Somalia’s economic recovery has benefitted substantially from the engagement of a range of businesses rooted in both the transnational Somali community and the domestic Somali markets they serve. As their enterprises have grown and expanded into larger conglomerates, many have managed to entrench and protect their position in the market through a mixture of strategic control over key resources and political influence. As a consequence, business and politics have become strongly intertwined through a range of elite networks, allowing corporate actors to have a sizeable impact on developments in governance and leading to unequal socioeconomic developments for those left without the necessary connections. The influential role of these transnational businesses has not been fully recognised by international policy makers, as attention to Somalia’s economic developments has been of a mostly technical nature. An influential set of stakeholders and significant interests have therefore not been adequately considered by donors. This chapter seeks to address this issue and thus consider how the influence of corporate actors on socioeconomic development and governance impinges on donors’ private sector development (PSD) efforts in general, and diaspora-based PSD efforts in particular.

The private sector’s development efforts

Donor engagement in Somalia has revolved around several key strands of programming: good governance/institution building (mainly by the EU/UK/US) aiming to increase: government institutions’ capacity, service delivery and authority; public-private partnerships and business environment reform (conducted by the World Bank/International Finance Corporation (IFC), and many smaller INGOs supporting microfinance); and humanitarian action (mainly resilience-related). As part of National Development Plan Pillar 3 (supporting inclusive and sustainable economic growth), aid support increased for private sector development from USD 20m to USD 31.1m in 2017.[171] The challenge has been to develop a more coherent approach to PSD that might involve more strategic dialogue between the government, private firms and development partners, to create both a unified approach and a special coordination arrangement for PSD (e.g. a PSD thematic coordination group), that would bring key actors to the table and feed into other coordination processes.[172] The primary PSD initiatives currently being supported include regulations and institution-building, capacity development, matching funds, and public-private dialogue. The Multi-Partner Fund is leading the regulatory framework, while IFC supports public-private dialogues – although at the same time contemplating larger investments.[173]

The most significant support coming through PSD is through development initiatives (regulatory support, capacity development and matching funds) rather than formal investment chains. In one key example, USAID’s GEEL project has supported economic transformation by investing or co-investing in 62 Somali companies, leveraging over USD 22.5m in new private investment, 40% from diaspora-owned enterprises.[174] Other donors are also engaged – for example, the EU through its Outreach Programme ‘Partnership for Inclusive Economic Growth’ supports the implementation of the value-chain strategies and actions. The Sustainable Employment and Economic Development (SEED) programme, funded by UK the Department for International Development (DFID), works with the Food and Agriculture Organization (FAO) to support agriculture production and export chains. In Somaliland, the Somaliland Development Fund covers private sector development as one of the key priority areas. Similarly, under the Somaliland arrangements in the New Deal, PSG4 on economic foundations include private sector development as the key driver for economic development but has not materialised to date.[175]

Critical agendas have been made for mobilising more private finance for small and medium-sized enterprises. Estimates are that investment financing by diasporas could be as much as USD 460m per annum.[176] In Sweden there are two diaspora support programmes offering matched funding for Somali-Swedish diaspora associations working with development and for social entrepreneurship.[177] Kaah Express (KIMS, an MTO) has also explored the possibility of offering customers a diaspora investment product, which would allow remitters to invest a portion of their monthly remittance in Somalia to stimulate economic growth.[178] The World Bank and the EU have also discussed diaspora bonds to fund infrastructure projects and social investments (as have been leveraged in Israel and India) but require additional credit enhancements and investor protections. As of now the strategy for harnessing diaspora investment is diffuse and disjointed, and caught up in turf wars between different branches of government (the investment and commerce ministry, the diaspora agencies and the Chamber of Commerce). All the branches have sought to engage the diaspora communities and harness investment opportunities, and offer land and tax breaks for the diaspora. These have included strategies where advice is provided on how to acquire shares in big corporations or where to invest in property, combined with pressure on the diaspora to invest – ‘Why don’t you give back, pressure to establish that ownership and maintain it through business, in addition to remittances.’[179] Most donor-diaspora strategy agencies are uncoordinated, and, for example, the Turkish Diaspora Network is run directly through the PM’s office. As a consequence, diaspora investment strategies are prone to co-optation and misuse to serve certain limited economic and political interests, that of conglomerates, clan or the state. In both cases, mistrust of government data and limited access to finances has reinforced practices of network-based strategies. As a result, forms of investment are either channelled into non-innovative sectors – into property development and the services industry that increase tensions within the private sector (between locals and diaspora) – or primarily through family or personal networks. As one government policy adviser in Somalia indicated: ‘Right now diaspora really want to invest, but they take their cues from diaspora that came before them, catalysts from their own communities, influential persons. They are not often engaged in broader macro-view and favour low-risk strategies. [Official] information on investments, government data, is not trusted.’[180]

