January 13, 2014
Although unrecognized as a sovereign state by the international community, the self-declared Republic of Somaliland is drawing attention as a target of foreign direct investment (FDI) in East Africa. An autonomous region of northern Somalia that is home to approximately 3.5 million people, Somaliland has operated as a de facto independent political entity since the 1991 collapse of the authoritarian Siad Barre regime in Mogadishu and the breakdown of order that ushered in Somalia’s civil war. Home to Hargeisa, Somalia’s second largest city, and the strategically relevant Gulf of Aden port of Berbera, Somaliland, unlike the rest of Somalia, has enjoyed relative peace and stability, allowing it to charter its own path toward a relatively promising and prosperous future.
Somaliland has established a functioning government body, with a ministerial cabinet led by President Ahmed Muhammed Mahmoud, and has committed itself to implementing the prerequisite economic and regulatory reforms needed to create a more favorable investment climate for foreign capital. To date, a number of foreign concerns have established a presence in Somaliland, including Coca-Cola Company, which entered the market in 2012. Estimated at around $17 million, Coca-Cola’s stake in Somaliland represents the single-largest foreign investment in the territory. Somaliland Beverage Industries (SBI) operates a Coca-Cola-licensed bottling plant for producing soft drinks for domestic and regional export markets. Soft drinks produced by SBI are sold to consumers in Somali-proper, as well as Ethiopia and Djibouti. While modest even by regional standards, Coca-Cola’s entry into the Somaliland market and its successful partnership with a local company reflect Somaliland’s potential to attract FDI. Not surprisingly, the opening of SBI’s state of the art facilities attracted much fanfare, including the presence of Somaliland’s president and other senior officials.
Somaliland continues to tout potential FDI opportunities through initiatives such as the online-based Somaliland Investment Portal, and has explored the possibility of establishing a free trade zone (FTZ). A November 2013 announcement by Somaliland’s Air and Transport Ministry that the region’s two international airports have successfully implemented internationally recognized security standards further attests to Somaliland’s efforts to showcase itself as an attractive destination for FDI.
Diplomatic engagement on numerous, overlapping levels is central to Somaliland’s approach to foreign affairs. In a quest to strengthen its regional and international position, Somaliland maintains active contact with a number of foreign states and organizations in Africa and beyond at the consulate-level and in other bilateral and multilateral venues. Somaliland’s network of foreign relationships extends to the United States, China, the United Arab Emirates (UAE), Saudi Arabia, Oman, Turkey, Sweden, and the European Union (EU). Somaliland maintains particularly strong ties with neighboring Ethiopia, and active diplomatic contact with the governments of the regional neighbors of the Federal Republic of Somalia (FRS), including Djibouti, Kenya, Uganda, and with the African Union (AU).
Ethiopia’s support for Somaliland, while stopping short of officially recognizing the region as a sovereign and independent state, is considerable, and represents perhaps Somaliland’s most important foreign relationship. For geopolitical reasons, Ethiopia is a major proponent of Somaliland’s political and economic development: Addis Ababa seeks to develop transportation infrastructure projects in Somaliland to facilitate the development of the port at Berbera as the major access point for land-locked Ethiopia’s international trade and for distributing international humanitarian aid to Ethiopia. Commonly referred to as the Berbera Corridor Project, this initiative enjoys the financial support of the EU and has the potential to dramatically impact regional communication and economic relations. Ethiopia has also declared military support for Somaliland.
