goma use mobile telephony indicates that the mobile phone revolution has touched almost every aspect of society in these three jurisdictions. Beyond improvements at the household level, a cellular telephone is a major tool for consolidating networks of interaction between businesses. It does this through improved payment facilities (via platforms like M-Pesa, Zaad, MTN Money, and Airtel Money) for small and medium-sized enterprises; enhanced business-to-business interactions; delivery of services to meet health and financial needs, and the resolution of market failures, as alluded to by Rahiq Gums and Resins (see Appendix A). Indeed, in all three jurisdictions, mobile phones are being employed to tackle the challenges of financial inclusivity, employment, and production and distribution of supplies. For all intents and purposes, the Zaad platform in Somaliland as well as MTN Money and Airtel Money in the eastern DRC are serving as mobile banking services (albeit only as a deposit-receiving mechanism) in that they permit the payment of salaries for a large group of enterprises.
Mobile phones are being employed to tackle the challenges of financial inclusivity, employment, and production and distribution of supplies.
The central place of cash transactions in the three jurisdictions cannot escape mention. While electronic payment systems are increasingly becoming commonplace in the more advanced sub-Saharan African countries, this is not the case in the eastern DRC, South Sudan, and Somaliland. In all three, one would be hard-pressed to find merchants willing to take credit cards. In Somaliland, there are no systems to support the use of credit cards. The other two are only marginally better. Though the cases in the three jurisdictions are extreme, it should not be lost on the reader that credit card use in the other African countries is still significantly below the level on other continents mostly because of the rural nature of most of the continent’s population. A February 2014 McKinsey study estimated the number of credit card transactions on the continent as a whole to be barely 2 in 10, though growing. For the DRC, South Sudan, and Somaliland, cash is still king and major foreign currencies, especially US dollars, have pride of place. One can make the argument that Zaad in Somaliland and Airtel Money, MTN Money, and M-Pesa in the eastern DRC and South Sudan have become a way of life there. These payment systems, while transformative, continue to grapple with significant challenges within the three jurisdictions. The challenges include battling banks (where they exist) and other financial institutions for customers, problems around the lack of interchangeability and functionality of mobile payment systems, and inadequate regulation and standards that in themselves may enable fraud and illicit financial flows.
Limited Role of Financial Institutions
Financial institutions do not serve the same role they do in the developed world. As known in the West, banks and other financial institutions play two indispensable roles in the financial systems. The first is providing support for financial markets, such as setting the rules of trading and providing clearinghouse and margin logistical support between the banks themselves. These services alleviate many of the information asymmetries between buyers and sellers that might lead to market failures. The second role that these banks are expected to perform is providing financial solutions where market failure occurs despite the presence of market-supporting institutions. Therefore, in theory, any eastern DRC company should be able to access credit in the form of bonds, commercial paper, letters of credit, and structured loans. But the various Goma-based vendors declared that the regional banks are reluctant to issue structured loans to businesses in the jurisdiction. The banks do not adequately serve the second role, and by largely operating as deposit-receiving institutions they do not fulfill the function of serving as an intermediary between surplus capital and capital-deficient entities that is expected of financial institutions. For these eastern DRC vendors, high interest and predatory lending practices make borrowing from regional banks untenable. The business owners finance their business operations from organic growth. This scenario is very majorly different from the one in Somaliland, where banking law is just now being set up and a Central Bank is planning to begin operations. For South Sudan, while the institutions exist, they remain barely operational due to severe liquidity constraints as a result of the ongoing conflict.
While the three jurisdictions have significant regional and country differences, they all have economies in which business models are run on price–value trade-offs that primarily target the bottom of the pyramid rather than the top of the pyramid sought in developed economies. As a result, it is no surprise that almost all of the businesses are locally owned in Somaliland and the eastern DRC. However, unlike in the developed world, where governments impose few procedures for the setting up of business, entrepreneurs in Somaliland, South Sudan, and the eastern DRC confront harsh regulatory burdens. As expected, the more entrepreneur-friendly these formal and informal requirements are, the more opportunity-driven entrepreneurship flourishes. In this research, Somaliland, with its relative stability and regional cohesion, stands out as the most business-friendly environment of the three jurisdictions. This observation is ironically supported by multiple responses noting the ease with which detrimental copycat businesses can be set up in Hargeisa.
