As discussed above, the Somali economic model has relied heavily upon its population abroad as a key asset, for instance for the sourcing and financing of goods required domestically. As frequently noted by international observers, remittances have long formed the backbone of the Somali economy, fuelling domestic consumption of imported goods and providing small-scale investment capital for small enterprises.[53] While such activities bridged the country through periods of drought and severe conflict, its significance has been declining as the Somali economy developed from a war economy into a viable domestic market in its own right, most notably since 2011. Such developments have given rise to increasing urbanisation as well as returns from Somalis abroad, and has significantly raised housing prices and rental fees while remittance levels have remained relatively stable.

While the significance of remittances declined, rapidly rising Somali demand for an increasingly wide range of goods and services, as well as the restart of the container terminals in both Berbera and Mogadishu, have provided substantial opportunities that few small and medium enterprises have managed to step up to due to various growth constraints. Paradoxically, although economic opportunities increased, a range of smaller companies have given way to a few major transnational conglomerates serving most of the market.[54] In effect, the formerly significant role of remittances flowing from the transnational community has largely been eclipsed by transnational businesses servicing the Somali markets while keeping a foot in the international Somali community as well.

In order to assess the impact of transnational businesses operating in Somalia on socioeconomic developments and governance, this chapter explicates the business models these corporations have used to capture significant shares of the market and presents an in-depth examination of some of the largest transnational conglomerates. It specifically seeks to explore how these companies manage to drive economic growth while also shaping the political environment in order to maintain a favourable business environment, allowing for further growth. Subsequent chapters will, in turn, explore how the operations of these transnational business models have affected socioeconomic developments and governance. However, before exploring the transnational business models themselves, it is important to consider the relatively unique domestic Somali business environment in which they operate.

Somali exceptionalism

While not strictly correct, the lack of governance noted by a management-level employee of a major Somali money transfer operator (MTO) does reflect a key aspect of the business environment in Somalia and Somaliland. While both Somalia and Somaliland have a formal government, its organisation is relatively small, weakly institutionalised and commands limited authority (especially in comparison to the far-more developed business community). The ability of individual governmental entities to act is further constrained because of a weak institutional capacity, an unclear regulatory environment, a weak information position (especially the lack of financial reporting among businesses), and insufficient staff capabilities (reinforced by clan-based hiring policies).[56] While many of these institutional weaknesses are by no means surprising nor unique, given the fragile environment and violence of the 1990s, it should be kept in mind that government weakness may also be partially by design, given Somali cultural antipathy towards formal government as well as shared memories of state oppression and exploitation under Siad Barre.[57] Although tracing the historical causes of state weakness is beyond the scope of this report, it is important to highlight that as a consequence of this severe weakness no Somali state institution has been able to take a major role in the development of the Somali territories. While the Mogadishu government has been noted for its extraversion and rent seeking, and the Somaliland government as a relatively stagnant institutionalised clan-power-sharing agreement, it has been the private sector that has taken the lead in the economic development of the area.[58]

Private businesses are the main development actors throughout Somalia (supplemented by a number of international development actors), and have operated largely unchecked by any kind of authority. Whereas in most oligopolistic systems under study it was a government that created a state-owned enterprise or protected an existing major enterprise’s privileged market access (e.g. either through formal arrangements as with Samsung, Hyundai or LG in South Korea, METEC or Ethio Telecom in Ethiopia, or through more through informal structures such as the privatisation of state companies in Russia or the Gupta family’s companies in South Africa), in Somalia the case is reversed. In the Somali case it was the private sector that created and consolidated a market, largely in the absence of any kind of formal governance, and in many cases, it is private enterprises supporting governing institutions to the extent that doing so protects their control over a given market. In contrast to other oligarchic systems it is thus not a state institution or individual politician acting as a patron of a (privatised) company, but rather state institutions are acting as subsidiaries of the major business conglomerates.[59] Similarly, the tendency of oligarchic systems to protect the status quo in order to maintain a stagnant market, preserving the company’s dominance over a market is largely absent throughout Somalia.[60] Instead, Somali companies are pushing rapid economic developments, and their support for political changes depends on the extent to which they align with the company’s growth strategy.[61]

