Developing Centers of Excellence and Economic Hubs in Somalia – An Alternative Approach to Development

Dr. Peter J. Middlebrook
Dr. Peter J. Middlebrook

by Dr. Peter J. Middlebrook 14

Somalia, like many countries, is land-locked on one side, and sea-locked on the other. If Somalia had been land-locked neighboring Germany or sea-locked neighboring Singapore, its development history would have had an entirely different trajectory.

In January 2016 I presented ‘Global Economic Futures’ to the CEO and Leadership of DP World, including a compelling pitch for DP Word to invest in Somalia. DP World is now invested in both Bosaso and Berbera ports and recently announced plans to develop a greenfield economic freezone in Somaliland, aimed at making Berbera a gateway port in East Africa. Big business, clear investment objectives, positive rates of return and strong government leadership is turning Somalia into an important destination for investors, and Chinese investors are unlikely to be far behind.

Dr. Peter J. Middlebrook DP World Presentation at the 2016 Leadership Summit, Dubai, U.A.E.

In a world where virtual market integration is emerging as a powerful transformer in its own right, building productivity hubs as centers of excellence could turn Somalia’s peripheral location in the Horn of Africa into a competitive advantage. After all, the main determinants of economic growth are population growth, productivity and decision making structures; not location per se. Location helps, but it is far from the sole determinant. If a new approach to development is adopted – a Centers of Excellence Approach – Somalia could finally see a revolution in productivity that would solve many of its problems.

According to the African Regional Integration Index, Somalia ranks the lowest in terms of regional economic integration across the Community of Sahel-Saharan States (CEN-SAD). If one compares Somalia with Eritrea, it is behind on trade, financial and macro-economic integration and on regional infrastructure. If one compares Somalia with Kenya it is behind on productive integration, trade, finance and free movement of people, but not on infrastructure. If one compares Somalia with Chad, Chad only excels in financial and macro-economic integration. Compared to all other CEN-SAD countries, the primary areas of under performance are (i) trade integration (ii) productive integration and (iii) financial and macro-economic integration; all of which call for a massive investment in ‘soft-infrastructure’ first, and ‘hard infrastructure’ second.2

Historically one might characterize Somali as being an economy without a state; though in recent years this has begun to change. Under Siad Barre the state became a model of predatory capitalism, and when that regime collapsed, instead of economic declining it instead peaked, showing the negative economic impact of the former state. Government should deliver ‘public goods’, but often delivers ‘public bads’. Given that the capacity of public and private decision-making structures in any economy determines the use of economic inputs (the factors of production) and the distribution of outputs, it is the level of centralization in decision-making and who makes investment decisions that is critical to growth outcomes. A strong business environment demands a clear investment framework, clear rules for investors, a reasonable regulatory regime and consistency.

While ‘hard-infrastructure’ is critical to growth, soft-infrastructure is the glue that puts in place and maintains a country’s physical infrastructure endowment. As Afghanistan and Pakistan have demonstrated, it is far better to have 1 or 2 trade corridors that function well, than a vast network of poorly connected sub-markets. Similarly, 78 percent of Burkina Faso’s trade is carried by four main roads and rail corridors linking the country to the gateway ports in Benin, Côte d’Ivoire, Ghana, and Togo. So why not adopt a Center’s of Excellence approach to development in Somalia, where anchor projects, ancillary and spin off investments are carefully prioritized, in key geographical, industrial and service areas. What is a required is a new approach, not a more of the same approach!

It’s the Economy Stupid!

In recent conversation with young billionaire Ashish Thakur, I was reminded of the two established rules of business leaders globally. Rule number 1; never loose money. Rule number 2; never forget rule number one. This adage, in a capitalist world, means that countries must establish themselves based on a viable business model, where all investments have strong economic and social rates of return.

As most countries have now been turned into business enterprises, even as they support a social contract with their citizenry, the business model of any economy is the key to its success. Rates of return must be positive, compounding of investment must occur, public and private equity must work hand in hand, and the economy must be structured in a way to redistribute incomes to create wealth while combating poverty. In Somalia, where tens of billions of dollars have been spent since 1991 on humanitarian assistance, these rules have never been applied, leading to donor fatigue and a cycle of cyclical drought that periodically decimates capital owned by the poorest quintile of society. The business model therefore must simply change.