Revenues from Natural Resource Extraction
The eastern DRC and South Sudan cases show business can contribute to the transparent and effective management of revenues from the export of natural resources. In the case of South Sudan, the export of crude petroleum is largely a government affair and it has ground to a near-halt during the course of the civil war. With little input from local communities, the exports have not been accompanied by needed investments in human, physical, and institutional capabilities to encourage a diversified economy—a situation also replicated in the eastern DRC. For Somaliland, the export of gums and resins by Rahiq is now taking place within a framework where the local community is involved and expectations for responsible business activity include the development of schools and other forms of infrastructure from those from whom the gums and resins are being sourced. While this is nascent, it does point to a direction for what the private sector can do in harnessing the benefits from extractive activities.
With little input from local communities, natural resources exports have not been accompanied by needed investments in human, physical, and institutional capabilities.
Presence of An Adequately Enabling Business Environment
The research shows that there must be a threshold of an adequately enabling environment for businesses to continue to direct investments into the country. Companies must believe there is a positive business case for successfully investing in an otherwise fragile and conflict-affected environment. The research shows that investors representing PKF, Toyota, and Coca-Cola are keen on developing their enterprises in Somaliland, just like the owners of Golis Energy, Sacadadiin Group, Warsame Contractors, AADCO Printing, Summertime, Sagal Jet, Tayo Uniforms, Mansoor Hotels, KEEPS, Rahiq Gums and Resins, Dil Bakery, Dalyit Dairy, Royal Restaurant and Lounge, and Qalah Beekeeping. This is in marked contrast to the owners of the South Sudan enterprises such as SITICO, the South Sudan brewery subsidiary of SABMiller, and EABL’s depot operations that closed due to the prevailing environment in Juba. While the other firms interviewed in South Sudan had not closed, they were—with the exception of UAP Sudan, Matku Engineering, Tango Consult, Dalbit Petroleum, Equator Broadcasting Corporation, Paradise Hotel and Restaurant, CFC-Stanbic Bank, Cooperative Bank, Equity, and Kenya Commercial Bank—contemplating doing so or scaling down until the business environment became more amenable to their respective business models. This was most apparent for Life Start Clinic, Afri-Africa, Olive Restaurant, Nellum Autospares, SITICO Petroleum, and Bridge Tours and Travel, which had all made significant adjustments to their South Sudan operations.
The private sector can work hand in hand with the other sectors to jump-start important institutional set-ups and rapid growth in the respective economies. In so doing, the private sector co-evolves with the environment and strategically responds to the opportunities and constraints of the institutional frameworks. In other words, public-private partnerships are excellent ways to drive positive development within the limitations of the institutional frameworks existing in the three jurisdictions. The cases of Alphamin Resources in the eastern DRC, Equator Broadcasting Corporation in South Sudan, or even the approach taken by UAP South Sudan to work with government to realize its objectives aptly demonstrate this point. In Somaliland, a clear need for waste management is being met by KEEPS, an entity that has included the local government of Hargeisa as a minority shareholder. For these partnerships to work, a high degree of flexibility and agility is required of all partners. While businesses must approach these arrangements with an open mind, as UAP South Sudan and KEEPS have done, the respective governments, too, must demonstrate a commitment to creating the appropriate enabling environment. These include a transparent and legal framework for spurring investment in infrastructure. And as the Somaliland Chamber of Commerce, Industry and Agriculture (SLCCIA) shows, local civil society groups and INGOs with which it partners can help make valuable connections among businesses, government, and local communities.
