Doing Business in Hargeisa 2012

Hargeisa is the largest economic center of Somaliland. It sits on the Horn of Africa, 50 kilometers from Ethiopia, and 160 kilometers from the closest port in Berbera on the Gulf of Aden. Following the civil war in the 1980s, Somaliland unilaterally declared independence from Somalia in 1991, but it still lacks international recognition. During the first decade after the civil war, insecurity and unrest prevailed. A reconciliation dialogue was initiated between clan representatives in the city of Borama in 1993. In 1997 the Hargeisa Conference laid the foundations for a new institutional agreement, resulting in the creation and strengthening of government institutions. A new constitution was approved by referendum in 2001 and a series of elections have since taken place: local elections in 2002, presidential elections in 2003 and 2010, and legislative elections in 2005.1
Livestock is the main pillar of Somaliland’s economy: it is estimated to contribute to 60% of GDP,2 with customs duties representing 85% of central government revenue and livestock representing the majority of export earnings.3 Remittances and an expanding service sector are other key economic sectors. The population—55% nomad and 35% urban—is growing fast at 3.1% a year.4 At 80%, unemployment is soaring.Relative peace and security have allowed for a vibrant private sector to develop. With limited government and financial institutions, the diaspora has been the main engine for recovery and source of investment: in 2008 the diaspora provided up to 80% of start-up capital for small and medium-size businesses.6 Remittances constitute 40% of urban households’ income in Hargeisa. For one-quarter of them, they are the main source of income.7 The private sector in Hargeisa delivers basic services such as health, education, electricity, domestic water supply and urban waste disposal. Doing Business in Hargeisa 2012 measures the 11 Doing Business indicators that study business regulations as they apply to a domestic company throughout its life cycle.8 A fundamental premise of Doing Business is that economic activity requires good rules—rules that establish and clarify property rights and reduce the cost of resolving disputes; rules that increase the predictability of economic interactions and provide contractual partners with certainty and protection against abuse. This report can be useful for public authorities in Hargeisa in two ways. First, it generates micro-level data on business regulations that can be compared internationally. This is no small contribution given there are limited statistics and official data. Access to reliable and consistent data in Africa and in fragile states is limited, which hinders legal development and reform. Second, each chapter identifies bottlenecks, highlights opportunities for improvement and presents international and regional good practices.
PRIVATE SECTOR DEVELOPMENT IN FRAGILE AND CONFLICT AFFECTED STATES
The 2011 World Development Report on conflict, security and development states that “strengthening legitimate institutions and governance to provide citizen security, justice, and jobs is crucial to break cycles of violence.”10 The private sector can play a positive role in the economic development of fragile and conflict-affected countries, generating jobs and government revenue through tax collection. But it is not easy to do business in countries affected by war and violence.
Conflict has a particularly acute impact on the formal private sector. Human capital is reduced as a result of violence or migration. Infrastructure and institutions are destroyed. Access to finance becomes difficult. Data from World Bank Enterprise Surveys show that the main constraints faced by firms working in conflict areas are lack of access to electricity and finance, political instability, practices of the informal sector, and corruption (figure 1.1). Compared globally, the business environment in fragile and conflict affected states tends to have the most bureaucratic hurdles and the fewest property protections for entrepreneurs.11 On average it is more difficult to do business in fragile and conflict–affected states, according to the
Doing Business indicators.
Nevertheless, many fragile and conflictaffected states in Sub-Saharan Africa have been improving their business environments in a number of regulatory areas. Most improvements have occurred in business entry, secured transactions and tax compliance requirements. Sierra Leone has been a consistent reformer and was among the countries that improved the most on the World Bank’s ease of doing business index during 2010/11. During that year, Sierra Leone improved its credit information system by enacting a new law providing for the creation of a public credit registry; it made trading across borders faster by implementing an automated system for customs data; and it established a fast-track commercial court in an effort to expedite commercial cases, including insolvency proceedings. Smart and transparent regulations are important to creating certainty and a level playing field, particularly for small and medium-size domestic entrepreneurs. The government has an important role to play in setting minimum standards and safeguards, supervising compliance with the law, and providing for conflict resolution institutions, among others. The government of Somaliland, aware of the importance of the private sector to economic development, has set for itself the task of creating an enabling climate for private sector development in the Draft Somaliland National Development Plan 2012–16. As the government undertakes reforms, it should collaborate with local stakeholders—private sector and civil society—to understand their needs and priorities. This process can in turn increase trust in public institutions.
MAIN FINDINGS
If one compared Hargeisa to the 183 economies measured by Doing Business 2012, it would rank 174 on the ease of doing business—ahead of economies like Eritrea (180) or Chad (183), but behind Djibouti (170) or the United Arab Emirates (33).
Behind the aggregate ranking, Hargeisa’s performance varies from topic to topic (figure 1.3). On the ease of dealing with construction permits, getting electricity and registering property, Hargeisa would rank 86, 84 and 79, respectively, ahead of the averages for Sub-Saharan Africa and the fragile and conflict-affected states. Although the institutions governing these areas in Hargeisa are generally efficient, there is space for improvement in terms of establishing safety standards, inspection guidelines and supervision. Costs are high when dealing with construction permits or getting electricity due to lack of infrastructure: limited water and electricity networks and lack of sewage make connection to utilities very expensive. Compared globally, Hargeisa would rank 175 on the ease of starting a business. The process in Hargeisa is faster but significantly more costly than the Sub-Saharan Africa average. When compared to 183 economies measured by Doing Business it is among the top 15 most expensive cities in the world to start a business, with 60% of the cost stemming from the cost of business licenses. High costs may have a role in the high level of informality. Statistics show that when businesses register, they are more likely to do so with the municipality than with the Ministry of Commerce: the municipality issued 3,075 business licenses in 2010 alone, while the ministry only registered a fraction with a total of 358 companies between 2002 and 2007.
On the ease of paying taxes and trading across borders, Hargeisa would rank 142 and 127, respectively. Although complying with tax obligations does not take long, the total tax rate is high, partly because of the absence of deductions or provisions for asset depreciation. The government’s collection capacity is limited and in many cases it becomes a negotiation with larger businesses. When it comes to trading across borders, importing and exporting a standardized container of cargo through the port of Berbera is faster and cheaper than the Sub-Saharan Africa average. Most of the costs in trading across borders go to inland handling and transportation as a result of the poor road infrastructure.
Hargeisa would rank 124 on the ease of enforcing a contract and 183 on resolving insolvency. Commercial dispute resolution through the courts is expensive but quite fast. The short time to enforce a contract is partly due to the low caseload, because most cases are solved through traditional justice mechanisms. The judiciary was reestablished in the past decade and there are promising signs: legal professionals are back, law faculties have opened their doors, and courthouses have been rebuilt. Increasing transparency and clarifying applicability of laws could help improve trust in the courts. Resolving insolvency is considered a no practice indicator given that there have only been a few cases of winding up with shareholders. On the ease of protecting investors and getting credit, Hargeisa would rank 181 and 184 respectively. These rankings reflect an incomplete regulatory framework. On the ease of getting credit, Hargeisa scores 0 out of 6 on the depth of credit information index, because there is no public or private credit registry or bureau, and 0 out of 10 on the strength of legal rights, given the lack of regulation on secured transactions. In terms of protecting investors, the Companies Law does not specifically address many issues affecting minority shareholders. This is why Hargeisa scores only 2 out of 10 in the overall strength of investor protection index.
KEY AREAS FOR IMPROVEMENT
Governments can contribute to improving the business environment in many ways. Whereas some areas are more urgent than others, Doing Business in Hargeisa 2012 draws on good global and regional practices to serve as guide for business reforms. This report identifies four general recommendations across the topics covered. First, the legal and regulatory framework should be completed and standards and guidelines issued. Approving a commercial banking act will be critical for the develop
ment of the financial sector; passing a commercial code would establish a regulatory framework for secured transactions; a building code is critical for the urban planning of Hargeisa. In the long term there should be regulations protecting minority shareholders. Although some of these laws are being drafted or debated, the legislative process has been contentious and slow with simultaneous draft bills originating from different ministries; between 1997 and 2002 Parliament passed only 22 bills.16 The Law Reform Commission could be strengthened to consolidate bill proposals from the executive. Existing laws should be made easily available and translated into the local language. For example, the Companies Law (2004) contains provisions affecting business incorporation, commercial disputes, and insolvency proceedings, among others, but it is available only in English. Given that many judges and lawyers speak only Somali, the law remains unapplied in many instances. Guidelines and standards are also important: inspection guidelines for construction permits, safety standards for electricity connections, and accounting standards for tax payments, among others. Second, administrative procedures for business registration, construction permits, and property registration can be streamlined. Entrepreneurs starting a business must interact with five government agencies and visit them multiple times to obtain the required licenses. Having a single access point could reduce the number of procedures and the time lost. Similarly, to obtain a building permit a construction company must interact with several different agencies including the district office, the Municipal Archives
Section, the Municipal Land Revenue
Section and the Mayor’s office. A single access point or one-stop shop would centralize all clearances in one location and make the technical approvals an in-house process at the municipality. Registering a property for tax purposes with the Municipality of Hargeisa could also become faster if the internal procedures were streamlined.
Third, measures should be taken to reduce costs, which are a cross-cutting issue. Where the source of high costs is licensing fees—as is the case for business registration—the issuing authority should consider cutting fees. Although the fees obtained from business permits are a source of revenue for local governments, high fees hinder formal economic activity. A good international practice is for fees to cover the administrative costs of government services. Where high costs are due to infrastructure limitations—mainly connection to water, sewage and electricity—long-term investment will be necessary.
Finally, the government should promote higher compliance with regulations. One way is through better communication and awareness campaigns. For example, the Business Registry in Juba, South Sudan, launched a registration promotion campaign after resuming its activities in 2006 and the number of businesses registering has increased consistently since then. Sierra Leone launched a comprehensive communications strategy after a tax law reform in 2009, managing to increase tax registrants. Another mechanism to improve compliance is through better enforcement. As the different government institutions increase their capacity, greater resources and effort should be put into supervision. Public officials should make sure that businesses register and pay taxes and constructions are undertaken with the necessary licenses.
