27 Feb The Nexus between Rule of Law and Foreign Direct Investment
Somaliland has been able to grow into an environment of booming private business characterized by a vibrant mix of sole traders, entrepreneurs, and medium-sized organic businesses.
This growing private sector is due in large part to Somaliland’s security, low tax rates, ready supply of cheap labor, growing economy, and increasing skill sets of the Somaliland labor force. In this stage of development Somaliland needs to fully embrace Foreign Direct Investment (FDI) to supplement the vibrant local investment sector. In the Horn of Africa there are many opportunities for investors, especially in the natural resources and transportation sector. Yet, Somaliland must also realize that investors have options. Djibouti and Ethiopia are economic competitors to Somaliland and in order to compete for the business of investors Somaliland must provide an attractive display of privileges in order to attract their investment. In this article, we explore the conditions which investors are seeking when they analyze whether or not to make an investment in a given country.
At a minimum, foreign investors require favorable conditions and an effective rule of law. More specifically investors need a legal system that is capable of enforcing contractual and property rights. To encourage FDI the Somaliland Government needs to fully implement two sets of rights: substantive rights and procedural rights. Substantive rights include guarantees of: protection of investment capital; protection of property – whether movable, immovable or intellectual; and free or relatively free trade. Investors are also looking for guarantees against: expropriation of investment capital, and inappropriate risks. In addition, investors require procedural rights that come from a legal system which is transparent and is capable of enforcing their substantive rights.
The Somaliland Constitution provides these minimum guarantees for foreign investors. Article 11(3) provides that the Government shall guarantee the protection of foreign investment. Pursuant to this Article, the Somaliland Parliament enacted Law No. 29 of 2004 for the promotion, protection and guarantees of foreign investment.
This Act, though not well-known nor fully implemented, supplements the guarantees in the Constitution and furthers the favorable conditions available to foreign investors. Article 12(1) of the Act provides that foreign investments shall receive as favorable treatment as domestic investments. Paragraph (2) of the Article provides that investments which are properly registered shall not be subject to expropriation measures, except in the only case where the public interest cannot be satisfied by measures other than expropriation. In case of expropriation, paragraph (3) of the Article provides that prompt compensation must be given to the investor. This compensation must be based on the fair market value of the assets which are to be expropriated. Not only are property rights protected for foreign investors, but so are the profits they gain from their investment. Profits originating from a registered foreign investment, may be freely transferred abroad.
In addition, the Act provides incentives to the foreign investors. These incentives include tax holidays and favorable tax reductions. Article 13 provides that “foreign investment shall be eligible for incentives and facilities, in accordance with the legislation in force ruling on such incentives and facilities. Foreign Investment is exempted from payment of tax on profit for a period of three years from commencing operations. In addition, after the expiry of the initial tax holiday period, foreign investors shall be entitled to a 50% reduction of the tax due for the profit reinvested”.
To support the lifestyle of foreign investors, the Act assures that employees and families of foreign investors are to be granted access for reasons of work. The Act also provides favorable procedures which are cost-effective and based on win-win approach.
To implement such constitutional guarantees, these guarantees must be enforceable though the rule of law and existing legal enforcement mechanisms. That is to say, the rule of law must be enforceable under normal circumstances. The Somaliland Government is working diligently to prepare for this situation by steadily reforming the entire judicial sector. The Constitution provides the judiciary with the necessary independence to fulfill their duties, and the new Chief Justice is deeply committed to a reform agenda for the judicial sector. The rule of law is very important issue to foster the security, governance, and investment in the country. Somaliland has made significant strides in the past five years towards a maturing judicial sector and is increasingly capable of enforcing the rule of law. So, if you are an investor thinking about opportunities in the Horn of Africa, give Somaliland a new look.