The importance of women-owned enterprises in providing employment in fragile states cannot be overemphasized. The role of gender is significant, as women did account for many of the small-business owners interviewed in Somaliland, South Sudan, and the eastern DRC. The cases of Olive Restaurant and Bridge Tours and Travel in South Sudan or the Idris Ladies’ Lingerie shop, the Royal Lounge and Restaurant, Tayo Uniforms, and Kaaba microfinance in Somaliland illustrate that women entrepreneurs use social networks for the advancement of economic activities. These social networks— particularly family relationships—play a crucial role in the formation and operation of these women-run enterprises. Unlike in the West, where corporations are underpinned by dispersed ownership, the overwhelming majority of local businesses in these geographies are characterized by concentrated ownership. This is especially true for the women-owned firms interviewed, where family considerations were integral to the running of the businesses. For instance, the many female vendors in the expansive Virunga Market in Goma, DRC, and the proprietors of Bridge Tours and Travel and Olive Restaurant (both in Juba) and of the Royal Lounge and Tayo Uniforms in Hargeisa derived much value from family relationships and informal social networks in the establishment of their businesses. This is probably partly due to the professed lack of access to formal business networks, especially in Somaliland. The strong family bonds and norms of reciprocity evident in the running of these women-owned businesses allow family members to help these enterprises, often without monetary compensation. Strong family involvement is especially present in the smaller women-run firms regardless of the jurisdiction.
Area governments should harness the power and reach of diaspora networks in order to benefit country economies. While the importance of diaspora remittances in-country stabilization is widely acknowledged, perhaps not as much has been made of the skills and knowledge transfer that these migrant communities abroad bring. In addition to their financial engagement, members of the diaspora can help foster innovation and learning processes and even contribute to political change in their home jurisdictions. The fostering of innovation in this study is most aptly demonstrated by Somaliland’s Zaad service. The novel service and the set-up of Telesom has been and continues to be driven by diaspora networks. For Telesom, the parent company of the Zaad service, close contacts and close coordination with the diaspora have also helped Somaliland benefit from the non-financial resources that the diaspora may bring. Apart from Telesom, many other Somaliland firms such as Dil Bakery, Dalyit Dairy, Idris Ladies’ Lingerie, the Royal Restaurant and Lounge, Kaaba Microfinance, Tayo Uniforms, the Toyota dealership, Sagal Jet, and Rahiq Gums and Resins are owned by diaspora returnees. The same applies to the Olive Restaurant, Tango Consult, and Matku Engineering in South Sudan and Au Bon Pain bakery in the eastern DRC—all of which are leading firms in their respective jurisdictions. In the cases of Sagal Jet, Tayo Uniforms, Au Bon Pain bakery, Rahiq Gums and Resins, Dalyit Dairy, and Matku Engineering, the firms are bringing in new processes for undertaking the production of goods and services that the jurisdictions have not previously been exposed to. It is noteworthy that many of these establishments are women-owned. All three jurisdictions have female-owned firms that demonstrate the possibilities local women can aspire to emulate, as referenced above. The diaspora-led firms have also imported Western-style business practices and values that work in these fragile territories. The establishment of diaspora-led businesses has a spillover effect: the development and integration of local businesses to world-class standards and, ultimately, global acceptance.
While the importance of diaspora remittances in country stabilization is widely acknowledged, perhaps not as much has been made of the skills and knowledge transfer that these communities bring.
International Development Agencies
The Private Sector and Service Delivery
The private sector lends a specific skillset and an assortment of experiences that can support fragile governments and societies. For example, as the cases of the independent power producer Mansoor Power Company and the refuse management firm KEEPS in Somaliland show, business has developed means of improving the delivery of basic services in hard-to-reach communities. Another example is provided by the private security industry. In all three jurisdictions, the large private security industry presence represents shrinkage of the state’s official security obligations, and a failure by the state to provide a service it has traditionally and conventionally assumed. A third example of the private sector filling a gap in service delivery is Somalia’s telecommunication provider, Telesom, which illustrates that business can contribute to supporting fragile governments and societies. The model of the money transfer service Zaad, which does not charge transaction fees, encourages financial inclusion for vulnerable members of society.