Starting a business
In Hargeisa the informal sector represents the largest part of the economy, providing 77% of the total employment in the city. Informality, which typically flourishes in conflict-affected economies, can limit firms’ growth and productivity. Although issues like security and stability take priority in the government’s agenda, making the process of business incorporation easy can encourage businesses to join the formal sector.
WHY DOES FORMAL BUSINESS REGISTRATION MATTER?
Registered businesses grow larger and are more productive than informal ones. They have access to services and institutions from courts to banks as well as to new markets—benefits that are not available to unregistered firms. Legal entities outlive their founders. Resources can be pooled as several shareholders join together. The legal form under which a company is registered also matters. Limited liability companies cap the financial liability of company owners to their investments, so personal assets are not put at risk.
Business entry regulation and associated costs can hinder or encourage business formalization. One study finds that higher entry costs are associated with a larger informal sector and a smaller number of legally registered firms.3 When regulation, compliance and start-up costs are cumbersome, cutting into businesses’ profits, they discourage entrepreneurs and hamper job creation. On the other hand, a recent study using data collected from company registries in 100 countries over 8 years found that simple business start-up is critical for fostering formal entrepreneurship. Countries with a quick, efficient and cost-effective business registration process have a higher entry rate as well as greater business density.
WHAT DOES STARTING A BUSINESS MEASURE?
Doing Business measures the procedures, time, cost and paid-in minimum capital required for a small to medium-size company to start up and operate formally (figure 3.1).
These procedures include obtaining all necessary licenses and permits and completing any required notifications, verifications or inscriptions for the company and employees with relevant authorities. To make the data comparable across 183 economies, Doing Business uses a standardized business that is 100% domestically owned, has a startup capital equivalent to 10 times income per capita, engages in general industrial or commercial activities and employs between 10 and 50 people.
HOW DOES IT WORK IN HARGEISA AND HOW DOES IT COMPARE GLOBALLY?
Starting a limited liability company in Hargeisa requires 11 procedures over 29 days and costs 130.6% of income per capita. In addition, 2,365% of income per capita has to be deposited into a bank account as minimum capital. Expressed as a percentage of income per capita, this is the highest minimum capital that has to be paid in the world. By contrast, in Rwanda, a regional and global good practice economy, an entrepreneur spends only three days and 4.7% of income per capita completing two procedures—and no minimum capital has to be paid in. Hargeisa would rank 175 compared to 183 other economies on the ease of starting a business as measured by Doing Business 2012, ahead of neighboring Djibouti (179) or Eritrea (182) but behind Rwanda (8), Yemen (66) or Ethiopia (99) (figure 3.2).Business incorporation in Hargeisa is governed mainly by the Companies Law of Somaliland (Law No. 25/2004), as well as administrative rules set up by the institutions involved in the process: the Ministry of Commerce issues commecial licenses; the Attorney General administers the act of incorporation; and the Ministry of Finance handles payments. Since 2007, only 358 corporations have registered with the Ministry of Commerce (figure 3.3). In total, the ministry has issued 1,274 business licenses since 1997. This is a very low number in an economy of more than 3.5 million inhabitants—about 0.4 registered firms per 1,000 inhabitants. There are thus many opportunities for streamlining business registration in Hargeisa. And indeed, authorities at both central and local levels have undertaken some reforms. At the beginning of 2012, the Ministry of Commerce eliminated a fee of 3% of initial capital for the commercial licenses, easing the financial burden on newly registered firms. Currently, the central government is working closely with international development partners to reform business incorporation. At the same time, Hargeisa Municipality has been working with international experts to restructure business classifications, based on which license fees are charged, and to simplify business registration at the local level. Overall, however, the business registration process remains expensive and relatively lengthy.
WHAT TO REFORM?
Reduce or abolish the paid-in minimum capital requirement
The paid-in minimum capital could be reduced to a nominal amount or abolished altogether. The economies that originally introduced the minimum capital requirement intended to protect investors and creditors. Because the deposited capital is often withdrawn immediately after registration, however, this does not offer real investor protection. According to a recent study, economies that have higher minimum capital requirements do not necessarily have higher bankruptcy recovery rates. And such requirements can have counterproductive effects on entrepreneurship. Since 2005, 57 economies have reduced or eliminated their requirement, lowering the average paid-in minimum capital requirement globally from 184% of income per capita to 49%. In Sub-Saharan Africa, 21 economies require no minimum capital; these include Burundi, Kenya, Liberia, South Africa, Sudan, and Tanzania.Clarify business classifications and consider reducing the cost of licensing
The fee schedules for both the commercial and local business licenses can be better defined. The Ministry of Commerce fee schedule currently requires a payment of 1% of the stated capital for initial registration, regardless of firm size. Commercial licenses are valid for only one year. Renewals are different and have significant fixed fees depending on the type of business. However, the type of business is defined only by broad classification, not firm characteristics. For instance, the renewal fee for all wholesale businesses is around $308. Firm characteristics such as revenues or number of employees are ignored. Annual renewals often end up being much more expensive than the initial registration. As a result, entrepreneurs are discouraged to register knowing that in a year’s time their license costs will increase. The municipal license fee schedule suffers from a similar lack of specifics, but also from a failure to define existing terms. Although it mentions different fees for small and large restaurants, for example, the terms small and large are undefined, leaving the matter open to public officials’ interpretation. The low number of registered businesses in Hargeisa may indicate that high licensing fees deter new firms from registering. Since few businesses register, high fees do not result in significant revenues for the government. Authorities could consider cutting fees and involving public and private stakeholders in a discussion on acceptable fee levels. Many argue that the right fees are those that cover the administrative costs of government services. Moreover, money to pay for government services is raised through taxes. Streamline procedures and establish a one-stop shop for business start-up
Currently, entrepreneurs must interact with five different government agencies when starting a business: the Ministry of Commerce, the Attorney General’s Office, the Ministry of Finance, the District Office, and Hargeisa Municipality. Some of these agencies require multiple visits; for instance, the Ministry of Commerce and the District Office have to be visited twice. And many entrepreneurs in Hargeisa claim things hardly get done without continual follow-up. Meanwhile, the Ministry of Finance is the only address where license fee payments can be made. As an interim measure, these procedures can be streamlined through better communication among these agencies. Rather than having entrepreneurs visit them separately, these agencies can set up a document-forwarding system among themselves. This measure would only be effective through efficient communication among government agencies. A better solution would be to set up a onestop shop that would place representatives of all relevant agencies under one roof to receive and process both applications and payments. The applications should consist of one consolidated form that fulfills the requirements of all agencies involved. There should also be a single window that would serve as a contact point for all of the agencies. This would allow an entrepreneur to complete company formation in a single trip, significantly reducing the hassle and time involved. An alternative is to identify one key agency to accept and process applications on behalf of other agencies; this agency could be given access to the registration database for the type of information needed. The key to a successful reform is giving officials at the one-stop shop decision-making power for their respective agencies. Without it, delays will continue as the documents travel to agency headquarters and back. In addition, duplicate processes at the other agencies must be eliminated. Economies that fail to do this see their one-stop shop become “one more stop” in the company registration process.
Globally, 83 economies have some kind of one-stop shop for business registration. These one-stop shops offer at least one more service to go along with business registration. Not surprisingly, services are more than twice as fast as in economies without a one-stop shop.15 The example of Rwanda is telling. In 2009 Rwanda consolidated the name-checking procedure at the main desk of its Commercial Registration Department. It also combined services into a single point of interaction in two stages. First, the Rwanda Development Board, Rwanda Revenue Authority and Caisse Sociale du Rwanda agreed in November 2008 to have representatives within the one-stop shop (at the Commercial Registration Department) receive and process applications. At this stage, the applicant was still required to interact separately with representatives of the Revenue Authority and Caisse Sociale. Second, in May 2009 the Commercial Registration Department reorganized its procedures so that applicants were no longer required to deal with representatives from the Revenue Authority and Caisse Sociale separately. By empowering the Registrar to process the applications on the premises rather than sending the applications to the separate agencies for processing, the onestop shop became fully functional.
Improve access to information and ensure transparency
Easy access to information saves time for businesses and public officials. It also increases predictability in the application of regulations and fee schedules. In Hargeisa, no agency offers easily accessible step-by-step guidelines on business registration. Entrepreneurs have to learn each step as they move along or hire a lawyer who deals with business registration matters on a regular basis and knows public officials in all relevant agencies. Similarly, not all agencies publish their fee schedules in public domains. At a minimum, fee schedules should be posted on clearly visible locations within agency premises. Many good-practice economies publish detailed fee schedules on their website platforms. Some economies also print the fee schedules directly on the application forms. New Zealand, the world’s top performer for starting a business, publishes a 10-page guidebook covering all issues regarding business registration and the steps needed to complete the process.16 Lower fees and easier access to fee schedules tend to go hand in hand. Regardless of income levels, incorporation fees tend to be lower in economies where information on fee schedules is easily accessible (figure 3.6). The cost to start a business averages 18% of income per capita in economies where fee schedules are easily accessible and 66% in economies where they are not. Make it optional to use professional intermediaries and register with the
Chamber of Commerce
There are two steps in Hargeisa that are being requested even though they not required by law: the notarization of incorporation documents and membership in the Chamber of Commerce. Making the Chamber of Commerce membership optional is a straightforward step. There is no rationale or legal basis in having central agencies require such membership in order to issue a commercial license. The Chamber of Commerce plays a critical role in representing the business community and protecting their interests. But for companies that do not see any benefits from the membership, paying the membership fee can be a financial barrier. The notarization issue is more complex to address. The company law requires that incorporation documents be prepared by a solicitor, although it does not define what exactly a solicitor is. It is assumed, however, that a solicitor is a professional with a legal background in incorporation matters. Government agencies require notarized paperwork to ensure that the documents are prepared by a designated professional. This adds to the complexity and cost of business registration. Given the situation, many entrepreneurs use public notaries to both draft and notarize the documents. One way to simplify the process is to introduce standard incorporation forms for small and medium-size companies, thus making the need to go through professional intermediaries optional.

