Osman Sheikh Ahmed’s book “Somaliland: Private Sector-Led Growth and Transformation Strategy” proposes a strategy for inclusive growth, focusing on the private sector, aiming to create jobs, reduce poverty, improve lives, and enhance government revenue.
Somaliland: Private Sector-Led Growth and Transformation Strategy
By Osman Sheikh Ahmed PhD (Author)
This publication, which focuses on Somaliland, lays out a strategy for inclusive growth that creates jobs, reduces poverty, improves the lives and livelihoods of the population, and enhances the government’s revenue base so that it can deliver basic services to the public. Based on the private sector, which accounts for 90% of Somaliland’s GDP, the proposed strategy aims at just growth but also the transformation of the economic base to a diversified, highly productive one that uses technology and innovation.
The comprehensive strategy for private sector development, which is outlined in this publication, will explore the nature of the impediments and constraints that the private sector faces today and will outline how to best remove them. It will also highlight the type of proactive support (beyond removing impediments) that is needed to help the sector to develop and contribute to the country’s development objectives. It will attempt to identify areas for investment opportunities that are also developmentally impactful. This should be particularly useful to both foreign and domestic investors who desire to make investment decisions but lack the necessary information on which to base those investment decisions.
Contents
Executive Summary
Background and Overview
Chapter 1: The Profile and Performance of the Private Sector
Chapter 2: Key Constraints to Private Sector Development
Poor infrastructure, especially the high cost of electricity
Lack of access to credit and financial services
Shortage of skilled labor
Weak policies and regulations
Land ownership and property rights
Weak public-private relations and business support services
Difficulties accessing international markets
Countervailing strengths
Chapter 3: A Strategy for Private Sector Development
Pillar 1: Create an enabling environment for the private sector
Reform and strengthen the business environment
Strengthen public sector institutions that interface with the private sector
Establish effective and regular public-private dialogue
Ease international restrictions on Somaliland businesses
Pillar 2: Access to finance, physical infrastructure, and skilled workers
Financial sector development
Development of physical infrastructure
Improve the skill level of workers
Pillar 3: Identify profitable and development-oriented investment opportunities
Berbera as a growth pole for economic and business development
Opportunities for diversification and productivity enhancement of primary sectors
Investment opportunities in industry
Regional trade development
Development of potential minerals and hydrocarbon resources
Adopt and develop knowledge- and innovation-based products and services
Pillar 4: Enterprise development: strengthening the enterprise ecosystem
Foster entrepreneurship development and promote MSMEs
The importance of the informal sector and microenterprises
Chapter 4: From Strategy to Development Outcome
Public-private collaboration
The responsibility of the private sector
Public sector interface with the private sector
The role and responsibility of society at large
Implementation modalities
Risks
Chapter 5: Conclusion
Annex I: Matrix of Policy Reforms and Strategic Actions
Annex II: Investment Opportunities
Annex III: Views of Businesses
References
About the Author
Boxes
Box 1: Examples of Somali entrepreneurial spirit and innovation
Box 2: The real estate and construction boom
Box 3: Constraints and impediments to businesses (in order of importance)
Figures
Figure 1: Strategy Map
Tables
Table 1: The 15 largest domestic companies in Somaliland (in terms of revenue)
Table 2: Business views on the severity of constraints (1-5), by firm size
Acronyms and Abbreviations
| AfCFTA | Africa Continental Free Trade Area |
| AfDB | African Development Bank |
| AML/ATF | Anti-money laundering and terrorism financing |
| MDBs | Multilateral development banks |
| EIB | European Investment Bank |
| FCA | Fragile and conflict-affected (states) |
| FDI | Foreign direct investment |
| GVC | Global value chain |
| GDP | Gross domestic product |
| ICD |
Islamic Corporation for the Development of the Private Sector |
| ICT | Information and communications technology |
| IFC | International Finance Corporation |
| IFIs | International financial institutions |
| MoTT |
Somaliland Ministry of Trade and Tourism |
| MoPD |
Somaliland Ministry of Planning and National Development |
