Somaliland Free Trade Zone Legislation

Somaliland is an autonomous region in the Horn of Africa that unilaterally declared independence from Somalia in 1991. Not only has Somaliland maintained democratic governance, but it has also made continual efforts to improve this governance and recently passed the “Somaliland Special Economic Zones Law."

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Somaliland is an autonomous region in the Horn of Africa that unilaterally declared independence from Somalia in 1991. Since its self-declared independence, Somaliland has maintained democratic governance and regularly scheduled elections through the government of the Republic of Somaliland. Not only has Somaliland maintained democratic governance, but it has also made continual efforts to improve this governance. Despite being hampered by the global COVID pandemic, Somaliland has recently passed the “Somaliland Special Economic Zones Law” (the Law). The text of the law was kindly provided to CCI by Ibrahim Hashi Jama of the Somaliland Law website. The Law creates a framework for Somaliland to establish and administer special economic zones within the rule of law. Below is an analysis of the Law itself, but first some high-level thoughts and key details:

 ·       Like all major legislation passed by the government of Somaliland, this law is written in Somali, but accompanied by an official English translation displayed side-by-side with the Somali. This is an indicator of how serious Somaliland is about attracting international investment.

·       The legislation creates an SEZ Authority that will be a single point of contact for all regulatory matters related to the enterprises that will be located in any SEZ.

·       Under this legislation, Somaliland will be able to contract with experienced private SEZ developers and managers.

·       The Law came into force on its publication in the Official Gazette on February 6, 2021.

·       The Berbera Free Zone is modelled on DP World’s Jebel Ali Free Zone (Jafza) in Dubai, which does not have the level of autonomy of a charter city, but does have a higher level of autonomy than many other SEZs.

·       The Berbera Free Zone being modeled on Jafza is an example of successful models replicating themselves.

The Law itself is broken into nine parts and is 83 pages in length. As this is a blog post, I won’t go into depth over the entire law, and instead will focus on three notable parts: (a) Part Two: Special Economic Zone Authority; (b) Part Three: Financial Provisions; and (c) Part Four: SEZ Developers and SEZ Administration Managers.

First, Part Two: Special Economic Zone Authority, establishes the Special Economic Zone Authority (the Authority) and lays out how it is structured. According to Article 10 of the Law, the Authority has “exclusive regulatory jurisdiction over all Special Economic Zones” in Somaliland. Furthermore, Article 11 states that the Authority is responsible for “the establishment, management, operation, maintenance, marketing, supervision and control of Special Economic Zones.” Under Article 11, the Authority is established as a “one stop shop” that handles all permitting, licensing, and regulation that occurs within a special economic zone. Additionally, the Authority will serve as the sole government interface for all enterprises within a zone. Finally, the Authority will be structured in a manner similar to a corporation, with a Governing Board and a General Manager that serve similar functions to a corporate board and a chief executive officer. Under Articles 12, 13, and 14, the Governing Board to the Authority is the same as the Board of Directors of the Somaliland Ports Authority. According to Article 13, Governing Board acts as the “policy making organ” of the Authority. Article 14 discusses the powers that the Governing Board has, which are diverse and includes “all powers necessary for the proper performance of the functions of the Authority” under the Law. Moreover, there is the General Manager of the Authority, who according to Article 15 is appointed by the President of Somaliland with the advice of the Governing Board. Article 15 further expounds on the required qualifications that the General Manager must have in order to be appointed, that the General Manager serves as the chief executive officer of the Authority, and the responsibilities of the General Manager, which focus on managing the day to day operations of the Authority.

This part of the Law does a good job at establishing an organization that is aimed at and capable of effectively operating SEZs. This is done in two ways. First, the Law gives the Authority the power necessary to fulfill its designated functions. Second, the Law creates a governance structure that will be able to wield the power that it has been given to effectively meet the goals of the Authority.

Second, Part Three: Financial Provisions, addresses how the Authority will be funded. Under Article 16, the Authority can receive funding from three sources: rents, fees, and other sources of income that the Authority accrues from operating SEZs, funds allocated to the Authority from the government of Somaliland, and any other sources of income that may vest or accrue with the Authority over the course of its operations. Article 17 of the Law requires that the Authority keeps proper accounting practices and reports their finances to the Auditor General of Somaliland. Furthermore, Article 18 of the Law sets out the requirements for the annual budget for the Authority, and Article 19 of the Law requires that the Authority gives both the Board of Governors and the President an annual report on the Authority.

Funding is a critical issue for a business oriented government organ in a developing country. SEZs can serve as crucial mechanisms for bringing funding to the government of Somaliland. While the Authority may need to start off with funding allocated to it by the government, the explicit authorization enabling the Authority to fund itself with income it receives from the course of its operations enables the Authority to push toward policies aimed at profit. Furthermore, the requirements to budget, audit, and report on the Authority’s state of affairs to the Board Governors and President of Somaliland create a system of accountability for the Authority, which will help ensure that it functions for the benefit of the government and people of Somaliland.

 

Third, Part Four: SEZ Developers and SEZ Administration Managers addresses how the Authority can work with SEZ developers. Article 20 requires that the President of Somaliland give approval to any agreement between the Authority and an SEZ developer. This Article also requires that the Authority issue a license to any such developer in accordance with a different part of the Law. Article 21 requires that any SEZ developer that the Authority contracts with be in a suitable financial position, have a credible development plan, and pay a fee to the Authority. Furthermore, Article 22 requires there to be a development agreement, but allows for the developer to enter into this contract without incorporating a separate entity in Somaliland. Article 23 gives two requirements to developers, that developers conduct their operations “in accordance with the terms of the applicable Development Agreement and the law,” and that the developer “notify the Authority as soon as reasonably practicable if it becomes aware that any SEZ [u]ser or SEZ Resident fails to comply with the provisions [the] Law or any SEZ [r]egulations.” Finally, Article 24 allows the Authority with the approval of the President of Somaliland, to enter into agreements with enterprises that manage and administer SEZs for the purpose of operating SEZs under the Law.

This part of the law allows for the Authority to contract out the development and management of SEZs to experienced partners. By allowing the Authority to conduct business in this manner, the Law increases the Authorities likelihood for creating and administering successful SEZs. With experienced partners, the Authority is less likely to have failed SEZ projects.

 

How is Somaliland’s SEZ scheme different from a charter city? There are two closely interconnected key differences. First, the structure is not the same as would likely be the case with a charter city. Structurally, the Authority is set up to oversee all SEZs that will be created in Somaliland. This is opposed to a charter city, which would have an organizational structure of its own that would likely answer to a government organ similar to the Authority, but for charter cities. Second, a charter city would likely have more autonomy than is currently allowed under the Law. If Somaliland wanted to establish one or more charter cities it would need to create a separate law that is somewhat analogous to this Law. This Law establishes a scheme for administering SEZs and an Authority responsible for administering them, a law enabling charter cities would be similar with a legal framework that delineates what a charter city could do and governmental organ responsible for regulating charter cities.

Somaliland has both policy and legal frameworks aimed at development that are setting up the country for a bright future. This Law is another step in the right direction for creating a booming economy for the people of Somaliland.