74663 SUB S ATIO B NA AL O NA 2012 Doing Business in Hargeisa 2012 CO M PAR I N G R EG U L ATIO N FO R D O M EST IC FIRMS IN HARGEISA AND WIT H 1 83 ECONOMI ES B NA S UB O NA ATIO AL 2012 Doing Business in Hargeisa 2012 CO M PAR I N G R EG U L ATIO N FO R D O M EST IC FIRMS IN HARGEISA AND WIT H 1 83 ECONOMI ES A COPUBLICATION OF THE WORLD BANK AND THE INTERNATIONAL FINANCE CORPORATION iv DOING BUSINESS 2012 © 2012 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington, D.C. 20433 Telephone 202-473-1000 Internet www.worldbank.org All rights reserved. A copublication of The World Bank and the International Finance Corporation. This volume is a product of the staff of the World Bank Group. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. 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Doi g Doin B Busines s SUBNATIONAL S Contents 1 Executive summary 6 About Doing Business and Doing Business in Hargeisa 2012 15 Starting a business 21 Dealing with construction permits 26 Getting electricity 31 Registering property 36 Getting credit 40 Protecting investors 44 Paying taxes 48 Trading across borders 51 Enforcing contracts 55 Resolving insolvency 59 Data notes 79 Indicator details 89 Acknowledgments Doing Business in Hargeisa 2012 measures busi- ing across borders, enforcing contracts, and ness regulations and their enforcement in resolving insolvency. Data on the employing Hargeisa, Somaliland. It is the first Doing Busi- workers indicator is available as an annex. The ness city profile in Somaliland. Comparisons data in Doing Business in Hargeisa 2012 are cur- with other economies are based on Doing Busi- rent as of May 2012. ness 2012—Doing business in a more transparent world—the ninth in a series of annual reports Doing Business in Hargeisa 2012 is part of the published by the World Bank and International World Bank’s Private Sector Development Re- Finance Corporation. The indicators in Doing engagement Program Phase II, implemented Business in Hargeisa 2012 are also comparable jointly by the World Bank and the International with 335 cities from 54 economies bench- Finance Corporation in collaboration with the marked in other subnational Doing Business Government of Somaliland. The project aims studies. All data and reports are available at to help build business in Somaliland through www.doingbusiness.org/subnational. entrepreneurship and an improved business environment. The study was produced at the Doing Business investigates the regulations that request of the Ministry of Planning and Devel- enhance business activity and those that con- opment of Somaliland and financed through a strain it. Doing Business in Hargeisa 2012 mea- World Bank executed trust fund with contri- sures regulations affecting 11 stages of the life butions from the U.K. Department for Inter- of a small or medium-size business: starting a national Development (UKAID), the Danish business, dealing with construction permits, International Development Agency (DANIDA) getting electricity, registering property, getting and the World Bank’s State and Peace-building credit, protecting investors, paying taxes, trad- Fund (SPF). 1 Executive summary Hargeisa is the largest economic center of source of income.7 The private sector in to reliable and consistent data in Africa and Somaliland. It sits on the Horn of Africa, Hargeisa delivers basic services such as in fragile states is limited, which hinders 50 kilometers from Ethiopia, and 160 kilo- health, education, electricity, domestic legal development and reform.9 Second, meters from the closest port in Berbera on water supply and urban waste disposal. each chapter identifies bottlenecks, high- the Gulf of Aden. Following the civil war in lights opportunities for improvement and the 1980s, Somaliland unilaterally declared Doing Business in Hargeisa 2012 measures presents international and regional good independence from Somalia in 1991, but it the 11 Doing Business indicators that study practices. still lacks international recognition. During business regulations as they apply to a the first decade after the civil war, insecu- domestic company throughout its life PRIVATE SECTOR DEVELOPMENT rity and unrest prevailed. A reconciliation cycle.8 A fundamental premise of Doing IN FRAGILE AND CONFLICT- dialogue was initiated between clan repre- Business is that economic activity requires AFFECTED STATES sentatives in the city of Borama in 1993. In good rules—rules that establish and clarify property rights and reduce the cost The 2011 World Development Report on 1997 the Hargeisa Conference laid the foun- conflict, security and development states dations for a new institutional agreement, of resolving disputes; rules that increase the predictability of economic interactions and that “strengthening legitimate institutions resulting in the creation and strengthening and governance to provide citizen security, of government institutions. A new constitu- provide contractual partners with certainty and protection against abuse. justice, and jobs is crucial to break cycles tion was approved by referendum in 2001 of violence.”10 The private sector can play a and a series of elections have since taken This report can be useful for public authori- positive role in the economic development place: local elections in 2002, presidential ties in Hargeisa in two ways. First, it gener- of fragile and conflict-affected countries, elections in 2003 and 2010, and legislative ates micro-level data on business regula- generating jobs and government revenue elections in 2005.1 tions that can be compared internationally. through tax collection. But it is not easy to This is no small contribution given there are do business in countries affected by war and Livestock is the main pillar of Somaliland’s limited statistics and official data. Access violence. economy: it is estimated to contribute to 60% of GDP,2 with customs duties FIGURE 1.1 Access to electricity and finance, and political instability: the main obstacles for enterprises in representing 85% of central government fragile and conflict- affected economies revenue and livestock representing the ma- Electricity 21.5% jority of export earnings.3 Remittances and Access to finance 17.6% an expanding service sector are other key Political instability 17.1% economic sectors. The population—55% Corruption 7.3% nomad and 35% urban—is growing fast Practices of the informal sector 6.5% at 3.1% a year.4 At 80%, unemployment is Tax rates 4.8% soaring.5 Access to land 4.2% Relative peace and security have allowed Crime, theft and disorder 4.1% for a vibrant private sector to develop. With Transportation 3.8% limited government and financial institu- Inadequately educated workforce 3.2% tions, the diaspora has been the main en- Customs and trade regulations 3.1% gine for recovery and source of investment: Business licensing and permits 3.1% in 2008 the diaspora provided up to 80% of Tax administration 2.1% start-up capital for small and medium-size Labor regulations 1.1% businesses.6 Remittances constitute 40% Courts 0.6% of urban households’ income in Hargeisa. Note: Enterprise Surveys data covers 24 of the 33 economies classified as fragile and conflict-affected states by the World Bank Group. For one-quarter of them, they are the main Source: Enterprise Surveys. www.enterprisesurveys.org. World Bank Group. 2 DOING BUSINESS IN HARGEISA 2012 Conflict has a particularly acute impact on the countries that improved the most on collaborate with local stakeholders—private the formal private sector. Human capital is the World Bank’s ease of doing business sector and civil society—to understand their reduced as a result of violence or migration. index during 2010/11. During that year, Sierra needs and priorities. This process can in turn Infrastructure and institutions are destroyed. Leone improved its credit information sys- increase trust in public institutions. Access to finance becomes difficult. Data tem by enacting a new law providing for the from World Bank Enterprise Surveys show creation of a public credit registry; it made MAIN FINDINGS that the main constraints faced by firms trading across borders faster by implement- If one compared Hargeisa to the 183 working in conflict areas are lack of access ing an automated system for customs data; economies measured by Doing Business to electricity and finance, political instability, and it established a fast-track commercial 2012, it would rank 174 on the ease of doing practices of the informal sector, and cor- court in an effort to expedite commercial business—ahead of economies like Eritrea ruption (figure 1.1). Compared globally, the cases, including insolvency proceedings. (180) or Chad (183), but behind Djibouti business environment in fragile and conflict- (170) or the United Arab Emirates (33) affected states tends to have the most bu- Smart and transparent regulations are impor- (table 1.1). reaucratic hurdles and the fewest property tant to creating certainty and a level playing protections for entrepreneurs.11 On average field, particularly for small and medium-size Behind the aggregate ranking, Hargeisa’s it is more difficult to do business in fragile domestic entrepreneurs. The government performance varies from topic to topic and conflict–affected states, according to the has an important role to play in setting mini- (figure 1.3). On the ease of dealing with Doing Business indicators.12 mum standards and safeguards, supervising construction permits, getting electricity and compliance with the law, and providing for registering property, Hargeisa would rank Nevertheless, many fragile and conflict- conflict resolution institutions, among oth- 86, 84 and 79, respectively, ahead of the av- affected states in Sub-Saharan Africa have ers. The government of Somaliland, aware of erages for Sub-Saharan Africa and the fragile been improving their business environments the importance of the private sector to eco- and conflict-affected states.13 Although in a number of regulatory areas (figure 1.2). nomic development, has set for itself the task the institutions governing these areas in Most improvements have occurred in busi- of creating an enabling climate for private Hargeisa are generally efficient, there is ness entry, secured transactions and tax sector development in the Draft Somaliland space for improvement in terms of establish- compliance requirements. Sierra Leone has National Development Plan 2012–16. As the ing safety standards, inspection guidelines been a consistent reformer and was among government undertakes reforms, it should and supervision. Costs are high when dealing FIGURE 1.2 Fragile and conflict-affected economies in Sub-Saharan Africa have recently undertook many business reforms across Doing Business indicators Number of business reforms 2005-2011 37 Sub-Saharan Africa 34 East Europe 30 South Asia 27 Latin America & the Caribbean Middle East & North Africa 19 East Asia Pacific 16 12 9 6 3 1 Starting a Getting Paying Registering Trading across Dealing with Enforcing Resolving Protecting Employing Getting Business Credit Taxes Property Borders Construction Contracts Insolvency Investors Workers Electricity* Permits Note: Doing Business data covers 30 of the 33 economies classified as fragile and conflict-affected states by the World Bank Group. Twenty-seven of those have undertaken reforms since 2005, 16 being in Sub-Saharan Africa. *Getting electricity reforms are counted since 2010. Source: Doing Business database. EXECUTIVE SUMMARY 3 FIGURE 1.3 Hargeisa’s performance in the Doing Business indicators compared with Sub-Saharan African economies and fragile and conflict-affected states UNITED KINGDOM HONG KONG SAR SAUDI ARABIA MALAYSIA SINGAPORE NEW ZEALAND CHINA ICELAND GEORGIA SOUTH AFRICA NEW ZEALAND MALDIVES SINGAPORE LUXEMBOURG JAPAN EASIEST (1) 84 79 86 Sub-Saharan Africa (46 economies) 106 137 111 110 112 119 117 127 Fragile & conflict 123 115 112 122 123 124 120 143 affected states 146 124 (30 economies) 117 142 127 133 131 134 Hargeisa 174 135 175 181 MOST DIFFICULT (183) 184 183 Ease of Doing Starting a Dealing with Getting Registering Getting Protecting Paying Trading across Enforcing Resolving Business Business Construction Electricity Property Credit Investors Taxes Borders Contracts Insolvency Permits Note: Rankings are based on the average economy percentile rankings on each indicator’s sub-components. See the data notes for details. Data are based on the Doing Business 2012 report.. Source: Doing Business database. with construction permits or getting electric- business licenses in 2010 alone, while the and clarifying applicability of laws could help ity due to lack of infrastructure: limited water ministry only registered a fraction with a improve trust in the courts. Resolving insol- and electricity networks and lack of sewage total of 358 companies between 2002 and vency is considered a no practice indicator make connection to utilities very expensive. 2007.14 given that there have only been a few cases of winding up with shareholders.15 Compared globally, Hargeisa would rank On the ease of paying taxes and trading 175 on the ease of starting a business. The across borders, Hargeisa would rank 142 On the ease of protecting investors and process in Hargeisa is faster but significantly and 127, respectively. Although complying getting credit, Hargeisa would rank 181 and more costly than the Sub-Saharan Africa with tax obligations does not take long, the 184 respectively. These rankings reflect an average. When compared to 183 economies total tax rate is high, partly because of the incomplete regulatory framework. On the absence of deductions or provisions for asset ease of getting credit, Hargeisa scores 0 measured by Doing Business it is among the depreciation. The government’s collection out of 6 on the depth of credit information top 15 most expensive cities in the world to capacity is limited and in many cases it be- index, because there is no public or private start a business, with 60% of the cost stem- comes a negotiation with larger businesses. credit registry or bureau, and 0 out of 10 on ming from the cost of business licenses. High When it comes to trading across borders, the strength of legal rights, given the lack of costs may have a role in the high level of importing and exporting a standardized con- regulation on secured transactions. In terms informality. Statistics show that when busi- tainer of cargo through the port of Berbera of protecting investors, the Companies Law nesses register, they are more likely to do so is faster and cheaper than the Sub-Saharan does not specifically address many issues with the municipality than with the Ministry affecting minority shareholders. This is why Africa average. Most of the costs in trading of Commerce: the municipality issued 3,075 Hargeisa scores only 2 out of 10 in the overall across borders go to inland handling and transportation as a result of the poor road strength of investor protection index. TABLE 1.1 How Hargeisa compares globally and regionally on the ease of infrastructure. doing business KEY AREAS FOR IMPROVEMENT Ease of Doing Business (Rank) Hargeisa would rank 124 on the ease of Governments can contribute to improving Singapore 1 enforcing a contract and 183 on resolving the business environment in many ways. United Arab Emirates 33 insolvency. Commercial dispute resolution Whereas some areas are more urgent than Rwanda 45 through the courts is expensive but quite fast. others, Doing Business in Hargeisa 2012 The short time to enforce a contract is partly draws on good global and regional practices Kenya 109 due to the low caseload, because most cases to serve as guide for business reforms. This Sudan 135 are solved through traditional justice mecha- report identifies four general recommenda- Djibouti 170 nisms. The judiciary was reestablished in the tions across the topics covered. Hargeisa 174 past decade and there are promising signs: Eritrea 180 legal professionals are back, law faculties First, the legal and regulatory framework Chad 183 have opened their doors, and courthouses should be completed and standards and Source: Doing Business database. have been rebuilt. Increasing transparency guidelines issued. Approving a commercial 4 DOING BUSINESS IN HARGEISA 2012 banking act will be critical for the develop- fees—as is the case for business registra- NOTES ment of the financial sector; passing a tion—the issuing authority should consider 1. International Crisis Group. 28 July 2003. commercial code would establish a regula- cutting fees. Although the fees obtained Somaliland: Democratisation and its Discontents. ICG Africa Report N°66. tory framework for secured transactions; from business permits are a source of Nairobi/Brussels. a building code is critical for the urban revenue for local governments, high fees 2. GDP numbers are estimated as there is planning of Hargeisa. In the long term there hinder formal economic activity. A good no reliable source. Ministry of Planning should be regulations protecting minority international practice is for fees to cover and Development. July 2012. Somaliland shareholders. Although some of these laws the administrative costs of government Statistical Bulletin 6. are being drafted or debated, the legislative services. Where high costs are due to in- 3. Government revenue comes from taxes process has been contentious and slow on trade and transactions and data are frastructure limitations—mainly connection for 2009. Ministry of Planning and with simultaneous draft bills originating to water, sewage and electricity—long-term Development. 2010. Somaliland in Figures. from different ministries; between 1997 and investment will be necessary. 4. Estimates are for Somaliland overall. 2002 Parliament passed only 22 bills.16 The Ministry of Planning and Development. Law Reform Commission could be strength- Finally, the government should promote 2010. Somaliland in Figures. Also Delegation ened to consolidate bill proposals from the higher compliance with regulations. One of the European Commission and UN- executive. Existing laws should be made way is through better communication and HABITAT. September 2002. “Somalia Urban Sector Profile Study.” easily available and translated into the lo- awareness campaigns. For example, the 5. USAID. July 2011. Private Sector Development cal language. For example, the Companies Business Registry in Juba, South Sudan, Assessment. Partnership for Economic Law (2004) contains provisions affecting launched a registration promotion cam- Growth Somaliland. business incorporation, commercial dis- paign after resuming its activities in 2006 6. Estimate for Somalia. UNDP Somalia. putes, and insolvency proceedings, among and the number of businesses registering March 2009. “Somalia’s Missing Middle: others, but it is available only in English. has increased consistently since then. The Somali Diaspora and its Role in Given that many judges and lawyers speak Development.” Sierra Leone launched a comprehensive only Somali, the law remains unapplied in 7. Munzele Maimbo, Samuel, ed. November communications strategy after a tax law 2006. “Remittances and Economic many instances. Guidelines and standards reform in 2009, managing to increase tax Development in Somalia: An Overview.” are also important: inspection guidelines registrants. Another mechanism to improve Conflict Prevention and Reconstruction for construction permits, safety standards compliance is through better enforcement. Paper No. 38. Washington, D.C.: The World for electricity connections, and accounting Bank Group. As the different government institutions in- standards for tax payments, among others. 8. Because the methodology for the employing crease their capacity, greater resources and workers indicators set is currently being effort should be put into supervision. Public refined, it is not included in the aggregate Second, administrative procedures for busi- officials should make sure that businesses ranking on the ease of doing business index ness registration, construction permits, and register and pay taxes and constructions for this report. However, the data are avail- property registration can be streamlined. able as an annex to the report. are undertaken with the necessary licenses. Entrepreneurs starting a business must 9. Anderson, John, and Sophie Pouget. 2012. interact with five government agencies and “Legal indicators: practical tools to promote visit them multiple times to obtain the re- legal and regulatory reform in Africa.” Africa quired licenses. Having a single access point Law Today 4:2. ABA Section of International Law. could reduce the number of procedures and 10. World Bank. 2011. World Development Report the time lost. Similarly, to obtain a building 2011: Conflict, Security, and Development. permit a construction company must inter- Washington, D.C.: The World Bank Group. act with several different agencies including 11. Peschka, Mary Porter. 2011. “The role of the district office, the Municipal Archives the private sector in fragile and conflict- Section, the Municipal Land Revenue affected states”. World Development Report Background Paper. Washington, D.C.: World Section and the Mayor’s office. A single ac- Bank Group. cess point or one-stop shop would central- 12. Johns, Melissa. 2010. “Conflict Affected ize all clearances in one location and make Countries: Reform Trends from the Doing the technical approvals an in-house process Business Data Set.” Working Paper. at the municipality. Registering a property Washington, D.C.: World Bank Group. for tax purposes with the Municipality of 13. Fragile and conflict-affected countries Hargeisa could also become faster if the include those economies measured by Doing Business that are considered fragile situa- internal procedures were streamlined. tions as defined by the World Bank FY12 list. They are as follows: Afghanistan, Angola, Third, measures should be taken to reduce Bosnia and Herzegovina, Burundi, Central costs, which are a cross-cutting issue. African Republic, Chad, Comoros, Congo, Where the source of high costs is licensing Dem. Rep., Congo, Rep., Côte d’Ivoire, EXECUTIVE SUMMARY 5 Eritrea, Georgia, Guinea, Guinea-Bissau, Haiti, Iraq, Kiribati, Kosovo, Liberia, Marshall Islands, Micronesia, Fed. Sts., Nepal, Sierra Leone, Solomon Islands, Sudan, Timor-Leste, Togo, West Bank and Gaza, Yemen, Rep., and Zimbabwe. 14. Somaliland Ministry of Commerce register books. Also Hargeisa Municipality Statistical Abstract. Fourth Edition, September 2012. 15. If an economy has had zero cases per year in the past five years involving a judicial reorganization, judicial liquidation or forclosure, the economy receives a “no practice” ranking. This means that creditors are unlikely to recover their money through a formal legal process (in or out of court). The recovery rate for “no practice” economies is zero. See Data notes for more details. 16. Academy for Peace and Development. April 2002. “The Judicial System in Somaliland.” Workshop Report. Hargeisa, Somaliland. 6 About Doing Business and Doing Business in Hargeisa 2012 A vibrant private sector—with firms making makers intending to change the experience objective: regulations designed to be efficient investments, creating jobs and improving and behavior of businesses will often start in their implementation, to be accessible to productivity—promotes growth and expands by changing rules and regulations that affect all who need to use them and to be simple opportunities for poor people. To foster a them. Doing Business goes beyond identifying in their implementation. Accordingly, some vibrant private sector, governments around that a problem exists and points to specific Doing Business indicators give a higher score the world have implemented wide-ranging regulations or regulatory procedures that for more regulation, such as stricter disclosure reforms, including price liberalization and may lend themselves to reform. And its requirements in related-party transactions. macroeconomic stabilization programs. But quantitative measures of business regulation Some give a higher score for a simplified way governments committed to the economic enable research on how specific regulations of implementing existing regulation, such as health of their country and opportunities for affect firm behavior and economic outcomes. completing business start-up formalities in a its citizens focus on more than macroeco- one-stop shop. nomic conditions. They also pay attention The first Doing Business report, published to the laws, regulations and institutional in 2003, covered 5 indicator sets and 133 Doing Business in Hargeisa 2012 encompasses arrangements that shape daily economic economies. The latest report, Doing Business 2 types of data. The first come from readings activity. 2012: Doing business in a more transparent of laws and regulations. The second are time world, covers 11 indicator sets and 183 econo- and motion indicators that measure the effi- Until 10 years ago, however, there were mies. Ten topics are included in the aggre- ciency and complexity in achieving a regula- no globally available indicator sets for gate ranking on the ease of doing business. tory goal (such as granting the legal identity monitoring such microeconomic factors and The project has benefited from feedback of a business). Within the time and motion analyzing their relevance. The first efforts, in from governments, academics, practitioners indicators, cost estimates are recorded from the 1980s, drew on perceptions data from and reviewers.1 The initial goal remains: to official fee schedules where applicable. A expert or business surveys that capture often provide an objective basis for understanding regulatory process such as starting a busi- one-time experiences of businesses. Such and improving the regulatory environment ness or registering property is broken down surveys can be useful gauges of economic for business. into clearly defined steps and procedures. and policy conditions. But few perception Here, Doing Business builds on Hernando de surveys provide indicators with a global Soto’s pioneering work in applying the time WHAT DOING BUSINESS IN coverage that are updated annually. and motion approach first used by Frederick HARGEISA 2012 COVERS Taylor to revolutionize the production of the The Doing Business project takes a different Doing Business in Hargeisa 2012 provides a Model T Ford. De Soto used the approach in approach from perception surveys. It looks quantitative measure of the national and lo- the 1980s to show the obstacles to setting up at domestic, primarily small and medium- cal regulations for starting a business, dealing a garment factory on the outskirts of Lima, size companies and measures the regula- with construction permits, getting electricity, Peru.2 tions applying to them through their life registering property, getting credit, protect- cycle. Based on standardized case studies, it ing investors, paying taxes, trading across borders, enforcing contracts and resolving WHAT DOING BUSINESS IN presents quantitative indicators on business insolvency—as they apply to domestic small HARGEISA 2012 DOES NOT COVER regulation that can be compared across 183 economies and over time. This approach and medium-size enterprises. Doing Business Just as important as knowing what Doing complements the perception surveys in in Hargeisa 2012 includes an annex on the Business in Hargeisa 2012 does is to know exploring the major constraints for busi- employing workers indicator. what it does not do —to understand what nesses, as experienced by the businesses limitations must be kept in mind in interpret- themselves and set out in the regulations A fundamental premise of Doing Business is ing the data. that apply to them. that economic activity requires good rules. These include rules that establish and clarify Limited in scope Rules and regulations are under the direct property rights, and rules that increase the Doing Business in Hargeisa 2012 focuses on control of policy makers—and policy predictability of economic interactions. The 11 topics, with the specific aim of measuring ABOUT DOING BUSINESS AND DOING BUSINESS IN HARGEISA 2012 7 the regulation and red tape relevant to the Based on standardized case altogether—by not registering for social life cycle of a domestic small to medium-size scenarios security, for example. firm. Accordingly: The indicators analyzed in Doing Business Where regulation is particularly onerous, Ė Doing Business in Hargeisa 2012 does in Hargeisa 2012 are based on standardized levels of informality are higher. Informality not measure all aspects of the business case scenarios with specific assumptions, comes at a cost: firms in the informal sec- environment that matter to firms or such as that the business is located in the tor typically grow more slowly, have poorer investors—or all factors that affect com- largest economic center of Somaliland, access to credit and employ fewer workers— petitiveness. It does not, for example, Hargeisa. Economic indicators commonly and their workers remain outside the protec- measure security, macroeconomic sta- make limiting assumptions of this kind. tions of labor law.3 All this may be even more bility, corruption, the labor skills of the Inflation statistics, for example, are often so for female-owned businesses, according population, the underlying strength of based on prices of consumer goods in a to country-specific research.4 Firms in the institutions or all aspects of the quality of few urban areas. Such assumptions allow informal sector are also less likely to pay infrastructure. Nor does it focus on regula- global coverage and enhance comparability, taxes. Doing Business measures one set of but they inevitably come at the expense of factors that help explain the occurrence of tions specific to foreign investment. generality. informality and give policy makers insights Ė While Doing Business in Hargeisa 2012 into potential areas of reform. Gaining a fuller focuses on the quality of the regulatory In areas where regulation is complex and understanding of the broader business envi- framework, it is not all-inclusive; it does highly differentiated, the standardized case ronment, and a broader perspective on policy not cover all regulations, or all regula- used to construct each Doing Business indi- challenges, requires combining insights from tory goals in Somaliland. As economies cator needs to be carefully defined. Where Doing Business with data from other sources, and technology advance, more areas of relevant, the standardized case assumes such as the World Bank Enterprise Surveys.5 economic activity are being regulated. For a limited liability company. This choice is example, the European Union’s body of in part empirical: private, limited liability WHY THIS FOCUS  laws (acquis) has now grown to no fewer companies are the most prevalent business Doing Business functions as a kind of cho- than 14,500 rule sets. Doing Business in form in most economies around the world. lesterol test for the regulatory environment Hargeisa 2012 covers 11 specific sets of The choice also reflects one focus of Doing for domestic businesses. A cholesterol test indicators. These indicator sets do not Business: expanding opportunities for entre- does not tell us everything about the state of cover all aspects of regulation in the area preneurship. Investors are encouraged to our health. But it does measure something venture into business when potential losses of focus. For example, the indicators on important for our health. And it puts us on are limited to their capital participation. starting a business or protecting investors watch to change behaviors in ways that will do not cover all aspects of commercial leg- improve not only our cholesterol rating but Focused on the formal sector islation. The employing workers indicators also our overall health. In constructing the indicators, Doing Business do not cover all areas of labor regulation. assumes that entrepreneurs are knowledge- One way to test whether Doing Business The current set of indicators does not, for able about all regulations in place and comply serves as a proxy for the broader business example, include measures of regulations with them. In practice, entrepreneurs may environment and for competitiveness is addressing safety at work or the right of spend considerable time finding out where to look at correlations between the Doing collective bargaining. to go and what documents to submit. Or Business rankings and other major economic Ė Doing Business in Hargeisa 2012 also does they may avoid legally required procedures benchmarks. Closest to Doing Business in not attempt to measure all costs and FIGURE 2.1 A strong correlation between Doing Business rankings and OECD rankings on product market benefits of a particular law or regulation regulation to society as whole. The paying taxes Ranking on OECD product market regulation indicators indicators, for example, measure the to- 40 tal tax rate, which is a cost to business. 35 The indicators do not measure, nor are 30 25 they intended to measure, the social 20 and economic programs funded through 15 tax revenues. Measuring business laws 10 5 and regulations provides one input into 0 the debate on the regulatory burden 0 20 40 60 80 100 120 140 associated with achieving regulatory ob- Ranking on the ease of doing business jectives. Those objectives can differ across Note: Correlation is significant at the 5% level when controlling for income per capita. economies. Source: Doing Business database; OECD data. 8 DOING BUSINESS IN HARGEISA 2012 FIGURE 2.2 A similarly strong correlation between Doing Business rankings and World Economic Forum basis for studying effects of regulations and rankings on global competitiveness their application. For example, Doing Business Ranking on Global Competitive Index 2004 found that faster contract enforcement 140 was associated with perceptions of greater 120 judicial fairness—suggesting that justice 100 delayed is justice denied.11 80 60 40 DOING BUSINESS IN HARGEISA 20 2012 AS A BENCHMARKING 0 0 20 40 60 80 100 120 140 160 180 EXERCISE Ranking on the ease of doing business Doing Business in Hargeisa 2012, in captur- Note: Correlation is significant at the 5% level when controlling for income per capita. ing some key dimensions of regulatory Source: Doing Business database; WEF 2010. regimes, can be useful for benchmarking. what it measures is the set of indicators on answers were unequivocal: women and men Any benchmarking—for individuals, firms or product market regulation compiled by the alike pin their hopes above all on income economies—is necessarily partial: it is valid Organization for Economic Co-operation and from their own business or wages earned in and useful if it helps sharpen judgment, less Development (OECD). These indicators are employment. Enabling growth—and ensur- so if it substitutes for judgment. designed to help assess the extent to which ing that poor people can participate in its the regulatory environment promotes or benefits—requires an environment where Doing Business in Hargeisa 2012 provides inhibits competition. They include measures new entrants with drive and good ideas, re- 2 takes on the data it collects: it presents of the extent of price controls, the licensing gardless of their gender or ethnic origin, can “absolute” indicators for each of the 11 regu- and permit system, the degree of simplicity get started in business and where good firms latory topics it addresses, and it provides of rules and procedures, the administrative can invest and grow, generating more jobs. comparisons between Hargeisa and other burdens and legal and regulatory barriers, regional and world economies both by indi- Small and medium-size enterprises are the prevalence of discriminatory procedures, cator and in aggregate. Judgment is required key drivers of competition, growth and job and the degree of government control over in interpreting these measures for any city creation, particularly in developing coun- business enterprises.6 The rankings on these and in determining a sensible and politically tries. But in these economies up to 80% of indicators—for the 39 countries that are economic activity takes place in the informal feasible path for reform. covered, several of them large emerging sector. Firms may be prevented from entering markets—are highly correlated with those on Reviewing the Doing Business rankings in iso- the formal sector by excessive bureaucracy the ease of doing business (the correlation lation may show unexpected results. Some and regulation. Even firms operating in the here is 0.72; figure 2.1). formal sector might not have equal access to economies may rank unexpectedly high on transparent rules and regulations affecting some indicators. And some economies that Similarly, there is a high correlation (0.82) their ability to compete, innovate and grow. have had rapid growth or attracted a great between the rankings on the ease of doing business and those on the World Economic deal of investment may rank lower than oth- Where regulation is burdensome and com- Forum’s Global Competitiveness Index, a petition limited, success tends to depend ers that appear to be less dynamic. much broader measure capturing such fac- more on whom you know than on what you tors as macroeconomic stability, aspects of But for reform-minded governments, how can do.9 But where regulation is transparent, human capital, the soundness of public insti- much the regulatory environment for lo- efficient and implemented in a simple way, tutions and the sophistication of the business it becomes easier for any aspiring entrepre- cal entrepreneurs improves matters more community (figure 2.2). Economies that do neurs, regardless of their connections, to than their relative ranking. As economies well on the Doing Business indicators tend operate within the rule of law and to benefit develop, they strengthen and add to regula- to do well on the OECD market regulation from the opportunities and protections that tions to protect investor and property rights. indicators and the Global Competitiveness the law provides. Not surprisingly, higher Meanwhile, they find more efficient ways Index and vice versa.7 rankings on the ease of doing business— to implement existing regulations and cut based on 10 areas of business regulation outdated ones. One finding of Doing Business: A bigger question is whether the issues on measured by Doing Business—are correlated which Doing Business focuses matter for de- dynamic and growing economies continually with better governance and lower levels of velopment and poverty reduction. The World reform and update their regulations and their perceived corruption.10 Bank study Voices of the Poor asked 60,000 way of implementing them, while many poor poor people around the world how they In this sense Doing Business values good rules economies still work with regulatory systems thought they might escape poverty.8 The as a key to social inclusion. It also provides a dating to the late 1800s. ABOUT DOING BUSINESS AND DOING BUSINESS IN HARGEISA 2012 9 WHAT RESEARCH SHOWS ON costs can boost legal certainty: businesses Ė In Colombia new firm registrations in- THE EFFECTS OF BUSINESS entering the formal sector gain access to the creased by 5.2% after the creation of a REGULATION legal system, to the benefit of both them- one-stop shop for businesses.25 Nine years of Doing Business data, together selves and their customers and suppliers.19 Ė In Portugal the introduction of a one-stop with other data sets, have enabled a grow- Assessing the impact of policy reforms poses shop for businesses led to a 17% increase ing body of research on how specific areas challenges. While cross-country correlations in new firm registrations and 7 new jobs of business regulation—and regulatory can appear strong, it is difficult to isolate for every 100,000 inhabitants compared reforms in those areas—relate to social and the effect of regulations given all the other with economies that did not implement economic outcomes. Some 873 articles have potential factors that vary at the country the reform.26 been published in peer-reviewed academic level. Generally, cross-country correlations journals, and about 2,332 working papers are A sound regulatory environment leads to stron- do not show whether a specific outcome is available through Google Scholar.12 ger trade performance. Efforts to streamline caused by a specific regulation or whether it coincides with other factors, such as a more the institutional environment for trade (such Much attention has been given to exploring positive economic situation. So how do we as by increasing the efficiency of customs) links to microeconomic outcomes, such know whether things would have been dif- have been shown to have positive effects as firm creation and employment. Recent ferent without a specific regulatory reform? on trade volumes.27 One study found that research focuses on how business regula- Some studies have been able to test this by an inefficient trade environment was among tions affect the behavior of firms by creating incentives (or disincentives) to register and investigating variations within an economy the main factors in poor trade performance operate formally, to create jobs, to innovate over time. Other studies have investigated in Sub-Saharan African countries.28 Similarly, and to increase productivity.13 Many studies policy changes that affected only certain another study identified the government’s have also looked at the role played by courts, firms or groups. Several country-specific ability to formulate and implement sound credit bureaus, and insolvency and collateral impact studies conclude that simpler entry policies and regulations that promote laws in providing incentives for creditors and regulations encourage the establishment of private sector development, customs ef- investors to increase access to credit. The more new firms: ficiency, quality of infrastructure and access literature has produced a range of findings. to finance as important factors in improving Ė In Mexico one study found that a program trade performance.29 The same study found Lower costs for business registration encourage that simplified municipal licensing led to a that economies with more constrained ac- entrepreneurship and enhance firm productivity. 