| MoII | Ministry of Investment and Industrial Development |
| MSME |
Micro-, small-, and medium-scale enterprises |
| NDP | National Development Plan |
| PPD | Public-private dialogue |
| PPP | Public-private partnership |
| PSD | Private sector development |
| S/Land | Somaliland |
| Somtel |
Telecommunications company based in Hargeisa, Somaliland |
| SomCable | Somaliland Cable |
| Telesom | Somaliland Telecommunications Company |
| VTE | Vocational and technical education |
| UN | United Nations |
| UNCTAD | United Nations Conference on Tariffs and Trade and Development |
| USAID | United States Agency for International Development |
Acknowledgments and Caveats
I WOULD LIKE to thank Dr. Amal Ali for her guidance on legal and regulatory issues impeding private sector development; Ms. Hana Hirsi, my executive assistant, for editing various sections of the draft; and to my daughter Osub Ahmed for reading through the early drafts, and to Marie Kirst for the cover design and for formulating the manuscript for printing. I am indebted to all of them. Any shortcomings from hereon are mine alone, as any of the views and policy recommendations herein contained.
About the Author
Dr. Osman Ahmed, is a former official of the World Bank, the International Finance Corporation (IFC), and the Islamic Development Bank. He has worked in both the public and private sectors in the United States and the Middle East, including Saudi Arabia’s Public Investment Fund (PIF) and with a number of consulting firms in the United States. Dr. Ahmed has also taught economics at several U.S. universities, including American University in Washington D.C., North Carolina Central University, and Elon University. Most recently, he was senior manager of policy and strategy at King Abdullah University of Science and Technology (KAUST) in Saudi Arabia. Presently, he is principal economic adviser to the President of Somaliland. Dr. has written extensively on economic and social development issues.
Executive Summary
This proposed strategy aims to help achieve inclusive growth that creates jobs, reduces poverty, improves the lives and livelihoods of the population, and enhances the government’s revenue base so that it can deliver basic services to the public. The envisioned result is not just economic growth but also the transformation of the economic base to a diversified, highly productive one that uses technology and innovation.
Based on its past track record in a difficult, post-conflict environment, the private sector is key to such growth and transformation. To that end, the proposed strategy focuses on the development of the private sector, which accounts for 90 percent of Somaliland’s gross domestic product (GDP). The intended audience is the Somaliland government, the Somaliland business community, potential foreign investors, as well international development partners.
Following the destructive war of 1988–1990, in which Somalia’s last military government waged a full-fledged war against the people and cities of Somaliland (then-the northern region of Somalia), the private sector in Somaliland played a key role in the reconstruction and revival of the country’s economy. With a very limited enabling environment and minimal government support, the sector has succeeded in delivering a range of critical goods and services to the population — from basic needs such as food to social services like schools and health facilities. According to a 2016 World Bank report, “the resilience, vibrancy, and innovation of Somaliland’s private sector are there to be seen by all.”
The private sector can do the same today provided the many challenges and impediments that makes it difficult to achieve its full potential are removed. There are significant opportunities for the sector to grow and prosper once a business environment that facilitates investment is created.
The proposed strategy includes the following four key pillars, which are explored in greater detail in the Executive Summary and in the main text that follows:
- Creating a policy and regulatory environment conducive to private investment
- Improving access to essential infrastructure, including physical, financial, and human resource infrastructure.
- Identifying and promoting investment opportunities in high-value, growth-generating areas.
- Providing direct support to businesses to take advantage of those opportunities and promoting and supporting enterprise development, especially among micro-, small-, and medium-scale enterprises (MSMEs).
A cross-cutting measure is establishing effective and synergistic public-private collaboration to catalyze investment, and growth is critical for achieving desired results.