Dealing with construction permits
Shukri owns a construction company in Hargeisa. While there is plenty of construction going on in the city, property ownership disputes and the lack of proper utility infrastructure pose major obstacles to his business. Moreover, Hargeisa is one of the most expensive cities in the world for dealing with construction permits. Like many builders, she is tempted to choose the “easy” path of grabbing land and building without a permit. In an economy where the population is growing 3.1%1 annually and informal construction is thriving, strategic urban planning and infrastructure development are becoming ever more challenging.

WHY DOES DEALING WITH CONSTRUCTION PERMITS MATTER?
Promulgating and enforcing proper building regulations ensure sustainable urban development. Striking the right balance between safety and efficiency, however, is challenging. Smart regulations ensure public safety while remaining efficient, transparent and affordable. If procedures are overly complicated or costly, builders tend to proceed without a permit. In developing economies 60-80% of construction projects are undertaken without a permit because the approval process is too complex or the oversight too lax.2 In Hargeisa, lack of legal certainty has contributed to low compliance levels and inconsistent implementation of regulations. In 2006 only 3,000 out of 60,000 developed properties were allocated title deeds.3
Furthermore, the central authority has in the past imposed several bans on construction to avoid safety risks resulting from land related conflicts.Building regulations also have an effect on the economy and employment. A recent study calculated that the construction industry constitutes on average 6.5% of GDP in OECD economies.4 In the European Union, the United States and Japan combined, more than 40 million people work in construction. It is estimated that for every 10 jobs directly related to a construction project, another 8 jobs are created in the local economy. These multiplier effects yield not only additional income for the community, but also additional tax revenues and investment. Beyond economic returns and pay-offs in attracting more investment, the more important benefit of building permit reforms is the protection of public safety.

WHAT DOES DEALING WITH CONSTRUCTION PERMITS MEASURE?
Doing Business records the procedures, time and cost required for a construction business to obtain all the necessary approvals to build a simple commercial warehouse and connect it to water, sewerage and a fixed telephone line (figure 4.1). The case study includes inspections and certificates needed before, during and after construction of the warehouse. To make the data comparable across 183 economies, the case study assumes that the warehouse is located in the periurban area of the city measured, is not in a special economic or industrial zone and will be used for general storage.