5% increase in the number of registered cess to foreign markets benefit more from Economies with efficient business registra- businesses and a 2.2% increase in wage improvements in the investment climate tion have a higher entry rate by new firms as employment, while competition from than those with easier access. well as greater business density.14 Economies new entrants lowered prices by 0.6% where registering a new business takes less and the income of incumbent businesses Research also shows that an economy’s time have seen more businesses register in by 3.2%.20 Other research found that ability to enforce contracts is an important industries where the potential for growth the same licensing reform directly led to determinant of its comparative advantage is greatest, such as those that have experi- a 4% increase in new start-ups and that in the global economy: among comparable enced expansionary shifts in global demand the program was more effective in munici- economies, those with good contract en- or technology.15 Reforms making it easier to palities with less corruption and cheaper forcement tend to produce and export more start a business tend to have a significant additional registration procedures.21 customized products than those with poor positive effect on investment in product contract enforcement.30 Another study market industries such as transport, com- Ė In India the progressive elimination of the shows that in many developing economies munications and utilities, which are often “license raj” led to a 6% increase in new production of high-quality output is a pre- sheltered from competition.16 There is also firm registrations, and highly produc- condition for firms to become exporters: evidence that more efficient business entry tive firms entering the market saw larger institutional reforms that lower the cost of regulations improve firm productivity and increases in real output than less produc- high-quality production increase the positive macroeconomic performance.17 tive firms.22 Simpler entry regulation and effect that trade facilitation can have on in- labor market flexibility were found to be come.31 Research shows that removing bar- Simpler business registration translates into complementary. States with more flexible riers to trade needs to be accompanied by greater employment opportunities in the formal employment regulations saw a 25% larger other reforms, such as making labor markets sector. Reducing start-up costs for new firms decrease in informal firms and 17.8% more flexible, to achieve higher productivity was found to result in higher take-up rates larger gains in real output than states with and growth.32 for education, higher rates of job creation less flexible labor regulations.23 The same for high-skilled labor and higher average licensing reform led to an aggregate pro- Regulations and institutions that form part of productivity because new firms are often set ductivity improvement of around 22% for the financial market infrastructure—includ- up by high-skilled workers.18 Lowering entry firms affected by the reform.24 ing courts, credit information systems, and 10 DOING BUSINESS IN HARGEISA 2012 collateral, creditor and insolvency laws—play Business data. Yet the debate typically pro- BOX 2.1 How economies have used Doing a role in easing access to credit. Enterprise ceeds to a deeper discussion exploring the Business in regulatory reform surveys conducted by the World Bank show relevance of the data to the economy and programs that access to credit is a major constraint to areas where reform might make sense. To ensure coordination of efforts across businesses around the world.33 Good credit agencies, such economies as Colombia, information systems and strong collateral Most reformers start out by seeking exam- Rwanda and Sierra Leone have formed regu- laws can help alleviate financing constraints. ples, and Doing Business helps in this (boxes latory reform committees reporting directly to Analysis in 12 transition economies found 2.1 and 2.2). For example, Saudi Arabia used the president that use the Doing Business indi- that reforms strengthening collateral laws the company law of France as a model of for cators as one input to inform their programs increased the supply of bank loans by revising its own. Many countries in Africa for improving the business environment. 13.7% on average.34 Creditor rights and the look to Mauritius—the region’s strongest More than 20 other economies have formed existence of credit registries, whether public performer on Doing Business indicators—as a such committees at the interministerial or private, are both associated with a higher source of good practices for business regula- level. These include India, Malaysia, Taiwan tion reform. In the words of Luis Guillermo (China) and Vietnam in East and South Asia; ratio of private credit to GDP.35 And greater Plata, the former Minister of Commerce, the Arab Republic of Egypt, Morocco, Saudi information sharing through credit bureaus Industry and Tourism of Colombia, Arabia, the Syrian Arab Republic, the United is associated with higher bank profitability Arab Emirates and the Republic of Yemen in and lower bank risk.36 the Middle East and North Africa; Georgia, It’s not like baking a cake where you follow the recipe. No. We are all different. Kazakhstan, the Kyrgyz Republic, Moldova Country-specific research assessed the But we can take certain things, certain and Tajikistan in Eastern Europe and Central effect of efficient debt recovery and exit Asia; Kenya, Liberia, Malawi and Zambia in processes in determining conditions of credit key lessons, and apply those lessons and Sub-Saharan Africa; and Guatemala, Mexico and in ensuring that less productive firms are see how they work in our environment. and Peru in Latin America. Governments have either restructured or exit the market: reported more than 300 regulatory reforms Over the past 9 years there has been much Ė The establishment of specialized debt that have been informed by Doing Business activity by governments in reforming the recovery tribunals in India sped up the res- since 2003. regulatory environment for domestic busi- olution of debt recovery claims and allowed nesses. Most reforms relating to Doing lenders to seize more collateral on default- Business topics were nested in broader ing loans. It also increased the probability BOX 2.2 How regional economic forums use programs of reform aimed at enhancing Doing Business of repayment by 28% and lowered interest economic competitiveness. In structuring The Asia-Pacific Economic Cooperation rates on loans by 1–2 percentage points.37 their reform programs for the business (APEC) organization uses Doing Business to Ė Following a broad bankruptcy reform in environment, governments use multiple identify potential areas of regulatory reform, Brazil in 2005 that, among other things, data sources and indicators. And reformers to champion economies that can help oth- improved the protection of creditors, the ers improve and to set measurable targets. respond to many stakeholders and interest cost of debt fell by 22% and the aggregate In 2009 APEC launched the Ease of Doing groups, all of whom bring important issues Business Action Plan with the goal of making level of credit rose by 39%.38 and concerns into the reform debate. World it 25% cheaper, faster and easier to do busi- Ė The introduction of improved insolvency Bank Group dialogue with governments ness in the region by 2015.i The action plan regimes that streamlined mechanisms for on the investment climate is designed to sets specific targets, such as making it 25% reorganization reduced the number of liq- encourage critical use of the data, sharpen- faster to start a business by reducing the av- uidations by 8.4% in Belgium and by 13.6% ing judgment, avoiding a narrow focus on erage time by 1 week. in Colombia as more viable firms opted for improving Doing Business rankings and Drawing on a firm survey, planners identi- fied 5 priority areas: starting a business, get- reorganization instead.39 In Colombia the encouraging broad-based reforms that ting credit, enforcing contracts, trading across new law better distinguished viable from enhance the investment climate. The World borders and dealing with permits. APEC nonviable firms, making survival more like- Bank Group uses a vast range of indicators economies then selected 6 “champion econo- ly for financially distressed but viable firms. and analytics in this policy dialogue, includ- mies” for the priority areas: New Zealand and ing its Global Poverty Monitoring Indicators, the United States (starting a business), Japan Logistics Performance Indicators and many (getting credit), Korea (enforcing contracts), HOW GOVERNMENTS USE Singapore (trading across borders) and Hong DOING BUSINESS others. With the open data initiative, all in- Kong SAR, China (dealing with construction Quantitative data and benchmarking can be dicators are available to the public at http:// permits). In 2010 and 2011 several of the useful in stimulating debate about policy, data.worldbank.org. champion economies organized workshops both by exposing potential challenges, and to develop programs for building capacity in METHODOLOGY AND DATA their area of expertise. by identifying where policy makers might look for lessons and good practices. For Doing Business data are based on national i. APEC (Asia-Pacific Economic Cooperation). 2010. “APEC Ease of Doing Business Action Plan governments, a common first reaction is to and local laws and regulations as well as (2010-2015).” http://aimp.apec.org. doubt the quality and relevance of the Doing administrative requirements. For a detailed ABOUT DOING BUSINESS AND DOING BUSINESS IN HARGEISA 2012 11 explanation of the Doing Business in Hargeisa were explored, including using principal Electricity.43 Doing Business in Hargeisa 2012 2012 methodology, see data notes. components and unobserved components. has reflected the removal of procedures The principal components and unobserved related to getting an electricity connection Information sources for the data components approaches turn out to yield from dealing with construction permits to Most of the indicators are based on laws results nearly identical to those of simple allow for international comparability. In and regulations. In addition, most of the cost averaging. The tests show that each set of addition, Doing Business in Hargeisa 2012 indicators are backed by official fee sched- indicators provides sufficiently broad cover- includes improvements in the methodology ules. Doing Business respondents both fill out age across topics. Thus Doing Business uses for the employing workers indicators and written surveys and provide references to the the simplest method: weighting all topics the getting credit (legal rights) indicators, relevant laws, regulations and fee schedules, equally and, within each topic, giving equal in addition to the removal of the procedures aiding data checking and quality assurance. weight to each of the topic components.41 related to getting an electricity connection from the dealing with construction permits For some indicators part of the cost compo- Inclusion of getting electricity indicators. It also includes changes in the nent (where fee schedules are lacking) and indicators ranking methodology for paying taxes. the time component are based on actual This year’s ease of doing business ranking practice rather than the law on the books. includes getting electricity as a new topic. Employing workers methodology. With the This introduces a degree of subjectivity. The getting electricity indicators were intro- aim of better capturing the balance between The Doing Business approach has therefore duced as a pilot in Doing Business 2010 and worker protection and efficient employment been to work with legal practitioners or Doing Business 2011, which presented the regulation that favors job creation, Doing professionals who regularly undertake the results in an annex. During the pilot phase Business has made a series of amendments transactions involved. Following the stan- the methodology was reviewed by experts, to the methodology for the employing dard methodological approach for time and and data on the time, cost and procedures workers indicators over the past 4 years. In motion studies, Doing Business breaks down to obtain an electricity connection were col- addition, the World Bank Group has been each process or transaction, such as start- lected for the full set of 183 economies. To working with a consultative group—includ- ing and legally operating a business, into avoid double counting, procedures related to ing labor lawyers, employer and employee separate steps to ensure a better estimate getting an electricity connection have been representatives, and experts from civil of time. The time estimate for each step is removed from the dealing with construction society, the private sector, the International given by practitioners with significant and permits indicators.49 Labour Organization (ILO) and the OECD— routine experience in the transaction. to review the methodology and explore Improvements to the methodology future areas of research.44 The consultative The Doing Business approach to data col- group completed its work this year, and its The methodology has undergone continual lection contrasts with that of enterprise or guidance has provided the basis for several improvement over the years.42 Changes have firm surveys, which capture often one-time changes in methodology (see also the data been made mainly in response to country perceptions and experiences of businesses. notes). A full report with the conclusions suggestions. In accordance with the Doing A corporate lawyer registering 100–150 of the consultative group is available on the Business methodology, these changes have businesses a year will be more familiar Doing Business website.45 been incorporated into the Doing Business in with the process than an entrepreneur, who Hargeisa 2012. will register a business only once or maybe Follow-on work is continuing to explore twice. A bankruptcy judge deciding dozens For starting a business, for example, the the measurement of worker protection to of cases a year will have more insight into minimum capital requirement can be an complement the measurement of the cost bankruptcy than a company that may un- obstacle for potential entrepreneurs. Initially, to employers of labor regulations. The data dergo the process. Doing Business measured the required mini- on worker protection will serve as a basis for mum capital regardless of whether it had to the development of a joint analysis of worker Development of the methodology be paid up front or not. In many economies protection by the World Bank Group and the The methodology for calculating each in- only part of the minimum capital has to be ILO. dicator is transparent, objective and easily paid up front. To reflect the actual potential replicable. Leading academics collaborate barrier to entry, the paid-in minimum capital Pending further progress on research in this in the development of the indicators, ensur- has been used since 2004. area, this year’s report does not present rank- ing academic rigor. Eight of the background ings of economies on the employing workers papers underlying the indicators have been Doing Business 2012 report removes proce- indicators or include the topic in the aggre- published in leading economic journals.40 dures related to getting an electricity con- gate ranking on the ease of doing business. nection from dealing with construction per- It does present the data on the employing Doing Business uses a simple averaging mits indicators. This has been done to avoid workers indicators. Additional data on labor approach for weighting sub-indicators and double counting as the Doing Business 2012 regulations collected in 183 economies are calculating rankings. Other approaches report includes an 11th indicator—Getting available on the Doing Business website.46 12 DOING BUSINESS IN HARGEISA 2012 Paying taxes methodology. Doing Business means are also rewarded (see the data notes Belgium, Brazil, Canada, Chile, China, the has benefited from dialogue with external for more details). The change aligns the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, stakeholders, including participants in the methodology for this indicator with guide- India, Ireland, Israel, Italy, Japan, Korea, International Tax Dialogue, on the survey lines of the United Nations Commission on Luxembourg, Mexico, the Netherlands, New instrument and methodology for the pay- International Trade Law (UNCITRAL) and Zealand, Norway, Poland, Portugal, Russia, ing taxes indicators. As a result of these the World Bank Group. the Slovak Republic, Slovenia, South Africa, consultations, this year’s report introduces Spain, Sweden, Switzerland, Turkey, the Data adjustments United Kingdom and the United States. a threshold for the total tax rate for the purpose of calculating the ranking on the All changes in methodology are explained 7. The World Economic Forum’s Global Competitiveness Report uses part of the ease of paying taxes. All economies with a in the data notes section of this report as Doing Business data sets on starting a total tax rate below the threshold (which well as on the Doing Business website. In business, employing workers, protecting will be calculated and adjusted on a yearly addition, data time series for each indicator investors and getting credit (legal rights). basis) will now receive the same ranking on and economy are available on the website, 8. Narayan, Deepa, Robert Chambers, Meer the total tax rate indicator. Since the total tax beginning with the first year the indicator or Kaul Shah and Patti Petesh. 2000. Voices of rate is 1 of 32 indicators included in the rank- economy was included in the report. To pro- the Poor: Crying Out for Change. Washington, DC: World Bank Group. ing on the overall ease of doing business, this vide a comparable time series for research, change has minimal effects on the overall the data set is back-calculated to adjust for 9. Hallward-Driemeier, Khun-Jush and Pritchett (2010) analyze data from World rankings. The correlation between rankings changes in methodology and any revisions in Bank Enterprise Surveys for Sub-Saharan on the ease of paying taxes with and without data due to corrections. The data set is not Africa and show that broadly de jure this threshold is 99%. The threshold is not back-calculated for year-to-year changes in measures such as Doing Business indicators based on any underlying theory. Instead, it income per capita. The website also makes are not correlated with ex post firm-level is meant to emphasize the purpose of the available all original data sets used for back- responses. While countries that do better according to Doing Business generally indicator: to highlight economies where the ground papers. Information on data correc- perform better on enterprise surveys, for tax burden on business is high relative to tions is provided in the data notes and on the the majority of economies in the sample the tax burden in other economies. Giving website. A transparent complaint procedure there is no correlation. Further, the authors the same ranking to all economies whose allows anyone to challenge the data. If errors find that the gap between de jure and de total tax rate is below the threshold avoids are confirmed after a data verification pro- facto conditions grows with the formal regulatory burden. This suggests that more awarding economies in the scoring for hav- cess, they are expeditiously corrected. burdensome processes in Africa open up ing an unusually low total tax rate, often for more space for making deals and that firms reasons unrelated to government policies may not incur the official costs of compli- toward enterprises. For example, economies NOTES ance, but they still pay to avoid them. A few that are very small or that are rich in natural 1. This has included a review by the World differences in the underlying methodologies Bank Independent Evaluation Group should be kept in mind. The Doing Business resources do not need to levy broad-based (2008) as well as ongoing input from the methodology focuses on the main business taxes. For more details on the calculation of International Tax Dialogue. city, while enterprise surveys typically the threshold, see the data notes. cover the entire country. Doing Business 2. De Soto, Hernando. 2000. The Mystery of Capital: Why Capitalism Triumphs in the West gathers the considered views of experts Getting credit methodology. The strength and Fails Everywhere Else. New York: Basic who examine the laws and rules underly- of legal rights index measures certain rights Books. ing the business regulatory framework in a narrow set of areas; enterprise surveys of borrowers and lenders with respect to 3. Schneider, Friedrich. 2005. “The Informal collect the views of enterprise managers secured transactions. The index describes Sector in 145 Countries.” Department of and the question posed to the manager is how well collateral and bankruptcy laws Economics, University Linz. seldom identical to the one being addressed facilitate lending by measuring 10 aspects 4. Amin, Mohammad. 2011. “Labor by Doing Business contributors, which is in of these laws. One aspect of collateral law Productivity, Firm-Size and Gender: The reference to a particular standardized case. Case of Informal Firms in Argentina and World Bank Enterprise Surveys, available at that is measured relates to whether secured Peru.” Enterprise Note 22, Enterprise http://www.enterprisesurveys.org, collect creditors can continue individual court ac- Analysis Unit, World Bank Group, business data on more than 100,000 firms tions after a debtor starts a court-supervised Washington, DC. in 125 economies, covering a broad range of reorganization procedure or whether they http://enterprisesurveys.org. business environment topics. are subject to an automatic stay or a mora- 5. http://www.enterprisesurveys.org 10. The correlation coefficient between the ease torium. Previously only economies where 6. OECD, “Indicators of Product Market of doing business ranking and the ranking secured creditors can continue a court ac- Regulation,” http://www.oecd.org. The on the Control of Corruption Index is 0.62 measures are aggregated into 3 broad and that between the ease of doing business tion in these circumstances were rewarded families that capture state control, bar- ranking and the ranking on the Transparency in the scoring for the strength of legal rights International Corruption Perceptions Index riers to entrepreneurship and barriers to index. Now economies where secured credi- international trade and investment. The 0.77. The positive correlation is statistically tors must stop individual court actions but 39 countries included in the OECD market significant at the 5% level. their rights remain protected through other regulation indicators are Australia, Austria, 11. World Bank. 2003. Doing Business in 2004: ABOUT DOING BUSINESS AND DOING BUSINESS IN HARGEISA 2012 13 Understanding Regulation. Washington, DC: 15. Ciccone, Antonio, and Elias Papaioannou. “Firm Informality in Colombia: Problems World Bank Group. 2007. “Red Tape and Delayed Entry.” Journal and Solutions.” Desarrollo y Sociedad, no. 63: 12. According to searches on Google Scholar of the European Economic Association 5 211–43. (http://scholar.google.com) and the Social (2-3):444-58. 26. Branstetter, Lee G., Francisco Lima, Lowell J. Science Citation Index. 16. Alesina, Alberto, Silvia Ardagna, Giuseppe Taylor and Ana Venâncio. 2010. “Do Entry 13. Djankov, Simeon, Rafael La Porta, Florencio Nicoletti and Fabio Schiantarelli. 2005. Regulations Deter Entrepreneurship and Job López-de-Silanes and Andrei Shleifer. “Regulation and Investment.” Journal of Creation? Evidence from Recent Reforms 2002. “The Regulation of Entry.” Quarterly the European Economic Association 3 (4): in Portugal.” NBER Working Paper 16473, Journal of Economics 117 (1): 1–37; Alesina, 791-825. National Bureau of Economic Research, Alberto, Silvia Ardagna, Giuseppe Nicoletti 17. Loayza,Norman, Ana Maria Oviedo Cambridge, MA. and Fabio Schiantarelli. 2005. “Regulation and Luis Serven. 2005. “Regulation and 27. Djankov, Simeon, Caroline Freund and Cong and Investment.” Journal of the European Macroeconomic Performance.” Policy S. Pham. 2010. “Trading on Time.” Review of Economic Association 3 (4): 791–825; Perotti, Research Working Paper 3469, World Bank, Economics and Statistics 92 (1): 166–73. Enrico, and Paolo Volpin. 2005. “The Washington DC; Barseghyan, Levon. 2008. 28. Iwanow, Thomasz, and Colin Kirkpatrick. Political Economy of Entry: Lobbying and “Entry Costs and Cross-Country Differences 2009. “Trade Facilitation and Manufacturing Financial Development.” Paper presented in Productivity and Output.” Journal of Exports: Is Africa Different?” World at the American Finance Association 2005 Economic Growth 13 (2): 145-67. Development 37 (6): 1039–50. Philadelphia Meetings; Klapper, Leora, Luc 18. Dulleck, Uwe, Paul Frijters and R. Winter- 29. Seker, Murat. 2011. “Trade Policies, Laeven and Raghuram Rajan. 2006. “Entry Ebmer. 2006. “Reducing Start-up Costs Regulation as a Barrier to Entrepreneurship.” Investment Climate, and Exports.” MPRA for New Firms: The Double Dividend on Paper 29905, University Library of Munich, Journal of Financial Economics 82 (3): the Labor Market.” Scandinavian Journal of 591–629; Fisman, Raymond, and Virginia Germany. Economics 108: 317–37; Calderon, César, Sarria-Allende. 2010. “Regulation of Alberto Chong and Gianmarco Leon. 2007. 30. Nunn, Nathan. 2007. “Relationship- Entry and the Distortion of Industrial “Institutional Enforcement, Labor-Market Specificity, Incomplete Contracts, and Organization.” Journal of Applied Economics Rigidities, and Economic Performance.” the Pattern of Trade.” Quarterly Journal of 13 (1): 91–120; Antunes, Antonio, and Tiago Emerging Markets Review 8 (1): 38–49; Economics 122 (2): 569–600. Cavalcanti. 2007. “Start Up Costs, Limited Micco, Alejandro, and Carmen Pagés. 2006. 31. Rauch, James. 2010. “Development through Enforcement, and the Hidden Economy.” “The Economic Effects of Employment Synergistic Reforms.” Journal of Development European Economic Review 51 (1): 203–24; Protection: Evidence from International Economics 93 (2): 153–61. Barseghyan, Levon. 2008. “Entry Costs and Industry-Level Data.” IZA Discussion Paper 32. Chang, Roberto, Linda Kaltani and Cross-Country Differences in Productivity 2433, Institute for the Study of Labor (IZA), Norman Loayza. 2009. “Openness Can and Output.” Journal of Economic Growth 13 Bonn, Germany. Be Good for Growth: The Role of Policy (2): 145–67; Eifert, Benjamin. 2009. “Do 19. Masatlioglu, Yusufcan, and Jamele Rigolini. Complementarities.” Journal of Development Regulatory Reforms Stimulate Investment 2008. “Informality Traps.” B.E. Journal of Economics 90: 33–49; Cunat, Alejandro, and Growth? Evidence from the Doing Economic Analysis & Policy 8 (1); Djankov, and Marc J. Melitz. 2007. “Volatility, Business Data, 2003–07.” Working Paper Simeon. 2009. “The Regulation of Entry: A Labor Market Flexibility, and the Pattern of 159, Center for Global Development, Survey.” World Bank Research Observer 24 Comparative Advantage.” NBER Working Washington, DC; Klapper, Leora, Anat Lewin (2): 183–203. Paper 13062, National Bureau of Economic and Juan Manuel Quesada Delgado. 2009. 20. Bruhn, Miriam. 2011. “License to Sell: The Research, Cambridge, MA. “The Impact of the Business Environment on the Business Creation Process.” Policy Effect of Business Registration Reform on 33. http://enterprisesurveys.org. Research Working Paper 4937, World Bank, Entrepreneurial Activity in Mexico.” Review 34. Haselmann, Rainer, Katharina Pistor and Washington, DC; Djankov, Simeon, Caroline of Economics and Statistics 93 (1): 382–86. Vikrant Vig. 2010. “How Law Affects Freund and Cong S. Pham. 2010. “Trading on 21. Kaplan, David, Eduardo Piedra and Enrique Lending.” Review of Financial Studies 23 Time.” Review of Economics and Statistics 92 Seira. 2007. “Entry Regulation and Business (2): 549–80. The countries studied were (1): 166–73; Klapper, Leora, and Inessa Love. Start-Ups: Evidence from Mexico.” Policy Bulgaria, Croatia, the Czech Republic, 2011. “The Impact of Business Environment Research Working Paper 4322, World Bank, Estonia, Hungary, Latvia, Lithuania, Poland, Reforms on New Firm Registration.” Policy Washington, DC. Romania, the Slovak Republic, Slovenia and Research Working Paper 5493, World Bank, Ukraine. 22. Aghion, Philippe, Robin Burgess, Stephen Washington, DC; Chari, Anusha. 2011. Redding and Fabrizio Zilibotti. 2008. “The 35. Djankov, Simeon, Caralee McLiesh and “Identifying the Aggregate Productivity Unequal Effects of Liberalization: Evidence Andrei Shleifer. 2007. “Private Credit in 129 Effects of Entry and Size Restrictions: An from Dismantling the License Raj in India.” Countries.” Journal of Financial Economics Empirical Analysis of License Reform in American Economic Review 98 (4): 1397–412. 84 (2): 299–329; Houston, Joel, Chen India.” American Economic Journal: Economic 23. Sharma, Siddharth. 2009. “Entry Regulation, Lin, Ping Lin and Yue Ma. 2010. “Creditor Policy 3: 66–96; Bruhn, Miriam. 2011. Labor Laws and Informality: Evidence from Rights, Information Sharing, and Bank Risk “License to Sell: The Effect of Business India.” Enterprise Survey Working Paper, Taking.” Journal of Financial Economics 96 (3): Registration Reform on Entrepreneurial Enterprise Analysis Unit, World Bank Group, 485–512. Activity in Mexico.” Review of Economics and Statistics 93 (1): 382–86. Washington, DC. 36. Ibid. 14. Klapper, Lewin and Quesada Delgado 2009. 24. Chari, Anusha. 2011. “Identifying the 37. Visaria, Sujata. 2009. “Legal Reform and Entry rate refers to newly registered firms Aggregate Productivity Effects of Entry and Loan Repayment: The Microeconomic as a percentage of total registered firms. Size Restrictions: An Empirical Analysis of Impact of Debt Recovery Tribunals in India.” Business density is defined as the total License Reform in India.” American Economic American Economic Journal: Applied Economics number of businesses as a percentage of the Journal: Economic Policy 3: 66–96. 1 (3): 59–81. working-age population (ages 18-65). 25. Cardenas, Mauricio, and Sandra Rozo. 2009. 38. Funchal, Bruno. 2008. “The Effects of 14 DOING BUSINESS IN HARGEISA 2012 the 2005 Bankruptcy Reform in Brazil.” 42. All changes in methodology are explained Economics Letters 101: 84–86. in the data notes of the report (data notes 39. Dewaelheyns, Nico, and Cynthia Van Hulle. and all Doing Business reports are available at 2008. “Legal Reform and Aggregate Small http://www.doingbusiness.org). and Micro Business Bankruptcy Rates: 43. Previous years’ data on dealing with con- Evidence from the 1997 Belgian Bankruptcy struction permits are adjusted to reflect this Code.” Small Business Economics 31 (4): change. They are made available on Doing 409–24; Giné, Xavier, and Inessa Love. Business website under “historical data” 2010. “Do Reorganization Costs Matter (http://www.doingbusiness.org). for Efficiency? Evidence from a Bankruptcy 44.For the terms of reference and composi- Reform in Colombia.” Journal of Law and tion of the consultative group, see World Economics 53 (4): 833–64. Bank, “Doing Business Employing Workers 40.All background papers are available on the Indicator Consultative Group,” Doing Business website http://www.doingbusiness.org. (http://www.doingbusiness.org). 45. http://www.doingbusiness.org/ 41. A technical note on the different aggregation methodology/employing-workers. and weighting methods is available on the 46. http://www.doingbusiness.org. Doing Business website (http://www.doingbusiness.org). 15 Starting a business In Hargeisa the informal sector represents FIGURE 3.1 What are the time, cost, paid-in minimum capital and number of procedures required to get a the largest part of the economy, providing local, limited liability company up and running? 77% of the total employment in the city.1 Cost (% of income per capita) Informality, which typically flourishes in Formal Operation conflict-affected economies, can limit firms’ growth and productivity. Although issues like security and stability take priority in the Paid in $ Number of minimum procedures government’s agenda, making the process capital of business incorporation easy can encour- age businesses to join the formal sector. WHY DOES FORMAL BUSINESS Entrepreneur REGISTRATION MATTER? Time (days) Preincorporation Incorporation Postincorporation Registered businesses grow larger and are more productive than informal ones.2 They WHAT DOES STARTING A minimum capital that has to be paid in the have access to services and institutions BUSINESS MEASURE? world. By contrast, in Rwanda, a regional and from courts to banks as well as to new global good practice economy, an entrepre- Doing Business measures the procedures, markets—benefits that are not available neur spends only three days and 4.7% of time, cost and paid-in minimum capital re- to unregistered firms. Legal entities outlive income per capita completing two proce- quired for a small to medium-size company their founders. Resources can be pooled as to start up and operate formally (figure 3.1). dures—and no minimum capital has to be several shareholders join together. The legal These procedures include obtaining all nec- paid in. Hargeisa would rank 175 compared form under which a company is registered essary licenses and permits and completing to 183 other economies on the ease of start- also matters. Limited liability companies cap any required notifications, verifications or ing a business as measured by Doing Business the financial liability of company owners to inscriptions for the company and employees 2012, ahead of neighboring Djibouti (179) or their investments, so personal assets are not with relevant authorities. To make the data Eritrea (182) but behind Rwanda (8), Yemen put at risk. comparable across 183 economies, Doing (66) or Ethiopia (99) (figure 3.2). Business entry regulation and associated Business uses a standardized business that is 100% domestically owned, has a start- Business incorporation in Hargeisa is costs can hinder or encourage business for- up capital equivalent to 10 times income governed mainly by the Companies Law of malization. One study finds that higher entry per capita, engages in general industrial or Somaliland (Law No. 25/2004), as well as costs are associated with a larger informal sector and a smaller number of legally reg- commercial activities and employs between administrative rules set up by the institu- istered firms.3 When regulation, compliance 10 and 50 people. tions involved in the process: the Ministry and start-up costs are cumbersome, cutting of Commerce issues commercial licenses; into businesses’ profits, they discourage HOW DOES IT WORK IN the Attorney General administers the act of entrepreneurs and hamper job creation.4 On HARGEISA AND HOW DOES IT incorporation; and the Ministry of Finance the other hand, a recent study using data COMPARE GLOBALLY? handles payments. Since 2007, only 358 cor- collected from company registries in 100 Starting a limited liability company in porations have registered with the Ministry countries over 8 years found that simple Hargeisa requires 11 procedures over 29 of Commerce (figure 3.3). In total, the business start-up is critical for fostering days and costs 130.6% of income per capita. ministry has issued 1,274 business licenses formal entrepreneurship. Countries with a In addition, 2,365% of income per capita since 1997. This is a very low number in an quick, efficient and cost-effective business has to be deposited into a bank account as economy of more than 3.5 million inhabit- registration process have a higher entry rate minimum capital. Expressed as a percent- ants—about 0.4 registered firms per 1,000 as well as greater business density.5 age of income per capita, this is the highest inhabitants. In Sub-Saharan Africa, there are 16 DOING BUSINESS IN HARGEISA 2012 FIGURE 3.2 Starting a business in selected African and Middle Eastern economies: Hargeisa has the highest paid-in minimum capital requirement in the world Global rank Procedures Time Cost Paid in minimum capital (183 economies) (number) (days) (% of income per capita) (% of income per capita) 1 New Zealand 15 85 Eritrea (84) 185 2,500 Rwanda (8) Hargeisa (2,365.2) Djibouti (169.8) Eritrea (13) Liberia (35) Djibouti (434.0) Hargeisa (11) Djibouti (11) Hargeisa (130.6) Yemen, Rep. (66) Ethiopia (333.5) SSA Average (8) Senegal (93) SSA Average (37) Ethiopia (99) Djibouti (37) Yemen, Rep. (83.8) SSA Average (81.2) Eritrea (243.0) Yemen, Rep. (6) Liberia (68.4) SSA Average (123) Senegal (68.0) Senegal (203.0) Ethiopia (5) Hargeisa (29) Eritrea (62.6) Liberia (4) SSA Average (129.8) Senegal (3) Yemen, Rep. (12) Rwanda (2) Ethiopia (9) Liberia (6) Ethiopia (12.8) Hargeisa (175) Senegal (5) Yemen, Rep. Djibouti (179) New Zealand (1) Rwanda (4.7) Liberia Rwanda (3) New Zealand (1) New Zealand (0.4) Rwanda 183 Eritrea (182) 0 0 0 0 New Zealand Notes: SSA denotes the Sub-Saharan Africa region. Rankings are based on the average economy percentile rankings on the procedures, time, cost and paid-in minimum capital requirement to start a business. See the data notes for details. Source: Doing Business database. on average 1.2 new registered firms for every Self-Administration Law (Law 23). The and medium-size enterprises with similar 1,000 inhabitants aged 16 to 64. South 6 number of business establishments regis- characteristics to the category of firms mea- Sudan, a country affected by many years of tered with the municipality is much higher sured by Doing Business.9 civil war, registered on average about 1,800 than those registered with the Ministry of new businesses yearly from 2006 to 2010, Commerce. Hargeisa Municipality issued The 11 procedures required to start a busi- significantly more than in Somaliland.7 3,075 business licenses in 2010 (figure 3.3) ness include 3 pre-incorporation, 3 incorpo- while the Ministry of Commerce issued only ration, and 5 post-incorporation interactions After incorporation and in order to oper- 118 commercial licenses for the same year. with various agencies (figure 3.4).10 Prior ate, businesses need to obtain a local While a significant portion of the municipal to incorporation, a business must notarize business license issued by the Hargeisa business licenses were issued to sole propri- a list of necessary documents, deposit the Municipality, as per the Regions and District etorships,8 many others were issued to small minimum paid-in capital into a bank account, FIGURE 3.3 More businesses register with Hargeisa Municipality than with the Ministry of Commerce Ministry of Commerce Hargeisa Municipality** Number of companies registered Number of business licenses issued*** 118 6000 120 5,435 100 100 5000 80 60 57 3,948 4000 3,788 40 34 39 3,075 20 3000 10* 2500 2513 0 2164 2007 2008 2009 2010 2011 2012 2052 2000 *Data for 2012 are as of February 2012. **No data are available for 2003–05 and 2008. 