I. Creating an enabling environment for private investment
Legal and regulatory reforms and strengthening implementation and enforcement
- There is a need for policymakers to close legal gaps and enact key laws that relate to private investment and business operations in such areas as conventional banking and energy. Policymakers must also reform and strengthen regulatory frameworks in areas such as business licensing and registration, land ownership and titling, and exit/liquidation mechanisms. For business licensing and registration, the recently operationalized One-Stop Investment Center is a good start. Businesses can now log into the One-Stop Investment Center’s website, apply online in any region of the country, and receive a registration and business license within few days. But it needs to be developed into a truly “one stop” shop which that enables investors to access all the government regulations and services without going to each entity separately.
- Regulations in the financial sector, as well as oversight and effective supervision of private banks, are weak. Oversight of mobile money — which accounts for almost 80 percent to 90 percent of all transactions — is next to nonexistent. In this regard, enforceable prudential regulations and strengthening the capacity of the Central Bank are critical.
Capacity-building and institutional reforms
Policymakers must also strengthen the capacity, efficiency, and service-orientation of existing and new public sector organizations that provide support and services to businesses. Sometimes, simple steps and requests from investors can take considerable amount of time and effort, particularly for new investors who are not familiar with the landscape and personalities involved.
It is also critical that the government’s ongoing public sector reforms, particularly civil service reform and Public Financial Management (PFM) reform, continue and deepen for more effective interaction and collaboration between the government and the business community.
II. Access to finance and credit, quality infrastructure, and skilled labor
Improve access to finance and credit
A lack of credit and financial services has constrained business formation, expansion, and productivity. Today, there are no commercial or investment banks in Somaliland, and Parliament has yet to pass legislation for conventional commercial banks. In the meantime, important provisions in Islamic Banking Law and current practices of existing Islamic banks — service charges, collateral requirements, lending practices — need to be examined with the aim of improving the current system. New banks should be encouraged to enter the market in order to enhance competition. At the same time, the laws, regulations, systems, and procedures that are necessary for supervision, prudential regulations, and effective monitoring of financial institutions by the government should be put in place on a priority basis. The unique needs of MSMEs, which may not have access to finance even under a better-developed banking system, need to be addressed.
Remittances are a very important source of financing household consumption and for investments, particularly in MSMEs. The huge amounts of remittances — estimated at $1 billion to $1.2 billion — should be properly mobilized, pooled through appropriate saving instruments and used for investment and growth. The government and private financial institutions can collaborate in this area to ensure effective mobilization and efficient use of those resources.
Develop Somaliland’s physical infrastructure
Somaliland’s physical infrastructure — its power, roads, water, ports, and airports — is in extremely poor condition and is a major reason for the high cost of doing business in the country. The country’s information and telecommunications infrastructure, which the domestic private sector has successfully developed, is one exception. However, even here, the legal and regulatory framework is weak or lacking (there is no information and communications technology law, for example). These issues must be fixed over the short term. The cost of electricity (currently $.70 per kilowatt-hour) is still high despite recent reductions from $1.0 per kWh. The cost of electricity in Somaliland continues to be among the highest in the world.
A strategy for infrastructure development should include institutional, legal, and regulatory reforms, including passing a revised Energy Act that builds upon the 2016 law and developing an energy sector strategy to guide sector policies and investments. It should also include promoting wind and solar energy — Somaliland has an abundance of both — and mobilizing internal and external resources for infrastructure development. Initiating public-private partnership (PPP) and creating an enabling environment for PPP would also be critical.
Given the paucity of domestic resources and the difficulty of attracting adequate private capital (outside of the power sector), support from the international donor community would be key for infrastructure development. At the same time, consideration should be given to develop enterprise zones and industrial parks where common infrastructure facilities and land are availed to businesses on a fair and transparent manner and in accordance with clear criteria.