HOW DOES IT WORK IN HARGEISA AND HOW DOES IT COMPARE GLOBALLY?
Despite numerous attempts by lawmakers to adopt a building code, Somaliland remains without one. The efforts have intensified in the past two years and there have been several law drafts circulated in review meetings with various stakeholders. UN-HABITAT published an urban planning manual for Somaliland in collaboration with the Somaliland Ministry of Public Works in 2010. While the manual is a valuable tool for industry practitioners from both the private and public sector, it is not an enforceable legal document.
In the interim, building permits in Hargeisa are administered loosely on the basis of the Land Management Law (Law 2/2001 & 2008), the Regions and District Self Administration Law (Law 23) and the City Charter of Hargeisa. However, none of these regulations provide sufficient legal detail and clarity on construction planning and administration, and the current permitting process has been subject to ad-hoc rules that have become common practice over time. Because of the lack of legal guidance and control in urban development, Hargeisa continues to experience informal developments, land disputes and limited access to basic services.Statistics support this observation. Between 1999 and 2002 the number of title deeds issued by Hargeisa Municipality decreased by two-thirds from 391 to 132 (figure 4.2). Conversely, according to the “Somaliland Times” there were on average 90 to 100 ongoing constructions every month in 2003.7 Similarly, municipal authorities confirm that the number of property disputes has increased since the early 2000s. Many are never resolved and parties go ahead and build without a permit. Consequently, unplanned urban development gives rise to buildings that do not comply with minimal safety standards posing a direct hazard to the public. Obtaining building approvals and utility connections in Hargeisa requires 15 procedures, takes 56 days and costs 1,038.8% of income per capita. This is much faster but more expensive than the Sub-Saharan Africa average, where the same number of procedures takes 211 days at a cost of 823.7% of income per capita (figure 4.3). If compared to the 183 economies measured by Doing Business 2012, Hargeisa would rank 86 on the ease of dealing with construction permits—ahead of Liberia (123), or Djibouti (142), but behind South Africa (31), Kenya (37) and Ethiopia (56).Seven of the 15 procedures required to deal with construction permits in Hargeisa take place before construction (figure 4.4). First a land legalization certificate is obtained; while this is not mandatory by law, it has become a common step due to widespread land disputes. Five procedures follow until a building permit is obtained. Once the construction starts, the building site is subject to inspections, which are not regulated by law. Typically, only one inspection takes place within two weeks after construction starts. After construction is complete, two more requirements are necessary to get the proper titling. The process concludes with five procedures to get connection to water, sewerage and telephone.
The 56 days required to deal with construction permits is fast—about one-fourth of the global average time (193 days) and faster than in good-practice economies like New Zealand or Finland. If a property is free of disputes, the land legalization certificate is normally issued in a week. Obtaining the necessary pre-construction clearances and the building permit takes 23 days. Going through inspections and getting the title deed takes approximately one week, while getting utilities set up takes three weeks. The cost of dealing with construction permits in Hargeisa is 1,038.8% of income per capita. This would place Hargeisa among the top 20 most costly economies globally. Only 16 economies are more expensive; these include Afghanistan, Burundi, Chad, Djibouti, Tanzania and Zimbabwe. However, just a small portion of the total cost comes from administrative fees ($16 for the land legalization certificate, $186 for the building permit, $13 for inspections and $16 for the title deed). The rest, almost 90% of the total cost, is spent on connecting the warehouse to utilities (figure 4.5). Lack of infrastructure places a heavy burden on entrepreneurs in Hargeisa. The civil conflict left most of the city and its infrastructure heavily damaged. The water network is in desperate need of upgrade and expansion. Many areas of the city have no access to water, so builders look for alternative solutions such as water reservoirs, which are expensive. In areas covered by the city water network, installation fees amount to $195 n average. The situation is even more problematic with sewerage. Since there is no sewerage system, new buildings have to have their own septic tanks. The cost varies depending on the size of the building. For a warehouse measured in the Doing Business case study, the average cost to build a sewerage tank is $1,750. Installation costs for telephone connections are $20 for buildings that are less than 200 meters away from connection points.
WHAT TO REFORM?
Draft and ratify a building code Hargeisa lacks a comprehensive set of construction regulations. This puts the future of city’s urban planning at risk. Lack of clear guidelines on safety standards puts the local population residing in buildings in danger. There is an immediate need for a comprehensive yet simple building code tailored towards local needs and circumstances. The new building code should become a common point of reference for all industry practitioners, including designers, contractors and government agencies reviewing building plans and construction. Drafting an entire building code is a complex task. Nevertheless, the central government can identify a checklist of priorities—such as fire protection, structural efficiency, sanitation, and environmental integrity—from well-established building codes in other economies. These priorities can form the core of Somaliland’s future building regulations, while being more easily understood and enforced by local authorities. The Republic of Yemen has followed this route, using the building code of the Arab League to establish a list of essential technical norms in 2008. The process was the outcome of a dialogue between enforcement agencies and private sector building professionals. In 2008 Algeria introduced a new building code aimed at strengthening enforcement mechanisms and addressing illegal construction. In Haiti lawmakers are about to adopt a standard international building code developed by the International Code Council while addressing country-specific technical requirements—such as special soil and seismic conditions.
Local authorities should collaborate with private architects and engineers to select a good-practice building code, adapt it, and draft checklists appropriate for Somaliland. Such participation can increase the relevance of future building standards to local technical constraints and building traditions as well as existing materials and systems used by contractors. Information about new regulations should then be extensively publicized.
Introduce inspection guidelines based on the risk characteristics of buildings
In Hargeisa, inspections are not regulated. They are random, and typically only one inspection occurs within two weeks of the start of construction. The inspectors check if the lining and marking of the building foundation have been implemented in compliance with the initially submitted plans. Once the building passes the foundation phase, no more inspections occur. Despite the legal vacuum, Hargeisa urban planning authorities should introduce temporary measures that ensure safety while encouraging efficiency. Proper inspections, clearances, and consultations should be in place to guarantee public safety. At the same time, because it is inefficient to treat all building projects equally, authorities should take the time to assess the risk of different projects and devise risk-based rules for dealing with clearances and approvals. They should collaborate with building practitioners to develop a building risk categorization and incorporate it into the proposed guidelines. Complex and risky structures must have stricter standards than two-story commercial warehouses—and, conversely, requiring less documentation for low-risk buildings can facilitate the approval process. This saves time for entrepreneurs and the authorities and allows both to use resources more efficiently without compromising safety.8 Globally, 86 economies have a risk-differentiated approach, including the 13 that established one in the past 7 years. In Sub-Saharan Africa, 20 economies apply risk-based approvals; these include Burundi, Ethiopia, Sudan and Tanzania.
Establish a single access point for building permit clearances
At the moment, a construction company must obtain documents or approvals and make payments at several different agencies to obtain a building permit. The authorities include, among others, relevant district offices, the Municipal Archives Section, the Municipal Land Revenue Section and Mayor’s Office. A single access point or a one-stop shop would centralize all clearances in one location and make the technical approvals an in-house process at the Municipality. The success of the one-stop shop would depend on having representatives from the different technical departments with the authority to clear projects under one roof. One-stop shops improve the organization of the review process—not by reducing the number of checks needed but by better coordinating the efforts among different authorities. As a result, more resources can be devoted to safety checks rather than to multiple interactions with and among various agencies. Globally 26 economies have some kind of one-stop shop for construction permitting. Most recently Mauritania and Taiwan, China, introduced one-stop shops while Morocco made improvements to the one created in 2006. One telling example is that of Burkina Faso. In 2006 the country was among the 10 economies with the most complex requirements of construction permitting in the world. Not surprisingly, more than 23% of local companies identified licenses and permits generally as a major constraint to doing business in the economy. To help address this concern, Burkina Faso opened a one-stop shop for construction permits in Ouagadougou in May 2008. The reform merged 32 procedures into 15, reduced the time required from 226 days to 122 days and cut the cost by 40%. Two years later the number of permits issued rose from 209 (in 2008) to 611 (in 2010).
Improve water and sewerage infrastructure
Central and local authorities should invest in Hargeisa’s infrastructure development in order to extend the water pipe network and develop sewerage systems. While there are budgetary constraints on the government’s side, other opportunities for raising funds should be explored. Recently, the European Union granted a substantial grant to improve the water services in Somaliland. The project will focus mainly on water supply infrastructure. Public private partnership is another alternative to explore in water delivery. Even small-scale projects targeting certain neighborhoods and following agreed-upon guidelines could potentially alleviate the problem. Solving the public infrastructural issues would significantly decrease the cost to construct new buildings in Hargeisa.

Getting electricity
In Somaliland 68% of urban households and 96% of firms have access to electricity. This is high compared to the Sub-Saharan Africa average, where the electrification rate in urban areas is 57.5%.2 However, Somaliland’s network is characterized by “extremely high costs, high wastage, poor quality, unreliability and losses of power.”3 In reality, local firms often rely on their own generators to face power outages.

WHY DOES GETTING ELECTRICITY MATTER?
Infrastructure services—particularly electricity—are a concern for businesses around the world. World Bank Enterprise Surveys show that managers in 41 Sub-Saharan African economies consider lack of electricity to be the biggest constraint to their businesses (figure 5.1).4 Poor electricity supply undermines firms’ productivity and investments. More than 30 African economies experience power shortages and regular interruptions to service, and African firms report losing 5 percent of their sales because of them. Overall, the economic cost of power outages in Africa can rise to 2 percent of GDP. Obtaining a new connection for a business—the process measured by the getting electricity indicator—represents only a small part of electricity services (figure 5.2). Yet analysis of 140 economies suggests that the connection to electricity is a useful proxy for the broader performance of the electricity sector.7 Longer delays and higher costs of getting an electricity connection are associated with lower electrification rates. Additional connection procedures are more likely in economies with weak electricity supplies because of high losses in transmission and distribution systems. The quality of regulatory institutions can be linked to generation and distribution. A study covering 28 developing economies found that high quality of regulatory governance is associated with higher per capita electricity generation. An efficient regulatory framework also helps build a reliable distribution system for firms and individuals.

WHAT DOES GETTING ELECTRICITY MEASURE?
Doing Business measures the procedures, time and cost required for a small to medium-size enterprise to obtain a new electricity connection for a standardized warehouse with specific electricity needs (figure 5.3). These procedures include applications and contracts with electricity utilities, necessary inspections, clearances from the distribution utility and other agencies, and external and final connection works. The warehouse is assumed to be located in Hargeisa, in an area where electricity is most easily available. The subscribed capacity of the connection is 140 kilovolt amperes (kVA) and the length of the connection is 150 meters.