Several international firms are also seeking to partner with the Somaliland and Ethiopian governments to modernize and expand the port at Berbera. The Omani Raysut Cement Company (RCC) plans to invest $24 million to build a new cement terminal in Berbera port in 2014. Further enhancing the capacity of Berbera port, the French global investment firm Bollore SA, through its subsidiary Bollore Logistics Africa, intends to open a shipping terminal in Berbera in the near future. With its political and economic footprint expanding across Africa, China is also making its presence felt in Somaliland. In November 2013, Chinese officials representing the Afro-China Commerce Industry Group (ACCIG) concluded a series of agreements with their Somalilander counterparts outlining plans to facilitate more Chinese investment in Somaliland. As part of the agreement, ACCIG will finance the construction of 20 factories in Somaliland while also supporting other ventures. China’s interests in East Africa are widely known. Yet China’s inroads into Somaliland are relatively modest. At this point, China continues to prioritize relations with Somalia-proper. China remains committed to Somalia’s stabilization and long-term development and has agreed to reopen its embassy in Mogadishu. Consequently, China is wary of upsetting its burgeoning relationship with the government in Mogadishu over its ties with Somaliland. In particular, China is also keen to ensure that its larger interests in East Africa are protected. Nevertheless, China’s activities in Somaliland reflect the region’s importance in the context of wider economic developments in East Africa.
Somaliland’s potential as a source of crude oil is also drawing attention from global oil majors. UK-based Genel Energy and the Omani state-owned Oman Oil Company (OOC), are currently conducting oil exploratory operations. Accurate figures on the extent of Somaliland’s oil reserves do not yet exist. Energy companies are hopeful that the region contains oil reserves comparable to those of Yemen across the Gulf of Aden, which is estimated to have around 3 billion barrels of proven oil reserves. Somaliland’s potential as an oil producer is considered to be modest in comparison to other major producers in the region. Given a consensus of projections pointing to a sustained increase in global aggregate demand for oil in the foreseeable future, even a modest amount of oil reserves can make an impact on Somaliand’s economy.
Somaliland’s diaspora community is furthering the region’s economic development, contributing an estimated $1.2 billion in remittances to the Somaliland economy from host nations in North America, Europe, and the Persian Gulf. Through initiatives such as the Somaliland Diaspora Agency (SDA), Somaliland is actively seeking to entice Somalilanders abroad to invest in their homeland. Furthermore, Somaliland signed a bilateral security agreement with the United Kingdom in May 2013. As a result, the UK subsequently agreed to drop a travel ban for UK citizens seeking to travel to Somaliland. The UK also agreed to provide the Somaliland Interior Ministry with training for its police force, coast guard, immigration, and criminal investigation services, and to provide data systems to better coordinate the work of these forces. Somaliland’s Interior and Defense ministries are trying to position the region as a security partner for regional and international actors in combating radical Islamist militancy, transnational organized crime, and piracy.
At the same time, numerous obstacles continue to hinder Somaliland’s goal of official independence, and its tenuous political situation undermines its image as a safe destination for foreign capital. Somalia’s central authorities in Mogadishu have historically rejected Somaliland’s secessionist ambitions, and have used military force to prevent it from breaking away from the FRS. Regional and international organizations such as the United Nations (UN) and the AU have voiced disapproval over Somaliland’s demand for independence on the grounds that it would establish a precedent for secession throughout the African continent.
Somaliland’s prospects are also hampered by an array of lingering conflicts with other parts of Somalia, including the neighboring breakaway regions of Puntland and the Khatumo State: Somaliland is enmeshed in disputes relating to land use and access to potential energy and other natural resource deposits, particularly with Puntland. These disputes led to intermittent armed conflict between the Somaliland and Puntland regions from 2007 to 2009, and have yet to be resolved to the satisfaction of either region. Somaliland also faces internal secessionist challenges in the northeastern area of Sanaag, a region that also borders Puntland, and in the northwestern area of Awdalland, bordering Djibouti. Basic infrastructure challenges remain, including the need for more paved roads; reliable electricity; greater telecommunications coverage (including reliable access to the Internet); confronting desertification and ensuring access to potable water for the vital agricultural and animal husbandry industries; the expansion and modernization of airports at Hargeisa and Berbera; and the need to modernize the port at Berbera.
Somaliland’s energy exploration efforts are complicated by the unresolved legality of the Somaliland government granting exploration licenses that override those granted by the government of Somalia under the authority of Siad Barre in the 1980s to different companies such as Conoco, Amoco, Chevron, and Phillips. The civil war and continuing instability in Somalia suspended oil exploration activity in the northern region of the country, now Somaliland, before the old contracts could be honored. Meanwhile, Somaliland’s crucial livestock sector – Somaliland is the largest supplier of livestock to Saudi Arabia, and the livestock industry is estimated to contribute $250 million annually to the region’s economy – is threatened by encroaching desertification and environmental degradation.