Donor strategies to invest through diaspora engagement need to reflect the intricacies of the political economy of Somalia into which such investments play, and consider how to safeguard the investment from power imbalances in private and public sector economic opportunities, forms of local resentment, and competition-stifling practices. The biggest issue facing SMEs is liquidity, and where aid relations have offered some relief, those come with reputational costs and often limiting scalability. In Mogadishu, loans offered by Dahabshiil (more freely than those offered by Salaama/Hormuud who only give loans to those with shares) were restrictive in both time for repayment and amount. This was explained by one respondent: ‘The longer the repayment, the greater the profit, and the easier for diaspora… Here, the most important thing is affordability – the bank can only give 24 months, they can’t afford above that. Needs lower interest for credit – for a $130,000 loan from Dahabshiil I paid more than 17% in interest that you have to pay in one year – maximum two years. But Dahabshiil is often preferred to Salama because they actually give the money. Credit from Salaama comes in terms of goods (they buy the goods for you through their own suppliers, no flexibility with this, you don’t know quite what you’re getting).’[181] Many members of the SME segment of the business community recommended that donors ‘find a way to facilitate lending, provide financing to your host-country diaspora to come either through a government-owned diaspora account or diaspora bonds – they ensure the risk and instil an appetite for business risk’.[182]

In addition to expanding enterprise resources, there are of course broader concerns about market functioning in weak states, and different strategies need to be used in Somalia and Somaliland in order to prevent reinforcing practices of poor economic and political reforms. Somalia is currently an aid-based business model of competitive rent-seeking while Somaliland’s model is business-led protectionism and consolidation of state power and resources by conglomerates. There is a greater record of successful public-private dialogue in Somaliland, but that has not always led to protection of SMEs. In both cases, given the influence of private actors over government policy, donors need to understand how good governance and institution-building and business environment reform efforts relate to businesses interests; how private actors may attempt to influence developments; and how current policies may prove counter to objectives or interests in economic development and market interests.

One issue has been in procurement policies for public and NGO contracting that favour foreign operators. This a source of particular frustration for local construction companies who often lose out to international or transnational companies: ‘Procurement is in the hands of different donors. Parliament just passed a procurement act – it doesn’t favour local actors – because the threshold is super low. In works, anything over $200,000 opens up to international bidding, in services over $40,000 opens up to international bidding.’[183] Such policies in public or NGO contracting that explicitly cater to transnational businesses reinforce an informality gap in the market between new companies engaging in public contracting and old companies remaining out of regulatory institutions. These practices also may prove counterproductive, with high expiration and low expansion rates of new diaspora business, and their stronger likelihood to outsource or engage with corporate actors (recognising them as key stakeholders or powerful spoilers) rather than cooperate with other SMEs or a business association. Their forms of international capital have rarely translated into effective or productive market practices. A more pluralistic economic environment in which SMEs can grow and drive development is not realistic unless the oligopolistic economic structures are challenged. Implementing reforms without changes to current structures risks SMEs becoming victims of predatory practices, given their dependence on the large conglomerates.

As a result, SMEs are a key domestic ally promoting more equitable development within Somali territories, and while this is not a new finding, international practice as well as broader political will has not facilitated a more conducive environment for SMEs. In a clear example, IFC-led PSD faced the constraint of operating in fragile contexts, which means it can only involve companies registered outside the country (or in Mogadishu), thus limiting engagement often to large corporations or business associations where conglomerates are often still dominant. For instance, Dahabshiil has a banking licence in Djibouti, company registration in the UK, and is formally established in Dubai, and is thus an eligible partner. Most SMEs cannot afford to open additional offices or acquire the relevant registrations abroad.

Both cases are in a context of transition and there is a question about whether structures of power (and the strength of transnational business vis-à-vis the state) can be challenged without significant disruptions to political settlements and instability. Yet, in the case of Somaliland, if the state falls too far behind the private sector, it will lose even the limited arbitration role it now has. For Somalia, a heavy-handed push for taxation without sufficient recourse for ensuring participation in the market and issues of liquidity will only further encourage rapid business interventions in the state to facilitate returns and expansion into sectors (moves to control resources). Transnational and international campaigns to ‘clean’ business practices will exacerbate certain divisions within the private sector that incentivise against collaboration or cooperation (these include procurement policies). In addition, it aligns business actors more closely to political factions for protection and leverage, which risks reinforcing an informality gap and thus creating a critical misalignment of discursive policies and reform agendas with the realities of informal business practice. Examples of two such cases can be found in boxes 8 and 9.

In the particular case of Somaliland, donors risk misinterpreting political stability for inclusive business practices, reinforcing a system of mutual co-dependence where predatory business practices align with state capture around a single Isaaq sub-clan. The state needs to become capable of challenging the capture of several markets, but is unlikely to do so given the current limited leverage of the state vis-à-vis the private sector. Some kind of ‘independent income’ for the state may help establish some economic leverage that balances out the leverage of the big companies (although the proceeds should not be so substantial as to render taxes irrelevant). Taxation requires a negotiation of the social contract between state and society. In Somaliland, the population and SMEs in the private sector support this, but the large conglomerates are likely to maintain a role as spoilers. The liberalisation (and recognition) of the banking sector may be the first step in allowing a more diverse economic space to arise, empowering a wider range of economic actors – but the way in which politics unfolds around the financial sector also sends a cautionary tone.

In summary, Somalia and Somaliland offer two different contexts for state building and the role of private sector and transnational business interests within that process. These divergent models outline the need for different private sector development approaches. Efforts to improve the economy and good governance through private sector development is a challenging task in contexts where the private sector remains stronger than the state, and where loopholes can be exploited. Diaspora investment and aid offer some potential for addressing liquidity concerns but neither are a magic bullet and both channels risk reinforcing rent-seeking practice and power differentials. In Somaliland, more support to SMEs is needed to counter the authority and political influence of monopolies and to provide a unique opportunity for economic development, which has occurred with less open access to transnational capital, whereas in Somalia, such support may risk reinforcing rivalrous competition, inefficient market outcomes and conflict.