Much of the external assistance to Somalia has done little more than fill cyclical production and income gaps, and while the international community has stepped up engagement on state building in recent years, much more needs to be done to create a resilient economy with a revenue base to allow core state functions to be self sustaining. The vast majority of NGOs in Somalia today are similar in nature to the many NGOs that operated in Afghanistan until 2008; they are simply for-profit actors masquerading in the name of the tax-free humanitarian cause. As a result, the many thousands of sub-projects funded by donors in recent decades have never amounted to more than the sum of the whole, and one must assume that a vast majority of those transfers have in fact stayed in people pockets. There are good NGOs out there, and they play a critical role, but they can only play that role once this sector is cleaned up.

Approximately US$ 4.5 billion has been spent on humanitarian assistance since 2011. Humanitarian aid spending since 2011 is 1,730 percent of the 2017 Federal Budget. The problem therefore is not lack of financing per se; but rather Somalia’s vicious business model that has led to investments that are nothing less than dead wood. Under the Federal Government, with increasing support from the international community, efforts are underway to change the model and maximize the rate of return of spending on growth, revenue and jobs.

Building Centers of Excellence

In development, everything can not be of equal priority. It is also not possible to build an entire economy from the ground up, especially if the fiscal resources are highly constrained; as they are. When you start paining a wall, you don’t start everywhere at the same time, you start from once place, and build out. That is also how good development works. Prioritization is key.

The best strategy for Somalia is not to wait three generations to develop both hard and soft infrastructures everywhere, but rather to develop centers of excellence across the country, at key locations, to act as magnets for investors. I am not suggesting that investments in education, health and water should adopt such an approach, as social equity is critical for public policy. However, unless a foundation for growth and revenues is a priority, the old business model will surely continue. But what would such an approach mean?
Somalia has a number of absolute and competitive advantages, and these must be exploited to the fullest.

In terms of absolute advantage, there is only one Somalia, with a strategic position linking the Gulf of Aden to the Red Sea, and with Saudi Arabia finally building industrial clusters and trade hubs on its west coast that link to the world economy, northern Somalia in particular is well placed to be part of that investment narrative. With a 3,333 kilometer coastline, off shore investments are waiting to occur. The Saudi announcement to build Neom City as a new megacity (bigger than Dubai) off the Gulf of Aqaba, will also provide a new market for Somalia exports. Neom is being planned to span 10,000 square miles; 33 times the size of New York City. Other absolute advantages include the low cost of wages, limited regulatory regime, and the emergence of free zones that will attract a new class of investor and formalize the informal economy.

Competitive advantages, which include export products with a positive Relative Competitive Advantage (RCA) rating, include the nascent state of its economy and its infrastructure, rapid rates of urbanization which lead to a shift in patterns of demand, and an extremely influential and business savvy diaspora that already integrates Somalia the world over.

An Anchor, Ancillary and Spin Off Planning Approach
Project level analysis alone does not explicitly analyze an investment’s distributional impact, although grouping investments within an ‘anchor, ancillary and spinoff’ framework provide for considerable upstream, sidestream and downstream benefits. These include (i) Indirect impacts: anchor and ancillary projects spend money on upstream, sidestream and downstream on goods and services (ii) spillover Impacts: anchor projects provide demand for the infrastructure services needed to operate and maintain the ancillary projects (iii) Catalytic Impacts: anchor and ancillary projects improve the productivity of local Micro to Small Medium Enterprises (MSMEs) allowing them to increase value addition and (iv) Imputed Impacts: anchor projects yield net government revenues, allowing continued investment in infrastructure services. Such an approach, which implies a focus on forecasting economic and financial rates of return, demands that the government develop the capacity for developing feasibility studies as bankable investments, in partnership with the private sector. Such capacities are lacking, but must be built.