HOW DOES IT WORK IN HARGEISA AND HOW DOES IT COMPARE GLOBALLY?
Obtaining an electricity connection in Hargeisa requires 5 procedures, takes 57 days and costs 1,878.5% of income per capita. Although this is more than twice as fast as and almost three times less expensive than the average in Sub-Saharan Africa, it is more expensive than all other regions in the world: the average costs in Organisation for
Economic Co-operation and Development (OECD) high-income economies and Middle East and North Africa economies are respectively 92.8% and 1,317.1% of income per capita. Hargeisa also compares favorably with neighboring economies (figure 5.4). In Djibouti obtaining the same connection involves only four procedures, but it is slower (180 days) and much more expensive (8,799.1% of income per capita). Hargeisa would rank 84 of 183 economies on the ease of getting electricity as measured by Doing Business 2012, ahead of Ethiopia (93) and Djibouti (143) but behind Yemen (52).
Around the world, the electricity connection process is governed by laws and regulations covering a variety of aspects. This is not the case in Hargeisa. Here, the main challenge is the absence of a regulatory framework. There are neither standardized procedures nor a central regulatory authority overseeing power generation, distribution and transmission (box 5.1). The process of obtaining an electricity connection is thus unregulated with regard to quality, safety, technical standards and procurement practices. Licensing procedures for utilities to generate and transmit electricity do not exist.
Hargeisa has one public utility—Somaliland Electricity Agency (SEA)—and up to 20 private independent power producers and suppliers.10 Each serves a specific city zone with its own respective network, generating, transmitting and distributing power to end-users. Although the private utilities report to the Ministry of Mining, Energy and Water Resources, and the public utility to the Ministry of Public Works, the ministries’ oversight is limited. In the absence of a regulatory framework, connections to electricity are at discretion of each utility company. After a four-year process involving various
stakeholders, the Ministry of Mining, Energy and Water Resources issued the Somaliland Energy Policy in 2010.11 The goal of the energy policy is to “provide a starting point from which the Government will provide legal guidelines on regulation of the energy sector.” There is an ongoing effort to issue regulations—the Energy and Electricity Act and the Energy Regulations are under way—which will aim to set clear rules and standards for electricity connection. In practice, obtaining a connection to electricity in Hargeisa requires five procedures involving a utility, which is similar to the average in Sub-Saharan Africa (figure 5.5).12 First, the customer submits an application to the utility company. Then the customer receives a visit from a technical expert who assesses the technical conditions, such as the nearest connection point, the type of wires and poles to be installed and whether a transformer is needed. The next step is for the technician to estimate the overall cost, for the manager to sign the estimate and for the customer to make the payment to the utility. Then the utility carries out all the external works, including the external wiring, the installation of the transformer and the installation of the meter. Finally, once the technical engineer has conducted an inspection of both external and internal wiring, the meter can be opened on the same day and electricity starts flowing. The number of separate steps is relatively low because the utility carries out all external works and imports the transformer. In many other economies, the customer has to separately hire a contractor to carry out external works. At 57 days, getting electricity in Hargeisa is significantly faster than the average in the OECD high-income economies (103 days) and in Sub-Saharan Africa (137 days). Part of the reason for the quick turnaround is that utilities do not have to comply with any safety standards when carrying out both the internal and external works. The lack of safety controls for internal and external wiring is a major concern in Sub-Saharan Africa. In nearly half of the region’s economies, the internal installation is never checked before the building is connected to the network. In Hargeisa, the situation is similar: internal installations might be checked by the technical engineer of the utility but this is not systematic as it is not a legal requirement. There are no instructions explaining how the inspection should be carried out, and there is no official internal report on the inspection. The speed with which external connection works are carried out is partly due to a lack of safety requirements and other technical standards. For example, in Kenya, the utility conducts an external site inspection after the client submits an application. If the client has not met standard requirements, the utility will give specific recommendations before proceeding to external works. Another contributing factor is that, except for the transformer required in the Doing Business case study,13 material—poles, wire and meter—is usually easily available, which is not always the case in Sub-Saharan Africa. In total, external works take 50 days, including the import of the transformer. This is similar to Sudan and Ethiopia (60 days) but much faster than Kenya (90 days) and Djibouti (150 days). In the absence of official fee schedules setting connection costs according to the requested load, voltage at the point of connection, location and other factors, fees are negotiated between the customer and the utility. Because the network’s capacity is limited, the installation of a distribution transformer is required, which accounts for 82% of the total cost (figure 5.6). Customers are not charged any application fee and no deposit is required.
WHAT TO REFORM?
Adopt and implement an electricity regulatory framework
Private and public actors in Hargeisa cite the absence of a regulatory framework as one of the main problems entrepreneurs face in getting an electricity connection. The Somaliland Energy Policy notably calls for the creation of an electricity regulatory authority that would regulate the “distribution […] of electric energy” and would be in charge of “advising on tariff structure as well as enforcing quality standards, performance and code of conduct.” The adoption and ratification of the Energy and Electricity Act and the Energy Regulation represent an important opportunity to create efficient institutions capable of ensuring a fast, safe and transparent connection framework.

Establish safety standards and supervision mechanisms for internal wiring
In Hargeisa, internal wiring safety checks exist but are neither systematic nor regulated, and there is no supervision of utilities. When safety checks take place, they are at discretion of the utility companies. The safety of internal wiring installations is a concern not only for people using the building but also for utilities: one customer’s faulty internal wiring can lead to power outages affecting other customers connected to the same distribution line. In 38 economies covered by Doing Business 2012—many of them in the Middle East and North Africa and in Sub-Saharan
Africa—internal wiring installations are never checked. The Somaliland Energy Policy of 2010 acknowledges that safety risk is one of the main weaknesses of the electricity sector. Future electricity regulations are a good opportunity to implement a safe and efficient process for internal wiring checking. Two important issues should be considered while implementing supervision mechanisms in Hargeisa. First, the responsibility of checking safety standards may be given either to utilities or to private contractors. In the short term it can be safer to require utilities or a designated agency to carry out safety checks. Although this approach leads to a greater burden on customers and longer average connection delays, it can also help provide basic standards for checking the internal wiring installations. In Benin, Cote d’Ivoire, Guinea Bissau and Niger, internal wiring is checked by government agencies independent of the utility. Once professional standards are clearly established and qualified electricians are available, the responsibility can be delegated to an electrical contractor, which usually implies fewer procedures and less time. This is the case in Denmark, Germany and Japan, where the utility simply requests certification by the electrical contractor that the internal wiring has been done in accordance with prevailing standards. The South African government, in an effort to free utilities from the burden of inspecting internal wiring. has made private electricians liable for the quality of the installations; however, the shortage of qualified electrical professionals has posed problems. Second, it is important to ensure that a regulation aimed at strengthening the safety of internal wiring is effectively implemented. In Senegal, it became legally mandatory to check internal wiring installations more than 10 years ago, but it has been very poorly implemented in practice.
Increase the transparency of connection costs and processes
In Hargeisa, all costs are set by the utility on a case-by-case basis. As a result, prices vary significantly and customers lack transparent information regarding their connection costs. An efficient electricity regulation should establish clearly how the costs should be shared when an expansion of the distribution network is needed. Several countries around the world worked in this direction.