The evidence from the research indicates that even for the three fragile jurisdictions chosen, in order for business to thrive, some supporting institutions must be in place. Adequate institutions guarantee long-term sustainability of the businesses. Adequacy is present in Somaliland. In the words of the leaders of KEEPS and PKF in Hargeisa, the traditional Islamic institutions that promote arbitrage and transactions in Somaliland, while not familiar to the West, do provide an environment for the growth of Hargeisa-based firms. Cultivating further private-sector development can be part of the solution in the building of frameworks and initiatives that improve the capacity of local institutions. Examples are the traditional clan-elder arrangements that arbitrate disputes, and the nascent government agencies which are slowly gaining legitimacy. Somaliland is working towards the growth of business collectives that improve professionalism in the private sector while advocating for the interests of their membership. Institutions such as Somaliland’s SLCCIA, the Barwaaqo Farmers’ Cooperative, and the proposed Barwaaqo Fishing Cooperative have important roles to play in the development of business. During the interviews, it was apparent that South Sudan—and the eastern DRC, to a lesser extent—do not have significant business collectives in place. It is imperative that these business collectives be operational because, as the extant literature demonstrates, they lead to a win-win situation for both government and the private sector. The networks arising from these collectives help enlarge the repertoire of policy alternatives and comparative institutional advantages that lead to new products and services and innovative firm strategies. Through their partnership efforts, business collectives improve competitiveness, which in turn helps the growth of the private sector and the economy as a whole.
The Private Sector and Stability
The local private sector can contribute to stability and improving economic and social conditions in fragile jurisdictions. Engagement with the local private sector, while not a panacea to the ills of fragility, forms a major part of any solution that stimulates economic growth. In Somaliland, where the private sector is thriving, all but four of the firms interrogated were primarily locally owned. In this jurisdiction, the four firms with substantial foreign interests are Ethiopian Airlines, Fly Dubai, the Coca-Cola franchise, and the Toyota dealership. Apart from the first two, which are foreign airlines, the other two are majority-Somali-owned. In contrast, many of the leading firms in South Sudan that have remained during the trying times, including UAP Sudan, CFC-Stanbic Bank, Bailey Consulting Group, Equity Bank, Cooperative Bank, Kenya Commercial Bank, Afri-Africa Restaurant, Dalbit Petroleum, and Paradise Hotel and Restaurant, are either subsidiaries of multinational corporations or are majority-owned by non-locals. With most of the jobs in Somaliland generated by local small and medium-sized enterprises, it is evident that these local firms are not only resilient in spite of the challenges of fragility, but actually exhibit growth. While South Sudan also illustrates resilience among the mentioned foreign interests that are still in operation, these firms are not growing at this time. Eastern DRC is somewhat of a mixed bag. Again, the overwhelming majority of the opportunity-driven enterprises are foreign-owned or subsidiaries of foreign interests, as demonstrated by the multitude of security firms serving the large UN presence. A few local firms, such as those in the hospitality industry, hardware merchants, and local travel businesses, continue to thrive, but even they are closely linked to the UN presence rather than the local DRC society. It follows that where growth is exhibited by local firms, additional development can be achieved by large businesses, which are invariably foreign-owned, and it is good to explore ways of connecting the local enterprises with global chains. Given that these local businesses have invaluable knowledge of local conditions and actors, these firms can, through last-mile models, provide job opportunities for women, youth, and other marginalized groups. Besides, it does appear that in the near future, firms such as Matku Engineering in South Sudan and Telesom, Rahiq Gums and Resins, Golis Energy, Sagal Jet, and the Toyota dealership in Somaliland may embark upon their own internationalization, being strongly influenced by prevailing domestic and international institutions.
Engagement with the local private sector, while not a panacea to the ills of fragility, forms a major part of any solution that stimulates economic growth.