1000 ***Includes new licenses and renewals. Source: Somaliland Ministry of Commerce register books. Hargeisa 0 Municipality Statistical Abstract (Second Edition, September 2003; Fourth 1999 2000 2001 2002 2006 2007 2009 2010 Edition, December 2008; and Fifth Edition draft, August 2012). STARTING A BUSINESS 17 FIGURE 3.4 Entrepreneurs must complete numerous procedures involving five government agencies Time (days) Cost (% of income per capita) Procedures 35 140% 1. Notarize incorporation documents Total cost 130.6% 2. Open a bank account with Bank of Somaliland and deposit the minimum capital 30 120% Cost of local 3. Obtain clearance from the Ministry of Commerce to business license 66.2% incorporate with Attorney General’s Office 25 100% Administered 4. Obtain certificate of incorporation from Attorney by the Ministry General’s Office of Commerce 20 80% 5. Apply for and obtain a commercial license at the Total time 29 days Ministry of Commerce 15 60% 6. Pay commercial license fee at the Ministry of Finance 7. Apply for local business license at the District Com- 10 40% missioner’s Office and receive on-site inspection of the business premises 8*. Register with the Somaliland Chamber of Commerce 5 20% 9. Pay local business license fee at the District Office 10. Obtain local business license from the Mayor’s Office 0 0% 1 2 3 4 5 6 7 8 9 10 11 11. Purchase a company seal Preincorporation Incorporation Postincorporation * This procedure is simultaneous with a previous procedure. Procedures Source: Doing Business database. and obtain clearance from the Ministry of (6 days) (figure 3.2). The interactions with Companies Law of Somaliland requires paid- Commerce to register with the Attorney the Ministry of Commerce and the local in minimum capital, but it does not set an General’s Office. Despite the fact that authorities are the main bottlenecks, taking amount. Section 58 of the law states that the notarization is not required by law, based two-thirds of the total time. Entrepreneurs in authorized minimum capital is determined on common practice and requirements set Hargeisa spend on average 11 days with the by order of the Attorney General. In practice, forth by the Ministry of Commerce and the Ministry of Commerce to obtain the neces- however, it is a subject of discussion among Attorney General, notaries formally witness, sary clearances for a commercial license, the Ministry of Commerce and the Attorney review and stamp the incorporation docu- and 9 days with local authorities at district General as well as representatives of the ments. Incorporation starts at the Attorney and municipal level to obtain a local business company being incorporated. This leaves General’s Office and concludes with the license. room for interpretation and gives public commercial license issued by the Ministry officials leverage to delay the process when of Commerce. After incorporation, a mu- Entrepreneurs pay 130.6% of income per disagreements arise. This can also discour- nicipal business license has to be obtained. capita ($276) to start a business in Hargeisa.11 age aspiring companies from joining the This license includes two interactions with Compared with 183 economies measured by formal sector if unreasonable amounts of the District Commissioner corresponding Doing Business, Hargeisa is among the top 15 capital deposits are asked. to the business premises location and one most expensive cities in the world to start a interaction with the Hargeisa Municipality to business. The $140 cost of the local business FIGURE 3.5 Two business licenses—the commercial obtain the municipal business license. Post- license represents more than half of the total license and the local business license— account for about 60% of the total cost incorporation steps also include registering cost and 66.2% of income per capita (figure with the Chamber of Commerce and com- 3.4). The Ministry of Commerce charges (% of total cost) missioning a company seal. Although neither 1% of the company’s start-up capital for Chamber of commerce of these procedures is required by law, the the commercial license. Overall, these two membership 18% Ministry of Commerce currently instructs licenses make up almost 60% of the total Company seal 7% every entity to register with the Chamber of cost. The next most expensive fee is the $50 Commerce and frequently requires Chamber Chamber of Commerce membership fee, of Commerce membership prior to issuing a which represents 18% of the total cost and Notarization 7% commercial license. 23.7% of income per capita (figure 3.5). Bank account 9% The 29 days needed to register a business In addition to start-up fees, entrepreneurs in Hargeisa are faster than the Sub-Saharan have to deposit on average 2,365% of income Commercial license 8% Africa average of 37 days, but significantly per capita as paid-in minimum capital—an Local business license 51% slower than regional good practices found in exorbitant and unaffordable amount for many Rwanda (3 days), Senegal (5 days) or Liberia local small and medium-size businesses. The Source: Doing Business database. 18 DOING BUSINESS IN HARGEISA 2012 There are thus many opportunities for regardless of firm size. Commercial licenses better communication among these agen- streamlining business registration in are valid for only one year. Renewals are cies. Rather than having entrepreneurs visit Hargeisa. And indeed, authorities at both different and have significant fixed fees them separately, these agencies can set up a central and local levels have undertaken depending on the type of business. However, document-forwarding system among them- some reforms. At the beginning of 2012, the type of business is defined only by broad selves. This measure would only be effective the Ministry of Commerce eliminated a fee classification, not firm characteristics. For through efficient communication among of 3% of initial capital for the commercial instance, the renewal fee for all wholesale government agencies. licenses, easing the financial burden on businesses is around $308. Firm character- newly registered firms. Currently, the central istics such as revenues or number of em- A better solution would be to set up a one- government is working closely with inter- ployees are ignored. Annual renewals often stop shop that would place representatives national development partners to reform end up being much more expensive than the of all relevant agencies under one roof to business incorporation. At the same time, initial registration. As a result, entrepreneurs receive and process both applications and Hargeisa Municipality has been working with are discouraged to register knowing that in a payments. The applications should consist international experts to restructure business year’s time their license costs will increase. of one consolidated form that fulfills the classifications, based on which license fees requirements of all agencies involved. There are charged, and to simplify business regis- The municipal license fee schedule suffers should also be a single window that would tration at the local level. Overall, however, from a similar lack of specifics, but also from serve as a contact point for all of the agen- the business registration process remains a failure to define existing terms. Although cies. This would allow an entrepreneur to expensive and relatively lengthy. it mentions different fees for small and large complete company formation in a single trip, restaurants, for example, the terms small and significantly reducing the hassle and time WHAT TO REFORM? large are undefined, leaving the matter open involved. An alternative is to identify one key to public officials’ interpretation. agency to accept and process applications on Reduce or abolish the paid-in behalf of other agencies; this agency could minimum capital requirement The low number of registered businesses in be given access to the registration database The paid-in minimum capital could be Hargeisa may indicate that high licensing for the type of information needed.14 reduced to a nominal amount or abolished fees deter new firms from registering. Since altogether. The economies that originally few businesses register, high fees do not The key to a successful reform is giving of- introduced the minimum capital require- result in significant revenues for the govern- ficials at the one-stop shop decision-making ment intended to protect investors and ment. Authorities could consider cutting fees power for their respective agencies. Without creditors. Because the deposited capital and involving public and private stakehold- it, delays will continue as the documents is often withdrawn immediately after reg- ers in a discussion on acceptable fee levels. travel to agency headquarters and back. In istration, however, this does not offer real Many argue that the right fees are those that addition, duplicate processes at the other investor protection. According to a recent cover the administrative costs of govern- agencies must be eliminated. Economies study, economies that have higher mini- ment services. Moreover, money to pay for that fail to do this see their one-stop shop mum capital requirements do not necessar- government services is raised through taxes. become “one more stop” in the company ily have higher bankruptcy recovery rates.12 registration process. And such requirements can have counter- Streamline procedures and establish productive effects on entrepreneurship.13 a one-stop shop for business start-up Globally, 83 economies have some kind of Since 2005, 57 economies have reduced Currently, entrepreneurs must interact one-stop shop for business registration. or eliminated their requirement, lower- with five different government agencies These one-stop shops offer at least one ing the average paid-in minimum capital when starting a business: the Ministry of more service to go along with business requirement globally from 184% of income Commerce, the Attorney General’s Office, registration. Not surprisingly, services are per capita to 49%. In Sub-Saharan Africa, the Ministry of Finance, the District Office, more than twice as fast as in economies 21 economies require no minimum capital; and Hargeisa Municipality. Some of these without a one-stop shop.15 The example of these include Burundi, Kenya, Liberia, South agencies require multiple visits; for instance, Rwanda is telling. In 2009 Rwanda consoli- Africa, Sudan, and Tanzania. the Ministry of Commerce and the District dated the name-checking procedure at the Office have to be visited twice. And many main desk of its Commercial Registration Clarify business classifications Department. It also combined services into a entrepreneurs in Hargeisa claim things and consider reducing the cost of single point of interaction in two stages. First, hardly get done without continual follow-up. licensing Meanwhile, the Ministry of Finance is the the Rwanda Development Board, Rwanda The fee schedules for both the commercial only address where license fee payments Revenue Authority and Caisse Sociale du and local business licenses can be better can be made. Rwanda agreed in November 2008 to have defined. The Ministry of Commerce fee representatives within the one-stop shop (at schedule currently requires a payment of 1% As an interim measure, these pro- the Commercial Registration Department) of the stated capital for initial registration, cedures can be streamlined through receive and process applications. At this STARTING A BUSINESS 19 stage, the applicant was still required to by law: the notarization of incorporation both draft and notarize the documents. One interact separately with representatives of documents and membership in the Chamber way to simplify the process is to introduce the Revenue Authority and Caisse Sociale. of Commerce. Making the Chamber of standard incorporation forms for small and Second, in May 2009 the Commercial Commerce membership optional is a medium-size companies, thus making the Registration Department reorganized its straightforward step. There is no rationale or need to go through professional intermediar- procedures so that applicants were no longer legal basis in having central agencies require ies optional. required to deal with representatives from such membership in order to issue a com- the Revenue Authority and Caisse Sociale mercial license. The Chamber of Commerce separately. By empowering the Registrar to NOTES plays a critical role in representing the busi- process the applications on the premises 1. International Labour Organisation. ness community and protecting their inter- 2010. Assessment on the Policy and Legal rather than sending the applications to the ests. But for companies that do not see any Frameworks for Micro, Small and Medium separate agencies for processing, the one- benefits from the membership, paying the Enterprises (MSMEs) in Somalia. UN stop shop became fully functional. membership fee can be a financial barrier. Joint Program on Local Governance and Decentralised Service Delivery: Improve access to information and The notarization issue is more complex to http://www.jplg.org. ensure transparency address. The company law requires that 2. Barseghyan, Levon, and Riccardo DiCecio. 2009. “Entry Costs, Industry Structure and Easy access to information saves time for busi- incorporation documents be prepared by a Cross-Country Income and TFP Differences.” nesses and public officials. It also increases solicitor, although it does not define what Working Paper 2009-005C, Federal Reserve predictability in the application of regulations exactly a solicitor is. It is assumed, how- Bank of St. Louis. and fee schedules. In Hargeisa, no agency of- ever, that a solicitor is a professional with a 3. Dabla-Norris, Era, and Gabriela Inchauste. fers easily accessible step-by-step guidelines legal background in incorporation matters. 2008. “Informality and Regulations: What on business registration. Entrepreneurs have Government agencies require notarized Drives the Growth of Firms?” IMF Staff Papers 5 (1): 50–82. to learn each step as they move along or hire paperwork to ensure that the documents 4. Fonseca, Raquel, Paloma Lopez-Garcia, a lawyer who deals with business registration are prepared by a designated professional. and Christopher Pissarides. 2001. matters on a regular basis and knows public This adds to the complexity and cost of “Entrepreneurship, Start-Up Costs and officials in all relevant agencies. Similarly, not business registration. Given the situation, Employment.” European Economic Review 45 all agencies publish their fee schedules in many entrepreneurs use public notaries to (4–6): 692–705. public domains. At a minimum, fee schedules 5. Klapper, Leora, Anat Lewin and Juan Manuel should be posted on clearly visible locations FIGURE 3.6 The cost to start a business is lower Quesada Delgado. 2009. “The Impact of where information on the fees is Business Environment on the Business within agency premises. Many good-practice easily accessible Creation Process.” Policy Research Working economies publish detailed fee schedules on Paper 4937. Washington, DC: The World their website platforms. Some economies Average cost to 66 Bank Group. Entry rate refers to newly start a business also print the fee schedules directly on the (% of income per capita) registered firms as a percentage of total application forms. registered firms. Business density is defined as the number of businesses as a percent- New Zealand, the world’s top performer age of the working-age population (pages 18–65). for starting a business, publishes a 10-page 6. World Bank Development Indicators: guidebook covering all issues regarding http://data.worldbank.org. business registration and the steps needed 7. Ministry of Registry and Ministry of Legal to complete the process.16 Lower fees and Affairs and Constitutional Development, easier access to fee schedules tend to go Government of South Sudan. hand in hand. Regardless of income levels, 8. The Hargeisa municipal statistics do not incorporation fees tend to be lower in econo- 18 break down licenses by legal company type, mies where information on fee schedules such as sole proprietorships, partnerships and limited liability companies. Rather, the is easily accessible (figure 3.6). The cost to breakdown is based on 10 different business start a business averages 18% of income per grades based on business size and type. For Economies where Economies where capita in economies where fee schedules fee schedules are fee schedules are not instance, commercial banks or supermarkets easily accesible easily accesible are easily accessible and 66% in economies fall under Grade 1, gas stations under Grade where they are not.17 Note: Fee schedules are considered easily accessible if they can 2, and large pharmacies under Grade 3. be obtained through the website of the relevant authority or 9. See the data notes for more details on the another government agency or through public notices, without Make it optional to use professional type of firms measured in the Doing Business a need for an appointment with an official. The data sample for incorporation includes 174 economies; that for electricity case study. intermediaries and register with the connections, 181 economies. Differences in the second panel 10. See also Indicator details for a detailed list of Chamber of Commerce are statistically significant at the 5% level after controlling for procedures. income per capita. There are two steps in Hargeisa that are be- Source: World Bank. 2011. Doing Business 2012: Doing Business in 11. All dollar amounts are U.S. dollars unless ing requested even though they not required a More Transparent World. Washington, D.C.: World Bank Group. otherwise indicated. 20 DOING BUSINESS IN HARGEISA 2012 12. Djankov, Simeon, Oliver Hart, Caralee McLiesh and Andrei Shleifer. 2008. “Debt Enforcement around the World.” Journal of Political Economy 116 (6): 1105–49. 13. Van Stel, Andre, David Storey and Roy Thurik. 2007. “The Effect of Business Regulations on Nascent and Young Business Entrepreneurship.” Small Business Economics 28 (2–3): 171–86. 14. Investment Climate Advisory Services, 2010. How Many Stops in a One-Stop Shop? A Review of Recent Developments in Business Registration. Washington, DC: The World Bank Group. 15. World Bank. 2011. Doing Business 2012: Doing Business in a More Transparent World. Washington, DC: The World Bank Group. 16. Companies Office, Ministry of Economic Development. June 2010. Companies: A Guide for New Zealand Businesses. 17. World Bank. 2011. Doing Business 2012: Doing Business in a More Transparent World. Washington, DC: The World Bank Group. 21 Dealing with construction permits Shukri owns a construction company in FIGURE 4.1 What are the time, cost and number of procedures to comply with formalities to build a Hargeisa. While there is plenty of con- warehouse? struction going on in the city, property Cost (% of income per capita) ownership disputes and the lack of proper utility infrastructure pose major obstacles Completed warehouse to his business. Moreover, Hargeisa is one of the most expensive cities in the world Number of for dealing with construction permits. Like procedures many builders, she is tempted to choose the “easy” path of grabbing land and building without a permit. In an economy where the A business in the population is growing 3.1%1 annually and construction industry informal construction is thriving, strategic Time (days) Preconstruction Construction Post construction and utilities urban planning and infrastructure develop- ment are becoming ever more challenging. industry constitutes on average 6.5% of GDP is located in the periurban area of the city in OECD economies.4 In the European Union, measured, is not in a special economic or WHY DOES DEALING WITH the United States and Japan combined, more industrial zone and will be used for general CONSTRUCTION PERMITS than 40 million people work in construction. storage. MATTER? It is estimated that for every 10 jobs directly Promulgating and enforcing proper build- related to a construction project, another 8 HOW DOES IT WORK IN ing regulations ensure sustainable urban jobs are created in the local economy.5 These HARGEISA AND HOW DOES IT development. Striking the right balance multiplier effects yield not only additional COMPARE GLOBALLY? between safety and efficiency, however, is income for the community, but also addi- challenging. Smart regulations ensure public Despite numerous attempts by lawmak- tional tax revenues and investment. Beyond safety while remaining efficient, transparent ers to adopt a building code, Somaliland economic returns and pay-offs in attracting and affordable. If procedures are overly com- remains without one. The efforts have more investment, the more important ben- plicated or costly, builders tend to proceed intensified in the past two years and there efit of building permit reforms is the protec- without a permit. In developing economies have been several law drafts circulated in tion of public safety. 60-80% of construction projects are under- review meetings with various stakeholders. taken without a permit because the approval UN-HABITAT published an urban planning WHAT DOES DEALING WITH manual for Somaliland in collaboration with process is too complex or the oversight too CONSTRUCTION PERMITS the Somaliland Ministry of Public Works in lax.2 In Hargeisa, lack of legal certainty has MEASURE? 2010.6 While the manual is a valuable tool contributed to low compliance levels and inconsistent implementation of regulations. Doing Business records the procedures, time for industry practitioners from both the In 2006 only 3,000 out of 60,000 devel- and cost required for a construction busi- private and public sector, it is not an enforce- oped properties were allocated title deeds.3 ness to obtain all the necessary approvals able legal document. Furthermore, the central authority has in the to build a simple commercial warehouse and connect it to water, sewerage and a In the interim, building permits in Hargeisa past imposed several bans on construction to avoid safety risks resulting from land- fixed telephone line (figure 4.1). The case are administered loosely on the basis of related conflicts. study includes inspections and certificates the Land Management Law (Law 2/2001 needed before, during and after construc- & 2008), the Regions and District Self- Building regulations also have an effect on tion of the warehouse. To make the data Administration Law (Law 23) and the City the economy and employment. A recent comparable across 183 economies, the Charter of Hargeisa. However, none of these study calculated that the construction case study assumes that the warehouse regulations provide sufficient legal detail 22 DOING BUSINESS IN HARGEISA 2012 FIGURE 4.2 Number of title deeds issued for Statistics support this observation. Between (123), or Djibouti (142), but behind South buildings in Hargeisa from 1999 to 1999 and 2002 the number of title deeds Africa (31), Kenya (37) and Ethiopia (56). 2002 600 issued by Hargeisa Municipality decreased 562 Seven of the 15 procedures required to deal by two-thirds from 391 to 132 (figure 4.2). with construction permits in Hargeisa take 500 Conversely, according to the “Somaliland place before construction (figure 4.4). First Times” there were on average 90 to 100 a land legalization certificate is obtained; 391 ongoing constructions every month in while this is not mandatory by law, it has 400 2003.7 Similarly, municipal authorities con- become a common step due to widespread firm that the number of property disputes land disputes. Five procedures follow until 300 265 has increased since the early 2000s. Many a building permit is obtained. Once the are never resolved and parties go ahead construction starts, the building site is sub- 200 and build without a permit. Consequently, ject to inspections, which are not regulated 132 unplanned urban development gives rise to by law. Typically, only one inspection takes 100 buildings that do not comply with minimal place within two weeks after construction safety standards posing a direct hazard to starts. After construction is complete, two the public. more requirements are necessary to get the 0 1999 2000 2001 2002 proper titling. The process concludes with Source: Hargeisa Municipality Statistical Abstract (Second Edition, Obtaining building approvals and utility con- five procedures to get connection to water, September 2003). sewerage and telephone. nections in Hargeisa requires 15 procedures, takes 56 days and costs 1,038.8% of income and clarity on construction planning and The 56 days required to deal with construc- administration, and the current permitting per capita. This is much faster but more tion permits is fast—about one-fourth of the process has been subject to ad-hoc rules expensive than the Sub-Saharan Africa aver- global average time (193 days) and faster that have become common practice over age, where the same number of procedures than in good-practice economies like New time. Because of the lack of legal guidance takes 211 days at a cost of 823.7% of income Zealand or Finland. If a property is free of and control in urban development, Hargeisa per capita (figure 4.3). If compared to the 183 disputes, the land legalization certificate is continues to experience informal develop- economies measured by Doing Business 2012, normally issued in a week. Obtaining the ments, land disputes and limited access to Hargeisa would rank 86 on the ease of dealing necessary pre-construction clearances and basic services. with construction permits—ahead of Liberia the building permit takes 23 days. Going FIGURE 4.3 Dealing with construction permits in Hargeisa is fast, but expensive Global rank Procedures Time Cost (183 economies) (number) (days) (% of income per capita) 1 Hong Kong SAR, China 25 300 2,300 Djibouti (2,286) Liberia (23) Sudan (270) South Africa (31) Kenya (37) Hargeisa (1,039) Ethiopia (56) SSA Average (211) Sudan (16) SSA Average (824) Djibouti (15) Hargeisa (15) Rwanda (84) SSA Average (15) Djibouti (172) Hargeisa (86) Rwanda (164) Liberia (694) South Africa (13) Rwanda (12) Ethiopia (128) South Africa (127) SSA Average (112) Kenya (125) Ethiopia (9) Liberia (123) Kenya (8) Sudan (130) Ethiopia (369) Djibouti (142) Hong Kong SAR, China (6) Liberia (75) Rwanda (312) Hong Kong SAR, China (67) Hargeisa (56) Kenya (161) Sudan (88) South Africa (21) Hong Kong SAR, China (18) 183 0 0 0 Notes: SSA denotes the Sub-Saharan Africa region. The ease of dealing with construction permits indicator is based on a simple average of the economy’s percentile rankings for the number of procedures, time and cost required to comply with formalities to build a warehouse and connect it to utilities. See Data notes for details. Source: Doing Business database. DEALING WITH CONSTRUCTION PERMITS 23 FIGURE 4.4 Dealing with construction permits in Hargeisa involves several agencies and costs 1,038.8% of income per capita Procedures Time (days) Cost (% of income per capita) 1. Apply for land legalization certificate and obtain 60 1,200% “check-in form” from the District Office 2. Receive inspection by a district surveyor and obtain Total time 56 days land legalization certificate approval from the District 50 1,000% Office and the Municipal Land Planning Department 3. Obtain land file number from the Municipal Archives Section and have application file forwarded to the Municipal Land Revenue Section 40 800% 4. Pay premium of land (building permit) fee at the Municipal Land Revenue Section 5. Get building approval from Hargeisa Municipality 30 600% 6. Notify the District Office of the intent to start Total cost construction and receive an on-site inspection by a 1,038.8% District Surveyor 7. Obtain land permit (approval to start construction) 20 400% from the District Commissioner 8. Receive on-site inspection by the District Inspectorate 9. Apply for property title deed at the District Commis- 10 200% sioner’s Office 10. Obtain property title deed from the Physical Asset and Land Tenure Department 0 0% 11. Apply for water connection at the Hargeisa Water 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Agency (HWA) 12. Receive inspection by an HWA technical team Land Construction clearance Inspection and Connection legalization and building permits title deed to utilities 13. Pay installation fees and obtain water connection (6 days) (23 days) (6 days) (21 days) 14. * Build a septic tank Procedures 15. * Apply for and obtain telephone land line connection from the telephone company Source: Doing Business database. * This procedure is simultaneous with a previous procedure. through inspections and getting the title problematic with sewerage. Since there is can identify a checklist of priorities—such deed takes approximately one week, while no sewerage system, new buildings have to as fire protection, structural efficiency, sani- getting utilities set up takes three weeks. have their own septic tanks. The cost varies tation, and environmental integrity—from depending on the size of the building. For a well-established building codes in other The cost of dealing with construction per- warehouse measured in the Doing Business economies. These priorities can form the mits in Hargeisa is 1,038.8% of income per case study, the average cost to build a sew- core of Somaliland’s future building regula- capita. This would place Hargeisa among erage tank is $1,750. Installation costs for tions, while being more easily understood the top 20 most costly economies glob- telephone connections are $20 for buildings and enforced by local authorities. The ally. Only 16 economies are more expensive; that are less than 200 meters away from Republic of Yemen has followed this route, these include Afghanistan, Burundi, Chad, connection points. using the building code of the Arab League to Djibouti, Tanzania and Zimbabwe. However, establish a list of essential technical norms just a small portion of the total cost comes in 2008. The process was the outcome of WHAT TO REFORM? from administrative fees ($16 for the land a dialogue between enforcement agencies legalization certificate, $186 for the building Draft and ratify a building code and private sector building professionals. permit, $13 for inspections and $16 for the Hargeisa lacks a comprehensive set of title deed). The rest, almost 90% of the total construction regulations. This puts the FIGURE 4.5 Utility connections make up almost 90% of the total cost cost, is spent on connecting the warehouse future of city’s urban planning at risk. Lack to utilities (figure 4.5). of clear guidelines on safety standards puts (% of total cost) the local population residing in buildings Utilities 89.5% Lack of infrastructure places a heavy burden in danger. There is an immediate need for on entrepreneurs in Hargeisa. The civil con- a comprehensive yet simple building code Building permit 8.5% flict left most of the city and its infrastructure tailored towards local needs and circum- heavily damaged. The water network is in stances. The new building code should Others 2.0% desperate need of upgrade and expansion. become a common point of reference for Many areas of the city have no access all industry practitioners, including design- to water, so builders look for alternative ers, contractors and government agencies solutions such as water reservoirs, which reviewing building plans and construction. are expensive. In areas covered by the city water network, installation fees amount to Drafting an entire building code is a complex $195 on average. The situation is even more task. Nevertheless, the central government Source: Doing Business database. 24 DOING BUSINESS IN HARGEISA 2012 In 2008 Algeria introduced a new building and the authorities and allows both to use Improve water and sewerage code aimed at strengthening enforce- resources more efficiently without compro- infrastructure ment mechanisms and addressing illegal mising safety.8 Globally, 86 economies have Central and local authorities should invest construction. In Haiti lawmakers are about a risk-differentiated approach, including the in Hargeisa’s infrastructure development in to adopt a standard international building 13 that established one in the past 7 years. order to extend the water pipe network and code developed by the International Code In Sub-Saharan Africa, 20 economies apply develop sewerage systems. While there are Council while addressing country-specific risk-based approvals; these include Burundi, budgetary constraints on the government’s technical requirements—such as special Ethiopia, Sudan and Tanzania. side, other opportunities for raising funds soil and seismic conditions. should be explored. Recently, the European Establish a single access point for Local authorities should collaborate with Union granted a substantial grant to improve building permit clearances private architects and engineers to select a the water services in Somaliland. The project At the moment, a construction company will focus mainly on water supply infrastruc- good-practice building code, adapt it, and must obtain documents or approvals and draft checklists appropriate for Somaliland. ture. Public private partnership is another make payments at several different agencies alternative to explore in water delivery. Even Such participation can increase the rel- to obtain a building permit. The authorities evance of future building standards to local small-scale projects targeting certain include, among others, relevant district of- technical constraints and building traditions neighborhoods and following agreed-upon fices, the Municipal Archives Section, the as well as existing materials and systems guidelines could potentially alleviate the Municipal Land Revenue Section and Mayor’s used by contractors. Information about problem. Solving the public infrastructural Office. A single access point or a one-stop new regulations should then be extensively issues would significantly decrease the cost shop would centralize all clearances in one publicized. to construct new buildings in Hargeisa. location and make the technical approvals an in-house process at the Municipality. The Introduce inspection guidelines success of the one-stop shop would depend NOTES based on the risk characteristics of on having representatives from the different 1. Estimates are for Somaliland overall. buildings technical departments with the authority Ministry of Planning and Development. In Hargeisa, inspections are not regulated. to clear projects under one roof. One-stop 2010. Somaliland In-Figures. Also Delegation They are random, and typically only one shops improve the organization of the review of the European Commission and UN- HABITAT. September 2002. “Somalia Urban inspection occurs within two weeks of the process—not by reducing the number of Sector Profile Study.” start of construction. The inspectors check if checks needed but by better coordinating 2. Moullier, Thomas. 2009. Reforming Building the lining and marking of the building foun- the efforts among different authorities. As Permits: Why Is It Important And What dation have been implemented in compli- a result, more resources can be devoted to Can IFC Really Do? IFC Advisory Services, ance with the initially submitted plans. Once safety checks rather than to multiple interac- Washington D.C.: The World Bank Group. the building passes the foundation phase, no tions with and among various agencies. 3. United Nations High Commissioner for more inspections occur. Refugees (UNHCR), United Nations Globally 26 economies have some kind of Human Settlements Programme (UN- Despite the legal vacuum, Hargeisa urban one-stop shop for construction permitting. HABITAT), and Norwegian Refugee Council. 