Registering property
Rahma bought a warehouse to stock inventory for her furniture store in Hargeisa.
Although obtaining a deed of sale from a notary was relatively quick, going to the municipality’s different offices to pay taxes was a long and complex process. And even after she had completed all the formal procedures, the transaction was not fully secured and safe: secure property rights have been a major concern since the end of the civil war, when many municipal records were lost or destroyed, and the land registration system is still being rebuilt. The property registry is not automatically updated after a new property transfer, it remains largely incomplete, and there is no system for non-encumbrance verification to ensure that a property is free of charges and liens.
WHY DOES REGISTERING PROPERTY MATTER?
Registered property rights are necessary to support investment, productivity and growth.1 Cadastres and land registries are tools used around the world to map, prove and secure property and use rights. These institutions are part of the land information system of an economy. With land and buildings accounting for between one-half and three-quarters of the wealth in most economies,2 having an up-to-date land information system clearly matters. The benefits of land registration go beyond the private sector. For governments, having reliable up-to-date information in cadastres and land registries is essential to correctly assess and collect tax revenue. With up-to date land information, governments can map the different needs in their cities and strategically plan the provision of services and infrastructure in the areas of each city where they are most needed.3 Land information can also help in planning the expansion of urban areas.
WHAT DOES REGISTERING PROPERTY MEASURE?
Doing Business records the procedures necessary for a business to purchase a property from another business and to transfer the property title to the buyer’s name (figure 6.1). The process starts with obtaining the necessary documents, such as a copy of the seller’s title, and conducting due diligence if required. The transaction is considered complete when it is opposable to third parties and when the buyer can use the property, use it as collateral for a bank or resell it. Every procedure required by law or necessary in practice is included, whether it is the responsibility of the seller or the buyer and even if it must be completed by a third party on their behalf.HOW DOES IT WORK IN
HARGEISA AND HOW DOES IT COMPARE GLOBALLY?
Land registration in Hargeisa is only partially regulated. The Urban Land Management
Law adopted in 2001 and amended in 2008 addresses several major issues such as land disputes resolution (box 6.1). The Somaliland Notaries Law adopted in 2001 defines the process and formalities of the sales contract notarization. But there is little regulation regarding the main institutions involved in property registration.
To transfer a property in Hargeisa, an entrepreneur must complete 6 procedures that take 25 days and cost 5.7% of property value. This is easier than the average in SubSaharan Africa, where it takes 6 procedures, 65 days and it costs 9.4% of property value (figure 6.2). Compared to the 183 economies measured by Doing Business 2012 Hargeisa would rank 79 on the ease of registering property, ahead of Ethiopia (113) and Djibouti (148), but behind Sudan (41) or the Republic of Yemen (55).
There is a property registry that records the maps and property rights in Hargeisa. It is managed by the Physical Asset and Land Tenure Department. Originally, there was a cadastre established by the British administration which covered this function, but it was largely destroyed in the late 1980s during the civil war. A new property registry was set up in 1994, and its reconstruction is still underway. The task is complicated since the war led to migratory flows, and many
land plots were grabbed during and after the war. The paper-based property registry remains largely incomplete with fewer than 4,000 registered property owners. It is not required by law for the buyer to register the property transfer, and it is not done in practice either. Consequently, in a majority of cases, the name that appears on the property registry for a specific land plot is that of the first registered owner instead of the current owner. The fact that the property registry is not up-to-date, does not prevent the buyer from using or reselling the property. But it makes it more difficult to verify that the property is free of charges and liens prior to a transfer. In 2004 the Municipality of Hargeisa started with a new initiative, implementing a Geographic Information System (GIS) based on satellite images that improve the quality of data collected.5 The GIS registers the location and names of building occupants, but not the size of the land plot nor the name of the owner.6 It is used for property taxation and functions independently of the paperbased property registry. The GIS allows the local government to tax the property occupant without having to define who the owner of each land plot is, a delicate issue that could reopen disputes. Nevertheless, the information obtained from the GIS could be leveraged for land registration purposes. Approximately 60,000 properties are registered in the GIS.7
Six procedures are required to register property in Hargeisa, the same as the Sub-Saharan Africa average, but fewer than Djibouti (7), Ethiopia (10) or Eritrea (11).8 First, the seller and buyer go to the notary with 2 witnesses to sign the sales deed. To prove ownership, the seller shows the original property registry record with the name of the last registered owner, the purchase-sales agreement and the receipts of the yearly land and property taxes. After the signature, the buyer pays transfer taxes to both the Municipality of Hargeisa and the Ministry of Finance. Then, the buyer applies for registration with the tax authorities at the District Office. The District Office sends a geometer to verify the location of the land plot, and then forwards the buyer’s application to the municipality’s Geographic Information System (GIS) Mapping Office, where the owner’s name and the location of the land plot are entered into the computerized system. Finally, the buyer returns to the municipality and pays the tax registration fee, completing the process (figure 6.3). It takes 25 days to complete all these procedures. This is significantly faster than the world average (59 days) and the Sub-Saharan Africa average (65 days), but slower than the 9 days needed in Sudan or the 19 days needed in the Republic of Yemen. While some time is saved by the fact there are no checks for encumbrances, there are many delays related to post-registration procedures. For example, after the buyer pays the municipal transfer tax, he has to wait five days to pick up the receipt because his file has to be signed by the General Taxation Officer, the Executive Officer of the municipality, and the Mayor himself. Also, the buyer has to wait 11 days from the moment he applies for tax registration until he can pay the fees and complete the registration of the land plot with the GIS Mapping Office. During this time the application goes back and forth between different offices in the municipality and the district—including the District Secretary, the municipality’s GIS Mapping Office, the Archives at three different times, and the Director of Land Management’s Office (figure 6.4). Registering property in Hargeisa costs 5.7% of the property value—less costly than the Sub-Saharan Africa average (9.4%) and similar to the world average of 5.7% (figure 6.5). There are five different taxes and fees, and two of them represent 73% of the total cost: the municipal transfer tax and the transfer tax paid to the Ministry of Finance. The fee to register with the tax authorities varies from one year to the next depending on the tax income targeted by the Municipality of Hargeisa. Also, the 2001 Notaries Law has a fee schedule, but notaries argue it is outdated and apply their own fees.
WHAT TO REFORM?
Consider moving to a title-based system
Property registries around the world confer different legal effects on the information they record. Title-based systems provide conclusive evidence about who holds the rights in a given property. Deed-based systems, by contrast, do not provide conclusive proof. They record property transfers, but the fact that a transfer is registered does not necessarily mean that it is valid. Because the last registered owner could be holding a title that is not valid, a buyer will usually hire a lawyer to determine the “good root” of the title he or she is buying. In Hargeisa, the reason for not registering owners in the current GIS is mainly political, since this could reopen disputes over land ownership. However, the necessity for an updated and more efficient system creates the opportunity to reconsider which system would be more appropriate.
In Samoa, after the Land Titles Registration Act of 2009 changed the registration system from a deed to a title system, the time required to transfer a property was reduced by four months. Some economies prefer to keep a deed system while improving the conclusiveness of the records held in the registry. Argentina, for example, has a deed-based system but complements it with a 20-year statute of limitations. This means that lawyers have to go back only years to check the good root of a title.

Update the system of property rights registration
Having updated data for property rights and encumbrances facilitates transfer of property. Hargeisa’s property registry is incomplete and there is no system for verifying encumbrances on property. If the land plot is not registered in the property registry, an owner can go through a land legalization process, but future transactions are rarely registered. These practices do not help maintain an upto-date property registry and increase the probability of land conflicts.
Hargeisa could learn from other experiences in economies that have recently set up property management systems, such as Timor-Leste. When Timor-Leste achieved independence in 1999 most of its land was occupied without official deeds and land conflicts were frequent. In 2007 a project started to issue title deeds to land owners. Cadastral surveys were organized for each property and by 2011 the project had established ownership of 91% of the 47,000 parcels under review. A subsequent government motion will allow the owners of the surveyed parcels to obtain formal land titles. Also, most economies require a non-encumbrance verification to ensure that the property is free of all charges and liens prior to the transfer. This procedure can be very efficient: 108 economies worldwide have an electronic database for encumbrances, and 36 of them offer information online, including Morocco. In Ethiopia, obtaining a certificate takes only two days and costs 0.09% of property value; the Land Registry has been decentralized in 10 sub-cities since 2005 in order to simplify property transfers. In the long term Hargeisa could use this reform as an example, taking advantage of the fact that its five district offices already deal with other issues related to land transactions, such as applications with tax authorities for newly acquired properties and applications for land legalization.
Coordinate the paper-based property registry and the GIS Office
The GIS Office managing Hargeisa’s electronic database for property taxation and the office in charge of the paper-based property registry are located next to each other, but there is almost no interaction. The municipality has plans to extend the GIS electronic database to the paper-based property registry,12 but nothing has been done since the creation of the GIS in 2004. Globally, 60% of economies covered by Doing Business 2012 have electronic databases for encumbrances. Digital records have advantages over paper records: they take less space, and backup copies ensure that property records will not be compromised in the event of natural disasters or wars. The Municipality of Hargeisa could put the technology and know-how it already possesses regarding electronic land information to good use by improving the quality of the property registry.
Streamline fee payment procedures
Transfering property in Hargeisa requires payment of five different taxes and fees, and waiting time is frequently long because many signatures are needed. For example, the application form to register with the tax authorities has to travel five times back and forth between different offices within the municipality before the buyer can pick it up and go to another office to make the payment. Simplifying this process would save time and increase transparency for new owners. Hargeisa could easily reduce the number of signatures needed for each application, and merge several payments such as the municipal and the Ministry of Finance taxes: these two payments are made in two offices next to each other, but the second can occur only after the first one has been approved by three municipal officials, including the Mayor. A one-stop shop is an efficient way to minimize interactions between agencies and entrepreneurs. Establishing a one-stop shop in Hargeisa could be a way to streamline procedures since most of them already take place within the municipality. Ghana did it in 2008 under the roof of its Lands Commission. In Djibouti, too, property registration was spedup in 2008 by improving efficiency at the Service des Domaines.Consider replacing percentage based fees with fixed fees
Property taxes are an important source for many governments. But when transfer fees are too burdensome, even already-registered property might again become informal, if subsequent transactions are not registered. This not only weakens the protection of property rights, but also reduces potential revenue from property taxes. In Hargeisa transfer taxes amount to 73% of the total costs: 37% for the municipal transfer tax paid at the municipal General Taxation Office and 36% for the transfer tax paid to the Ministry of Finance. Over the past 7 years, 56 economies worldwide have lowered transfer taxes and other government fees, reducing the global average cost to register property by 4% of the property value. Of these economies, 23 are in Sub-Saharan Africa. Mozambique reduced its transfer tax rate from 10% in 2005 to 2.4% in 2006. Others took a gradual approach: Burundi cut the transfer cost by 10% of property value over 3 years, by first abolishing the 7% registration fee and then reducing the transfer tax rate from 6% of the property value to 3%.