INGO’s: A Double-Edged Sword
The presence of INGOs creates a strong stimulus in the three cities of Hargeisa (Somaliland), Juba (South Sudan), and Goma (eastern DRC). But the presence of INGOs also comes with a significant cost. The double-edged sword of the aid workers’ presence also extends to the sphere of social services: in the relative absence of the state, it is UN agencies and NGOs that provide or at least support much of the region’s education, health, and water and sanitation services. In the eastern DRC in 2014 alone, the international medical charity Médecins Sans Frontières (MSF) ran forty health centers, nine health posts, and four referral clinics and supported eleven government-owned health clinics. However, the concentration of international humanitarian organizations and their expatriate staff has also resulted in additional conflicts and contrasts. In the particular context of a weak institutional framework, informal urbanization, and a highly contested economic, social, and political urban arena, the international humanitarian presence has become a significant factor in reinforcing patterns of conflict and competition across the urban political and socioeconomic spaces. The inflation of rents, increasing prices of houses and land, and the profound dollarization of local markets in the three cities further sharpen the socio-geographic urban fault lines they added.
It is a sentiment echoed by one Congolese employee of an NGO, who asked not be to be identified: he is of the opinion that the real beneficiaries of economic prosperity brought about by aid organizations are the same people who have benefited from the extraction of minerals. He asserts they are the people with access to aid funds and who therefore can build hotels and expensive restaurants. Housing and office rentals have become very expensive because NGO staffs pay high rents for decent housing, and the landlords know this. Some have removed people from their rentals because they want to refurbish them and lease them out to those who can pay more. Others engage in the practice of cutting power that condemned BCG and Bridge Tours and Travel in Juba to occupying offices without access to power during the time of the interviews The problem is not unique to Juba; it is also seen in Goma, where roads in the central business district and the gentrified east of the city are largely paved and well-lit, while those in most outlying shanty-town areas of the city are barely passable.
The Emergence of Effective Institutions
Strong institutions are critical, but take time to emerge. Even with the best technical advice and other donor support, as in Somaliland, South Sudan, and the eastern DRC—all three of which are acknowledged as being among the most fragile and conflict-affected jurisdictions—effective institutions will take a long time to emerge. The situation in South Sudan is particularly dire. The conflict has dramatically eroded gains that were initially made in the establishment of institutions following the country’s independence from its northern neighbor. But even for Somaliland, where there is no major conflict, the emergence of institutions is a slow and tortuous process. Take the case of the financial institutions: while a law establishing the Somaliland Central Bank has been passed, independent financial institutions that are able to carry out the full gambit of banking activities are still a long way off. Telesom’s services are indeed an encouraging sign, but the lack of international recognition for Somaliland hampers the progress towards the establishment of a formal banking institution as known in the West. In terms of human capital, the three jurisdictions suffer from human resource deficiencies, and the educational institutions have not met and do not appear ready to meet the needs of the jurisdictions. Many of the skilled positions in the three jurisdictions are held by foreigners, especially those from the relatively more stable neighboring countries of Kenya, Ethiopia, and Uganda. South Sudan scores particularly low on this point.
While no single report can be exhaustive in capturing all that is practiced in the three jurisdictions, this analysis of how the institution of business operates in these areas provides a good representation of the manner in which business entities tackle their everyday challenges and create value, and should add to an area of study where little has been documented previously. There are many shared strategies as well as a few distinct differences. Differences aside, the analyses of the business behavior in the three geographies indicate possible entry points for interventions that can lead to stabilization and development away from state fragility. This is important because the institution of business serves critical functions in the development of any country. One of these functions is the creation of employment opportunities. Central governments in these territories and international development agencies would, as a matter of policy, be interested in this employment creation as an avenue toward attaining growth. Beyond growth, the creation of employment serves another key purpose that international businesses that subscribe to the UN guiding principles should want to promote: the work created by business is one of society’s most important institutions. It is the main mechanism through which spending power is allocated and the plight of citizens can be improved. Work provides citizens with meaning, structure, and identity— all essential additions to what is undoubtedly a portfolio of institutions necessary to counter the forces that promote state fragility.