Develop skill levels of the workforce
To meet the needs of a growing economy, Somaliland needs a workforce with adequate skills. However, aside from several fragmented initiatives, there have been few efforts to fill the skills gap. Quality vocational education and market-driven skills development programs must be started and implemented.. Efforts in this area can initially target recent secondary and university graduates, the bulk of whom are unemployed, to equip them with skills in line with potential market demand and to enable them to start their own businesses, where appropriate.
III: Identify investment opportunities and growth drivers
The private sector, which is driven by market incentives, is best positioned to determine where and when to invest given profit opportunities, incentives, and risks. The role of the government and public-private support institutions is to provide the right incentive signals and the necessary information on existing and emerging business opportunities. This is particularly important for a private sector such as Somaliland’s that is still small and embryonic.
Potential opportunities in Berbera Port and associated facilities
The port, airport, special economic zone (SEZ), and the corridor to Ethiopia could provide considerable opportunities for private investment, both foreign and domestic. Those facilities can open opportunities and spur the development of services such as transport, logistics, and trade facilitation, as well as freight-forwarding services. They can attract and catalyze industry and business clusters to the SEZ and may attract light manufacturing and assembly operations. The clustering of businesses and associates that are all located in the same geographical area can provide increased efficiency and productivity resulting from the interaction and knowledge-sharing that proximity brings. The road corridor could increase the volume of trade, improve transport efficiency, and advance regional integration. The Berbera civilian airport — which has one of the longest runways in the African continent — has the potential to become a distribution center for airfreight in the Horn of Africa region and beyond, as well as a hub for long-distance airfreight. In all of those facilities, there will be opportunities for investment and business expansion.
Value-addition and diversification of the productive base
Diversification and value-addition in the main economic activities are essential for sustainable growth. Instead of exporting live animals, downstream processing — including packaged meat and leather goods — can provide avenues for value-addition. Livestock accounts for up to 90 percent of total exports, and 80 percent of livestock are destined to a single market: Saudi Arabia. Diversification of export markets, especially to overseas markets where organic, lean meats are valued, should be a policy objective carried out through public-private collaboration underpinned by market studies and trade negotiations with potential importers. The agriculture sector also has opportunities to enhance productivity and contribute to job creation, poverty reduction, and food security in a number of ways. These include introducing new technologies and techniques that have been tested and applied in similar environments — dry farming, better rain harvesting and irrigation, and new draught-resistant crops — and developing high-value products such as horticulture.
Proper development of mineral and hydrocarbon resources
Somaliland has considerable potential in hydrocarbon — oil and gas — as well as mineral deposits, but that has not been fully explored yet. On oil and gas, only one-quarter of the 24 blocks (12,000 square kilometers each) has been awarded to international oil companies for exploration. With respect to mining, all geological data of the country have been collected. So far, there are only small-scale and artisanal operations in different regions of the country — in Jade mining, gemstone, and gold. There are also plenty of other minerals in Somaliland such as industrial minerals — including iron ore, titanium, aluminum, tungsten, tin, and galena — as well as other rare earth metals such as columbite-tantalite and molybdenum. The country also has deposits of feldspar, gypsum, copper, kaolin, limestone, quartz, silica sand, tantalum, and uranium. While there is considerable investment opportunity in the extractive industry, the government should make it a top priority to not only properly manage those resources to maximize benefits to the country, but also to do so in a transparent and accountable manner.
Develop and adopt knowledge- and innovation-based products and services
New technologies can provide countries that, like Somaliland, have been left behind due to conflict, fragility, and other factors, with the opportunity to more quickly climb up the development ladder. The highly successful information and communications technology (ICT) in Somaliland provides a powerful example of the potential of new technology-based businesses. The installation of a proposed international cable through Berbera — under partnership with the three ICT firms: Telesom, Somtel, and SomCable — is likely to open opportunities for knowledge-based products and services and improve access to global knowledge.