2008. Land, Property, and Housing planning authorities should introduce tem- Most recently Mauritania and Taiwan, China, in Somalia. Available at http://www. porary measures that ensure safety while introduced one-stop shops while Morocco unhabitat.org/pmss/listItemDetails. encouraging efficiency. Proper inspections, made improvements to the one created in aspx?publicationID=2601. clearances, and consultations should be 2006. One telling example is that of Burkina 4. OECD. 2010. “Construction Industry.” OECD in place to guarantee public safety. At the Faso. In 2006 the country was among Journal: Competition Law and Policy 10 (1): same time, because it is inefficient to treat the 10 economies with the most complex 156–57. all building projects equally, authorities requirements of construction permitting in 5. PricewaterhouseCoopers. 2005. should take the time to assess the risk of the world. Not surprisingly, more than 23% “Economic Impact of Accelerating Permit Processes on Local Development and different projects and devise risk-based of local companies identified licenses and Government Revenues.” Report prepared rules for dealing with clearances and ap- permits generally as a major constraint to for the American Institute of Architects, provals. They should collaborate with doing business in the economy.9 To help Washington, DC. building practitioners to develop a building address this concern, Burkina Faso opened 6. UN-Habitat and Somaliland Ministry of risk categorization and incorporate it into a one-stop shop for construction permits Public Works, Housing, and Transport. the proposed guidelines. Complex and risky in Ouagadougou in May 2008. The reform Urban Planning Manual for Somaliland. 2010. Nairobi: UN-Habitat. Available at structures must have stricter standards than merged 32 procedures into 15, reduced the http://www.unhabitat.org/pmss/listItemDe- two-story commercial warehouses—and, time required from 226 days to 122 days and tails.aspx?publicationID=2970. conversely, requiring less documentation for cut the cost by 40%. Two years later the 7. The Somaliland Times. 2003. Hargeisa low-risk buildings can facilitate the approval number of permits issued rose from 209 (in Urban Household Economy Assessment, Pt. process. This saves time for entrepreneurs 2008) to 611 (in 2010).10 VIII: Sectoral Inventory. Issue 107. Hargeisa, DEALING WITH CONSTRUCTION PERMITS 25 Somaliland. 8. World Bank. 2010. Doing Business in 2011: Making a Difference for Entrepreneurs. Washington, D.C.: World Bank.Group. 9. World Bank Enterprise Surveys: http://www.enterprisesurveys.org. 10. Information provided in 2010 by Burkina Faso’s Centre de Facilitation des Actes de Construire. 26 Getting electricity In Somaliland 68% of urban households and FIGURE 5.1 Firms in Sub-Saharan Africa consider electricity their biggest constraint 96% of firms have access to electricity.1 This Share of managers identifying issue as the most serious obstacle to their business (%) is high compared to the Sub-Saharan Africa average, where the electrification rate in ur- Electricity 21.4% 14% ban areas is 57.5%.2 However, Somaliland’s Access to finance 20.2% 16.3% network is characterized by “extremely high 9.9% Practices of informal sector costs, high wastage, poor quality, unreli- 11.1% 7.9% ability and losses of power.”3 In reality, local Tax rates 10.5% firms often rely on their own generators to Political instability 6.4% 8.4% face power outages. 6.3% Corruption 6.7% 5.6% WHY DOES GETTING ELECTRICITY Crime, theft and disorder 5.4% MATTER? Access to land 4.7% 3.3% Infrastructure services—particularly electric- Transportation 4.3% 3.2% ity—are a concern for businesses around the 3.4% Customs and trade regulations 3.3% world. World Bank Enterprise Surveys show 3.1% that managers in 41 Sub-Saharan African Tax administration 3.2% 3% economies consider lack of electricity to be Inadequately educated workforce 7.9% the biggest constraint to their businesses Business licensing and permits 2.3% 3.1% (figure 5.1).4 Poor electricity supply under- 1% Labor regulations 2.6% Sub-Saharan Africa mines firms’ productivity and investments.5 Courts 0.8% More than 30 African economies experience 1% All economies power shortages and regular interruptions Note: The data sample comprises 109 economies worldwide and 41 economies in Sub-Saharan Africa. to service, and African firms report losing Source: World Bank Enterprise Surveys (2006–2011 data). 5 percent of their sales because of them. part of electricity services (figure 5.2). Yet associated with lower electrification rates. Overall, the economic cost of power outages analysis of 140 economies suggests that Additional connection procedures are more in Africa can rise to 2 percent of GDP.6 the connection to electricity is a useful likely in economies with weak electricity Obtaining a new connection for a busi- proxy for the broader performance of the supplies because of high losses in transmis- ness—the process measured by the getting electricity sector.7 Longer delays and higher sion and distribution systems. The quality of electricity indicator—represents only a small costs of getting an electricity connection are regulatory institutions can be linked to gen- FIGURE 5.2 Doing Business measures the connection process at the level of distribution utilities eration and distribution. A study covering 28 developing economies found that high qual- ity of regulatory governance is associated with higher per capita electricity generation.8 An efficient regulatory framework also helps build a reliable distribution system for firms Generation Transmission and individuals. Distribution WHAT DOES GETTING New connections ELECTRICITY MEASURE? Network operation and maintenance Customer Metering and billing Doing Business measures the procedures, time and cost required for a small to GETTING ELECTRICITY 27 medium-size enterprise to obtain a new FIGURE 5.3 The getting electricity indicator measures the time, cost and number of procedures required to electricity connection for a standardized obtain a new electricity connection warehouse with specific electricity needs Cost (% of income per capita) (figure 5.3). These procedures include ap- plications and contracts with electricity Electricity is flowing utilities, necessary inspections, clearances from the distribution utility and other agen- Number of cies, and external and final connection works. procedures 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 Entrepreneur Time (days) (kVA) and the length of the connection is Pre connection Connection works Post connection 150 meters. works respectively 92.8% and 1,317.1% of income case in Hargeisa. Here, the main challenge HOW DOES IT WORK IN per capita. Hargeisa also compares favorably is the absence of a regulatory framework. HARGEISA AND HOW DOES IT with neighboring economies (figure 5.4). There are neither standardized procedures COMPARE GLOBALLY?  In Djibouti obtaining the same connec- nor a central regulatory authority overseeing Obtaining an electricity connection in tion involves only four procedures, but it is power generation, distribution and transmis- Hargeisa requires 5 procedures, takes 57 slower (180 days) and much more expensive sion (box 5.1). The process of obtaining an days and costs 1,878.5% of income per (8,799.1% of income per capita). Hargeisa electricity connection is thus unregulated capita. Although this is more than twice as would rank 84 of 183 economies on the ease with regard to quality, safety, technical stan- fast as and almost three times less expensive of getting electricity as measured by Doing dards and procurement practices. Licensing than the average in Sub-Saharan Africa, it is Business 2012, ahead of Ethiopia (93) and procedures for utilities to generate and more expensive than all other regions in the Djibouti (143) but behind Yemen (52). transmit electricity do not exist.9 world: the average costs in Organisation for Economic Co-operation and Development Around the world, the electricity connection Hargeisa has one public utility—Somaliland (OECD) high-income economies and process is governed by laws and regulations Electricity Agency (SEA)—and up to 20 Middle East and North Africa economies are covering a variety of aspects. This is not the private independent power producers and FIGURE 5.4 Getting electricity in Hargeisa is faster and less expensive than the Sub-Saharan Africa average—but more expensive than in all other regions in the world Global rank Procedures Time Cost (183 economies) (number) (days) (% of income per capita) 1 Iceland 5 Hargeisa (5) 250 9,000 Djibouti (8,799.1) OECD High Income Average (5) South Africa (226) SSA Average (5) Sudan (5) Djibouti (4) Ethiopia (4) Yemen, Rep. (52) Iceland (4) Djibouti (180) OECD High Income South Africa (4) Average (53) Yemen, Rep. (4) SSA Average (5,429.8) Hargeisa (84) SSA Average (137) Ethiopia (93) Yemen, Rep. (4,569.8) OECD High Income Sudan (3,949.3) Sudan (107) Average (103) Ethiopia (95) Ethiopia (3,386.0) SSA Average (112) South Africa (125) Sudan (70) Djibouti (143) Hargeisa (57) Hargeisa (1,878.5) South Africa (1,651.5) Yemen, Rep. (35) Iceland (22) OECD High Income Average (92.8) 183 0 0 0 Iceland (13.6) Notes: SSA denotes the Sub-Saharan Africa region. Rankings are the simple average of the city’s percentile rankings on the procedures, time and cost to get an electricity connection. Cities with the same aver- age percentile rankings have the same rank. See Data notes for details. Source: Doing Business database. 28 DOING BUSINESS 2012 will aim to set clear rules and standards for BOX 5.1 The challenges of generating, transmitting and distributing electricity in Somaliland electricity connection. Although Somaliland has its own energy resources—especially wind, solar, and fossil fuels—this potential is largely under-utilized. Instead, electricity is generated almost exclusively from imported In practice, obtaining a connection to elec- diesel. Somaliland’s consumption tariff of between $0.8 and $1.0 per kilowatt-hour (kWh) is one of tricity in Hargeisa requires five procedures the highest in the world. By contrast, end-users in South Africa pay about 10 times less at $0.09/ involving a utility, which is similar to the aver- kWh.i The estimated installed capacity in Somaliland is 77 megawatts (MW), of which 6 MW are age in Sub-Saharan Africa (figure 5.5).12 First, attributed to the public utility SEA. But only 44% of it is actually realized: as the Somaliland Energy the customer submits an application to the Policy puts it, the network is characterized by “poor servicing, inefficient production, aging genera- utility company. Then the customer receives tors and idle capacity.” Power losses are estimated at between 25% and 40%, far from the 10-12% international target.ii Local firms often have their own generators to face power outages. a visit from a technical expert who assesses the technical conditions, such as the nearest Anecdotal evidence from the utility companies suggests that obtaining the financing necessary connection point, the type of wires and poles to invest in production and networks is difficult in an economy with no commercial banks and no to be installed and whether a transformer is electricity regulatory framework. The only financing alternatives are investing their own equity, rais- ing funds from the diaspora, or getting small loans from local remittance companies. needed. The next step is for the technician to estimate the overall cost, for the manager A sound regulatory framework would allow the government to engage in major energy projects, to sign the estimate and for the customer such as the establishment of an electric grid with Ethiopia—which has important hydroelectric and geothermal generation capacities—and even with other East African countries as part of a regional to make the payment to the utility. Then interconnected grid. New regulations would also facilitate exploitation of coal resources in the north the utility carries out all the external works, of Somaliland as well as investments in wind and solar energy that are available in the region, ac- including the external wiring, the installation cording to private and public utilities. of the transformer and the installation of the meter. Finally, once the technical engineer i. Energy Supply Association of Australia (ESAA). International Electricity Price Comparisons. ESAA Fact sheet. www.esaa.com.au/Library/PageContentFiles/de27d276-324e-4ac3-ac98-fd8714f97ff8/120412_ has conducted an inspection of both external International_electricity_price_comparisons.pdf and internal wiring, the meter can be opened ii. Ministry of Mining, Energy and Water Resources of Somaliland. 2010. Somaliland Energy Policy. on the same day and electricity starts flow- ing. The number of separate steps is rela- tively low because the utility carries out all suppliers.10 Each serves a specific city zone After a four-year process involving various external works and imports the transformer. with its own respective network, generat- stakeholders, the Ministry of Mining, Energy In many other economies, the customer has ing, transmitting and distributing power to and Water Resources issued the Somaliland to separately hire a contractor to carry out end-users. Although the private utilities Energy Policy in 2010.11 The goal of the energy external works. report to the Ministry of Mining, Energy and policy is to “provide a starting point from At 57 days, getting electricity in Hargeisa Water Resources, and the public utility to which the Government will provide legal is significantly faster than the average in the Ministry of Public Works, the ministries’ guidelines on regulation of the energy sec- the OECD high-income economies (103 oversight is limited. In the absence of a regu- tor.” There is an ongoing effort to issue regu- days) and in Sub-Saharan Africa (137 days). latory framework, connections to electricity lations—the Energy and Electricity Act and the Part of the reason for the quick turnaround are at discretion of each utility company. Energy Regulations are under way—which is that utilities do not have to comply with FIGURE 5.5 The longest procedure to get electricity is related to external connections works, including the waiting time for the transformer Time (days) Cost (% of GNI) 60 Total time 57 days 3,000% 50 2,500% Procedures 1. Submit application to utility office and await site visit Total cost 40 1878.5% 2,000% 2. Receive site visit from technical expert and await estimate 30 1,500% 3. Receive estimate and make payment 4. Utility officer carries out external connections works 20 1,000% and installs meter 5. Receive external and internal inspections, meter opening and electricity flow 10 500% 0 0% 1 2 3 4 5 Procedures Source: Doing Business database. GETTING ELECTRICITY 29 FIGURE 5.6 Cost breakdown of material to connect to electricity in Hargeisa main weaknesses of the electricity sector. Price paid by the client Future electricity regulations are a good op- 1% (50% of total cost) portunity to implement a safe and efficient Transformer ($3,250) process for internal wiring checking. 82% 10% 7% Wire ($400) Two important issues should be considered Poles ($266) while implementing supervision mechanisms Meter ($55) in Hargeisa. First, the responsibility of check- ing safety standards may be given either to 0% 50% 100% utilities or to private contractors. In the short Source: Doing Business database. term it can be safer to require utilities or a designated agency to carry out safety checks. any safety standards when carrying out both are not charged any application fee and no Although this approach leads to a greater the internal and external works. The lack of deposit is required. burden on customers and longer average con- safety controls for internal and external wir- nection delays, it can also help provide basic ing is a major concern in Sub-Saharan Africa. WHAT TO REFORM? standards for checking the internal wiring In nearly half of the region’s economies, the Adopt and implement an electricity installations. In Benin, Cote d’Ivoire, Guinea- internal installation is never checked before regulatory framework Bissau and Niger, internal wiring is checked by the building is connected to the network. Private and public actors in Hargeisa cite government agencies independent of the util- In Hargeisa, the situation is similar: internal the absence of a regulatory framework as ity. Once professional standards are clearly installations might be checked by the tech- one of the main problems entrepreneurs established and qualified electricians are nical engineer of the utility but this is not face in getting an electricity connection. The available, the responsibility can be delegated systematic as it is not a legal requirement. Somaliland Energy Policy notably calls for the to an electrical contractor, which usually There are no instructions explaining how the creation of an electricity regulatory authority implies fewer procedures and less time. This inspection should be carried out, and there is that would regulate the “distribution […] of is the case in Denmark, Germany and Japan, no official internal report on the inspection. electric energy” and would be in charge of where the utility simply requests certification The speed with which external connection by the electrical contractor that the internal “advising on tariff structure as well as enforc- works are carried out is partly due to a lack wiring has been done in accordance with ing quality standards, performance and code of safety requirements and other technical prevailing standards. The South African of conduct.” The adoption and ratification of standards. For example, in Kenya, the utility government, in an effort to free utilities from the Energy and Electricity Act and the Energy conducts an external site inspection after the the burden of inspecting internal wiring. has Regulation represent an important opportu- client submits an application. If the client has made private electricians liable for the quality nity to create efficient institutions capable of not met standard requirements, the utility of the installations; however, the shortage of ensuring a fast, safe and transparent connec- will give specific recommendations before qualified electrical professionals has posed tion framework. proceeding to external works. Another problems. contributing factor is that, except for the Establish safety standards and transformer required in the Doing Business Second, it is important to ensure that a supervision mechanisms for internal case study,13 material—poles, wire and me- regulation aimed at strengthening the safety wiring of internal wiring is effectively implemented. ter—is usually easily available, which is not always the case in Sub-Saharan Africa. In In Hargeisa, internal wiring safety checks ex- In Senegal, it became legally mandatory to total, external works take 50 days, including ist but are neither systematic nor regulated, check internal wiring installations more than the import of the transformer. This is similar and there is no supervision of utilities. When 10 years ago, but it has been very poorly to Sudan and Ethiopia (60 days) but much safety checks take place, they are at discre- implemented in practice.14 faster than Kenya (90 days) and Djibouti tion of the utility companies. The safety of (150 days). internal wiring installations is a concern not Increase the transparency of only for people using the building but also for connection costs and processes In the absence of official fee schedules utilities: one customer’s faulty internal wiring In Hargeisa, all costs are set by the utility on setting connection costs according to the can lead to power outages affecting other a case-by-case basis. As a result, prices vary requested load, voltage at the point of con- customers connected to the same distribu- significantly and customers lack transparent nection, location and other factors, fees tion line. In 38 economies covered by Doing information regarding their connection costs. are negotiated between the customer and Business 2012—many of them in the Middle An efficient electricity regulation should the utility. Because the network’s capacity East and North Africa and in Sub-Saharan establish clearly how the costs should be is limited, the installation of a distribution Africa—internal wiring installations are never shared when an expansion of the distribu- transformer is required, which accounts for checked. The Somaliland Energy Policy of 2010 tion network is needed. Several countries 82% of the total cost (figure 5.6). Customers acknowledges that safety risk is one of the around the world worked in this direction. 30 DOING BUSINESS 2012 In 2011 Afghanistan introduced a new fee Integration.” Policy Research Working Paper schedule for connections, making it easier 3323. Washington, D.C.: World Bank Group; Ritva Reinikka and Jakob Svensson. 1999. for entrepreneurs to understand the con- “Confronting Competition: Investment nection process. Trinidad and Tobago also Response and Constraints in Uganda.” Policy made connection costs more transparent Research Working Paper 2242. Washington, through a new capital contribution policy. D.C.: World Bank Group; Benjamin Eifert. Before August 2009 connection costs were 2007. “Infrastructure and Market Structure in Least-Developed Countries.” University calculated case by case, making it difficult of California at Berkeley, Department of for customers to assess whether they were Economics; Atsushi Iimi. 2008. “Effects charged too much. Now the utility bears the of Improving Infrastructure Quality on connection costs and then distributes them Business Costs: Evidence from Firm-Level across all customers through clearly regu- Data.” Policy Research Working Paper 4581. Washington, D.C.: World Bank Group. lated consumption tariffs. This reduced the connection cost for the case study customer 6. Foster, Vivien and Briceño-Garmendia, Cecilia. 2009. Africa’s Infrastructure, A in Port of Spain by 52% of income per capita. Time for Transformation. Agence Française de Développement and World Bank. Also, utility companies can make it easier Washington, D.C. for customers to find out what they need 7. Geginat, Carolin, and Rita Ramalho. 2010. to pay. This can be done by posting all the “Connecting Businesses to the Electrical necessary information about procedures Grid in 140 Economies.” Paper pre- and paperwork for new connections in their sented at the International Conference on office, on their website, or in other public of- Infrastructure Economics and Development, Toulouse, January 2010. fices. They can also post their performance 8. Cubbin, John, and Jon Stern. 2006. standards, such as for turnaround time. For “The Impact of Regulatory Governance example, in Guinea-Bissau, the Direcção and Privatization on Electricity Industry Geral da Energia makes available to the pub- Generation Capacity in Developing lic all laws and regulations regarding internal Economies.” World Bank Economic Review 20 wiring, through documents available in the (1): 115–41. institution’s offices. And in Burkina Faso, 9. USAID. 2011. Somaliland Private Sector customers can find all necessary information Development Assessment. regarding the connection costs, a description 10. Municipality of Hargeisa. 2012. Statistical Abstract of Hargeisa Municipality. To be of steps to follow to obtain a connection, and published. Hargeisa. the forms to file. Utilities in Hargeisa could 11. Ministry of Mining, Energy and Water follow this example and make fees available Resources of Somaliland. 2010. Somaliland to the public through a brochure or board at Energy Policy. customer service offices, and through their 12. Doing Business 2012. For a full explanation of websites when they have one. current procedures in Hargeisa, see List of procedures under Getting electricity. 13. See Data notes. NOTES 14. A study carried out by the agency in charge 1. Ministry of Mining, Energy and Water of safety checks showed that only 7% of Resources of Somaliland. 2010. Somaliland domestic installations complied with safety Energy Policy. Hargeisa. standards and that fires due to electricity 2. World Bank Group. 2010. Addressing the problems are frequent. Electricity Access Gap. Washington, D.C.: World Bank Group. 3. Ibid. Somaliland Energy Policy. 4. www.enterprisesurveys.org 5. Calderón, César and Luis Servén. 2003. “The Output Cost of Latin America’s Infrastructure Gap.” In The Limits of Stabilization: Infrastructure, Public Deficits, and Growth in Latin America, William R. Easterly and Luis Servén, eds. Washington, D.C.: World Bank Group; David Dollar, Mary Hallward-Driemeier, and Taye Mengistae. 2005. “Investment Climate and International 31 Registering property Rahma bought a warehouse to stock inven- FIGURE 6.1 What are the time, cost and number of procedures required to transfer a property between 2 tory for her furniture store in Hargeisa. local companies? Although obtaining a deed of sale from Cost (% of property value) a notary was relatively quick, going to Buyer can use the municipality’s different offices to pay the property, resell it or use taxes was a long and complex process. Number of it as collateral And even after she had completed all the procedures formal procedures, the transaction was not fully secured and safe: secure property Land & 2-story warehouse rights have been a major concern since the Seller with property registered and no end of the civil war, when many municipal title disputes Time (days) records were lost or destroyed, and the land Preregistration Registration Postregistration registration system is still being rebuilt. The property registry is not automatically also help in planning the expansion of urban property, use it as collateral for a bank or updated after a new property transfer, it areas. resell it. Every procedure required by law or remains largely incomplete, and there is no necessary in practice is included, whether system for non-encumbrance verification to WHAT DOES REGISTERING it is the responsibility of the seller or the ensure that a property is free of charges and PROPERTY MEASURE? buyer and even if it must be completed by a liens. Doing Business records the procedures nec- third party on their behalf. essary for a business to purchase a property WHY DOES REGISTERING from another business and to transfer the HOW DOES IT WORK IN PROPERTY MATTER? property title to the buyer’s name (figure HARGEISA AND HOW DOES IT Registered property rights are necessary 6.1). The process starts with obtaining the COMPARE GLOBALLY? to support investment, productivity and necessary documents, such as a copy of the Land registration in Hargeisa is only partially growth.1 Cadastres and land registries are seller’s title, and conducting due diligence regulated. The Urban Land Management tools used around the world to map, prove and secure property and use rights. These if required. The transaction is considered Law adopted in 2001 and amended in 2008 institutions are part of the land information complete when it is opposable to third addresses several major issues such as land system of an economy. With land and build- parties and when the buyer can use the disputes resolution (box 6.1). The Somaliland ings accounting for between one-half and three-quarters of the wealth in most econo- BOX 6.1 A land registration system still affected by the civil war mies,2 having an up-to-date land information More than 20 years after the end of hostilities, land tenure and land administration are still system clearly matters. strongly affected by the civil war. Many of the paper-based records in the municipal cadastre were lost or destroyed. The lack of up-to-date information, combined with the the fact that numerous The benefits of land registration go beyond land parcels were grabbed during and after the war, has made it difficult and sensitive to register the private sector. For governments, having owners accurately. Land conflicts in Hargeisa are frequent and can lead to violent confrontations.i reliable up-to-date information in cadastres The Urban Land Management Law addresses the issue of land disputes, but in practice most cases are resolved through customary law. In recent years, with the boom of private investment coming and land registries is essential to correctly in large part from the diaspora, solving this problem has become even more urgent. Real estate assess and collect tax revenue. With up-to- prices are soaring in Hargeisa: a property of 40 square meters (430 square feet) in the center of date land information, governments can map Hargeisa can be sold at more than $100,000.ii the different needs in their cities and strate- i. Barry, Michael and Florian Bruyas. 2007. Land Administration Strategy Formulation in Post Conflict Situations: The gically plan the provision of services and Case of Hargeisa, Somaliland. International Federation of Surveyors. Working Week. infrastructure in the areas of each city where ii. Interviews with notaries in Hargeisa. April 2012. they are most needed.3 Land information can 32 DOING BUSINESS IN HARGEISA 2012 FIGURE 6.2 It is faster and less expensive to register property in Hargeisa than in many Sub-Saharan African economies Global rank Procedures Time Cost (183 economies) (number) (days) (% of property value) 1 Saudi Arabia 10 Ethiopia (10) 70 15 Georgia SSA Average (65) Kenya (64) Djibouti (13.0) Kenya (8) Sudan (41) Yemen, Rep. (55) Djibouti (7) Rwanda (61) SSA Average (9.4) South Africa (76) Hargeisa (6) SSA Average (6) Ethiopia (41) Hargeisa (79) South Africa (6) Djibouti (40) Sudan (6) Yemen, Rep. (6) Rwanda (5) Rwanda (6.3) Ethiopia (113) Rwanda (25) Hargeisa (5.7) SSA Average (119) Hargeisa (25) South Africa (5.6) South Africa (23) Kenya (4.3) Kenya (133) Yemen, Rep. (19) Yemen, Rep. (3.8) Djibouti (148) Saudi Arabia (2) Sudan (3.0) Sudan (9) Ethiopia (2.1) Georgia (1) Georgia (2) Saudi Arabia (2) Georgia (0.1) 183 0 0 0 Saudi Arabia (0) Notes: SSA denotes the Sub-Saharan Africa region. Rankings are based on the average percentile rankings on the procedures, time, and cost to register property. Cities with the same average percentile rankings have the same rank. See data notes for details. Source: Doing Business database. Notaries Law adopted in 2001 defines the the war led to migratory flows, and many occupant without having to define who the process and formalities of the sales contract land plots were grabbed during and after owner of each land plot is, a delicate issue notarization. But there is little regulation the war. The paper-based property registry that could reopen disputes. Nevertheless, regarding the main institutions involved in remains largely incomplete with fewer than the information obtained from the GIS could property registration. 4,000 registered property owners.4 It is be leveraged for land registration purposes. not required by law for the buyer to register Approximately 60,000 properties are regis- To transfer a property in Hargeisa, an the property transfer, and it is not done in tered in the GIS.7 entrepreneur must complete 6 procedures practice either. Consequently, in a major- that take 25 days and cost 5.7% of property ity of cases, the name that appears on the Six procedures are required to register value. This is easier than the average in Sub- property registry for a specific land plot is property in Hargeisa, the same as the Saharan Africa, where it takes 6 procedures, that of the first registered owner instead of Sub-Saharan Africa average, but fewer 65 days and it costs 9.4% of property value the current owner. The fact that the property than Djibouti (7), Ethiopia (10) or Eritrea (figure 6.2). Compared to the 183 economies registry is not up-to-date, does not prevent (11).8 First, the seller and buyer go to the measured by Doing Business 2012 Hargeisa the buyer from using or reselling the prop- notary with 2 witnesses to sign the sales would rank 79 on the ease of registering erty. But it makes it more difficult to verify deed. To prove ownership, the seller shows property, ahead of Ethiopia (113) and Djibouti that the property is free of charges and liens the original property registry record with (148), but behind Sudan (41) or the Republic prior to a transfer. the name of the last registered owner, the of Yemen (55). purchase-sales agreement and the receipts In 2004 the Municipality of Hargeisa of the yearly land and property taxes. After There is a property registry that records started with a new initiative, implementing a the signature, the buyer pays transfer taxes the maps and property rights in Hargeisa. Geographic Information System (GIS) based to both the Municipality of Hargeisa and It is managed by the Physical Asset and on satellite images that improve the quality the Ministry of Finance. Then, the buyer Land Tenure Department. Originally, there of data collected.5 The GIS registers the loca- applies for registration with the tax authori- was a cadastre established by the British tion and names of building occupants, but ties at the District Office. The District Office administration which covered this function, not the size of the land plot nor the name of sends a geometer to verify the location of but it was largely destroyed in the late 1980s the owner.6 It is used for property taxation the land plot, and then forwards the buyer’s during the civil war. A new property registry and functions independently of the paper- application to the municipality’s Geographic was set up in 1994, and its reconstruction is based property registry. The GIS allows Information System (GIS) Mapping Office, still underway. The task is complicated since the local government to tax the property where the owner’s name and the location of REGISTERING PROPERTY 33 FIGURE 6.3 Procedures, time and cost to register property in Hargeisa Time (days) Cost (US$) Total cost 30 $599.3 600 Procedures 1. Prepare and notarize the deed of sale and related documents 20 400 2. Pay the transfer tax at the municipal General Taxation Office and obtain a receipt 3. Pay the transfer tax at the Revenue Office of the Total time Ministry of Finance 25 days 4. Apply for tax registration at the District Office 10 200 5. Receive visit from the Geometer of the District Office to register the property with the GIS Mapping Office 6. Pay the registration fee to tax authority and obtain a confirmation. 0 0% 1 2 3 4 5 6 Procedures Source: Doing Business database. the land plot are entered into the computer- two of them represent 73% of the total cost: WHAT TO REFORM? ized system. Finally, the buyer returns to the the municipal transfer tax and the transfer Consider moving to a title-based municipality and pays the tax registration tax paid to the Ministry of Finance. The fee system fee, completing the process (figure 6.3). to register with the tax authorities varies Property registries around the world confer It takes 25 days to complete all these from one year to the next depending on the different legal effects on the information procedures. This is significantly faster tax income targeted by the Municipality of they record. Title-based systems provide than the world average (59 days) and the Hargeisa. Also, the 2001 Notaries Law has conclusive evidence about who holds the Sub-Saharan Africa average (65 days), but a fee schedule, but notaries argue it is out- rights in a given property. Deed-based sys- slower than the 9 days needed in Sudan or dated and apply their own fees.9 tems, by contrast, do not provide conclusive the 19 days needed in the Republic of Yemen. While some time is saved by the fact there FIGURE 6.4 Tax registration with the Municipality is a cumbersome process are no checks for encumbrances, there are many delays related to post-registration Buyer initiates tax registration procedures. For example, after the buyer at District office pays the municipal transfer tax, he has to wait five days to pick up the receipt because Secretary of the District prepares District Office Buyer receives Geometer a file with: form filed by buyer, his file has to be signed by the General of the visit from approves notarized sale agreement, printed Geometer of location of map from GIS Office, receipt of the Taxation Officer, the Executive Officer of the Municipality the District land plot Land Visit fee and a new form signed by Geometer and Secretary municipality, and the Mayor himself. Also, the buyer has to wait 11 days from the mo- Staff registers Printing of a map of the ment he applies for tax registration until he GIS Mapping data of the zone where the land plot GIS approves Office of the application form is located, for Geometer location of can pay the fees and complete the registra- Municipality brought by land plot Geometer tion of the land plot with the GIS Mapping Office. During this time the application goes back and forth between different offices in Reception of Archives give a registration Archives receive Buyer can pick up Archives of the the file from number to the file, and send the form and the file. Now, he can the municipality and the district—including Municipality Secretary of the it to Land Management send it to the pay the fees for tax District Office Department GIS Office registration 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). Land Management Director of the Land Management Department of Department signs the form prepared by the Secretary of the District, and Tax the Municipality sends it back to Archives registration Registering property in Hargeisa costs 5.7% completed of the property value—less costly than the Sub-Saharan Africa average (9.4%) and sim- Process Output Approval needed in order to document move to the following step ilar to the world average of 5.7% (figure 6.5). There are five different taxes and fees, and Source: Doing Business database. 