In Geopolicity we promote an economic planning model built around anchor, ancillary and spin off investments, as outlined below. Such an approach focuses investment into centers of excellence, allowing the revenue base to swell through large taxpayers, further allowing reinvestment back in the economy. I am not suggesting that only large investments should take place, but without national anchor projects, the cycle of underinvestment will continue.

Free Zones and Multi Modal Hubs:
Somalia is a trading nation with a significant trade deficit. The deficit is financed by diaspora and aid flows, and FDI. This equation needs to change if the re-introduction of the Somali currency is not to lead to currency deflation, which leads to inflation on imported goods. Moreover, although routes from Somalia to other African countries may not appear lucrative, it is the closer distances from Somali ports to the ports in the Middle East, Pakistan, and India and beyond that could add value to these corridors through Somalia.

Outside of maritime and coastal linkages, there is a potential to link Somalia with Ethiopia, South Sudan, Uganda and Central Africa through the rehabilitation of inter-state and inter-regional road corridors and development of transit service facilities. ADB investments, and potentially Chinese, are key here. Currently, however, the only established corridor connecting Somalia with the rest of Africa is the Berbera–Addis Ababa Corridor, though Kismayo may also provide a competitive route to Nairobi and Kampala once it is developed. Inland integration must be married with trade harmonization, and again the center of excellence approach built around anchor projects works well here.

According to the African Development Bank Somalia Transport Needs Assessment in 2013 a total of 2.1 million metric tons of cargo was handled at Somali ports, with the main trade partners accounting for 90% of the trade as follows: Ethiopia (26%), Oman (18%), Saudi Arabia (13%), India (9%), Kenya (7%), China (7%), Yemen (4%), Pakistan (3%) and Turkey (2%). It is clear therefore, that with India and China already accounting for 20% of trade, there is considerable headroom for an increase to Asia and the Gulf States (31%), highlighting the importance of global regional market integration.

The potential for developing transport and logistics hubs (multimodal transport husband trade logistics hubs) is best coordinated with a push to establish free zones across major cities, linked to transport hubs. Location is key. Multimodal hubs and ports are now standard economic models deployed across the world, and they would work well in Somalia, as part of a center of excellence approach. My company, Geopolicity Inc., led much of the economic work on such hubs in Central Asia, as we also supported work on the economic viability of the Second Suez Canal. Developing a Multimodal Hub / Port concept for Somalia, and rolling it out, should remain a critical priority, as will encouraging such investment and structures into South Central Somalia, not just the north.

Free Zones are also beginning to emerge, and will become game changes in the investment landscape. Investment laws will need to allow ‘secure’ foreign ownership, and JLT and Jebal Ali Free Zones in Dubai are useful models in this regard. MIA could be a formal freezone also, providing a spike in direct, indirect and induced incomes for the local economy. If ownership laws are not changed however, investors will hedge against risks, only looking for so-called sweetheart deals, and a significant number of investors will be locked out of contributing to Somalia’s success.

National and Regional Financial Markets:

For domestic and foreign investors, the next decade must see a revolution in financial market reform, as the most obvious soft infrastructure gap affecting all investors. In business, cash is king. Unless investors can leverage financial markets, securitize investments through collateral, and benefit from interest rates that do not price investment out of the market, progress will be slow. Government and the IMF must solve the debt burden, re-introduce a national currency, and establish a financial services authority as priority, to include the development of financial products from household loans to trade finance.

All things being equal, the next decade should be good for Somalia, and if centers of excellence begin to emerge, the status quo will gradually shift from a legacy model that encouraged cyclical drought and under-investment, to a new model aligned to emerging development thinking. The financing for this exists, and Somalia must seize on external changes, such as the crisis in the Middle East and rise of the Petro Yuan, which are forcing sovereign wealth funds the world over to look for new markets.

1 Peter J. Middlebrook is the CEO of Geopolicity Inc, an international consultancy group specializing in economic reforms, and a former World Bank, UK Government and EU Economist. He has worked in Somalia since 1992, and maintains a close interest in the MENA region. He can be reached at ceo@geopolicity.com

2 https://www.integrate-africa.org/rankings/country-profiles/country/somalia/