Paying taxes
Taxes are vital for every economy. Governments around the world rely on them to finance public infrastructure and provide services necessary to support economic and social development. The government of Somaliland’s success with mobilizing tax revenue has been unstable over the years, ranging from $20 million to $40 million per year between 1999 and 2007.1 Ineligible for most traditional aid programs, Somaliland’s government relies heavily on loans from individuals and private firms2 and on customs tariffs. Remittances, which constitute 40 percent of urban household incomes in Somaliland, help finance basic services that are covered by the state in other countries, such as health and education.3 In the future, the government’s ability to raise funds through efficient taxation will be crucial.
WHY DOES PAYING TAXES MATTER?
The tax burden on businesses matters for investment and growth. High tax rates and burdensome tax administrations are consistently ranked among the main obstacles to doing business by entrepreneurs around the world.4 Keeping tax rates at a reasonable level encourages the development of the private sector and the formalization of businesses. This is particularly important for small and medium-size enterprises, which contribute to growth and job creation but usually do not add significantly to tax revenue. In Sub-Saharan Africa and the Middle East and North Africa micro, small and medium-size enterprises make up more than 90% of taxpayers but contribute only 25–35% of tax revenue. Some 235 years after Adam Smith proclaimed simplicity to be one of the pillars of any effective tax system,7 multiple taxation—where the same tax base is subject to more than one tax treatment—increases the administrative burden and the number of payments firms must make. In Haiti, for example, a limited liability company is subject to the local tax on profit in addition to the corporate income tax and different forms have to be filled out, often requiring different methods for calculating the tax. Other economies in Sub-Saharan Africa with multiple taxation include Eritrea, Guinea, Nigeria, South Africa and Zimbabwe. Multiple taxation also complicates tax administration for tax authorities and increases the cost of revenue administration for governments. And it risks damaging investor confidence in an economy. In SubSaharan Africa businesses are required on average to make 37 payments to comply with their tax duties. Conversely, companies in the OECD make 13 payments on average.
WHAT DOES PAYING TAXES MEASURE?
Doing Business measures the payments, time and total tax rate borne by a standard firm with 60 employees in a given year. The number of payments indicator measures the frequency with which the company has to file and pay different types of taxes and contributions, adjusted for the way in which those payments are made. The time indicator captures the number of hours required to prepare, file and pay three major types of taxes: profit taxes, consumption taxes and labor taxes and mandatory contributions. The total tax rate measures the tax cost borne by the standard firm (figure 9.1).
HOW DOES PAYING TAXES WORK IN HARGEISA AND HOW DOES IT COMPARE GLOBALLY?
The main law governing taxes is the Somaliland Direct Tax Law of 1996.8 A number of other laws regulate indirect taxation such as the Sales Tax Law (No. 84/96), the Registration Tax Law (No. 83/96), the Circulation Tax Law (No. 82/96), the Stamp Duty Law (No. 85/96) and the Stores Regulation (No. 88/96). The authorities that are involved in tax collection are the Municipality of Hargeisa at the local level, and the Office Inland Revenue Department under the Ministry of Finance at the central level.Globally, Hargeisa would rank 142 compared with 183 economies on the ease of paying taxes as measured by Doing Business 2012—ahead of Egypt (145) and Kenya (166) but behind Sudan (103) and Liberia (98). In Hargeisa, the standardized case study company would spend 188 hours per year making 34 tax payments and pay 101.9% of its annual commercial profit in taxes (figure 9.2). The administrative burden is less cumbersome than Yemen, where the same company would spend 248 hours every year on 44 payments. But the total tax rate is more than three times higher than in Yemen, where the company would pay 33% of its profit in taxes. In Rwanda, among the easiest economies to pay taxes in Sub-Saharan Africa, a company needs to make 18 payments a year and pay 31.3% of commercial profits.
The administrative burden of complying with tax payments is slightly less cumbersome in Hargeisa than the average in Sub-Saharan Africa, where 37 tax payments are made per year on average. However, the number of payments could be lowered following the example of Ethiopia, where only 19 payments are required. Hargeisa’s number of payments is driven by 2 taxes: the sales tax and the labor taxes and contributions. Both must be filed in and paid manually each month (12 times per year). The frequency of filing and the method of filing and payment make a difference in how many payments are recorded. For example, the United Arab Emirates has 3 taxes but 14 payments, whereas South Africa has 10 taxes but, because of online filing and ability to file and pay some taxes jointly, only 9 payments are recorded.
Compared globally, paying taxes in Hargeisa is fast. Companies in Hargeisa would spend on average 188 hours preparing tax returns and complying with other tax related requirements; this is below the average 318 hours spent in Sub-Saharan Africa economies. Of the total time, 36 hours are dedicated to corporate income taxes, 72 hours to sales taxes and 80 to labor-related taxes. But paying taxes in Hargeisa is also fast due to low compliance. Since only a small number of formal companies pay taxes, there are no significant backlogs at the Inland Revenue Department. The total tax rate in Hargeisa is high compared globally (figure 9.3). Companies would have to pay 101.9% of their profits to comply with their formal tax obligations. This is almost twice the regional average of SubSaharan Africa (57.1%), which is the region with the highest total tax rate. Some of SubSaharan Africa economies have a cascading style tax system, which adds extra tax costs to each consumer so that an element of them is borne by each company in the supply chain. A total tax rate of over 100% means that a company in that economy with the 20% mark-up of the Doing Business case study could not make enough money just to pay all its taxes.9 The current tax law in Somaliland is broad in its scope and the general provisions do not provide sufficient detail. This makes implementation difficult. There are no general accounting principles. Businesses are not entitled to any deduction on the expenses they incur to generate income. Finally, the current tax law does not allow businesses to take into account capital asset depreciation in their tax statements. These factors make it difficult for businesses to comply with their tax obligations.
Given that Somaliland is ineligible for most traditional aid programs, the government relies on loans from the private sector. These are often repaid via tax breaks, a factor that introduces a degree of arbitrariness in the country’s taxation system. Even more, tax rates can be lowered based on oral agreements, introducing a level of negotiation.
In addition, the small state budget also has an impact on the capacity of the authorities to enforce tax compliance. Inspections and prosecution of violators can be costly, and are not substantially enforced in Hargeisa.
WHAT TO REFORM?
Educate entrepreneurs and train accountants on the taxation system
Often the biggest obstacles to paying taxes for small businesses are the lack of basic accounting skills as well as the gap between the tax law and its interpretation in practice. The government can fill this gap by providing capacity-building and training for small businesses. The benefits to tax training are mutual: if well-trained entrepreneurs are able to file returns and pay taxes more efficiently, the government can improve compliance with the tax regulation. Creating a cadre of trained and certified tax professionals—essentially accountants— would help small enterprises with tax compliance. A good example is Sierra Leone, where income tax professionals have been trained and certified for small businesses, which has helped improve tax compliance.
Launch a communications campaign
It is difficult to make businesses pay taxes if they are used to avoiding them. Communications efforts can help raise awareness and diffuse potential resistance. Somaliland can learn from other postconflict economies that have successfully improved compliance through communications. Sierra Leone introduced a series of tax reforms in 2009. Sensing reluctance from the private sector, tax authorities knew they had to prompt a cultural shift to promote tax compliance. They designed a comprehensive communications strategy and conducted a countrywide campaign to communicate the role of taxes in re-building a post-conflict society. They held business forums to gather feed-back on improving the tax system, and they communicated directly with businesses to encourage tax compliance. Thanks to the reforms and the communications efforts, in 2009 the National Revenue Authority enrolled 11 percent more income tax registrants than in 2008 and 35 percent more than in 2007.
Adopt accounting standards and develop tax regulation
The lack of generally accepted accounting standards, including regulations on depreciations and deductions, makes it difficult for businesses to comply with tax requirements. The government should adopt accounting standards and develop detailed tax regulations, including deductions. Ensure transparency and consistency in the implementation of the tax system
One of the main challenges of Somaliland’s tax system are informality and arbitrariness. Ensuring that the tax provisions are transparent and implemented consistently is critical for the system to work efficiently. A first step in this direction can be to improve the audit capacity of tax authorities. Tax evasion cannot be properly tackled if companies suspected of “malfeasance” are not audited regularly. With risk-based audit systems, tax authorities audit only companies whose tax returns reveal an anomaly or a significant risk of fraud.13 Coupled with strict enforcement and a mechanism for appeal and review, a risk-based audit system would discourage tax evasion and increase the likelihood that fraud would be caught and punished.