34 DOING BUSINESS IN HARGEISA 2012 FIGURE 6.5 Transfer taxes and registration fees make up most of the cost of transferring property in Hargeisa Also, most economies require a non-encum- Cost (% of property value) brance verification to ensure that the prop- Total transfer taxes and registration fees Total professional costs erty is free of all charges and liens prior to the transfer. This procedure can be very efficient: Average OECD High Income Average Sub-Saharan United Arab 108 economies worldwide have an electronic 2% economies: 4.4% Africa: 9.4% Emirates database for encumbrances, and 36 of them offer information online, including Morocco. Ethiopia 2.1% In Ethiopia, obtaining a certificate takes only two days and costs 0.09% of property value; the Land Registry has been decentralized in Sudan 3% 10 sub-cities since 2005 in order to simplify Fee 1: Notary (0.4%) property transfers. In the long term Hargeisa Tax 2: Municipality (2.1%) could use this reform as an example, taking Tax 3: Ministry of Finance (2.1%) Fee 4: District Office (0.1%) advantage of the fact that its five district of- Fee 5: Tax Authority registration (1.1%) fices already deal with other issues related to Hargeisa 5.7% land transactions, such as applications with tax authorities for newly acquired properties and applications for land legalization. Sierra Leone 11.8% Coordinate the paper-based Djibouti 13% property registry and the GIS Office The GIS Office managing Hargeisa’s elec- 0% 2% 4% 6% 8% 10% 12% 14% tronic database for property taxation and the office in charge of the paper-based property Source: Doing Business database. registry are located next to each other, but proof. They record property transfers, but Update the system of property there is almost no interaction. The munici- the fact that a transfer is registered does not pality has plans to extend the GIS electronic rights registration database to the paper-based property reg- necessarily mean that it is valid. Because Having updated data for property rights and istry,12 but nothing has been done since the the last registered owner could be holding encumbrances facilitates transfer of proper- creation of the GIS in 2004. a title that is not valid, a buyer will usually ty. Hargeisa’s property registry is incomplete hire a lawyer to determine the “good root” and there is no system for verifying encum- Globally, 60% of economies covered by of the title he or she is buying. In Hargeisa, brances on property. If the land plot is not Doing Business 2012 have electronic databas- the reason for not registering owners in the registered in the property registry, an owner es for encumbrances. Digital records have current GIS is mainly political, since this can go through a land legalization process, advantages over paper records: they take but future transactions are rarely registered. less space, and backup copies ensure that could reopen disputes over land ownership. property records will not be compromised However, the necessity for an updated and These practices do not help maintain an up- in the event of natural disasters or wars. more efficient system creates the opportu- to-date property registry and increase the The Municipality of Hargeisa could put the nity to reconsider which system would be probability of land conflicts. technology and know-how it already pos- more appropriate. sesses regarding electronic land information Hargeisa could learn from other experi- ences in economies that have recently set to good use by improving the quality of the In Samoa, after the Land Titles Registration property registry. up property management systems, such as Act of 2009 changed the registration Timor-Leste. When Timor-Leste achieved system from a deed to a title system, the Streamline fee payment procedures independence in 1999 most of its land was time required to transfer a property was Transfering property in Hargeisa requires occupied without official deeds and land reduced by four months. Some economies payment of five different taxes and fees, conflicts were frequent. In 2007 a project prefer to keep a deed system while improv- and waiting time is frequently long because started to issue title deeds to land owners.10 many signatures are needed. For example, ing the conclusiveness of the records held Cadastral surveys were organized for each the application form to register with the in the registry. Argentina, for example, has property and by 2011 the project had estab- tax authorities has to travel five times back a deed-based system but complements it lished ownership of 91% of the 47,000 par- and forth between different offices within with a 20-year statute of limitations. This cels under review. A subsequent government the municipality before the buyer can pick means that lawyers have to go back only 20 motion will allow the owners of the surveyed it up and go to another office to make the years to check the good root of a title. parcels to obtain formal land titles.11 payment. Simplifying this process would REGISTERING PROPERTY 35 save time and increase transparency for new NOTES owners. Hargeisa could easily reduce the 1. Deininger, Klaus. 2003. Land Policies for number of signatures needed for each ap- Growth and Poverty Reduction. World Bank plication, and merge several payments such Policy Research Report. New York: Oxford University Press. as the municipal and the Ministry of Finance 2. World Bank. 1989. World Development Report taxes: these two payments are made in two 1989, p. 87. New York: Oxford University offices next to each other, but the second Press. can occur only after the first one has been 3. Property information held in cadastres and approved by three municipal officials, includ- land registries is part of the land information ing the Mayor. available to governments. Land information also includes other geographic, environmen- A one-stop shop is an efficient way to mini- tal and socioeconomic data that are useful for urban planning and development. mize interactions between agencies and en- 4. Interviews with Municipal officials in trepreneurs. Establishing a one-stop shop in Hargeisa. April 2012. Hargeisa could be a way to streamline proce- 5. UN Habitat. 2006. Municipal Revenue dures since most of them already take place Generation Through Property Taxation, The within the municipality. Ghana did it in 2008 UN-HABITAT Approach. Better Information for under the roof of its Lands Commission. In Better Cities, the Case of Hargeisa. Djibouti, too, property registration was sped 6. Barry, Michael and Florian Bruyas. 2007. up in 2008 by improving efficiency at the Land Administration Strategy Formulation in Service des Domaines. Post Conflict Situations: The Case of Hargeisa, Somaliland. FIG (International Federation of Surveyors) Working Week. Consider replacing percentage- 7. Interview with the GIS Mapping Office staff based fees with fixed fees in Hargeisa. April 2012. Property taxes are an important source for 8. See List of procedures for a detailed descrip- many governments. But when transfer fees tion of procedures. are too burdensome, even already-registered 9. The Somaliland Notaries Law sets the fee property might again become informal, if for property transfer at Sh. Sl. 20,000, the equivalent of $3.50. Notaries, however, subsequent transactions are not registered. argue that this fee dates back to 2001 and is This not only weakens the protection of not adapted to the cost of living in Hargeisa, property rights, but also reduces potential so in practice the notary fees for land trans- revenue from property taxes. In Hargeisa action are set by the market. For the Doing transfer taxes amount to 73% of the total Business 2012 case study, the fee has been estimated to vary between $40 and $50. costs: 37% for the municipal transfer tax 10. The project is managed by Tetra-Tech and paid at the municipal General Taxation funded by USAID. Office and 36% for the transfer tax paid to 11. IRIN News. September 29, 2011. “Timor- the Ministry of Finance. Leste: Regulating land ownership ‘key to stability’.” www.irinnews.org/report. Over the past 7 years, 56 economies aspx?reportid=93845. worldwide have lowered transfer taxes and 12. Barry, Michael and Florian Bruyas. 2007. other government fees, reducing the global Ibid. average cost to register property by 4% of the property value. Of these economies, 23 are in Sub-Saharan Africa. Mozambique re- duced 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%. 36 Getting credit Mobile banking has been soaring in Hargeisa for each additional loan a firm took. A more WHAT DOES GETTING CREDIT in the last years, and it is not uncommon to intensive bank-borrower relationship im- MEASURE? see street vendors be paid directly by cell proved by 4.2% the likelihood that a loan for Doing Business measures the legal rights of phone.1 It is also possible for a student in a small firm would be approved.4 borrowers and lenders with respect to se- the university to pay the fees by cell phone. However, access to traditional finance is lim- cured transactions, as well as the sharing of Legal rights facilitate the use of movable ited for local businesses. There are no com- credit information (figure 7.2). The first set mercial banks in Somaliland, and borrowers assets as collateral, because of the abil- of indicators describes how well collateral have to look for alternative ways to get credit ity to enforce claims in the event of default. and bankruptcy laws facilitate lending. For from remittance companies or members of Movable assets like machinery, inventory or example, does the law allow companies to their clan in the diaspora. Creditors cannot accounts receivable—not fixed assets like keep the possession of the asset they grant consult the credit history of a potential bor- land or buildings—often account for a large rower, nor can they register movable assets as collateral? Is there a collateral registry share of capital stock of small and medium- as collateral. or registration institution in operation for size enterprises. In the developing world 78% security interests over movable property? WHY DOES GETTING CREDIT of the capital stock of businesses is typically Do secured creditors have priority rights to MATTER? available in movable assets and only 22% in the collateral in a bankruptcy procedure? Access to credit is essential to private sector property.5 However, banks in these countries The second set measures the coverage, development. Lack of it is a major constraint prefer fixed assets as collateral (figure 7.1). In scope and accessibility of credit information for small and medium businesses, par- economies with a modern secured transac- available through credit registries and credit ticularly in Africa. Only 22% of enterprises in tions system, these movable assets could bureaus. For example, do retailers or utility Sub-Saharan Africa have a loan, compared to 43% in other developing countries. And 45% easily be used as collateral. But in most de- companies as well as financial institutions of firms in the region cite access to finance veloping economies movable property would share credit information with credit regis- as a major constraint to growth.2 Institutions likely be unacceptable, in part because the tries or credit bureaus? Are data on both that share credit information and a regula- law does not provide sufficient protection for firms and individuals distributed in credit tory framework for secured transactions can creditors. reports? facilitate access to finance and improve its allocation. These institutions and systems FIGURE 7.1 In developing economies, there is a mismatch between the types of assets owned by businesses work best together. and those accepted by creditors as collateral for loans Share of assets (%) Credit bureaus and registries are essential components of the financial infrastructure 34% 22% 18% that facilitate access to finance. Sharing credit information reduces information Land/building asymmetries between lenders and bor- rowers, thereby improving access to credit 9% Machinery for small firms and lowering interest rates. Accounts receivable Credit information sharing systems also improve borrower discipline and support bank supervision and credit risk monitoring.3 44% 73% Researchers found that in Mozambique, with Business assets Assets used as collateral the existence of data on repayment behavior, Source: Safavian, Mehnaz, Heywood Fleisig and Jevgenijs Steinbuks. March 2006. “Unlocking Dead Capital: How Reforming Collateral banks required 11.6% less in collateral value Laws Improves Access to Finance.” Private Sector Development Viewpoint 307. Washington, D.C.: World Bank Group. GETTING CREDIT 37 FIGURE 7.2 Do lenders have credit information on entrepreneurs seeking credit? Is the law favorable to future or after-acquired assets, and secured borrowers and lenders using movable assets as collateral? creditors are paid after general tax and Legal rights and secured transactions employee claims in the case of insolvency proceedings. Can movable Is there a WHAT TO REFORM? assets be used collateral registry as collateral? in operation? The financial system’s legal framework in Borrower Borrower Lender Lender Somaliland is underdeveloped. In the short Can lender access term, the priority is to allow commercial credit information banks to set up. In this respect, the approval on borrowers? of a commercial banking bill is an essential step to be taken. In the longer term, imple- menting credit information sharing institu- Credit information tions and a regulatory framework for secured HOW DOES IT WORK IN Sub-Saharan Africa average is 2 out of 6 on transactions—the two fields covered by this HARGEISA AND HOW DOES IT the depth of credit information and 6 out indicator—can facilitate access to finance COMPARE GLOBALLY?  of 10 on the strength of legal rights (figure and improve its allocation. The following 7.3). Hargeisa would rank last on the ease of reform recommendations are aimed at There are no commercial banks in getting credit compared to 183 economies enhancing the financial system once com- Somaliland. The Central Bank was originally measured by Doing Business 2012, behind mercial banks have started setting up in the a branch of the Bank of Somalia and its ac- Sudan (166) and Djibouti (177). Kenya, one economy. tivities were limited to currency minting of the top performers in Sub-Saharan Africa, and paying public-sector payrolls.6 The new Promote a system to exchange ranks 8 globally with scores of 4 out of 6 on Central Bank Constitutive Act approved in credit information credit information and 10 out of 10 on legal April 2012 mandates that the Central Bank rights. Today, no institution exists that collects and issue licenses for commercial banks. Several shares credit information on borrowers in foreign banks have expressed interest in Hargeisa has no public credit registry or pri- setting up activity in Somaliland. However, vate credit bureau to share credit information FIGURE 7.3 Hargeisa ranks last on the ease of Somaliland lacks the basic institutions and on borrowers. In Sub-Saharan Africa 16 of 46 getting credit, regionally and globally regulations necessary for a formal financial economies, including Eritrea and Sudan, lack Global rank system: the approval of a commercial any type of credit reporting systems to share (183 economies) banking bill is still pending. A draft is being credit information on borrowers. In Hargeisa, 1 Malaysia South Africa discussed in the Parliament. given the underdeveloped financial system, United Kingdom it is not surprising that a credit registry or a Kenya (8) Today, loans are granted on the basis of trust Rwanda (8) credit bureau does not exist. But the forth- and relationships, and they mostly take place coming adoption of a commercial banking within the social networks of clans. Money bill will open the economy to commercial transfer companies have become the main banks, and a well functioning credit informa- vehicle for deposits, although they operate tion sharing system will become crucial. The in a legal and institutional vacuum. They recently adopted Central Bank Constitutive Nigeria (78) have started developing mobile banking in Act mentions the future creation of a credit partnership with telecommunication compa- bureau that could be operated by the Central nies, allowing clients to make payments and Bank itself. SSA Average (111) to check their accounts balance from a cell phone. Microfinance institutions are rare7 On the strength of legal rights, Hargeisa and they do not compensate for the lack of scores 0 out of 10 because the legal frame- commercial banks.8 Credit information sys- work underpinning secured transactions is incomplete. The only applicable legislation is Ethiopia (150) tems and a regulatory framework for secured transactions are almost nonexistent. the Somali Civil Code of 1973, which is based Sudan (166) on the Egyptian Civil Code of 1948. The civil Djibouti (177) Hargeisa scores 0 out of 6 categories on code does not allow non-possessory secured 183 Hargeisa (184) the depth of credit information index. On transactions—the debtor must always Notes: SSA denotes the Sub-Saharan Africa region. The ease of the strength of legal rights index, Hargeisa relinquish control of the asset granted as getting credit is based on the percentile ranking of the sum of the strength of legal rights index and the depth of credit information also scores 0 out of 10 given the incomplete collateral. The legal framework also does index. See Data notes for details. regulations on secured transactions. The not allow a security right to extend into Source: Doing Business database. 38 DOING BUSINESS 2012 Somaliland. When there are many lenders or strengthened access to credit information A modern legal framework for secured lend- when borrowers move geographically and no by improving their existing credit registries. ing also establishes clear priority rules to credit reporting system is available, borrow- For example, Rwanda’s private credit bureau resolve conflicting claims among secured ers can become over-indebted and it leads to started in 2010 to collect and distribute creditors when a debtor defaults, whether in asymmetries of information between lend- information from utility companies. Today, a bankruptcy procedure or not. One effective ers and borrowers limiting access to credit. the bureau distributes historical information way to establish priority rights is to record Credit reporting addresses this problem, and of more than two years. And in Zambia, ac- the security interest in a centralized collateral the government should promote it. Credit cess to credit information was improved by registry. Somaliland has incomplete regula- information sharing started informally in making it mandatory for banks and nonbank tions regarding secured transactions, and most economies: tailors in London used financial institutions registered with the Bank they are scattered among the Somali Civil to share information on defaulting debt- of Zambia to use credit reference reports and Code, the Company Law and possibly the ors. More recently in 2002, Nicaraguan provide data to the credit bureau. commercial banking law currently being de- microfinance institutions began sharing bated in Parliament—which, if passed, would information voluntarily through Sin Riesgos, Enact a single comprehensive law represent a major opportunity to establish a a credit bureau promoted by the Nicaraguan concerning the use of movable favorable framework for secured transactions. microfinance association ASOMIF. At the assets as collateral time it was created, Sin Riesgos was the only The United Nations Commission on In Sub-Saharan Africa, several economies privately held credit bureau operating in the International Trade Law (UNCITRAL) rec- have recently improved their secured- country. Commercial banks were unable to ommends that the same rules or principles transactions systems, strengthening legal share credit data except via the public credit guide all secured transactions.11 A modern rights in the region (figure 7.4). For example, registry due to the legal framework in place secured transactions system provides for the the countries making up the Organization regarding bank secrecy. 9 use of security interests in all types of mov- for the Harmonization of Business Law in able assets—whether tangible or intangible, Africa (OHADA) revised their Uniform Act In the long term, there should be a competi- whether present, after-acquired or future Organizing Securities in 2010. The new law tive credit reporting system in Somaliland assets, and wherever located—including both broadens the range of assets that can be used that allows for collection of negative and possessory and non-possessory interests.12 as collateral (including future assets), extends positive data from a variety of sources, is secure and efficient, operates within a FIGURE 7.4 Sub-Saharan Africa is among the regions that most strengthened the legal rights of borrowers framework that ensures borrower privacy and lenders from 2005 to 2011 rights are upheld, and provides an adequate Average strength of legal rights index (0-10) mechanism for recourse in case of incorrect Doing Business 2006 Doing Business 2012 information or data breaches. A task force coordinated by the World Bank developed Global average: 5.8 the “general principles for credit reporting,” 7.1 OECD high income 7.2 which provide an agreed framework in the form of international standards for credit 5.8 Eastern Europe reporting systems policy and oversight.10 & Central Asia 6.6 Of the economies benchmarked by Doing 5.1 East Asia & Pacific Business, 77% have a public or private credit 6.5 information sharing system, although the 4.4 type of information they collect and share Sub-Saharan Africa 5.8 varies widely. Since 2005, 20 new credit registries or bureaus have been established 4.6 South Asia in economies that previously had no report- 5.6 ing system, many of them in Sub-Saharan Africa. In 2009 Liberia established its first 5.0 Latin America & the Caribbean 5.6 database of credit information on borrowers at its central bank. In 2008 the Central Bank Middle East & 2.9 of Nigeria issued a guideline defining the North Africa 3.2 licensing, operational and regulatory require- ments for a private credit bureau. Ghana 0 1 2 3 4 5 6 7 8 and Uganda granted operating licenses to Note: The data sample for Doing Business in 2006 (2005) includes 174 economies. The sample for Doing Business in 2012 (2011) also in- cludes The Bahamas, Bahrain, Brunei Darussalam, Cyprus, Kosovo, Liberia, Luxembourg, Montenegro and Qatar, for a total of 183 economies. private credit bureaus that began operations Doing Business in 2006 data are adjusted for any data revisions and changes in methodology and regional classifications of economies. in 2010. Other economies in the region Source: Doing Business database. GETTING CREDIT 39 the security interest to the proceeds of the and Vanuatu.14 Once registered, security in- maximum extent possible, all transactions original asset, and introduces the possibility of terests immediately have effect against third that create a right in any type of asset meant to secure the performance of an obligation out-of-court enforcement. Liberia also passed parties. (that is, to fulfill security functions) should a new commercial code in this direction in be considered to be secured transactions 2011. In Rwanda, getting credit was made and regulated by the same rules or, at least, easier with a new secured transactions act NOTES by the same principles. and insolvency act to make secured lending 1. Two companies provide mobile banking 12. World Bank Group. 2005. Principles for more flexible, allowing a wider range of assets services. One of them reported starting Effective Insolvency & Creditor Rights Systems. operating in this sector in September 2009 Washington, D.C. to be used as collateral and a general descrip- and having almost 200,000 clients in April tion of debts and obligations. In addition, 13. Notice-based registration does not require 2012. out-of-court enforcement of collateral has documents to be registered, whereas 2. Demirgüç-Kunt, Asli and Leora Klapper. document-based registration requires become available to secured creditors, who 2012. Financial Inclusion in Africa: An registering voluminous documentation as also now have top priority within bankruptcy. Overview. Washington, D.C.: The World well as specialist review of the documents During the past 5 years, Rwanda improved its Bank. provided and the assets used as collateral. A score on the Doing Business legal rights index 3. Nguyen, Ha and Rong Qian. 2012. The notice registry also has lower administrative from 2 to 8 points (out of 10 points). Cross-Country Magnitude and Determinants and archival costs than a document registry. of Collateral Borrowing. Washington, DC. The 14. Alvarez de la Campa, Alejandro, Santiago World Bank. Croci Downes and Betina Tirelli Hennig. Implement a system of registration 4. Behr, Patrick, Entzian Annekathrin and 2012. Making Security Interests Public: of movable property with a Andre Guettler. 2011. “How Do Lending Registration Mechanisms in 35 Jurisdictions. collateral registry Relationships Affect Access to Credit and Washington, D.C.: World Bank Group. Creditors need an effective mechanism to Loan Conditions in Microlending?” Journal of know whether the potential borrower has Banking and Finance 35: 2169–78. already granted a security interest in the 5. Alvarez de la Campa, Alejandro, Yair collateral and, if so, what priority those rights Baranes, Sevi Simavi and Everett T. Wohlers. 2010. Secured Transactions Systems and have. A central collateral registry—recording Collateral Registries. Washington, D.C.: interests in all types of movable assets—sup- International Finance Corporation. ports the use of movable collateral to secure 6. The Somaliland Central Bank Constitutive loans. Somaliland does not have such a reg- Act was signed by the President on April 12, istry for movable assets. Good international 2012. http://www.somalilandlaw.com/bank- practices suggest that such a registry should ing___finance_laws.html contain information on all types of loans and 7. USAID. 2011. Somaliland Private Sector assets, unified in a centralized and electronic Development Assessment. According to the report, there are one microfinance institu- database—although specialized registries tion and several international NGOs and such as vehicles or intellectual property can multilateral organizations offering micro- also exist. credit. However, most of the microfinance programs ran by international actors have Setting up registries—or unifying and im- stopped due to a low repayment rate. proving existing ones—is a common reform 8. According to interviews, remittance compa- that has been implemented: Georgia, Ghana, nies also started providing microcredit. One Guatemala, Honduras, and Solomon Islands of the major remittance companies stated are economies that have established a col- that around 100 loans had been given in two years of activities, 90% of them to individu- lateral registry in recent years. Today 68 als. These loans were usually under $ 2,000 economies globally, including Kenya, have and for periods of two years maximum. some sort of centralized registry for movable 9. CGAP and International Finance Corporation property used as collateral by companies. In (IFC). 2011. Credit Reporting at the Base of only 15 of these 68 economies, however, can the Pyramid: Key issues and Success Factors. the collateral registries be characterized as Washington, D.C. modern, notice-based ones.13 These regis- 10. http://siteresources.worldbank.org/ tries offer online access to registration and FINANCIALSECTOR/Resources/ searches, register all types of encumbrances, GeneralPrinciplesforCreditReporting.pdf establish clear parameters for priority, and 11. United Nations Commission on International Trade Law (UNCITRAL). 2010. UNCITRAL maintain a central database searchable by Legislative Guide on Secured Transactions. New the debtor’s name or other unique identifiers. York. The Guide adopts what might be char- For example, online searches are possible in acterized as an integrated and functional Cambodia, Guatemala, the Solomon Islands approach. It takes the position that, to the 40 Protecting investors With Somaliland’s government increasingly assets by company insiders for personal protections: (a) rules on the approval and relying on the private sector, and in the ab- gain. Related-party transactions are the most disclosure of related-party transactions sence of a functioning banking system, share common example. High ownership concen- (extent of disclosure index), (b) liability of ownership is the main source of financing tration and informal business relations can company directors for self-dealing (extent for businesses in Hargeisa. Strong minority foster an environment in which controlling of director liability index), and (c) sharehold- investor protections improve the ability of shareholders profit at the expense of minor- ers’ ability to access corporate information enterprises to raise the capital needed to ity shareholders and even the company’s before and during litigation (ease of share- grow, diversify, compete, and do business financial health—because the company sells holder suits index) (figure 8.1). The data with others: companies can grow more assets at excessively low prices, buys assets come from a survey of corporate and secu- quickly by raising capital, which normally at inflated prices, or gives loans to control- rities lawyers and are based on securities can be achieved through selling shares of ling shareholders on below-market terms. regulations, company laws, civil procedure the company to equity investors. Selling Empirical research shows that stricter regula- codes and court rules of evidence. The rank- shares allows companies to expand without tion of self-dealing is associated with greater ing on the strength of investor protection providing collateral or repaying bank loans. equity investment and lower ownership con- index is the simple average of the percentile Investors, however, are concerned with cor- centration.3 Another recent study shows that rankings of its component indicators.5 porate governance and look for legal protec- protecting minority shareholders is the key to tion. If investors fear potential expropriation boosting investment. In fact, the presence of HOW DOES IT WORK IN by a company’s directors, they tend to invest legal and regulatory protections for investors HARGEISA AND HOW DOES IT in fewer companies in which they take ma- explains up to 73% of the decision to invest. COMPARE GLOBALLY?  jority stakes. In the long run, the lack of such In contrast, company characteristics explain In Hargeisa, corporate governance and legal and regulatory framework discourages only between 4% and 22% of the decision to protection of minority shareholders are regu- investments and imposes growth barriers to invest.4 lated by the Companies Law of Somaliland these enterprises. (Law No. 25/2004).6 The law does not WHAT DOES PROTECTING specifically address many issues affecting WHY DOES PROTECTING INVESTORS MEASURE? the protection of minority shareholders in INVESTORS MATTER? Doing Business measures the strength of le- related-party transactions, which is why Economies that effectively protect minor- gal protections of minority investors against Hargeisa scores only 2 out of 10 on the over- ity investors tend to have dynamic capital markets. In these economies investors misuse of corporate assets by company all strength of investor protection index. This participate in major company decisions and directors for personal gain. The indicators is similar to Djibouti (2.3), but outperformed directors are accountable to shareholders for distinguish three dimensions of investor by the majority of economies in Sub-Saharan oversight of managerial decisions. If the laws FIGURE 8.1 How well are minority shareholders protected against self-dealing in related-party transactions? do not provide such protections, minority investors may be reluctant to invest, unless Extent of disclosure Mr. James they become controlling shareholders.1 Other Disclosure and approval Lawsuit research shows that corporate risk-taking requirements and firm growth rates are positively related 60% ownership, sits 90% ownership, sits Extent of director liability on board of directors on board of directors to investor protections. Better systems may Ability to sue directors for damages lead corporations to undertake risky but Company A Company B Ease of shareholder suits (buyer) (seller) value-enhancing investments.2 Access by shareholders to documents plus other Minority Transaction In the area of investor protection and cor- evidence for trial shareholders involving conflict of interest porate governance, an important issue is self-dealing—that is, the use of corporate PROTECTING INVESTORS 41 Africa, including neighboring Ethiopia (4.3), FIGURE 8.2 Protecting investors in Hargeisa through related-party transactions. But this Eritrea (4.7) and Kenya (5). New Zealand is compared regionally and globally is not the only challenge businesses face. The the global leader on this indicator, scoring Global rank Companies Law is available only in English, 9.7. Compared with the 183 economies mea- (183 economies) making it difficult for local businesses, law- 1 New Zealand yers and judges to use it effectively. sured by Doing Business 2012, Hargeisa would South Africa (10) rank 181, the same as Suriname and followed by Lao PDR and Afghanistan (figure 8.2). Other economies in the region can serve Rwanda (29) as examples of successful reformers in this On the extent of disclosure index, Hargeisa area—Sub-Saharan Africa has implemented scores 2 out of 10. Related-party transac- some of the most comprehensive investor- tions are only approved by the board of protection reforms (figure 8.3). Botswana, OECD High Income directors and the interested parties have a Average (63) Mozambique, Rwanda, Sierra Leone, say. The law requires interested parties to Swaziland and Tanzania have updated their disclose any conflicts of interest; however, company laws, for example. Burundi has the law is silent on the content of the dis- Kenya (97) adopted a new company act that requires closure. Moreover, the law does not require Eritrea (111) greater corporate disclosure and higher SSA Average (112) any public disclosure of such transactions in standards of accountability for company Ethiopia (122) the companies’ annual reports.7 By contrast, directors. in South Africa—the country in Sub-Saharan Rwanda in particular has steadily reformed Africa with the highest score (8) on the its commercial laws and institutions since disclosure measure—both the board of Djibouti (179) 2001. A new company law, adopted in directors and minority shareholders must Hargeisa (181) 2009, regulates conflicts of interest by approve the transaction, an external body Suriname (181) Afghanistan (183) requiring shareholder approvals for related- has to review it, and internal and external 183 party transactions involving more than 5% disclosure of conflicts of interest is required. Notes: SSA denotes the Sub-Saharan Africa region. The ease of protecting investors is based on the percentile ranking of the of company assets. The law also introduces average of the extent of disclosure index, director liability index, extensive requirements for disclosure of On the extent of director liability index and ease of shareholder suits index. See Data notes for details. Hargeisa scores 3 out of 10. Although share- Source: Doing Business database. related-party transactions—from the board holders can sue when the company’s affairs of directors and in the company’s annual are found both in the Companies Law of report. This makes it easier for sharehold- have been conducted in a manner which is Somaliland (Law No. 25/2004) and the ers to sue directors for prejudicial related- unfairly prejudicial to the interests of the Somali Civil Procedure Code (Law No. 19 party transactions. And for the first time in company,8 the remedies are limited and directors can only be held liable in case of of July 27, 1974).10 Minority shareholders Rwanda’s legal history, the law sets out a fraud.9 Unless the transaction is fraudulent— face difficulties when trying to collect and clear catalogue of directors’ duties. The re- where directors are liable for imprisonment access documents to prove their case. forms have started to reap benefits. In 2009 or fine, or both—there are no provisions The Companies Law allows shareholders alone, in the midst of the global economic to obtain copies only of annual accounts, crisis, Rwanda attracted $1.1 billion in invest- for any remedies, such as damages from a director’s report, auditor’s report and minute ment, 41% more than in the previous year.13 related-party transaction or rescission of the transaction. In economies with more strin- books; copies of the contracts are not avail- gent investor protection regulations—such able for direct inspection.11 In addition, only WHAT TO REFORM? as New Zealand, the country that tops the the Attorney General may appoint inspec- The Companies Law of Somaliland contains rankings on the index—shareholders can sue tors to investigate the transaction. There is only limited safeguards for minority share- for damages. In Singapore, minority stake- no provision allowing minority shareholders holders. Although this might not be a priority holders can hold the directors liable and to inspect the transaction documents before in the short term, in the longer term authori- have the transaction voided if it is unfair or filing suit. Judicial proceedings are solely ties should undertake a comprehensive set prejudicial to other shareholders. Economies decided by the judge. Direct questioning is of reforms regarding the transparency of in Sub-Saharan Africa that allow director’s disallowed (although in practice the par- related-party transactions and liability in liability for damages include Rwanda and ties often suggest questions). Obtaining cases of self-dealing. They should also es- South Africa. documents is also left to the discretion of tablish shareholders’ ability to sue officers the judge, who decides what information is and directors for misconduct, and increase Hargeisa receives only 1 out of 10 points required to decide the case.12 shareholder access to corporate documents on the ease of shareholders suits index, during trial. Any reform should start with a which measures the type of evidence that With an overall score of 2 out of 10, Hargeisa detailed analysis of the Companies Law, but can be collected by minority shareholders offers limited protection for shareholders the following are some of the major points before and during a trial. Provisions for this against the misuse of corporate assets that should be taken into consideration. 