Somalia’s reputation as a failed state, and the continuing threat of violent instability in Somalia-proper, negatively impacts Somaliland’s image as a viable destination for FDI. Somaliland will continue to be associated with the violence and instability typical of the rest of Somalia in the foreseeable future. Moreover, foreign investors are likely to remain wary of injecting substantial amounts of capital into Somaliland while Somaliland’s sovereignty remains a point of dispute. On the political front, as the international community continues to make inroads into stabilizing the situation in Somalia, major actors with a vested interest in stability in the Horn of Africa are also likely to pay close attention to Mogadishu’s position toward Somaliland. In this regard, Somaliland’s demands for independence and other advantages may be overlooked in favor of achieving a Somalia-wide solution that contributes to regional peace and stability in the FRS and the Horn of Africa.
However, other territories engaged in ongoing disputes over sovereignty, including Taiwan, Kosovo, and the Kurdish Regional Government (KRG) in Iraq, have successfully attracted FDI while also developing formidable diplomatic, economic, and defense portfolios. Somaliland is likely to pursue some of the strategies adopted by these entities as it continues to make its case to the international community.
The greatest risk to investment in Somaliland is the region’s lack of official recognition as a distinct political entity with sovereignty over the resources located in its territory, and questions over its ability to make and honor contracts with interested investors without the approval of Mogadishu.
On the domestic front, the persistence of high unemployment leading to out-migration, especially among Somaliland’s youth, many of whom head to Europe as illegal migrant workers, present long-term challenges to the vitality of Somaliland’s economy. This trend also impacts the future of Somaliland’s domestic market. Somaliland’s troubled domestic economy makes it difficult for its government to collect sufficient tax revenue to provide effective public services and address the infrastructural inadequacies of the region.
The threat of instability caused by militant groups in neighboring Somalia; the possibility of the resumption of piracy activities in the Gulf of Aden maritime zone; border disagreements over land use, maritime and airspace access; disputes over potential energy resources between Somaliland and the FRS; and Somaliland’s disputes with its neighboring break-away regions and from secessionist areas within its territory all present security risks. These internal disputes in particular, caused mainly by ethnic and tribal disagreements, are continuing challenges to the Somaliland government, and present another difficulty as it tries to position Somaliland as the safest and most stable region of Somalia.
In lieu of international recognition of its sovereignty, Somaliland maintains an aggressive approach in its international engagement, seeking partnerships with a wide range of global actors in government, the private sector, and from Somaliland’s diaspora in order to improve the region’s long-term economic viability and importance to international commerce.
Somaliland has demonstrated its commitment to attracting FDI in a variety of industries in order to reduce its economic dependence on remittances and animal husbandry. While the extraction of potential energy resources in the region presents obvious opportunities for investment, Somaliland’s desire to make Berbera port a premier shipping hub in the East African and Gulf of Aden region also provides emerging opportunities for investment. Berbera port offers a particularly strong opportunity. Somaliland authorities are trying to position Berbera port as a vital trade node for the rapidly growing economies of the Horn of Africa and the wider region of East Africa, serving as a logistical route for imports to reach key emerging markets in Ethiopia, Kenya, and Uganda. Investment in the development of the port to handle a greater capacity of cargo, and improving Somaliland’s transportation infrastructure in order to facilitate the shipment of goods from the port are all areas of opportunity.
The marketing of Somaliland as a safe tourist destination, primarily cultural and eco-tourism, could also emerge as an important segment of the Somaliland economy. The ancient rock art at Las Gaal (some of the best preserved examples of ancient human art in the entire world), could soon receive UNESCO World Heritage site status, making it a rising tourism destination. Extensive coral reefs in the Gulf of Aden west of Berbera and highland forests in the Caal Madow mountain range also have the potential to attract significant eco-tourism.
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