In addition to the differentially balanced state-business relation, the frequently observed oligarchic phenomenon of worsening socioeconomic outcomes (mostly approached through income inequality) does find its reflection in the Somali system.[62] While some actors most definitely managed to maintain or acquire wealth throughout the civil war period, the vast majority of the population lost whatever possessions they previously had and was left fairly destitute. Coupled with the relatively flat nomadic organisation principles and the limited degree of urbanisation, Somali society emerged from this period with relatively low levels of inequality.[63] Rapid economic developments over the past few years have introduced a degree of organisation, however, widening the gaps between different socioeconomic groups. This widening inequality is a relatively new phenomenon, and is not widely recognised within Somalia.[64] It has, however, been feeding increasing local resentment within the private sector and political sphere. Smaller enterprises especially have faced reduced opportunities to maintain their position in the market and compete in government tenders due to their weaker political connections. Outside of the business community, the extent to which people’s clan-based representatives in politics are really improving clan members’ fortunes is increasingly being questioned. Most notably, young people attempting to obtain a job are increasingly disillusioned with the extent to which their clan connections can get them ahead, given the major salary discrepancies between most governmental patronage positions and positions in the private sector that are accessible mostly to better educated sections of the population.[65]

The transnational business model

The sustained economic growth in Somalia over the past years has created opportunities in a wide variety of sectors, drawing in a wide range of investors from across the transnational Somali community. The majority of diaspora investors and domestic entrepreneurs indicate the availability of profitable opportunities which they have been able to capitalise on, yet growth opportunities have been more constrained and are not a realistic perspective for all actors involved.[66] A select few private actors have been able to benefit disproportionately from the opportunities available, and have developed in large conglomerates with rapidly growing operations in a majority of markets. While the relatively advanced remittances/MTO markets have frequently been cited as the key drivers of growth, and most conglomerates maintain significant operations in these markets, the importance of profits from this market should not be overestimated.[67] For example, assuming that Dahabshiil, the biggest MTO in Somalia, manages to capture a 75% market share of Somali remittances (about USD 1.3bn, 60% of which is funnelled through MTOs), earning 5% in fees over the transfers leads to a relatively modest annual revenue of approximately USD 29m.[68] This is unlikely to cover the company's operating costs, as it employs about 5,000 people managing its network of roughly 24,000 agents across 126 countries.[69] Although Dahabshiil has also tapped into non-Somali remittance corridors (most notably in Asia), it should be clear from this example that profits from Somali remittances alone cannot adequately account for the substantial growth the company has gone through.[70] The company has therefore established a wide variety of other operations in markets such as micro finance, property, cement, electricity, food, cars and the exploitation of a shopping mall (see figure 4).

Profitable business opportunities are readily available in developing markets such as Somalia.[71] The actual constraint that most Somalia companies face is growth potential. The importance of a core market such as remittances helps companies overcome this constraint, not through the profits earned but by the access to liquidity. In a market where nearly all goods and assets are imported, the importance of having access to substantial capital (especially in hard currency) is the key factor to transforming a small-scale start-up into a fully-fledged business. Even short-term access to such liquidity can be rapidly leveraged into further growth, given the generally high profit margins, short cycle times and limited upfront investments required for most types of business in Somalia.[72] Given its strategic importance, access to liquidity is tightly controlled to maintain competitive advantages. While many markets are easy for new players to enter, there is fierce competition in those core markets from which major conglomerates draw the foreign currency that fuels their operations in other potentially profitable markets. This liquidity disparity is further entrenched through both a weak financial regulatory environment as well as other more protectionist regulations limiting the scope of foreign funding to enter Somalia without a strongly established domestic partner. In Somaliland, established hawala money transfer agencies have been remarkably effective at leveraging rather unique requirements of Sharia-compliant financing to protect their control over financial flows.[73]

A consequence of the poor availability of capital and credit/financing modalities is the strong limits it places on the establishment of small enterprises as well as their ability to scale up, forcing existing SMEs to rely solely on organic growth. Taking up a larger projects requiring an upfront investment is simply not feasible given the constrained working capital.[74] Liquidity constraints form an artificial limit to the development of the SMEs, in particular limiting the emergence of medium-sized enterprises able to compete with the conglomerates (also see box 3).[75] This, in turn, limits the demand for a more transparent and level playing field that medium enterprises require to compete with larger competitors, allowing the close ties between business and political actors to endure. Effectively, the overall size and turnover of a company across its markets becomes a key competitive criteria, allowing it to rapidly capture market shares in other profitable markets and to maintain a favourable political environment to protect it.[76]

With a few notable exceptions (such as telecoms, livestock and some agricultural products) most consumption within Somalia is served through imports from abroad rather than domestic production (e.g. approximately 80% of products in Somaliland are imported).[81] As such, barriers to entry, like initial capital requirements or specialist skills, are low for most markets, and government regulations and controls over imported goods are weakly developed and poorly enforced. The growth strategies of most of the major conglomerates appears to capitalise on this situation: rather than reinforcing their competitive advantage in a select number of markets most of the major conglomerates have scrambled to gain a foothold in a wide variety of markets, often unrelated to their core business (such as rice, cars, electricity, hotels, construction and property – see figure 4). Given that the majority of these goods are imported, these companies can frequently leverage a scale advantage by being able to move goods in container volumes rather than smaller freights. This has allowed them to take up positions as one of few wholesalers, forcing smaller less capitalised players in the market into roles as distributors or retailers.[82] Nonetheless, (price)competition with other conglomerates has so far been considerable, and has been offset mainly by companies pushing for further protectionist measures and preferential access to key formal and informal institutions to further entrench their positions (see box 4 for an example).