42 DOING BUSINESS 2012 Increase disclosure obligations to extent to which each party stands to gain will provide an opinion on the terms of the the board of directors and in the personally from company actions. transaction that will help shareholders make annual report an informed decision. Involve shareholders in the approval The Companies Law requires only that the Make directors accountable for of related party transactions interested party disclose his conflict of inter- Several measures can be put in place to their actions est to the board and that the transaction be involve shareholders. Shareholders should be In Hargeisa, neither a company’s officers approved by the board of directors. However, allowed to inspect substantially all of a com- nor its board can be held liable in cases of directors are not obliged to undergo full pany’s documents (with some exceptions, prejudicial related- party transactions. With or immediate disclosure of information on such as for industrial secrets); an external almost no incentives to include minor- topics such as immediate stakes in related- body, for example an independent auditor, ity shareholders’ interests into the decision- party transactions, names, and all holdings should review suspicious transactions before making process, directors could be tempted in personally owned companies or services they take place; and minority shareholders to abuse their power and company’s funds provided and received. Failure to require for their own interests. should be allowed to sue insiders on behalf of such disclosures allows directors to omit im- the company (a “derivative suit”). portant evidence pertaining to related-party In order to create a legal structure that transactions. Sixty economies worldwide, including ensures the protection of investors’ rights, Lebanon and the United Kingdom, currently future laws should require that directors France, Singapore and New Zealand have require shareholder approval of large related- exercise appropriate diligence, care, and the world’s strictest rules on related-party party transactions. In Rwanda, for example, loyalty—and make decisions that are well transactions. Managers and directors in related-party transactions representing less informed when running the company. They these countries are required to disclose to than 5% of company assets are approved should also avoid conflicts of interests and the board any personal interest they have in by the board of directors. If the transaction always put the concerns of the corporation the operations of the company. These dis- involves more than 5% of company assets, it before self-interests. For example, in New closures should state not only the existence must be approved at a shareholders meeting. Zealand, directors and officers must pay of conflicts of interests, but also reveal the This dual model gives the company the nec- damages caused to the company and pay nature of such interests and the extent of essary flexibility to conduct its daily activities, back the profit made in violation of their any personal gains from company actions. while ensuring that minority shareholders duties to the corporation in the case of preju- Countries with strong investor protection are involved in major decisions. Twenty-five dicial related-party transactions. systems require that annual reports include of the sixty economies requiring approval of detailed information about related-party related-party transactions by disinterested Grant shareholders greater access transactions. To increase shareholders’ ac- shareholders also require review of the terms to corporate documents before and cess to information about management of these transactions by an independent body during trial dealings, the annual report should publish (such as an independent auditor) before Without access to documentary evidence, the nature of management interests and the their approval. The independent auditor minority investors may find it difficult to prove that directors have been managing FIGURE 8.3 Stronger investor protections in Sub-Saharan African economies since 2005 the company’s affairs improperly. Currently Strenght of investor protection index (0-10) shareholders in Hargeisa do not have access 6.3 6.3 to copies of the contracts and depend largely 6.0 6.0 on the judge’s discretion to obtain evidence. 2011 5.7 5.0 To protect minority shareholders from self- dealing, regulations should give shareholders 4.7 4.3 2005 the right to inspect a company’s documents 4.3 4.0 if they suspect wrongdoings by directors. The law can grant this right with some exceptions—for example, protecting corpo- 2.7 rate secrets. This could maintain a balance 2.0 between the needs of managers (to operate without overly burdensome intrusion by shareholders) and the needs of shareholders (to monitor management actions). Botswana Mozambique Rwanda Sierra Leone Swaziland Tanzania Of the 183 economies covered by Source: Doing Business database. Doing Business 2012, more than 30 PROTECTING INVESTORS 43 economies—including Canada, the 25/2004), Part XIV: Protection of com- Dominican Republic and Hong Kong SAR, pany’s member against unfair prejudice. China—grant shareholders access to any 9. Companies Law of Somaliland (Law No. corporate document they require, but only 25/2004), Section 188: Punishment for fraudulent trading. before the trial. El Salvador, Kazakhstan, 10. http://www.somalilandlaw.com/civil_proce- New Zealand and South Africa require dure_law.html. that all company documents related to the 11. Companies Law of Somaliland (Law No. case be open for inspection during the trial. 25/2004), Sections 105, 106, 162, 167, 184. Mozambique and Rwanda grant sharehold- 12. Somali Civil Procedure Code (Law No.19 of ers access to any internal documents except 27 July 1974): Articles 131, 132, 133, 182, 185. corporate secrets. And if the management 13. World Bank. 2010. Doing Business in the East fails to provide sufficient information, African Community 2010. Washington, D.C.: shareholders can ask the court to appoint The World Bank Group. government inspectors with full powers to access all corporate documents. Mauritania, the Syrian Arab Republic and the Republic of Yemen permit limited or no access to evidence during the trial, making it virtually impossible for minority investors to prove their case. Make the Companies Law available in Somali The Companies Law is available only in English, making it difficult for local business- es, lawyers and judges to use it. With the law properly translated into Somali, shareholders will feel they have the framework in place to protect their rights, and the legal community will have a law they can actually use. NOTES 1. Dahya, Jay, Orlin Dimitrov and John McConnell. 2008. “Dominant Shareholders, Corporate Boards, and Corporate Value: A Cross-Country Analysis.” Journal of Financial Economics 87 (1): 73–100. 2. Kose, Lubomir Litov and Bernard Yeung. 2008. “Corporate Governance and Risk- Taking.” Journal of Finance 63 (4): 1679–728. 3. Djankov, Simeon, Rafael La Porta, Florencio López-de-Silanes and Andrei Shleifer. 2008. “The Law and Economics of Self-Dealing.” Journal of Financial Economics 88 (3):430–65. 4. Doidge, Craig, Andrew Karolyi, and René M. Stulz. 2007. “Why Do Countries Matter So Much for Corporate Governance?” Journal of Financial Economics 86 (1):1–39. 5. See Data Notes for more details. 6. http://www.somalilandlaw.com/somalil- and_company_law.html 7. Companies Law of Somaliland (Law No. 25/2004), Section 30: Powers of directors to bind the company; and Section 127: Directors to disclose interest in contracts. 8. Companies Law of Somaliland (Law No. 44 Paying taxes Taxes are vital for every economy. than one tax treatment—increases the ad- to file and pay different types of taxes and Governments around the world rely on them ministrative burden and the number of pay- contributions, adjusted for the way in which to finance public infrastructure and provide ments firms must make. In Haiti, for example, those payments are made. The time indica- services necessary to support economic a limited liability company is subject to the tor captures the number of hours required and social development. The government local tax on profit in addition to the corporate to prepare, file and pay three major types of of Somaliland’s success with mobilizing tax income tax and different forms have to be taxes: profit taxes, consumption taxes and revenue has been unstable over the years, filled out, often requiring different methods labor taxes and mandatory contributions. ranging from $20 million to $40 million per for calculating the tax. Other economies in The total tax rate measures the tax cost year between 1999 and 2007.1 Ineligible for Sub-Saharan Africa with multiple taxation borne by the standard firm (figure 9.1). most traditional aid programs, Somaliland’s include Eritrea, Guinea, Nigeria, South Africa government relies heavily on loans from and Zimbabwe. Multiple taxation also com- individuals and private firms2 and on cus- HOW DOES PAYING TAXES WORK plicates tax administration for tax authorities toms tariffs. Remittances, which constitute IN HARGEISA AND HOW DOES IT and increases the cost of revenue administra- 40 percent of urban household incomes in COMPARE GLOBALLY?  tion for governments. And it risks damaging Somaliland, help finance basic services that investor confidence in an economy. In Sub- The main law governing taxes is the are covered by the state in other countries, Saharan Africa businesses are required on Somaliland Direct Tax Law of 1996.8 A such as health and education.3 In the future, average to make 37 payments to comply with number of other laws regulate indirect taxa- the government’s ability to raise funds their tax duties. Conversely, companies in the tion such as the Sales Tax Law (No. 84/96), through efficient taxation will be crucial. OECD make 13 payments on average. the Registration Tax Law (No. 83/96), the Circulation Tax Law (No. 82/96), the WHY DOES PAYING TAXES WHAT DOES PAYING TAXES Stamp Duty Law (No. 85/96) and the Stores MATTER? MEASURE? Regulation (No. 88/96). The authorities The tax burden on businesses matters for Doing Business measures the payments, that are involved in tax collection are the investment and growth. High tax rates and time and total tax rate borne by a standard Municipality of Hargeisa at the local level, burdensome tax administrations are consis- firm with 60 employees in a given year. The and the Office Inland Revenue Department tently ranked among the main obstacles to under the Ministry of Finance at the central number of payments indicator measures doing business by entrepreneurs around the the frequency with which the company has level. world.4 Keeping tax rates at a reasonable level encourages the development of the private FIGURE 9.1 What are the time, total tax rate and number of payments necessary for a local medium-size sector and the formalization of businesses. company to pay all taxes? This is particularly important for small and Total tax rate Time medium-size enterprises, which contribute to growth and job creation but usually do not add significantly to tax revenue.5 In Sub-Saharan Africa and the Middle East and To prepare, file and pay value added or sales tax, North Africa micro, small and medium-size Hours per year profit tax and labor % of profit enterprises make up more than 90% of before all taxes taxes and contributions taxpayers but contribute only 25–35% of tax revenue.6 Some 235 years after Adam Smith pro- claimed simplicity to be one of the pillars of any effective tax system,7 multiple taxation— Number of payments where the same tax base is subject to more (per year) PAYING TAXES 45 FIGURE 9.2 Paying taxes in Hargeisa compared regionally and globally Global rank Payments Time Total tax rate (183 economies) (number per year) (hours per year) (% of profit) 1 50 500 110 Canada (8) Hargeisa (101.9) Rwanda (19) Yemen, Rep. (44) Egypt, Arab Rep. (433) Sudan (42) Kenya (41) Kenya (393) Ethiopia (40) South Africa (44) SSA Average (37) Hargeisa (34) Liberia (33) SSA Average (318) Egypt, Arab Rep. (29) SSA Average (57.1) Yemen, Rep. (248) Liberia (98) Kenya (49.6) Sudan (103) South Africa (200) Liberia (43.7) Ethiopia (19) Ethiopia (198) Egypt, Arab Rep. (43.6) SSA Average (115) Hargeisa (188) Sudan (36.1) Rwanda (18) Yemen, Rep. (116) Sudan (180) South Africa (33.1) Liberia (158) Yemen, Rep. (32.9) Rwanda (148) Rwanda (31.3) Hargeisa (142) Canada (131) Ethiopia (31.1) Egypt, Arab Rep. (145) Canada (28.8) South Africa (9) Canada (8) Kenya (166) 183 0 0 0 Notes: SSA denotes the Sub-Saharan Africa region. Rankings are based on the average economy percentile rankings on the payments, time and total tax rate. See the data notes for details. Source: Doing Business database. Globally, Hargeisa would rank 142 compared is driven by 2 taxes: the sales tax and the would have to pay 101.9% of their profits to with 183 economies on the ease of pay- labor taxes and contributions. Both must be comply with their formal tax obligations. This ing taxes as measured by Doing Business filed in and paid manually each month (12 is almost twice the regional average of Sub- 2012—ahead of Egypt (145) and Kenya (166) times per year). The frequency of filing and Saharan Africa (57.1%), which is the region but behind Sudan (103) and Liberia (98). the method of filing and payment make a dif- with the highest total tax rate. Some of Sub- In Hargeisa, the standardized case study ference in how many payments are recorded. Saharan Africa economies have a cascading- company would spend 188 hours per year For example, the United Arab Emirates has 3 style tax system, which adds extra tax making 34 tax payments and pay 101.9% of taxes but 14 payments, whereas South Africa costs to each consumer so that an element its annual commercial profit in taxes (figure has 10 taxes but, because of online filing and of them is borne by each company in the 9.2). The administrative burden is less ability to file and pay some taxes jointly, only supply chain. A total tax rate of over 100% cumbersome than Yemen, where the same 9 payments are recorded. means that a company in that economy company would spend 248 hours every year with the 20% mark-up of the Doing Business on 44 payments. But the total tax rate is Compared globally, paying taxes in Hargeisa case study could not make enough money more than three times higher than in Yemen, is fast. Companies in Hargeisa would spend just to pay all its taxes.9 The current tax law where the company would pay 33% of its on average 188 hours preparing tax returns in Somaliland is broad in its scope and the profit in taxes. In Rwanda, among the easi- and complying with other tax related require- general provisions do not provide sufficient est economies to pay taxes in Sub-Saharan ments; this is below the average 318 hours detail.10 This makes implementation difficult. Africa, a company needs to make 18 pay- spent in Sub-Saharan Africa economies. Of There are no general accounting principles. ments a year and pay 31.3% of commercial the total time, 36 hours are dedicated to Businesses are not entitled to any deduc- profits. corporate income taxes, 72 hours to sales tion on the expenses they incur to generate taxes and 80 to labor-related taxes. But income. Finally, the current tax law does not The administrative burden of complying with paying taxes in Hargeisa is also fast due to allow businesses to take into account capital tax payments is slightly less cumbersome in low compliance. Since only a small number asset depreciation in their tax statements. Hargeisa than the average in Sub-Saharan of formal companies pay taxes, there are no These factors make it difficult for businesses Africa, where 37 tax payments are made per significant backlogs at the Inland Revenue to comply with their tax obligations. year on average. However, the number of Department. payments could be lowered following the ex- Given that Somaliland is ineligible for most ample of Ethiopia, where only 19 payments The total tax rate in Hargeisa is high com- traditional aid programs, the government are required. Hargeisa’s number of payments pared globally (figure 9.3). Companies relies on loans from the private sector. These 46 DOING BUSINESS 2012 are often repaid via tax breaks, a factor that help small enterprises with tax compliance. A enrolled 11 percent more income tax regis- introduces a degree of arbitrariness in the good example is Sierra Leone, where income trants than in 2008 and 35 percent more country’s taxation system. Even more, tax tax professionals have been trained and certi- than in 2007.12 rates can be lowered based on oral agree- fied for small businesses, which has helped ments, introducing a level of negotiation.11 improve tax compliance. Adopt accounting standards and In addition, the small state budget also has develop tax regulation an impact on the capacity of the authorities Launch a communications campaign The lack of generally accepted accounting to enforce tax compliance. Inspections and It is difficult to make businesses pay standards, including regulations on depre- prosecution of violators can be costly, and taxes if they are used to avoiding them. ciations and deductions, makes it difficult for are not substantially enforced in Hargeisa. Communications efforts can help raise businesses to comply with tax requirements. awareness and diffuse potential resistance. The government should adopt accounting WHAT TO REFORM? Somaliland can learn from other post- standards and develop detailed tax regula- conflict economies that have successfully tions, including deductions. Educate entrepreneurs and train accountants on the taxation system improved compliance through communica- tions. Sierra Leone introduced a series of tax Ensure transparency and Often the biggest obstacles to paying taxes consistency in the implementation reforms in 2009. Sensing reluctance from for small businesses are the lack of basic of the tax system the private sector, tax authorities knew they accounting skills as well as the gap between had to prompt a cultural shift to promote tax One of the main challenges of Somaliland’s the tax law and its interpretation in practice. compliance. They designed a comprehensive tax system are informality and arbitrariness. The government can fill this gap by provid- communications strategy and conducted a Ensuring that the tax provisions are transpar- ing capacity-building and training for small countrywide campaign to communicate the ent and implemented consistently is critical businesses. The benefits to tax training are role of taxes in re-building a post-conflict for the system to work efficiently. A first mutual: if well-trained entrepreneurs are able society. They held business forums to gather step in this direction can be to improve the to file returns and pay taxes more efficiently, feed-back on improving the tax system, and audit capacity of tax authorities. Tax evasion the government can improve compliance they communicated directly with businesses cannot be properly tackled if companies with the tax regulation. to encourage tax compliance. Thanks to the suspected of “malfeasance” are not audited Creating a cadre of trained and certified tax reforms and the communications efforts, regularly. With risk-based audit systems, tax professionals—essentially accountants— would in 2009 the National Revenue Authority authorities audit only companies whose tax returns reveal an anomaly or a significant risk FIGURE 9.3 The total tax rate in Hargeisa is high compared globally of fraud.13 Coupled with strict enforcement Total tax rate (% of profit) and a mechanism for appeal and review, a Global average: 44.9 Sub-Saharan Africa average: 57.1 risk-based audit system would discourage tax evasion and increase the likelihood that Congo, Dem. Rep. 339.7 fraud would be caught and punished. Gambia, The 283.5 Sri Lanka 105.2 NOTES 1. Eubank, Nicholas. 2010. “Peace-Building Hargeisa 101.9 without External Assistance: Lessons from Somaliland.” CGD Working Paper Uzbekistan 97.5 198. Washington, D.C.: Center for Global Development. Eritrea 84.5 2. Leo, Benjamin, Vijaya Ramachandran and Ross Thuotte. 2012. Supporting Private Djibouti 38.7 Business Growth in African Fragile States. Washington, D.C.: Center for Global United Kingdom 37.3 Development. South Africa 33.1 3. Munzele Maimbo, Samuel, ed. 2006. “Remittances and Economic Development, Social Development.” Conflict Prevention Canada 28.8 and Reconstruction Paper No. 38. Washington, D.C.: The World Bank Group. 0 50 100 150 200 250 300 350 4. According to World Bank Enterprise Surveys, Note: The global average is based on 183 economies measured by Doing Business. Due to the assumptions of the Doing Business case firms in 90% of countries surveyed rank tax study, which assumes a very low profit margin, where the data show that taxes exceed profit, the company must apply a price markup of more than 120% of the cost of goods sold to be able to pay its taxes. See the data notes for more details. compliance among the top five obstacles to Source: Doing Business database. doing business. World Bank Group. 2006. PAYING TAXES 47 “Enterprise Surveys: Regulations and Tax.” www.enterprisesurveys.org 5. Hibbs, Douglas A., and Violeta Piculescu. 2010. “Tax Toleration and Tax Compliance: How Government Affects the Propensity of Firms to Enter the Unofficial Economy.” American Journal of Political Science 54 (1): 18–33. 6. International Tax Dialogue. October 2007. “Taxation of Small and Medium Enterprises.” Background paper for the International Tax Dialogue Conference. Buenos Aires, Argentina. 7. Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations. Facsimile of the 1st ed. Amherst, NY: Prometheus Books, 1991. 8. Law No.86/96 of 13 March 1996, as amended by Decree Law 23/2000. 9. World Bank Group and PricewaterhouseCoopers. November 10, 2011. “Paying Taxes 2012 The global picture”. Washington, D.C.: World Bank Group. 10. Interviews with the Ministry of Finance and private sector. Hargeisa. April 2012. 11. Leo et al. Supporting Private Business Growth in African Fragile States. 12. Rahman, Shaela. “Using Strategic Communications to Engage Stakeholders in Tax Reform.” In Practice Note. Washington, D.C.: World Bank Group. 13. Khwaja, Munawer Sultan and Rajul Awasthi, Jan Loeprick (eds.). June 2011. Risk-Based Tax Audits. Washington, D.C.: The World Bank Group. http://elibrary.worldbank.org/ content/book/9780821387542. 48 Trading across borders Trade is a key pillar of Somaliland’s economy. FIGURE 10.1 What are the time, documents and cost to export and import a 20-foot container by sea Livestock exports are estimated to account transport? for up to 80% of export earnings,1 and customs duties represented 85% of the government’s revenue in 2009.2 Its main Time Time port, Berbera, is one of the oldest ports in the region and has an advantageous location Cost Cost To export To import on the south of the Gulf of Aden, one of the Documents Documents Full, 20-foot container world’s key trade routes. The main exports leaving the port of Berbera are livestock and Import dried animal skins going to the countries of the Arabian Peninsula. Improving customs and port operations will be vital to increasing Export trade flows and granting access to imported goods that are not available in the economy. Port and terminal Customs and Inland handling border agencies transport WHY DOES TRADING ACROSS increase trade in manufacturing by up to limited space, container cargo handling and BORDERS MATTER? $377 billion a year in all regions.6 other trade-related operations take place in The benefits of trade are well documented. the same area. Infrastructure limitations to- Limited access to international markets can WHAT DOES TRADING ACROSS gether with operational inefficiencies cause prevent the growth of businesses and econo- BORDERS MEASURE? major delays in the peak season of livestock mies of scale. Local markets are often small, exports, when the presence of a high number Doing Business measures the time and cost particularly in developing economies, and of animals in the terminal makes container (excluding tariffs) associated with exporting trade provides potential for greater output handling operations hard to perform. At the and importing a 20-foot container by sea at lower cost. Trade also allows developing same time, container ships with imports transport, and the number of documents economies to become part of global supply have to wait up to one week outside the necessary to complete the transaction chains. Access to imported raw materials and port for vessels exporting livestock to leave (figure 10.1). The indicators cover docu- other inputs is often crucial for businesses, before they can enter and unload. mentation requirements and procedures at while delays or shortages can affect produc- customs and other regulatory agencies as tion. Trade can also lead to positive externali- Compared globally to 183 economies well as at the port. They also cover logisti- ties such as the transfer of know-how.3 measured by Doing Business 2012, Hargeisa cal aspects, including the time and cost of would rank 127 on the ease of trading across International trade plays an important part in inland transport between company ware- borders—ahead of Benin (129), and Sierra the development of economies.4 Facilitating houses and traders’ ports. Leone (132), but behind Liberia (116) and the trade is therefore a natural concern for policy Republic of Yemen (118). An entrepreneur in makers. Researchers find that streamlining HOW DOES IT WORK IN Hargeisa needs to submit 7 documents, wait customs and administrative procedures helps HARGEISA AND HOW DOES IT 25 days, and spend $1,920 to import a 20- increase trade flows. A study in Sub-Saharan COMPARE GLOBALLY?  foot standardized container of cargo through Africa estimates that reducing export costs Hargeisa is an inland city. The primary the port of Berbera. To export through the by 10% through improvements in the ef- port used by the local traders is the port same port, an entrepreneur needs to sub- ficiency of trade processes increases exports of Berbera, on the south side of the Gulf of mit 6 documents, wait 22 days, and spend by 4.7%.5 Globally, improving port efficiency, Aden, about 160 kilometers northeast of $1,940. This is slower and more expensive the customs environment, the regulatory Hargeisa. The port’s container-handling fa- than the case of Djibouti where importing environment and the service sector could cilities present some insufficiencies. Due to takes 18 days and costs $911, while exporting TRADING ACROSS BORDERS 49 TABLE 10.1 Trading across borders in Hargeisa compared regionally and globally Documents to Time to Cost to Documents to Time to Cost to Rank Economy export export export import import import (183 economies) (number) (days) ($ per container) (number) (days) ($ per container) Singapore 1 4 5 456 4 4 439 United Arab Emirates 5 4 7 630 5 7 635 Djibouti 37 5 18 836 5 18 911 Egypt, Arab Rep. 64 8 12 613 9 12 755 Liberia 116 10 15 1,220 9 14 1,200 Yemen, Rep. 118 6 27 890 9 25 1,475 Hargeisa 127 6 22 1,940 7 25 1,920 Benin 129 7 30 1,049 8 32 1,496 Sierra Leone 132 7 24 1,573 7 27 1,639 SSA (Average) 134 8 31 1,960 8 37 2,502 Notes: SSA denotes the Sub-Saharan Africa region. Rankings are based on the average economy percentile rankings on the documents, time, and cost to import and export. See the data notes for details. Source: Doing Business database. takes 18 days and costs $836. Compared to commercial banks in Somaliland that can free circulation of heavily laden or larger the average economy in Sub-Saharan Africa, issue such a document to traders. As a con- trucks. As a consequence, cargo for exports is the process is quicker and less expensive in sequence, most businesses need to transfer typically manually loaded onto smaller trucks Hargeisa. In fact in Sub-Saharan Africa, im- funds through remittance companies to at the warehouse, taken to Berbera, and then porting requires an average of 8 documents, Djibouti or other economies where local manually loaded onto containers available takes 37 days and costs $2,502, while ex- banks are able to issue the required letter of at the port. Additionally, import containers porting requires 8 documents, takes 31 days credit. This is expensive and can add about two weeks to the process (figure 10.2). are seldom released for transportation on and costs $1,960 (table 10.1). land—or, if they are, it is against high deposits Importing a container through the port of Exporting a container to Hargeisa through and the risk of detention charges. Because the Berbera requires seven documents: the bill the port of Berbera has a total cost of $1,940, shipping lines do not have empty-container of lading, the packing list, the commercial in- which is in line with the Sub-Saharan Africa depots near Hargeisa or any other inland voice, the certificate of quality, the customs regional average of $1,960. Conversely, destination, importers must either pay to declaration form, the certificate of origin, Hargeisa’s import costs, at $1,920, are 30% lower than the Sub-Saharan Africa average of return the empty container to port or unload and the boarding list. Exporting requires six $2,502. The biggest share of the cost for both the container in the port. This makes inland documents: the bill of lading, the packing list, the commercial invoice, the certificate imports and exports is represented by inland handling and transportation cumbersome, of quality, the customs declaration form and transportation ($1,100) (figure 10.3). This is driving costs up. the delivery order. because of infrastructure limitations. The road that connects Hargeisa to the port of Berbera Recent reforms in many economies in Sub- In terms of time, the biggest bottleneck is is narrow and not well paved, which prevents Saharan Africa have made it easier to trade the preparation of the documents due to the large container trucks from using it. Hargeisa’s across borders. For example, Sierra Leone letter of credit.7 This is because there are no urban infrastructure does not allow for the has adopted the Automated System for Customs Data (ASYCUDA), originally devel- FIGURE 10.2 Traders spend over 70% of their time obtaining documents oped by the United Nations Conference on Days to import and export Trade and Development (UNCTAD),8 which Document preparation Inland transportation Custom clearance Port and allows customs declarations to be lodged and inspection terminal handling electronically. Tanzania’s implementation of the Pre-Arrival Declaration (PAD) system Import 18 1 2 4 Total: 25 days eliminated duplication of documents by different authorities. Senegal opened the market for transport and delivery of contain- ers going through the port of Dakar, which Export 18 1 1 2 Total: 22 days led to a significant increase in the number of certified container truck companies. Higher competition led to a decrease in the cost of Source: Doing Business database. inland transportation for containers. 50 DOING BUSINESS 2012 FIGURE 10.3 Inland transportation represents the to focus inspections on higher-risk cargo. reforms in recent years. One of the most biggest share of the cost for exports Several countries in Sub-Saharan Africa, successful examples in Sub-Saharan Africa Export including Kenya, Madagascar, Mauritius, is Madagascar, which implemented an elec- Rwanda, Senegal and Uganda, already have tronic data interchange system—Tradenet— Document or are working on establishing such system. preparation in 2007. As a result, customs declarations 19% When Mauritius introduced a computerized can now be submitted electronically. Under risk management system in 2007, it reduced the new system, payment of customs duties the physical inspections from 100% to just has also been made easier. Consequently, 30% of the cargo. A specific assessment of customs clearance time has fallen from Port and the port of Berbera could be conducted to seven to three days for exports and four days terminal handling 14% determine which would be an appropriate for imports. risk-based inspection system while ensuring security. As a first step, the port of Berbera could Customs clearance and inspection consider introducing a computerized system 10% Inland Improve roads to speed inland for customs management, allowing customs transportation 57% transportation and invest in port officers to electronically process documents Source: Doing Business database. infrastructure related to customs clearance. Sierra Leone More than one-half of the total cost of im- and other countries have successfully imple- WHAT TO REFORM? porting and exporting to and from Hargeisa mented the ASYCUDA system. Information Streamline document requirements is due to inland transportation and handling technology offers several additional benefits and make information publicly costs. The road connecting Hargeisa to the to the government, including facilitation of available port is narrow and badly paved, which drives compliance management, risk analysis, costs up and causes delays. Somaliland timely and accurate trade statistics, and Currently traders in Hargeisa must fill out and should consider improving the road as well revenue collection. submit six documents to export and seven to as surrounding infrastructure. In Eritrea, for import. The government should explore ways example, the infrastructure at Massawa port to streamline these requirements. Exports was upgraded, as were the roads between NOTES from good practice countries require only Massawa and the capital, Asmara. 1. Bradbury, Mark. 2008. Becoming Somaliland. four documents: bill of lading, commercial London: Progressio. invoice, customs declaration and packing Infrastructure investments should also focus 2. Government revenue comes from taxes on list. Fewer documents reduce the hassle and on the container handling facilities of the port trade and transactions and data is for 2009. delay for importers and exporters. Elimination of Berbera. A port assessment should be car- Ministry of Development and Planning 2010 of unnecessary documentation has proved ried out to determine infrastructure and ca- Somaliland in figures. popular in Latin America and Caribbean. The pacity constraints and other areas in need of 3. Saggi, Kamal. 2002. “Trade, Foreign Direct Dominican Republic, Ecuador and Honduras improvement. A larger terminal would likely Investment, and International Technology have eliminated notarization requirements. facilitate port operations: livestock could be Transfer: A Survey.” World Bank Research Observer 17 (2): 191–235. handled in one area of the terminal, for ex- Public information is also lacking regarding ample, while a new area could be specifically 4. Bolaky, Bineswaree, and Caroline L. Freund. the official fees, procedures and documents 2008. “Trade, Regulations, and Income.” destined to handle containers. This would Journal of Development Economics 87: 309–21. required for trading in and out of Somaliland. decrease import time, especially during the This can result in misinterpretation of the 5. Hoekman, Bernard, and Alessandro Nicita. peak livestock export season, since vessels 2009. “Trade Policy, Trade Cost and regulation and, potentially, corruption. entering the port of Berbera would not have Developing Country Trade.” Policy Research Publicizing customs procedures, fees and to wait for export ships to leave the port first. Working Paper 4797. Washington, D.C.: documents would promote transparency and Container handling operations would also be World Bank Group. help importers and exporters save time. easier to perform if livestock were confined to 6. Wilson, John S., Catherine L. Mann and a specific section of the terminal. Tsunehiro Otsuki. 2004. “Assessing the Introduce risk-based inspections Potential Benefit of Trade Facilitation: Currently 100% of the cargo going through Computerize customs management A Global Perspective.” Policy Research and move towards exchanging trade Working Paper 3224. Washington, D.C.: the port of Berbera is inspected. This level World Bank Group. of inspections is unwarranted. Generally, information electronically 7. One of the case study assumptions is that the vast majority of imports and exports is Adoption of electronic systems for filing, payment is made by letter of credit, so it is conducted by legitimate businesses and transferring, processing and exchanging not contained in the list of documents. See does not pose a threat to the country or its customs information has become an impor- Data notes for a detailed explanation of the exchequer. Most modern customs systems tant tool for managing flows of information. methodology. are risk-based, allowing customs officials It has been one of the most popular trade 8. http://www.asycuda.org/aboutas.asp. 51 Enforcing contracts Somaliland’s judicial system was heav- WHAT DOES ENFORCING FIGURE 11.1 What are the time, cost and procedural requirements to resolve a commercial ily affected by the civil war: the existing CONTRACTS MEASURE? dispute through the courts? infrastructure was destroyed and judges Doing Business measures the time, cost and legal professionals fled. Things started and procedural complexity of resolving a Court improving a decade ago, however. A new commercial lawsuit between two domes- constitution reestablished the legal frame- tic businesses (figure 11.1). The dispute Time work in 2001. Legal professionals who were involves the breach of a sales contract Cost trained abroad have begun to return, and worth twice the income per capita of the Number of economy. The case study assumes that the procedures local universities have reopened their doors. court hears arguments on the merits, and Courts are being rebuilt and reorganized. Company A Company B that an expert provides an opinion on the Commercial dispute While there is still much to be done, these (seller & plaintiff) (buyer & defendant) quality of the goods in dispute. are positive signs of recovery. Filing of Trial & Enforcement HOW DOES IT WORK IN court case judgment WHY DOES COMMERCIAL HARGEISA AND HOW DOES IT DISPUTE RESOLUTION MATTER? COMPARE GLOBALLY? Functioning courts in fragile and conflict-af- Traditional dispute resolution systems been translated into Somali, but key pieces of fected countries are important both for eco- were always important in Somaliland, but commercial legislation, like the Companies nomic growth and state building.1 Restoring following the civil war in the 1980s and the Law of Somaliland, continue to only be avail- public confidence in courts is a daunting collapse of the formal judicial system they able in English today. Since many judges do task, especially in economies where conflict became the only mechanism for conflict not speak English, these laws remain virtually resolution. The existing legal system consists unapplied. In addition, there are no uniform has weakened the judicial system and where of civil and common law of different origins guidelines, and judges often differ in their traditional dispute resolution mechanisms and languages (box 11.1). The constitution application of the various sources of law.5 have been the only option for a long time.2 of 20013 brought into effect all Somali laws Although traditional justice will continue to existing prior to it. Besides statutory law, Human capacity remains a main challenge. play an important role, strengthening the Xeer4—or customary law—and Sharia are In 2011 there were 136 judges and 135 formal court system is particularly important also major sources of law. Some laws had registered lawyers in Somaliland. Only 7% for businesses. BOX 11.1 Somaliland’s legal frameworki Effective commercial dispute resolution Somaliland was a British protectorate from 1886 to 1960, during which time common law was has many benefits. Courts are essential introduced. Meanwhile, Somalia adopted Italian civil law. After independence from Great Britain for entrepreneurs to protect their property and unification with Somalia in 1960, the resulting legal system was a blend of the two legal rights and interpret the rules of the market. systems. After the end of the civil war in 1991 and the unilateral declaration of independence by Efficient and transparent courts encourage Somaliland, there was no clear legal framework. A constitution was adopted in 1997 and ratified new business relationships because firms by public referendum in 2001. It legally validated all existing laws, vested the Parliament with the know they have recourse to the courts if a authority to issue new legislation, and proclaimed the independence of the judiciary. Currently, a customer fails to comply with contractual collection of laws of different legal origins coexist. The 1973 Civil Code was inspired by the Egyptian duties. Speedy trials are essential for small Civil Code, thus indirectly by the French Napoleonic Code. The Civil Procedure Code from 1974 has enterprises because they may lack the its origins in the Italian equivalent. The 2004 Companies Law follows common law. resources to stay in business while awaiting i. UN-HABITAT, UNHCR and the Norwegian Refugee Council. 