 This attention is reflected in the Fragile States Index produced by the Fund for Peace on an annual basis since 2004. See Fund For Peace, “Fragile States Index 2015,” accessed June 7, 2016, http://fsi.fundforpeace.org/rankings-2015.
 See the Fund for Peace’s compilation of indices for fragility, “Fragile States Index 2015,” accessed June 7, 2016, http://fsi. fundforpeace.org/.
 See a recent depiction of these constraints in Brian Ganson and Achim Weman, Business and Conflict in Fragile States (Oxon, UK: Routledge, 2016).
 The Ungoverned Seas,” The Economist, November 29, 2014, http://www.economist.com/news/middle-east-and-africa/21635049-waters-around-somalia-are-calmer-piracy-west-africa-rising.
 See the work of the International Development Association, part of the World Bank Group, “Fragile and Conflict-Affected States,” accessed June 6, 2016, http://ida.worldbank.org/ results/abcs/abcs-ida-fragile-and-conflict-affected-states.
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 See a comprehensive discussion of this point in Avinash K. Dixit, Lawlessness and Economics: Alternative Modes of Governance (Princeton, New Jersey: Princeton University Press, 2007).
 Qu Yi, Qu Ting, and Yaoan Wu, “The Role of Regional Formal Institutions and Foreign Direct Investment in Innovation in Chinese Enterprises,” Asia Pacific Business Review (2015): 1–17, http://dx.doi.org/10.1080/13602381.2015.1094293.
 See the press release from the UN Office of the Secretary-General, “Growing Sustainable Business in Least Developed Countries is ‘Most Promising Pathway’ in Overcoming Poverty Trap,” SG/SM/8359-AFR/469-ENV/DEV/694, September 3, 2002, http://www.un.org/press/ en/2002/sgsm8359.doc.htm.
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 Fragile states are not equivalent to low-income states. Fragility takes any of four forms: states with weak institutions, divided states, authoritarian security states, and post-conflict states. See Bruce Jones and Ben Tortolani, Deep Dive on Fragile States, Center on International Cooperation at New York University, August 2013, http://cic.nyu.edu/sites/default/files/ jones_ tortolani_drive_fragile_states_0.pdf.
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 This is a widely accepted definition of fragile states. See Ganson and Weman, Business and Conflict in Fragile States.
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 A good overview of Somaliland’s history is in “Somaliland Profile,” BBC News, last modified May 26, 2016, http://www. bbc.com/news/world-africa-14115069.
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 Following a July 2016 violent conflict between Kiir loyalist and Machar forces, Riek Machar fled South Sudan and the remaining Juba-based SPLM-IO members replaced Machar with Taban Deng as their nominee for the vice presidency.
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 Pompeii was an ancient Roman city near modern Naples that was nearly wiped out by the volcanic eruption of Mount Vesuvius in 79 A.D. See “Pompeii,” the History Channel, accessed October 6, 2016, http://www.history.com/topics/ ancient-history/pompeii.
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 This follows along with the work of Matthew B. Miles, A. Michael Huberman, and John Saldana, Qualitative Data Analysis: A Methods Sourcebook (Thousand Oaks, CA: Sage Publications, 2014).
 See United States Small Business Administration, “Managing a Business: Business Guides by Industry,” accessed July 18, 2016, https://www.sba.gov/managing-business/business-guides-industry.
 While not operational as a fully registered bank with internationally recognized banking practice standards (e.g., with correspondent partners), Dahabshiil’s Hawala business does issue select credit to a few of its regular customers who can provide specific guarantees.
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 Sharia literally means “the way” to a watering hole. The term is now more generally used to mean “way of life,” but also specifically to mean application of Islamic legal provisions as spelled out in canonical texts and derived from jurists.
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