With the importance of companies’ relations to formal and informal governance structures, the corporate social responsibility (CSR) departments of the major Somali conglomerates serve an important strategic function. These departments are well funded and highly professionalised, work in close coordination with higher management, and allocate a substantial amount of funds that often equals corporate zakat contributions (which are generally 10% of net income, although figures up to 20% have been noted).[84] Zakat contributions are generally directed toward charitable organisations and projects, working mainly on traditional humanitarian issues. While donations to, for instance, drought relief are undoubtedly appreciated, they are rarely publicly announced nor directly related to a pay-off.[85] CSR contributions, on the other hand, are generally characterised as ‘community projects’, with a developmental focus, in response to project proposals or requests from the community.[86] While projects may vary considerably, from education to healthcare to infrastructure development, their implementation is generally characterised by a far more targeted and visible approach. Community requests often arise in the form of (clan) elders making direct requests for funding at branch offices, suggesting to personally implement projects targeting clearly defined beneficiaries.[87] The direct nature of the social services provided effectively allows the company to develop its own social contract with the community in question, thus securing a licence to operate in the area. It has also allowed major conglomerates to enjoy relatively high levels of trust from the general population, whom have generally been wary of new entrants and been slow to make use of their services.[88] Corporate-funded social services have been highly visible against the backdrop of weak governmental provision, as was the case when Hormuud ambulances and firefighters became the first responders to the 2017 Mogadishu truck bombing.[89]

The direct relation established avoids the company having to rely on frequently weak central governmental structures to provide access at the location.[90] The company also builds its own soft-power, establishing a relation with regional clan-stakeholders who are in turn able to lobby their clan-aligned political representatives in the company’s interest. In this regard, the coincidence between Dahabshiil’s and clan-elders’ Sharia-based objections to the initial draft of the Somaliland banking law (which would create space for traditional banking) were striking.[91] At an international level, major corporations have also been known to influence the flows of development aid in order to influence government policy.[92]

The corporate social responsibility (CSR) track is frequently further supported by a range of more individualised incentives. One Somali diaspora businessman clarified that ‘businesses are richer than the government in Somalia. For many people, getting a government post is a de facto application for a position in one of the big companies.’[93] A Somaliland minister, formerly employed in the Somali banking sector, underlined similar concerns, citing his own and his personnel’s salary discrepancies compared to those prevalent in the telecommunications sector.[94] As a consequence, movements between the private sector and ministries are not uncommon. While such career opportunities may ensure that regulatory bodies and private entities share technical knowledge keeping their activities in sync, the attractiveness of such career perspectives may create undesirable personnel incentives. It should be noted that crossovers between the public and the private sectors occur in both directions, although movements into the public sector seem to occur more at elite levels.[95] Many corporate actors also, usually somewhat covertly, fund election campaigns of specific political groups and individuals. While this may, at times, harm a company’s connections to certain constituencies, it has proven to be a reliable way to benefit from government tenders.[96] Electoral support has been key to the establishment of a number of government-mandated and natural monopolies, although it should be kept in mind that a number of contracts thus awarded have also been declared void after incumbent politicians changed in the next electoral cycle.[97] Corporate support to public officials therefore continues throughout their term in office, ranging from quid pro quo financial incentives to more general investments in politicians’ continued goodwill (for instance, the somewhat symbolic provision of armoured vehicles to ministers of the Federal Government of Somalia is rumoured to be supplied by a telecom conglomerate).[98] Government institutions’ lack of adequate resources and the low salaries of civil servants have facilitated the development of such particularistic relationships, reducing government actors’ manoeuvring space to take action independent of corporate interests.