2008. Land, Property, and Housing in Somalia. the outcome of a long court dispute. 52 DOING BUSINESS IN HARGEISA 2012 of judges had a law degree and 10% had Regional Courts, and thirty-seven District is spent during the trial stage (figure 11.3). completed higher education studies.6 But Courts. The District and Regional Courts are Although the Chairman of Hargeisa’s positive developments over the past decade the courts of first instance. Jurisdiction for Regional Court has instructed judges to deal will start reaping benefits. New graduates commercial matters is determined on the with cases promptly, cases are often inter- are coming out of the University of Hargeisa basis of the claim value, and higher claims rupted while parties try to solve their dispute Faculty of Law, established in 2002; and the amounts are litigated at the Regional Court. before clan elders, returning to the court only Amoud University Faculty of Law and Islamic Commercial cases are ruled mainly under the if they do not reach an agreement.7 Yet the Sharia, established in 2008. The Somaliland Civil Procedure Code of 1974. Following this main reason for the speedy resolution is that Lawyers Association was created in 2004. law, enforcing a contract through Hargeisa’s relatively few cases actually reach the courts Regional Courts involves 52 procedures, in Somaliland (figure 11.4). There were 3,447 Enforcing a contract in Hargeisa takes 52 which is high compared regionally and incoming civil cases in 2010 for a population procedures over 281 days and costs 40.4% globally. However, the high number of proce- of around 3.85 million inhabitants. This is of the claim value. While this is more than dures does not seem to have a high impact very low: for example, Bosnia & Herzegovina, twice as fast and 10 percentage points less on the length of proceedings. One reason the Czech Republic and Spain had a similar expensive than the Sub-Saharan Africa aver- for this could be that judges do not follow all number of cases for every 100,000 inhabit- age (655 days and 50% of the claim value), the formal steps required by the law, in part ants in 2008.8 Similarly, within civil cases, it is quite expensive compared globally. because many do not have formal legal train- Hargeisa’s Regional Court deals with ap- Compared to the 183 economies measured ing. If the law is applied, procedural complex- proximately 20 commercial cases per year.9 by Doing Business 2012, Hargeisa would rank ity could become a hurdle in the future as the This may be explained by lack of trust in the 124—ahead of Sudan (148) and Djibouti number of cases increases. judicial system. In fact, customary justice (160) but behind Ethiopia (57). Contract continues to be the most prevalent form of enforcement in Tanzania—the top performer Enforcing a contract in Hargeisa takes conflict resolution in Somaliland: 75–80% in Sub-Saharan Africa—requires 38 proce- 281 days, among the fastest economies of conflicts are settled by elders or religious dures, takes 462 days and costs 14.3% of the compared globally. Doing Business tracks leaders.10 claim value (figure 11.2). the time needed to resolve a commercial dispute through 3 stages of litigation: filing The cost to enforce a contract in Hargeisa is There are fifty court houses in Somaliland: and service; trial and judgment; and finally, 40.4% of the claim value, similar to the cost the Supreme Court, six Appeals Courts, six enforcement. In Hargeisa, most of the time in Côte d’Ivoire (41.7%) and in Madagascar FIGURE 11.2 Enforcing a contract in Hargeisa is fast but expensive compared globally Global rank Procedures Time Cost (183 economies) (number) (days) (% of claim value) 1 Luxembourg 60 1,300 Timor-Leste (1,285) 170 Djibouti (1,225) Timor-Leste (163.2) Sudan (53) Hargeisa (52) Tanzania (36) Timor-Leste (51) Congo, Dem. Rep. (151.8) Yemen, Rep. (38) United Arab Emirates (49) Egypt, Arab Rep. (1,010) Ethiopia (57) Congo, Dem. Rep. (43) Egypt, Arab Rep. (41) Sudan (810) Djibouti (40) SSA Average (39) Tanzania (38) SSA Average (655) SSA Average (50.0) Ethiopia (37) Ethiopia (620) Yemen, Rep. (36) Congo, Dem. Rep. (610) United Arab Emirates (537) Hargeisa (40.4) SSA Average (117) Yemen, Rep. (520) Tanzania (462) Djibouti (34) Hargeisa (124) Luxembourg (26) United Arab Emirates (134) Luxembourg (321) United Arab Emirates (26.2) Egypt, Arab Rep. (26.2) Egypt, Arab Rep. (147) Hargeisa (281) Sudan (19.8) Sudan (148) Yemen, Rep. (16.5) Djibouti (160) Ethiopia (15.2) Tanzania (14.3) Congo, Dem. Rep. (170) Luxembourg (9.7) 183 Timor-Leste (183) 0 0 0 Notes: SSA denotes the Sub-Saharan Africa region. Rankings are based on the average of city percentile rankings on the procedures, time, and cost required to resolve a commercial dispute through the courts. See the data notes for details. Source: Doing Business database. ENFORCING CONTRACTS 53 FIGURE 11.3 The trial and judgment phase takes the FIGURE 11.4 Only a low number of cases reach courts in Somaliland longest Time (days) Number of cases filed in Somaliland Courts 2007-2010 Civil Criminal Enforcement 90 days Filing & service 21 days 3,614 3,073 2,469 2,016 3,447 3,076 Trial & judgment 170 days 895 983 2007 2008 2009 2010 Source: Doing Business database. Source: UNDP. “Somaliland Ministry of Justice Judicial Reform Work-Plan: 2011-2015.” Draft. Somalia: UNDP. (42.4%). This is more expensive than the official gazette since January 2012—the Introducing specialization among judges can global average of 34.8% of the claim value, Law Reform Commission, or the Ministry increase their expertise in specific matters. but less costly than the average cost in Sub- of Justice. This institution should ensure This in turn can help judges deal with cases Saharan Africa (50%). Attorney and expert that all laws are available in Somali, starting more efficiently, contributing towards a more fees account for the largest percentage of the with the Companies Law. Laws and regula- standard application of the law. Hargeisa’s costs. Other costs include the advertisement tions should be made easily available for Regional Court could start by separating civil fees for the public sale and court fees set and and criminal cases; eventually it could assign purchase or consultation in local shops and collected by the Ministry of Finance. some judges to hear commercial matters universities or the courts. Courts should specifically. A careful analysis of the court’s A number of recent and ongoing initiatives publish fee schedules on public notice caseload should precede the design of a are working to strengthen the evolving judi- boards, thereby improving transparency specific solution. But specialization is not an cial system. The 2011–2015 Judicial Reform and reducing opportunities for corruption. exclusive feature of high-income economies: Work Plan, developed by the Ministry of eighty-seven economies measured by Doing Justice in collaboration with local stakehold- Train legal professionals and Business 2012 have a specialized commercial ers and international partners, recognizes the introduce specialization among court, section or judge. Specialized com- importance of a functioning justice system judges mercial courts started operating in the for continued economic growth and social Lack of human capacity is a common chal- Democratic Republic of Congo in 2006, four development in Somaliland.11 Several nation- lenge in conflict-affected countries. Judges years after their creation was approved by al workshops on justice reform have taken and legal professionals should receive law. Kenya, Nigeria and Uganda have a com- place involving the relevant ministries as well adequate training. As the cadre of legal mercial division within their courts. Lesotho, as representatives of the justice sector and professionals increases, specialized training which started off by appointing and training civil society.12 A new hearing room was built programs should focus on specific topics, one judge to hear commercial cases in 2010, in the Hargeisa Regional Court, the archives including commercial legislation and judicial has since launched a specialized commercial have been reorganized and court registrars precedents, and promote the standard appli- court. are equipped with computers. Each judge has a court clerk tracking caseloads, which cation of the law. The curriculum at the local Keep performance statistics helps manage cases and workloads. universities should be carefully reviewed to Keeping detailed statistics helps in track- make sure that new laws are studied and that ing judges’ caseloads. Statistics are also WHAT TO REFORM? professional training is included. Although important for any judicial reform program Make laws available in Somali and training takes time, it does show results. In because they help identify bottlenecks, track publish court fee schedules 2009 the West Bank and Gaza saw contract trends and allocate resources. Today the enforcement speed up as new judges were Access to information is critical for legal Regional Court of Hargeisa keeps track only recruited and trained and specialized en- of the total number of cases, distinguishing certainty. It is essential that all applicable laws be made available in the local lan- forcement judges were appointed. In 2008 only between civil or criminal and pending guage, and accessible for judges and legal Mozambique’s judiciary hired and trained or closed. As the number of cases grows, professionals. There should be one public more than 20 judges, introduced court having accurate and detailed data about the institution responsible for this task. It could administrators, and set up performance types of cases that reach the court and the be the Chief State Counsel—which has measurement for judges, decongesting the length of proceedings will be important for been responsible for the publication of the courts and prompting large efficiency gains. the organization of the court. 54 DOING BUSINESS IN HARGEISA 2012 Courts across African economies are intro- NOTES ducing different case management solutions. 1. Deval Desai, Deborah Isser and Michael Uganda in 2009 introduced a case manage- Woolcock. November 21, 2011. “Rethinking ment software system that gives the court an Justice Reform in Fragile and Conflict- Affected States”. World Bank Legal Review. electronic case register, a case calendar for Washington, D.C.; World Bank Group. monitoring deadlines, and readily available 2. Le Sage, Andre. July 2005. Stateless Justice statistics. Magistrates can now easily spot in Somalia: Formal and Informal Rule of cases that have not been served in a timely Law Initiatives. Geneva: The Centre for manner and dismiss them, putting pressure Humanitarian Dialogue. on the plaintiff to perform service promptly. 3. http://www.somalilandlaw.com/somalil- In 2011, Zambia launched an electronic case and_constitution.htm management system that includes digitizing 4. Xeer is a set of rules and obligations developed between traditional elders to all court records and allows for electronic mediate relations between Somalia’s clans case referencing. In 2010, with the approval and sub-clans. It is not codified. of new Civil Procedure Rules, Kenyan courts 5. Academy for Peace and Development. April introduced a new case-track system in 2002. “The Judicial System in Somaliland.” which cases are categorized as small claims, Workshop Report. Hargeisa, Somaliland. fast track or multi-track. While these are all 6. United Nations Development Programme. electronic solutions, the Regional Court of “Somaliland Ministry of Justice Judicial Reform Work-Plan: 2011–2015.” Draft. Hargeisa can improve case management by Somalia: UNDP. other means that do not necessarily require 7. UNDP. “Somaliland Ministry of Justice the use of technology. Judicial Reform Work-Plan.” 8. Ministry of Planning and Development. Somaliland in figures. 2010. Also European Commission for the Efficiency of Justice (CEPEJ). 2010. “European judicial systems: Efficiency and quality of justice”. p.143. Strasbourg, France. 9. Interview with Hargeisa’s Regional Court Chairman. April 2012. 10. UNDP. “Somaliland Ministry of Justice Judicial Reform Work-Plan.” 11. UNDP. “Somaliland Ministry of Justice Judicial Reform Work-Plan.” 12. Interview with UNDP Access to Justice expert. May 2012. 55 Resolving insolvency Perhaps no other area of business regula- from issuing high-risk loans, and managers few insolvency cases have reached court in tion has been tested more by the recent and shareholders from taking imprudent recent years and there is no formal financial global financial and economic crisis than loans and making other reckless financial system (figure 12.2).6 insolvency. As crisis-affected businesses decisions.2 A firm suffering from bad man- file for bankruptcy, governments around the agement choices or a temporary economic This does not put Hargeisa far behind other world see their insolvency regimes bending downturn may still be turned around. When economies in the region. According to Doing under difficult economic conditions. Good it is, all stakeholders benefit. Creditors can re- Business 2012, 7 of the 15 economies world- insolvency regimes maximize the total cover a larger part of their investment, more wide with “no practice” are located in Sub- proceeds received by creditors, sharehold- employees keep their jobs, and the network Saharan Africa; these include Burundi, Cape ers, employees and other stakeholders. of suppliers and customers is preserved. Verde, the Comoros, Equatorial Guinea, They also rehabilitate viable businesses Eritrea, Guinea-Bissau, and the Seychelles. while closing unviable ones and establish- WHAT DOES RESOLVING Recognizing this shortcoming, economies ing a clear priority ranking of creditors for INSOLVENCY MEASURE? in the region are taking steps to introduce repayment. Well-developed insolvency Doing Business measures the time, cost and regimes address financial distress through FIGURE 12.2 Resolving insolvency in Hargeisa outcome of insolvency proceedings involv- compared regionally and globally both formal in-court mechanisms and out- ing domestic entities (figure 12.1).3 Speed, of-court tools. Global rank low costs and the continuation of viable (183 economies) businesses characterize the top-performing 1 Japan WHY DOES RESOLVING economies. Doing Business does not mea- INSOLVENCY MATTER? sure insolvency proceedings of individuals How insolvencies are resolved matters for and financial institutions. Botswana (28) the health of an economy. Keeping viable businesses operating is among the most HOW DOES IT WORK IN important goals of bankruptcy systems. A HARGEISA AND HOW DOES IT good insolvency regime should prevent the COMPARE GLOBALLY? premature liquidation of sustainable busi- South Africa (77) The Companies Law of Somaliland (Law No. nesses.1 It should also discourage lenders 25/2004) regulates the winding up and liq- FIGURE 12.1 What are the time, cost and outcome uidation procedures by the court, voluntary of insolvency proceedings involving a local company? or subject to the supervision of the court.4 There are no specific reorganization provi- SSA Average (127) sions in the law. The law is only available in Court Malawi (132) English, not in Somali, and not many judges Djibouti (141) speak English. This may be one of the many Outcome Time reasons why the law is not more often used Cost in practice. In cases of corporate distress, it Burundi (183 – No practice) is more common for entrepreneurs to obtain Comoros (183 – No practice) Recovery rate 183 Hargeisa (183 – No practice) out-of-court settlements through customary Secured Unsecured law applied by the elders. Notes: SSA denotes the Sub-Saharan Africa region. The ease creditor Insolvent of resolving insolvency indicator is based on the economy’s company creditors (bank) percentile ranking on the recovery rate. The latter takes into Hargeisa is classified as a “no practice” account how many cents on the dollar claimants (creditors, tax economy according to the Doing Business authorities, and employees) recover from the insolvent firm as well as time and cost component indicators. See Data notes for Secured Other methodology5 because, although there are details. loan claims no official statistics, judges report that very Source: Doing Business database. 56 DOING BUSINESS IN HARGEISA 2012 FIGURE 12.3 The pace of bankruptcy reform has picked up in Sub-Saharan Africa It is important that the business community Major reforms making it easier to resolve insolvency in Sub-Saharan Africa trusts the insolvency regime and courts. One of the ways in which stakeholders 7 could gain confidence in the law is through training programs and outreach efforts that explain the law and how to use it. In 4 Rwanda, a no-practice country according to Doing Business, the complexity of the insol- vency law hinders its use; however, along with the development of model orders that 1 1 fill the gaps in the law and clarify its usage, officials have established a series of training courses for judges, lawyers and insolvency 2007 2008 2009 2010 2011 2012 practitioners to promote understanding of Note: An economy can be considered to have only one Doing Business reform per topic and year. Doing Business includes data for 46 economies in Sub-Saharan Africa. and confidence in the law. It is also impor- Source: Doing Business database. tant that the law serves smaller businesses as well as the larger ones. One way of doing functioning insolvency frameworks or im- provisions on reorganization and adminis- so is to put in place fast-track, simplified, prove existing ones. As a result, the pace of tration; the provisions encourage business less-expensive procedures for smaller busi- bankruptcy reforms in Sub-Saharan Africa to re-organize rather than go straight into nesses and individuals. has picked up considerably in recent years liquidation. (figure 12.3). One of the difficulties stems from the fact WHAT TO REFORM? that the Companies Law of Somaliland Somaliland can look to its neighbors and internationally for leading practices and re- is available only in English. This makes it An in-depth diagnostic would be needed forms in the area of insolvency (table 12.1). In difficult for local businesses, lawyers and to identify the most suitable reforms that Botswana, for example, insolvency proceed- judges to use the law. Making the law avail- could strengthen the insolvency regime in ings take less than two years and cost 15% able in Somali will facilitate its use in court Somaliland. Below are some of the good of the estate value. Creditors are expected to and members of the business community practices by which other economies have recover 64.5% of the estate, which is slightly will feel they have a law they can actually made resolving insolvency easier across the short of the OECD high-income economies’ understand and use. In turn, this will in- average of 68.2%, but significantly higher world. crease confidence in the formal bankruptcy than the Sub-Saharan Africa average of proceedings. 19.1%. Recent reform examples in the region Increase confidence in the include an insolvency law in Mauritius, insolvency framework Revise insolvency legislation which introduced a rehabilitation procedure Even though Somaliland has legislation to conform to international for companies as an alternative to winding in place to govern judicial proceedings for leading practices and introduce up, and defined the rights and obligations of companies in distress, the law is rarely reorganization provisions creditors and debtors. Namibia has adopted applied in practice. The low number of A comprehensive evaluation of current legis- new legislation establishing clear procedures insolvency cases in Hargeisa shows that lation is recommended to identify measures for liquidation. Both Rwanda and South enterprises prefer to deal with insolvency that could bring Somaliland’s insolvency Africa have improved the process of deal- ing with financially distressed companies through unofficial channels or to litigate legislation in line with international good by streamlining reorganization procedures. their case in other jurisdictions such as practices. Among these measures could be Sierra Leone eased the process of insolvency Djibouti or Dubai instead of resorting to the provisions for the efficient reorganization or with a new Companies Act that includes local judicial system. restructuring of distressed companies that would allow the companies to continue op- TABLE 12.1 Examples of regional improvements making it easier to resolve insolvency erating. It is important to separate unviable Feature Economy businesses from viable businesses, and the Eliminate formalities or introduce or tighten time limits Malawi latter should be considered candidates for Regulate the profession of insolvency administrator Botswana; Namibia reorganization. Many jurisdictions, including Establish or promote reorganization, liquidation or foreclosure procedures Namibia; South Africa Rwanda and South Africa, have reformed Allow creditors’ committees a say in relevant decisions South Africa their insolvency legislation in recent years to Source: Doing Business database. improve such reorganization procedures. RESOLVING INSOLVENCY 57 Train insolvency practitioners NOTES One of the main prerequisites for creating 1. Djankov, Simeon, Oliver Hart, Caralee McLiesh and Andrei Shleifer. 2008. “Debt a fully functioning insolvency system is the Enforcement around the World.” Journal of development of the insolvency practitioner Political Economy 116 (6): 1105–49. profession. Insolvency practitioners play a 2. Claessens, Stijn, and Leora Klapper. 2003. key role in reorganization and liquidation “Bankruptcy around the World: Explanations proceedings, as they often supervise or of Its Relative Use.” Policy Research Working take over the management of companies Paper 2865. Washington, DC: World Bank. undergoing bankruptcy. It is important to 3. Outcome refers to whether the hotel business in the Doing Business case study establish and enforce professional standards emerges from the proceedings as a going for insolvency practitioners—for example, concern or whether the company’s assets through licensing, training, ethical guide- are sold piecemeal (see Data notes). lines and national standards of professional 4. Companies Law of Somaliland (Law No. conduct. Mechanisms to monitor insolvency 25/2004), Sections 211–24. practitioners and to investigate any viola- 5. If an economy has had zero cases per year tions should also be introduced. in the past five years involving a judicial reorganization, judicial liquidation or foreclosure, the economy receives a “no Consider adopting guidelines that practice” ranking. This means that creditors facilitate out-of-court workouts are unlikely to recover their money through a In some economies, until proper systems formal legal process (in or out of court). The are put in place, a short-term solution is to recovery rate for “no practice” economies is zero. See Data notes for more details. develop alternative dispute resolution tools 6. Interview with the Chairman of the Hargeisa for resolving simpler debt disputes. Although Regional Court. Hargeisa. April 2012. an in-depth investigation would be required to assess the need for such structures, one possibility is to develop out-of-court guidelines. Out-of-court guidelines enable debtors and creditors to undertake an in- formal restructuring process by negotiating options that can later be approved in court. This helps ease the burden on courts while increasing the likelihood that companies will restructure their debt if there is still a chance of rescuing the business. Out-of-court workouts are most common in high-income OECD economies. In Sub-Saharan Africa only 22% of the surveyed economies have rules on out-of- court settlement for bankruptcy. In Hargeisa out-of-court settlements are informally administered by clan elders. In the absence of explicit rules, creditors who do not partici- pate in settlement negotiations cannot op- pose a deal or become party to an ultimate agreement, nor is there a mechanism to enforce the agreements. Proper enforcement mechanisms are required for out-of-court settlements to succeed. 59 Data notes The indicators presented and analyzed in other professionals routinely administering Doing Business measure business regulation or advising on legal and regulatory require- ECONOMY CHARACTERISTICS and the protection of property rights—and ments. These experts have several rounds Gross national income (GNI) per capita Doing Business in Hargeisa 2012 reports their effect on businesses, especially small of interaction with the Doing Business in 2009 income per capita for Somalia and medium-size domestic firms. First, the Hargeisa 2012 team, through face-to-face as published by the United Nations indicators document the complexity of regu- interviews, conference calls and written Statistics Division (http:/ /data.un.org/ lation, such as the number of procedures to correspondence. The data from surveys are CountryProfile.aspx?crName=Somalia). start a business or to register and transfer subjected to numerous tests for robustness, Income is calculated using the Atlas method (current US$). For cost indica- commercial property. Second, they gauge which lead to revisions or expansions of tors expressed as a percentage of in- the time and cost of achieving a regulatory the information collected. For example, the come per capita, 2009 GNI in US dollars goal or complying with regulation, such as preliminary findings are presented through is used as the denominator. Somalia’s the time and cost to enforce a contract, go a right of reply session conducted with GNI per capita in 2009 = US$211.4. through bankruptcy or trade across borders. government officials. Following the right Region and income group Third, they measure the extent of legal of reply sessions experts are contacted to Doing Business uses the World Bank protections of property, for example, the validate findings and clarify issues from the regional and income group classifica- tions available at http://www.worldbank. protections of investors against looting by right of reply sessions. org/data/countryclass. company directors or the range of assets that can be used as collateral according to The Doing Business methodology offers secured transactions laws. Fourth, a set of several advantages. It is transparent, using indicators documents the tax burden on factual information about what laws and businesses. Finally, a set of data covers dif- regulations say and allowing multiple in- ferent aspects of employment regulation. teractions with local respondents to clarify potential misinterpretations of questions. The data for all sets of indicators in Doing Having representative samples of respon- Business in Hargeisa 2012 are as of May 2012. dents is not an issue; Doing Business is not The data for paying taxes refer to January- a statistical survey, and the texts of the rel- December 2010. evant laws and regulations are collected and answers checked for accuracy. The method- METHODOLOGY ology is inexpensive and easily replicable, so The Doing Business in Hargeisa 2012 data are data can be collected in a large sample of collected in a standardized way. To start, economies. Because standard assumptions the Doing Business team, with academic are used in the data collection, comparisons advisers, designs a questionnaire. The and benchmarks are valid across econo- questionnaire uses a simple business case mies. Finally, the data not only highlight the to ensure comparability across economies extent of specific regulatory obstacles to and over time—with assumptions about the business but also identify their source and legal form of the business, its size, its loca- point to what might be reformed. tion and the nature of its operations. Then the survey is customized to the particular LIMITS TO WHAT IS MEASURED case of Hargeisa. Surveys are administered The Doing Business methodology has limita- through 83 local experts, including law- tions that should be considered when inter- yers, business consultants, construction preting the data. First, the data often focus on firms, engineers, freight forwarders, local a specific business form—generally a limited and central-level government officials and liability company (or its legal equivalent) of a 60 DOING BUSINESS IN HARGEISA 2012 specified size—and may not be representa- removed from the dealing with construction FIGURE 13.1 Starting a business: getting a limited tive of the regulation on other businesses, permits indicators. liability company up and running Rankings are based on 4 indicators for example, sole proprietorships. Second, transactions described in a standardized Third, a threshold has been introduced for Preregistration, As % of income case scenario refer to a specific set of issues the total tax rate for the purpose of calculat- registration and per capita, no ing the ranking on the ease of paying taxes. postregistration bribes included and may not represent the full set of issues a (in calendar days) All economies with a total tax rate below the business encounters. Third, the measures of threshold (which will be calculated and ad- time involve an element of judgment by the justed on a yearly basis) will now receive the 25% 25% expert respondents. When sources indicate Time Cost same ranking on the total tax rate indicator. different estimates, the time indicators The threshold is not based on any underly- 25% 25% reported in Doing Business represent the me- Procedures Paid-in ing theory. Instead, it is meant to emphasize minimum dian values of several responses given under the purpose of the indicator: to highlight capital the assumptions of the standardized case. economies where the tax burden on busi- Procedure is Funds deposited in a Finally, the methodology assumes that a busi- ness is high relative to the tax burden in completed when bank or with a notary other economies. Giving the same ranking to final document before registration (or ness has full information on what is required is received within 3 months), as % and does not waste time when completing all economies whose total tax rate is below of income per capita procedures. In practice, completing a proce- the threshold avoids awarding economies in the scoring for having an unusually low function without corruption. If answers by lo- dure may take longer if the business lacks in- total tax rate, often for reasons unrelated to cal experts differ, inquiries continue until the formation or is unable to follow up promptly. government policies toward enterprises. For data are reconciled. Alternatively, the business may choose to example, economies that are very small or disregard some burdensome procedures. To make the data comparable across econo- that are rich in natural resources do not need For both reasons the time delays reported in mies, several assumptions about the busi- to levy broad-based taxes Doing Business in Hargeisa 2012 would differ ness and the procedures are used. from the recollection of entrepreneurs re- ported in the World Bank Enterprise Surveys Assumptions about the business STARTING A BUSINESS or other perception surveys. The business: Doing Business records all procedures that are officially required for an entrepreneur to Ė Is a limited liability company (or its legal CHANGES IN WHAT IS MEASURED start up and formally operate an industrial equivalent). If there is more than one The methodology for 3 of the Doing Business type of limited liability company in the or commercial business. These include ob- topics was updated this year—getting credit, economy, the limited liability form most taining all necessary licenses and permits dealing with construction permits and pay- popular among domestic firms is chosen. and completing any required notifications, ing taxes. Information on the most popular form is verifications or inscriptions for the company and employees with relevant authorities. The obtained from incorporation lawyers or First, for getting credit, the scoring of one of ranking on the ease of starting a business is the statistical office. the 10 components of the strength of legal the simple average of the percentile rankings Ė Operates in the economy’s largest busi- rights index was amended to recognize ad- on its component indicators (figure 13.1). ness city. ditional protections of secured creditors and borrowers. Previously the highest score of 1 After a study of laws, regulations and publicly Ė Is 100% domestically owned and has 5 was assigned if secured creditors were not available information on business entry, a owners, none of whom is a legal entity. subject to an automatic stay or moratorium detailed list of procedures is developed, along Ė Has start-up capital of 10 times income on enforcement procedures when a debtor with the time and cost of complying with per capita at the end of 2010 (2009 in entered a court-supervised reorganization each procedure under normal circumstances Hargeisa), paid in cash. procedure. Now the highest score of 1 is and the paid-in minimum capital require- Ė Performs general industrial or commercial also assigned if the law provides secured ments. Subsequently, local incorporation activities, such as the production or sale creditors with grounds for relief from an lawyers, notaries and government officials to the public of products or services. The automatic stay or moratorium (for example, complete and verify the data. business does not perform foreign trade if the movable property is in danger) or sets Information is also collected on the sequence activities and does not handle products a time limit for the automatic stay. in which procedures are to be completed and subject to a special tax regime, for ex- Second, because the ease of doing business whether procedures may be carried out si- ample, liquor or tobacco. It is not using index now includes the getting electricity multaneously. It is assumed that any required heavily polluting production processes. indicators, procedures, time and cost related information is readily available and that all Ė Leases the commercial plant and offices to obtaining an electricity connection were agencies involved in the start-up process and is not a proprietor of real estate. DATA NOTES 61 Ė Does not qualify for investment incentives Only procedures required of all businesses median reported value is applied. In all cases or any special benefits. are covered. Industry-specific procedures the cost excludes bribes. Ė Has at least 10 and up to 50 employees 1 are excluded. For example, procedures to month after the commencement of opera- comply with environmental regulations are Paid-in minimum capital tions, all of them nationals. included only when they apply to all busi- The paid-in minimum capital requirement nesses conducting general commercial or reflects the amount that the entrepreneur Ė Has a turnover of at least 100 times in- industrial activities. Procedures that the needs to deposit in a bank or with a notary come per capita. company undergoes to connect to electric- before registration and up to 3 months fol- Ė Has a company deed 10 pages long. ity, water, gas and waste disposal services lowing incorporation and is recorded as a are not included. percentage of the economy’s income per Procedures capita. The amount is typically specified in A procedure is defined as any interaction of Time the commercial code or the company law. the company founders with external parties Time is recorded in calendar days. The Many economies require minimum capital (for example, government agencies, lawyers, measure captures the median duration that but allow businesses to pay only a part of it auditors or notaries). Interactions between incorporation lawyers indicate is necessary before registration, with the rest to be paid company founders or company officers and in practice to complete a procedure with after the first year of operation. In Italy in employees are not counted as procedures. minimum follow-up with government agen- June 2011 the minimum capital requirement Procedures that must be completed in the cies and no extra payments. It is assumed for limited liability companies was €10,000, same building but in different offices are of which at least €2,500 was payable before that the minimum time required for each counted as separate procedures. If found- registration. The paid-in minimum capital procedure is 1 day. Although procedures may ers have to visit the same office several recorded for Italy is therefore €2,500, or take place simultaneously, they cannot start times for different sequential procedures, 9.9% of income per capita. In Mexico the on the same day (that is, simultaneous pro- each is counted separately. The founders minimum capital requirement was 50,000 cedures start on consecutive days). A proce- are assumed to complete all procedures pesos, of which one-fifth needed to be paid dure is considered completed once the com- themselves, without middlemen, facilita- before registration. The paid-in minimum pany has received the final document, such tors, accountants or lawyers, unless the use capital recorded for Mexico is therefore as the company registration certificate or tax of such a third party is mandated by law. If 10,000 pesos, or 8.4% of income per capital. number. If a procedure can be accelerated for the services of professionals are required, an additional cost, the fastest procedure is procedures conducted by such profession- The data details on starting a business can chosen. It is assumed that the entrepreneur als on behalf of the company are counted be found for each economy at http://www. does not waste time and commits to com- separately. Each electronic procedure is doingbusiness.org by selecting the economy pleting each remaining procedure without counted separately. If 2 procedures can be in the drop-down list. This methodology was delay. The time that the entrepreneur spends completed through the same website but developed in Djankov and others (2002) and is on gathering information is ignored. It is as- require separate filings, they are counted as adopted here with minor changes. sumed that the entrepreneur is aware of all 2 procedures. entry requirements and their sequence from TABLE 13.1 What do the starting a business the beginning but has had no prior contact indicators measure? Both pre- and postincorporation procedures with any of the officials. Procedures to legally start and operate a company that are officially required for an entrepreneur (number) to formally operate a business are recorded Preregistration (for example, name verification or Cost reservation, notarization) (table 13.1). Cost is recorded as a percentage of the Registration in the economy’s largest business city Procedures required for official correspon- economy’s income per capita. It includes all Postregistration (for example, social security registra- tion, company seal) dence or transactions with public agencies official fees and fees for legal or professional Time required to complete each procedure are also included. For example, if a company services if such services are required by