Enforcing contracts
Somaliland’s judicial system was heavily affected by the civil war: the existing infrastructure was destroyed and judges and legal professionals fled. Things started improving a decade ago, however. A new constitution reestablished the legal framework in 2001. Legal professionals who were trained abroad have begun to return, and local universities have reopened their doors. Courts are being rebuilt and reorganized. While there is still much to be done, these are positive signs of recovery.
WHY DOES COMMERCIAL DISPUTE RESOLUTION MATTER?
Functioning courts in fragile and conflict-affected countries are important both for economic growth and state building.1 Restoring public confidence in courts is a daunting task, especially in economies where conflict has weakened the judicial system and where traditional dispute resolution mechanisms have been the only option for a long time. Although traditional justice will continue to play an important role, strengthening the formal court system is particularly important for businesses.
Effective commercial dispute resolution has many benefits. Courts are essential for entrepreneurs to protect their property rights and interpret the rules of the market. Efficient and transparent courts encourage new business relationships because firms know they have recourse to the courts if a customer fails to comply with contractual duties. Speedy trials are essential for small enterprises because they may lack the resources to stay in business while awaiting the outcome of a long court dispute.
WHAT DOES ENFORCING CONTRACTS MEASURE?
Doing Business measures the time, cost and procedural complexity of resolving a commercial lawsuit between two domestic businesses (figure 11.1). The dispute involves the breach of a sales contract worth twice the income per capita of the economy. The case study assumes that the court hears arguments on the merits, and that an expert provides an opinion on the quality of the goods in dispute.
HOW DOES IT WORK IN HARGEISA AND HOW DOES IT COMPARE GLOBALLY?
Traditional dispute resolution systems were always important in Somaliland, but following the civil war in the 1980s and the collapse of the formal judicial system they became the only mechanism for conflict resolution. The existing legal system consists of civil and common law of different origins and languages (box 11.1). The constitution of 20013 brought into effect all Somali laws existing prior to it. Besides statutory law, Xeer4—or customary law—and Sharia are also major sources of law. Some laws had been translated into Somali, but key pieces of commercial legislation, like the Companies
Law of Somaliland, continue to only be available in English today. Since many judges do not speak English, these laws remain virtually unapplied. In addition, there are no uniform guidelines, and judges often differ in their application of the various sources of law.Human capacity remains a main challenge. In 2011 there were 136 judges and 135 registered lawyers in Somaliland. Only 7% of judges had a law degree and 10% had
completed higher education studies. But positive developments over the past decade will start reaping benefits. New graduates are coming out of the University of Hargeisa Faculty of Law, established in 2002; and the Amoud University Faculty of Law and Islamic Sharia, established in 2008. The Somaliland Lawyers Association was created in 2004. Enforcing a contract in Hargeisa takes 52 procedures over 281 days and costs 40.4% of the claim value. While this is more than twice as fast and 10 percentage points less expensive than the Sub-Saharan Africa average (655 days and 50% of the claim value), it is quite expensive compared globally. Compared to the 183 economies measured by Doing Business 2012, Hargeisa would rank 124—ahead of Sudan (148) and Djibouti (160) but behind Ethiopia (57). Contract enforcement in Tanzania—the top performer in Sub-Saharan Africa—requires 38 procedures, takes 462 days and costs 14.3% of the claim value (figure 11.2).
There are fifty court houses in Somaliland: the Supreme Court, six Appeals Courts, six Regional Courts, and thirty-seven District Courts. The District and Regional Courts are the courts of first instance. Jurisdiction for commercial matters is determined on the basis of the claim value, and higher claims amounts are litigated at the Regional Court. Commercial cases are ruled mainly under the Civil Procedure Code of 1974. Following this law, enforcing a contract through Hargeisa’s Regional Courts involves 52 procedures, which is high compared regionally and globally. However, the high number of procedures does not seem to have a high impact on the length of proceedings. One reason for this could be that judges do not follow all the formal steps required by the law, in part because many do not have formal legal training. If the law is applied, procedural complexity could become a hurdle in the future as the number of cases increases.
Enforcing a contract in Hargeisa takes 281 days, among the fastest economies compared globally. Doing Business tracks the time needed to resolve a commercial dispute through 3 stages of litigation: filing and service; trial and judgment; and finally, enforcement. In Hargeisa, most of the time is spent during the trial stage (figure 11.3). Although the Chairman of Hargeisa’s Regional Court has instructed judges to deal with cases promptly, cases are often interrupted while parties try to solve their dispute before clan elders, returning to the court only if they do not reach an agreement. Yet the main reason for the speedy resolution is that relatively few cases actually reach the courts in Somaliland (figure 11.4). There were 3,447 incoming civil cases in 2010 for a population of around 3.85 million inhabitants. This is very low: for example, Bosnia & Herzegovina, the Czech Republic and Spain had a similar number of cases for every 100,000 inhabitants in 2008.8 Similarly, within civil cases, Hargeisa’s Regional Court deals with approximately 20 commercial cases per year. This may be explained by lack of trust in the judicial system. In fact, customary justice continues to be the most prevalent form of conflict resolution in Somaliland: 75–80% of conflicts are settled by elders or religious leaders.The cost to enforce a contract in Hargeisa is 40.4% of the claim value, similar to the cost in Côte d’Ivoire (41.7%) and in Madagascar (42.4%). This is more expensive than the global average of 34.8% of the claim value, but less costly than the average cost in SubSaharan Africa (50%). Attorney and expert fees account for the largest percentage of the costs. Other costs include the advertisement fees for the public sale and court fees set and collected by the Ministry of Finance.A number of recent and ongoing initiatives are working to strengthen the evolving judicial system.
The 2011–2015 Judicial Reform
Work Plan, developed by the Ministry of Justice in collaboration with local stakeholders and international partners, recognizes the importance of a functioning justice system for continued economic growth and social development in Somaliland.11 Several national workshops on justice reform have taken place involving the relevant ministries as well as representatives of the justice sector and civil society.12 A new hearing room was built in the Hargeisa Regional Court, the archives have been reorganized and court registrars are equipped with computers. Each judge has a court clerk tracking caseloads, which helps manage cases and workloads.
WHAT TO REFORM?
Make laws available in Somali and publish court fee schedules
Access to information is critical for legal certainty. It is essential that all applicable laws be made available in the local language, and accessible for judges and legal professionals. There should be one public institution responsible for this task. It could be the Chief State Counsel—which has been responsible for the publication of the official gazette since January 2012—the Law Reform Commission, or the Ministry of Justice. This institution should ensure that all laws are available in Somali, starting with the Companies Law. Laws and regulations should be made easily available for purchase or consultation in local shops and universities or the courts. Courts should publish fee schedules on public notice boards, thereby improving transparency and reducing opportunities for corruption.

Train legal professionals and introduce specialization among judges Lack of human capacity is a common challenge in conflict-affected countries. Judges and legal professionals should receive adequate training. As the cadre of legal professionals increases, specialized training programs should focus on specific topics, including commercial legislation and judicial precedents, and promote the standard application of the law. The curriculum at the local universities should be carefully reviewed to make sure that new laws are studied and that professional training is included. Although training takes time, it does show results. In 2009 the West Bank and Gaza saw contract enforcement speed up as new judges were recruited and trained and specialized enforcement judges were appointed. In 2008 Mozambique’s judiciary hired and trained more than 20 judges, introduced court administrators, and set up performance measurement for judges, decongesting the courts and prompting large efficiency gains. Introducing specialization among judges can increase their expertise in specific matters. This in turn can help judges deal with cases more efficiently, contributing towards a more standard application of the law. Hargeisa’s Regional Court could start by separating civil and criminal cases; eventually it could assign some judges to hear commercial matters specifically. A careful analysis of the court’s caseload should precede the design of a specific solution. But specialization is not an exclusive feature of high-income economies: eighty-seven economies measured by Doing Business 2012 have a specialized commercial court, section or judge. Specialized commercial courts started operating in the Democratic Republic of Congo in 2006, four years after their creation was approved by law. Kenya, Nigeria and Uganda have a commercial division within their courts. Lesotho, which started off by appointing and training one judge to hear commercial cases in 2010, has since launched a specialized commercial court.

Keep performance statistics
Keeping detailed statistics helps in tracking judges’ caseloads. Statistics are also important for any judicial reform program because they help identify bottlenecks, track trends and allocate resources. Today the Regional Court of Hargeisa keeps track only of the total number of cases, distinguishing only between civil or criminal and pending or closed. As the number of cases grows, having accurate and detailed data about the types of cases that reach the court and the length of proceedings will be important for the organization of the court.
Courts across African economies are introducing different case management solutions. Uganda in 2009 introduced a case management software system that gives the court an electronic case register, a case calendar for monitoring deadlines, and readily available statistics. Magistrates can now easily spot cases that have not been served in a timely manner and dismiss them, putting pressure on the plaintiff to perform service promptly. In 2011, Zambia launched an electronic case management system that includes digitizing all court records and allows for electronic case referencing. In 2010, with the approval of new Civil Procedure Rules, Kenyan courts introduced a new case-track system in which cases are categorized as small claims, fast track or multi-track. While these are all electronic solutions, the Regional Court of Hargeisa can improve case management by other means that do not necessarily require the use of technology.

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