While substantial funds flow into the public sphere, formal tax contributions from the private sector remain markedly low (USD 88.6m/2.8% of GDP in 2016).[99] None of the major conglomerates make any financial statements or any other data public, intentionally creating ambiguity regarding any taxes due.[100] While with some companies flat tax rates have been agreed, these arrangements can hardly be considered equitable.[101] Among many corporate actors, there is a willingness to contribute to the state budget, however. As one Somaliland ministerial employee explained: ‘Whether you call it taxes, charities, or CSR, whenever the government needs help they can call the private sector and ask for the money.’ This, however, creates a situation in which tax contributions are negotiated, frequently between parties in an unequal financial position. Contributions made thus become particularised: they may be directly connected to a public official managing the contribution, may stand in direct relation to the services it funds, and at times have been known to be paid into private accounts.[102] Both the Federal Government of Somalia (FGS) and the Somaliland government have accrued substantial debts owed to the business community, further weakening their position as independent authorities (see boxes 5 and 6).[103]

The conglomerates’ political business models have been a relatively effective approach to capturing a wide variety of markets, yet some sectors have remained relatively competitive, allowing a wider variety of producers to operate. A clear example can be found in the construction sector, where dozens of small and some medium-sized construction companies have been able to exist side by side with larger competitors (often with partnerships with the major conglomerates). With the economic growth and influx of returning diaspora, demand for construction work has skyrocketed and plot prices have risen sharply, fuelling further interest from property investors.[122] The sector generally generates high returns on investment (up to 20% per project for SMEs, up to 50% for more professional companies).[123] Given that (small-scale) construction requires relatively little in terms of technical requirements, has low-scale advantages, and the short-term liquidity required is often provided by the buyer, the sector has low barriers to entry.[124] While such traits have made it nearly impossible for large actors to fully capture the market, it should be noted that conglomerates have been able to appropriate large parts of the margin on a project by leveraging their dominant position as suppliers. For instance, in Hargeisa, Dahabshiil has managed to position itself as a dominant player supplying loans to bail out over-budget projects and for construction materials, and appears to be attempting to capture the cement market.[125] A similar ostensibly competitive situation exists in the livestock sector, with a wide range of herders trading sheep, goats and camels in a number of different regional marketplaces. While there are some major old Somali companies with relatively strong positions in the sector, the major conglomerates do not appear to have entered the market in a significant way.[126] It should be kept in mind, however, that the market is subject to major influences from its main buyer, as virtually all exports follow established trading channels almost exclusively with Saudi Arabia (which has been known to stop all livestock trade at times).[127] The livestock market is thus a relatively difficult market to enter into for traders without favourable access to the right export channels.

The rapid rise and dominant economic presence of the major Somali transnational conglomerates is visible throughout all markets and Somali regions. The impact of the emergence of transnational entrepreneurship has been multifaceted, given the complex political settlement prevalent in the area. Transnational businesses have provided a number of critical services and a degree of governance throughout the civil war period and during post-war reconstruction (in the absence of a state). Telecommunications have prospered, and MTO/remittances have provided a critical lifeline for the country as well as aiding post-war recovery (especially during droughts and famine). The advanced networks of import/export traders also mean that there has been a wide variety of goods available even during the more difficult times, thus raising the quality of life in Somalia (and beyond, as some of the goods are subsequently exported to Somalia’s neighbours). The increasing trade volumes have also provided the economic rationale for the reopening of container terminals across the Somali territories. The restart of container shipping created a stable supply of foodstuffs and other goods, eliminating the seasonal supply and price fluctuations of small-scale Dhow shipping (which virtually halts during the monsoon season), thereby reducing food insecurity. The Somali transnational community also grew regionally and internationally (making inroads into other markets such as Kenya, South Africa, Ethiopia, Uganda and the UAE) generating the capital required for further investments in Somalia and in Somali hubs abroad.

Yet, the aggressive way in which private business reacted to statelessness in Somalia has resulted in ‘monopolies, coordination failures, externalities, and public goods provision’, that precluded efficient market outcomes. Such practices have at times engendered mistrust between the business and political elites and fuelled factional infighting, especially in Somalia.[128] The major Somali conglomerates have developed more rapidly than governance institutions and have been able to leverage their position to shape the business environment in their favour. The lack of regulation and regulatory bodies have allowed for an unchecked growth in the Somali markets, leaving space for the sale of counterfeit or expired medication, spoiled food staples, the use of unsafe construction practices and other cases that highlight a lack of consumer protection.[129] Suppliers and substitute goods are of little consequence, given the virtually non-existent supplier lock-in and low switching costs of the import model. New entrants are barred from many markets by liquidity constraints, scale advantages in logistics and unfavourable regulatory constraints. Buyers meanwhile have limited choice in oligopolistically divided markets. While strong competition does exist between the major corporate actors, this competition has been limited to a select few core markets granting access to liquidity and a range of market regulations. This has allowed the major corporate actors to expand rapidly, venturing into a wide range of markets and extending their influence over both formal and informal governance structures.