Opportunities in climate change building resilience
Climate change has significantly affected Somaliland’s economy and residents. Recurrent draughts have decimated the two sectors on which Somaliland economy depends and from which the bulk of the population — specifically, the poorest segment — derives income and employment. To build economic and climate resilience, Somaliland could take advantage of the global attention to climate change and attempt to access potential resources intended to address climate change-induced crises. For example, the development of solar and wind energy, of which Somaliland has an abundance, could be avenues for profitable and sustainable private investment.
IV. Enterprise development: Strengthening the enterprise ecosystem
The Somaliland government, in collaboration with the private sector and with support from the international donor community, should attempt to foster entrepreneurship development and promotion of MSMEs for job creation through a package of training and financial support and incubation centers for startup businesses. Startups can play a significant role, both directly and through demonstration effect, in job creation. They can also be an avenue for diaspora investments, a large part of which currently goes into consumption (including on Qat imports) and on speculative land purchases. It is likely that innovation-oriented startups, formalized informal enterprises (through, for example, reducing barriers and improving the incentives to formalize), service sectors, and small-scale industries could lead to job creation. Those areas must be promoted and an enabling environment created for them. Given that the most binding infrastructure constraints cannot be provided across the country, industry, and technology parks, where common facilities to enterprise in those parks, can be provided and should be seriously considered.
Entrepreneurship development should initially be focused on unemployed youth and recent secondary and university graduates who have basic levels of education but lack practical business skills. In addition to improvements in the overall business environment, potential entrepreneurs would need direct support in such areas as training — vocational (i.e., skills training for certain occupations), business, and financial training — as well as financial support such as grants, in-kind assistance, and microcredit, which have been found effective elsewhere. Consideration may be given to establish pilot programs consisting of entrepreneurship training and incubation centers for startup businesses. Incubation centers work with small businesses at the startup or early development stage in such areas as mentoring, prototype development, and co-funding where needed, particularly in innovation and technology areas.
V. Public-private collaboration
- While the private sector is driven by market signals and seeks investment opportunities that maximize their returns, the public sector plays the key role in facilitating private investment while protecting public welfare. To that effect, the government’s role, besides creating the right investment climate, should be on:
- Providing necessary market information and studies as well as incentives for investment, especially in new and emerging areas
- Helping catalyze investment in new areas which, while developmentally impactful, the private sector is initially reluctant to enter
- Mobilizing the resources necessary for big-ticket infrastructure projects through PPPs and mobilization of external development support.
- Preventing the emergence of monopolies and discouraging anti-competitive behavior such as collusion and price fixing
- Reigning-in adverse impacts on the environment, particularly as the industrial sector grows
- Ensuring that the private sector pays its fair share of the country’s tax revenue, which it currently does not
- Encouraging businesses’ overall social responsibility
VI. Implementation
This strategy is broad and extensive, and its implementation requires a level of institutional capacity and financial resources in which Somaliland is relatively weak. It will also take time and cannot be done all at once. The initial focus should be on measures that can significantly improve the business environment or on those that can significantly benefit the overall economy.
In the short term, the passage of laws, such as revised Energy Act, that are currently pending in Parliament and do not require significant resources, may be considered for quick action. Regulatory measures that have already been agreed upon, such as improving the effectiveness of the recently operationalized One-Stop Investment Center; business advisory services for SMSE; and a regular forum for public-private dialogue can all be implemented over the short term. These could have major effects on the business environment and create confidence and momentum. The development of physical and financial infrastructure is likely a medium- to long-term proposition, but requisite laws, underlying sector development strategies, initial interventions, and mobilizing requisite resources would need to commence in the near term.
To avoid the diffusion of responsibility and ensure accountability, the responsibility for leading the implementation effort must lie with one central institution, with involvement of the private sector, and with a direct link to the top leadership of the country. Such an institution would need to be endowed with the requisite authority and the capacity to coordinate across sectors and stakeholder entities.
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