law. (calendar days) seal or stamp is required on official docu- Fees for purchasing and legalizing company Does not include time spent gathering information ments, such as tax declarations, obtaining books are included if these transactions are Each procedure starts on a separate day the seal or stamp is counted. Similarly, if a required by law. The company law, the com- Procedure completed once final document is received company must open a bank account before mercial code and specific regulations and fee No prior contact with officials registering for sales tax or value added tax, schedules are used as sources for calculating Cost required to complete each procedure this transaction is included as a procedure. costs. In the absence of fee schedules, a gov- (% of income per capita) Shortcuts are counted only if they fulfill 4 ernment officer’s estimate is taken as an of- Official costs only, no bribes criteria: they are legal, they are available ficial source. In the absence of a government No professional fees unless services required by law to the general public, they are used by the officer’s estimate, estimates of incorporation Paid-in minimum capital (% of income per capita) majority of companies, and avoiding them lawyers are used. If several incorporation Funds deposited in a bank or with a notary before causes substantial delays. lawyers provide different estimates, the registration (or within 3 months) 62 DOING BUSINESS IN HARGEISA 2012 DEALING WITH CONSTRUCTION necessary to obtain construction permits FIGURE 13.2 Dealing with construction and approvals. permits: obtaining the necessary PERMITS requirements to build a warehouse Doing Business records all procedures Ė Has at least 1 employee who is a licensed and connect it to utilities required for a business in the construction architect and registered with the local as- Rankings are based on 3 indicators industry to build a standardized warehouse. sociation of architects. Days to build a As % of income These procedures include submitting all Ė Has paid all taxes and taken out all nec- warehouse in per capita, no main city bribes included relevant project-specific documents (for essary insurance applicable to its general example, building plans and site maps) business activity (for example, accidental 33.3% 33.3% to the authorities; obtaining all necessary insurance for construction workers and Time Cost clearances, licenses, permits and certifi- third-person liability). cates; completing all required notifications; Ė Owns the land on which the warehouse is 33.3% and receiving all necessary inspections. built. Procedures Doing Business also records procedures for obtaining connections for water, sewerage Assumptions about the warehouse Procedure is completed when final document is and a fixed landline.1 Procedures necessary The warehouse: received; construction permits, inspections and utility connections included to register the property so that it can be Ė Will be used for general storage activities, used as collateral or transferred to another such as storage of books or stationery. The Ė Does not require water for fire protection entity are also counted. The survey divides warehouse will not be used for any goods reasons; a fire extinguishing system (dry the process of building a warehouse into requiring special conditions, such as food, system) will be used instead. If a wet fire distinct procedures and calculates the time chemicals or pharmaceuticals. protection system is required by law, it is and cost of completing each procedure. Ė Has 2 stories, both above ground, with assumed that the water demand specified The ranking on the ease of dealing with a total surface of approximately 1,300.6 below also covers the water needed for construction permits is the simple average square meters (14,000 square feet). Each fire protection. of the percentile rankings on its component floor is 3 meters (9 feet, 10 inches) high. Ė Has an average water use of 662 liters indicators (figure 13.2). Ė Has road access and is located in the (175 gallons) a day and an average waste- periurban area of the economy’s largest water flow of 568 liters (150 gallons) a Information is collected from experts in business city (that is, on the fringes of the day. construction licensing, including architects, city but still within its official limits). Ė Has a peak water use of 1,325 liters (350 construction lawyers, construction firms, Ė Is not located in a special economic or in- gallons) a day and a peak wastewater flow utility service providers and public officials dustrial zone. The zoning requirements for of 1,136 liters (300 gallons) a day. who deal with building regulations, includ- warehouses are met by building in an area Ė Will have a constant level of water de- ing approvals and inspections. To make the where similar warehouses can be found. mand and wastewater flow throughout data comparable across economies, several Ė Is located on a land plot of 929 square the year. assumptions about the business, the ware- meters (10,000 square feet) that is 100% house project and the utility connections are The telephone connection: owned by BuildCo and is accurately regis- used. tered in the cadastre and land registry. Ė Is 10 meters (32 feet, 10 inches) from the Ė Is a new construction (there was no previ- main telephone network. Assumptions about the ous construction on the land). Ė Is a fixed landline. construction company The business (BuildCo): Ė Has complete architectural and technical Procedures plans prepared by a licensed architect. Ė Is a limited liability company. A procedure is any interaction of the com- Ė Will include all technical equipment Ė Operates in the economy’s largest busi- pany’s employees or managers with external required to make the warehouse fully ness city. parties, including government agencies, operational. Ė Is 100% domestically and privately owned. notaries, the land registry, the cadastre, util- Ė Will take 30 weeks to construct (exclud- ity companies, public and private inspectors Ė Has 5 owners, none of whom is a legal ing all delays due to administrative and and technical experts apart from in-house entity. regulatory requirements). architects and engineers. Interactions Ė Is fully licensed and insured to carry out between company employees, such as construction projects, such as building Assumptions about the utility development of the warehouse plans and warehouses. connections inspections conducted by employees, are Ė Has 60 builders and other employees, The water and sewerage connection: not counted as procedures. Procedures all of them nationals with the technical Ė Is 10 meters (32 feet, 10 inches) from the that the company undergoes to connect to expertise and professional experience existing water source and sewer tap. water, sewerage and telephone services are DATA NOTES 63 included. All procedures that are legally or clearances; receiving inspections before, FIGURE 13.3 Getting electricity: obtaining an in practice required for building a warehouse during and after construction; getting utility electricity connection Rankings are based on 3 indicators are counted, even if they may be avoided in connections; and registering the warehouse exceptional cases (table 13.2). property. Nonrecurring taxes required for the Days to obtain As % of income an electricity per capita, no completion of the warehouse project are also connection in bribes included Time recorded. The building code, information main city Time is recorded in calendar days. The mea- from local experts and specific regulations 33.3% 33.3% sure captures the median duration that local and fee schedules are used as sources for Time Cost experts indicate is necessary to complete a costs. If several local partners provide differ- procedure in practice. It is assumed that the ent estimates, the median reported value is 33.3% minimum time required for each procedure used. Procedures is 1 day. Although procedures may take place simultaneously, they cannot start on the The data details on dealing with construction permits can be found for each economy at Steps to file an application, prepare a design, same day (that is, simultaneous procedures complete works, obtain approvals, go http://www.doingbusiness.org by selecting the through inspections, install a meter and start on consecutive days). If a procedure sign a supply contract economy in the drop-down list. can be accelerated legally for an additional cost, the fastest procedure is chosen. It is as- Ė Is located in the economy’s largest busi- sumed that BuildCo does not waste time and ness city. GETTING ELECTRICITY commits to completing each remaining pro- Ė Is located within the city’s official limits cedure without delay. The time that BuildCo Doing Business records all procedures re- and in an area where other warehouses spends on gathering information is ignored. quired for a business to obtain a permanent are located (a nonresidential area). It is assumed that BuildCo is aware of all electricity connection and supply for a Ė Is not located in a special economic or building requirements and their sequence standardized warehouse. These procedures investment zone; that is, the electricity from the beginning. include applications and contracts with connection is not eligible for subsidization electricity utilities, all necessary inspections or faster service under a special invest- Cost and clearances from the utility and other ment promotion regime. If several options Cost is recorded as a percentage of the agencies and the external and final connec- for location are available, the warehouse economy’s income per capita. Only official tion works. The survey divides the process of is located where electricity is most easily costs are recorded. All the fees associated getting an electricity connection into distinct available. with completing the procedures to legally procedures and calculates the time and cost of completing each procedure. The rank- Ė Has road access. The connection works build a warehouse are recorded, includ- ing on the ease of getting electricity is the involve the crossing of a road (for excava- ing those associated with obtaining land simple average of the percentile rankings on tion, overhead lines and the like), but they use approvals and preconstruction design are all carried out on public land; that is, its component indicators (figure 13.3). TABLE 13.2 What do the dealing with there is no crossing onto another owner’s construction permits indicators Data are collected from the electricity dis- private property. measure? tribution utility, then completed and verified Ė Is located in an area with no physical con- Procedures to legally build a warehouse (number) by electricity regulatory agencies and inde- straints. For example, the property is not Submitting all relevant documents and obtain- pendent professionals such as electrical en- near a railway. ing all necessary clearances, licenses, permits and certificates gineers, electrical contractors and construc- Ė Is used for storage of refrigerated goods. Completing all required notifications and receiving all tion companies. The electricity distribution Ė Is a new construction (that is, there was necessary inspections utility surveyed is the one serving the area no previous construction on the land Obtaining utility connections for water, sewerage and (or areas) where warehouses are located. If a fixed telephone landline where it is located). It is being connected there is a choice of distribution utilities, the Registering the warehouse after its completion (if to electricity for the first time. required for use as collateral or for transfer of the one serving the largest number of customers warehouse) is selected. Ė Has 2 stories, both above ground, with Time required to complete each procedure a total surface area of approximately (calendar days) To make the data comparable across 1,300.6 square meters (14,000 square Does not include time spent gathering information economies, several assumptions about the feet). The plot of land on which it is built is Each procedure starts on a separate day warehouse and the electricity connection are 929 square meters (10,000 square feet). Procedure completed once final document is received used. No prior contact with officials Assumptions about the electricity Cost required to complete each procedure Assumptions about the warehouse connection (% of income per capita) The warehouse: The electricity connection: Official costs only, no bribes Ė Is owned by a local entrepreneur. Ė Is a permanent one. 64 DOING BUSINESS IN HARGEISA 2012 Ė Is a 3-phase, 4-wire Y, 140-kilovolt- necessary in practice, rather than required by median reported value is used. In all cases ampere (kVA) (subscribed capacity) law, to complete a procedure with minimum the cost excludes bribes. connection. follow-up and no extra payments. It is also Ė Is 150 meters long. The connection is to assumed that the minimum time required for Security deposit either the low-voltage or the medium- each procedure is 1 day. Although procedures Utilities require security deposits as a guar- voltage distribution network and either may take place simultaneously, they cannot antee against the possible failure of custom- overhead or underground, whichever is start on the same day (that is, simultane- ers to pay their consumption bills. For this more common in the economy and in the ous procedures start on consecutive days). reason the security deposit for a new cus- area where the warehouse is located. The It is assumed that the company does not tomer is most often calculated as a function length of any connection in the customer’s waste time and commits to completing each of the customer’s estimated consumption. private domain is negligible. remaining procedure without delay. The Ė Involves the installation of only one Doing Business does not record the full time that the company spends on gathering electricity meter. The monthly electricity amount of the security deposit. If the deposit information is ignored. It is assumed that the consumption will be 0.07 gigawatt-hour is based on the customer’s actual consump- company is aware of all electricity connec- (GWh).The internal electrical wiring has tion, this basis is the one assumed in the tion requirements and their sequence from already been completed. case study. Rather than the full amount of the beginning. the security deposit, Doing Business records Procedures Cost the present value of the losses in interest A procedure is defined as any interaction earnings experienced by the customer be- Cost is recorded as a percentage of the of the company’s employees or its main cause the utility holds the security deposit economy’s income per capita. Costs are electrician or electrical engineer (that is, over a prolonged period, in most cases until recorded exclusive of value added tax. All the one who may have done the internal the end of the contract (assumed to be after the fees and costs associated with complet- wiring) with external parties such as the 5 years). In cases where the security deposit ing the procedures to connect a warehouse electricity distribution utility, electric- is used to cover the first monthly consump- to electricity are recorded, including those ity supply utilities, government agencies, tion bills, it is not recorded. To calculate electrical contractors and electrical firms. related to obtaining clearances from govern- the present value of the lost interest earn- Interactions between company employees ment agencies, applying for the connection, ings, the end-2010 lending rates from the and steps related to the internal electrical receiving inspections of both the site and the International Monetary Fund’s International wiring, such as the design and execution of internal wiring, purchasing material, getting Financial Statistics are used. In cases where the internal electrical installation plans, are the actual connection works and paying a se- the security deposit is returned with inter- not counted as procedures. Procedures that curity deposit. Information from local experts est, the difference between the lending rate must be completed with the same utility and specific regulations and fee schedules and the interest paid by the utility is used to but with different departments are counted are used as sources for costs. If several lo- calculate the present value. as separate procedures (table 13.3). cal partners provide different estimates, the In some economies the security deposit can The company’s employees are assumed to TABLE 13.3 What do the getting electricity indicators measure? be put up in the form of a bond: the com- complete all procedures themselves unless Procedures to obtain an electricity connection (number) pany can obtain from a bank or an insurance the use of a third party is mandated (for Submitting all relevant documents and obtaining all company a guarantee issued on the assets example, if only an electrician registered with necessary clearances and permits it holds with that financial institution. In the utility is allowed to submit an applica- Completing all required notifications and receiving all contrast to the scenario in which the cus- tion). If the company can, but is not required necessary inspections tomer pays the deposit in cash to the utility, to, request the services of professionals Obtaining external installation works and possibly purchasing material for these works in this scenario the company does not lose (such as a private firm rather than the utility for the external works), these procedures are Concluding any necessary supply contract and ownership control over the full amount and obtaining final supply can continue using it. In return the company recorded if they are commonly done. For all Time required to complete each procedure will pay the bank a commission for obtain- procedures, only the most likely cases (for (calendar days) example, more than 50% of the time the ing the bond. The commission charged may Is at least 1 calendar day utility has the material) and those followed vary depending on the credit standing of the Each procedure starts on a separate day in practice for connecting a warehouse to company. The best possible credit standing Does not include time spent gathering information electricity are counted. and thus the lowest possible commission are Reflects the time spent in practice, with little follow- up and no prior contact with officials assumed. Where a bond can be put up, the Time Cost required to complete each procedure value recorded for the deposit is the annual (% of income per capita) Time is recorded in calendar days. The commission times the 5 years assumed to Official costs only, no bribes measure captures the median duration that be the length of the contract. If both options Value added tax excluded the electricity utility and experts indicate is exist, the cheaper alternative is recorded. DATA NOTES 65 In Honduras in June 2011 a customer re- FIGURE 13.4 Registering property: transfer of Ė Has no trees, natural water sources, natu- questing a 140-kVA electricity connection property between 2 local companies ral reserves or historical monuments of Rankings are based on 3 indicators would have had to put up a security deposit any kind. of 126,894 Honduran lempiras (L) in cash Days to transfer As % of property Ė Will not be used for special purposes, and or check, and the deposit would have been property in value, no bribes main city included no special permits, such as for residential returned only at the end of the contract. The customer could instead have invested use, industrial plants, waste storage or 33.3% 33.3% this money at the prevailing lending rate of Time Cost certain types of agricultural activities, are 18.87%. Over the 5 years of the contract this required. would imply a present value of lost inter- Ė Has no occupants (legal or illegal), and no 33.3% est earnings of L 73,423. In contrast, if the Procedures other party holds a legal interest in it. customer chose to settle the deposit with a bank guarantee at an annual rate of 2.5%, Procedures Steps to check encumbrances, obtain clearance the amount lost over the 5 years would be certificates, prepare deed and transfer title so that the property can be occupied, A procedure is defined as any interaction just L 15,862. sold or used as collateral of the buyer or the seller, their agents (if The data details on getting electricity can be an agent is legally or in practice required) Assumptions about the parties found for each economy at http://www.doing or the property with external parties, in- business.org. The parties (buyer and seller): cluding government agencies, inspectors, Ė Are limited liability companies. notaries and lawyers. Interactions between Ė Are located in the periurban area of the REGISTERING PROPERTY company officers and employees are not economy’s largest business city. considered. All procedures that are legally or Doing Business records the full sequence of Ė Are 100% domestically and privately in practice required for registering property procedures necessary for a business (buyer) owned. to purchase a property from another busi- are recorded, even if they may be avoided in Ė Have 50 employees each, all of whom are ness (seller) and to transfer the property title exceptional cases (table 13.4). It is assumed nationals. to the buyer’s name so that the buyer can use that the buyer follows the fastest legal op- Ė Perform general commercial activities. the property for expanding its business, use tion available and used by the majority of the property as collateral in taking new loans property owners. Although the buyer may Assumptions about the property or, if necessary, sell the property to another use lawyers or other professionals where business. The process starts with obtaining The property: necessary in the registration process, it is the necessary documents, such as a copy of Ė Has a value of 50 times income per capita. The sale price equals the value. assumed that the buyer does not employ an the seller’s title if necessary, and conducting due diligence if required. The transaction is outside facilitator in the registration process Ė Is fully owned by the seller. considered complete when it is opposable unless legally or in practice required to do so. Ė Has no mortgages attached and has been to third parties and when the buyer can use under the same ownership for the past 10 TABLE 13.4 What do the registering property the property, use it as collateral for a bank years. indicators measure? loan or resell it. The ranking on the ease of Procedures to legally transfer title on immovable Ė Is registered in the land registry or cadas- property (number) registering property is the simple average tre, or both, and is free of title disputes. Preregistration procedures (for example, checking for of the percentile rankings on its component liens, notarizing sales agreement, paying property indicators (figure 13.4). Ė Is located in a periurban commercial zone, transfer taxes) and no rezoning is required. Registration procedures in the economy’s largest Every procedure required by law or neces- Ė Consists of land and a building. The land business city sary in practice is included, whether it is the area is 557.4 square meters (6,000 square Postregistration procedures (for example, filing title with municipality) responsibility of the seller or the buyer or feet). A 2-story warehouse of 929 square Time required to complete each procedure must be completed by a third party on their meters (10,000 square feet) is located on (calendar days) behalf. Local property lawyers, notaries and Does not include time spent gathering information the land. The warehouse is 10 years old, property registries provide information on is in good condition and complies with Each procedure starts on a separate day procedures as well as the time and cost to all safety standards, building codes and Procedure completed once final document is received complete each of them. other legal requirements. The property of No prior contact with officials To make the data comparable across econo- land and building will be transferred in its Cost required to complete each procedure entirety. (% of property value) mies, several assumptions about the parties Official costs only, no bribes to the transaction, the property and the Ė Will not be subject to renovations or ad- No value added or capital gains taxes included procedures are used. ditional building following the purchase. 66 DOING BUSINESS IN HARGEISA 2012 Time The ranking on the ease of getting credit FIGURE 13.5 Getting credit: collateral rules and is based on the percentile rankings on its credit information Time is recorded in calendar days. The Rankings are based on 2 indicators measure captures the median duration component indicators: the depth of credit that property lawyers, notaries or registry information index (weighted at 37.5%) and Scope, quality and accessibility of credit officials indicate is necessary to complete a the strength of legal rights index (weighted information through public and private at 62.5%) (figure 13.5).2 credit registries procedure. It is assumed that the minimum time required for each procedure is 1 day. 37.5% 62.5% Although procedures may take place simul- LEGAL RIGHTS Depth Strength of credit of legal taneously, they cannot start on the same The data on the legal rights of borrowers information rights index (0–6) index (0–10) day. It is assumed that the buyer does not and lenders are gathered through a survey waste time and commits to completing each of financial lawyers and verified through remaining procedure without delay. If a pro- analysis of laws and regulations as well as cedure can be accelerated for an additional public sources of information on collateral cost, the fastest legal procedure available and bankruptcy laws. Survey responses are and used by the majority of property owners verified through several rounds of follow-up Regulations on nonpossessory security interests in movable property is chosen. If procedures can be undertaken communication with respondents as well simultaneously, it is assumed that they are. as by contacting third parties and consult- Note: Private bureau coverage and public registry coverage are measured but do not count for the rankings. It is assumed that the parties involved are ing public sources. The survey data are aware of all requirements and their sequence confirmed through teleconference calls or possession and ownership of the collateral. from the beginning. Time spent on gathering on-site visits in all economies. In economies where the law does not allow information is not considered. nonpossessory security interests in movable Strength of legal rights index property, ABC and BizBank use a fiduciary Cost The strength of legal rights index measures transfer-of-title arrangement (or a similar Cost is recorded as a percentage of the prop- the degree to which collateral and bankruptcy substitute for nonpossessory security inter- erty value, assumed to be equivalent to 50 laws protect the rights of borrowers and lend- ests). The strength of legal rights index does times income per capita. Only official costs ers and thus facilitate lending (table 13.5). not cover functional equivalents to security required by law are recorded, including fees, Two case scenarios, case A and case B, are over movable assets (for example, leasing or transfer taxes, stamp duties and any other used to determine the scope of the secured reservation of title). payment to the property registry, notaries, transactions system. The case scenarios public agencies or lawyers. Other taxes, such involve a secured borrower, the company In case B, ABC grants BizBank a business as capital gains tax or value added tax, are ABC, and a secured lender, BizBank. In certain charge, enterprise charge, floating charge or excluded from the cost measure. Both costs economies the legal framework for secured any charge that gives BizBank a security in- borne by the buyer and those borne by the transactions means that only case A or case B terest over ABC’s combined movable assets seller are included. If cost estimates differ can apply (not both). Both cases examine the (or as much of ABC’s movable assets as pos- among sources, the median reported value same set of legal provisions relating to the use sible). ABC keeps ownership and possession is used. of movable collateral. of the assets. The data details on registering property can Several assumptions about the secured bor- The strength of legal rights index includes be found for each economy at http://www rower and lender are used: 8 aspects related to legal rights in collateral .doingbusiness.org by selecting the economy in Ė ABC is a domestic, limited liability law and 2 aspects in bankruptcy law. A score the drop-down list. company. of 1 is assigned for each of the following features of the laws: Ė The company has 100 employees. Ė Any business may use movable assets as Ė ABC has its headquarters and only base of GETTING CREDIT collateral while keeping possession of the operations in the economy’s largest busi- Doing Business measures the legal rights assets, and any financial institution may ness city. of borrowers and lenders with respect to accept such assets as collateral. Ė Both ABC and BizBank are 100% domesti- secured transactions through one set of indi- Ė The law allows a business to grant a cally owned. cators and the sharing of credit information nonpossessory security right in a single through another. The first set of indicators The case scenarios also involve assump- category of movable assets (such as ac- describes how well collateral and bankruptcy tions. In case A, as collateral for the loan, counts receivable or inventory), without laws facilitate lending. The second set mea- ABC grants BizBank a nonpossessory requiring a specific description of the sures the coverage, scope and accessibility security interest in one category of movable collateral. of credit information available through public assets, for example, its accounts receivable Ė The law allows a business to grant a non- credit registries and private credit bureaus. or its inventory. ABC wants to keep both possessory security right in substantially DATA NOTES 67 all its movable assets, without requiring a Ė The law allows parties to agree in a col- a minimum coverage of 1% of the adult specific description of the collateral. lateral agreement that the lender may population to score a 1 on this indicator. Ė A security right may extend to future or enforce its security right out of court. Ė By law, borrowers have the right to access after-acquired assets and may extend their data in the largest credit registry or The index ranges from 0 to 10, with higher automatically to the products, proceeds or bureau in the economy. scores indicating that collateral and bank- replacements of the original assets. ruptcy laws are better designed to expand The index ranges from 0 to 6, with higher Ė A general description of debts and ob- access to credit. values indicating the availability of more ligations is permitted in the collateral credit information, from either a public credit agreement and in registration documents; CREDIT INFORMATION registry or a private credit bureau, to facili- all types of debts and obligations can be The data on credit information sharing are tate lending decisions. If the credit registry or secured between the parties, and the built in 2 stages. First, banking supervision bureau is not operational or has a coverage collateral agreement can include a maxi- authorities and public information sources of less than 0.1% of the adult population, mum amount for which the assets are are surveyed to confirm the presence of a the score on the depth of credit information encumbered. public credit registry or private credit bureau. index is 0. Ė A collateral registry or registration institu- Second, when applicable, a detailed survey on the public credit registry’s or private credit In Lithuania, for example, both a public credit tion for security interests over movable bureau’s structure, laws and associated rules registry and a private credit bureau oper- property is in operation, unified geograph- is administered to the entity itself. Survey re- ate. Both distribute positive and negative ically and by asset type, with an electronic sponses are verified through several rounds information (a score of 1). Both distribute database indexed by debtors’ names. data on firms and individuals (a score of 1). of follow-up communication with respon- Ė Secured creditors are paid first (for ex- Although the public credit registry does not dents as well as by contacting third parties ample, before general tax claims and and consulting public sources. The survey distribute data from retailers or utilities, the employee claims) when a debtor defaults data are confirmed through teleconference private credit bureau does do so (a score of outside an insolvency procedure. calls or on-site visits in all economies. 1). Although the private credit bureau does Ė Secured creditors are paid first (for ex- not distribute more than 2 years of historical ample, before general tax claims and Depth of credit information index data, the public credit registry does do so employee claims) when a business is The depth of credit information index (a score of 1). Although the public credit measures rules and practices affecting the registry has a threshold of 50,000 litai, the liquidated. coverage, scope and accessibility of credit private credit bureau distributes data on Ė Secured creditors either are not subject information available through either a public loans of any value (a score of 1). Borrowers to an automatic stay or moratorium on have the right to access their data in both the credit registry or a private credit bureau. A enforcement procedures when a debtor public credit registry and the private credit score of 1 is assigned for each of the follow- enters a court-supervised reorganization bureau (a score of 1). Summing across the ing 6 features of the public credit registry or procedure, or the law provides secured indicators gives Lithuania a total score of 6. private credit bureau (or both): creditors with grounds for relief from an Ė Both positive credit information (for ex- automatic stay or moratorium (for exam- Public credit registry coverage ample, outstanding loan amounts and ple, if the movable property is in danger) The public credit registry coverage indica- pattern of on-time repayments) and or sets a time limit for the automatic stay.3 tor reports the number of individuals and negative information (for example, late firms listed in a public credit registry with TABLE 13.5 What do the getting credit payments, and number and amount of defaults and bankruptcies) are distributed. information on their borrowing history from indicators measure? the past 5 years. The number is expressed Strength of legal rights index (0–10) Ė Data on both firms and individuals are as a percentage of the adult population (the Protection of rights of borrowers and lenders through distributed. collateral laws population age 15 and above in 2010 accord- Ė Data from retailers and utility compa- ing to the World Bank’s World Development Protection of secured creditors’ rights through bankruptcy laws nies as well as financial institutions are Indicators). A public credit registry is defined Depth of credit information index (0–6) distributed. as a database managed by the public sector, Scope and accessibility of credit information dis- Ė More than 2 years of historical data are usually by the central bank or the superin- tributed by public credit registries and private credit distributed. Credit registries and bureaus bureaus tendent of banks, that collects information that erase data on defaults as soon as on the creditworthiness of borrowers (indi- Public credit registry coverage (% of adults) they are repaid obtain a score of 0 for this viduals or firms) in the financial system and Number of individuals and firms listed in a public credit registry as percentage of adult population indicator. facilitates the exchange of credit information Private credit bureau coverage (% of adults) Ė Data on loan amounts below 1% of in- among banks and other regulated financial Number of individuals and firms listed in largest pri- come per capita are distributed. Note institutions. If no public registry operates, vate credit bureau as percentage of adult population the coverage value is 0. that a credit registry or bureau must have 68 DOING BUSINESS IN HARGEISA 2012 Private credit bureau coverage FIGURE 13.6 Protecting investors: minority Ė Buyer enters into the transaction. All shareholder rights in related-party required approvals are obtained, and all The private credit bureau coverage indica- transactions tor reports the number of individuals and required disclosures made (that is, the Rankings are based on 3 indicators transaction is not fraudulent). firms listed by a private credit bureau with Requirements on Liability of CEO and Ė The transaction causes damages to Buyer. information on their borrowing history from approval and disclosure board of directors in a the past 5 years. The number is expressed of related-party related-party Shareholders sue Mr. James and the other transactions transaction as a percentage of the adult population (the parties that approved the transaction. 33.3% 33.3% population age 15 and above in 2010 accord- Extent of Extent of disclosure director Extent of disclosure index ing to the World Bank’s World Development index liability index The extent of disclosure index has 5 compo- Indicators). A private credit bureau is defined 33.3% nents (table 13.6): as a private firm or nonprofit organization Ease of shareholder that maintains a database on the creditwor- suits index Ė Which corporate body can provide legally thiness of borrowers (individuals or firms) sufficient approval for the transaction. A score of 0 is assigned if it is the CEO in the financial system and facilitates the Type of evidence that can be collected before and during the trial or the managing director alone; 1 if the exchange of credit information among credi- board of directors or shareholders must tors. Credit investigative bureaus and credit Assumptions about the business vote and Mr. James is permitted to vote; reporting firms that do not directly facilitate The business (Buyer): 2 if the board of directors must vote and information exchange among banks and oth- Ė Is a publicly traded corporation listed on Mr. James is not permitted to vote; 3 if er financial institutions are not considered. the economy’s most important stock ex- shareholders must vote and Mr. James is If no private bureau operates, the coverage change. If the number of publicly traded not permitted to vote. value is 0. companies listed on that exchange is less Ė Whether immediate disclosure of the The data details on getting credit can be found than 10, or if there is no stock exchange transaction to the public, the regulator or for each economy at http://www.doingbusiness. in the economy, it is assumed that Buyer the shareholders is required.4 A score of 0 org by selecting the economy in the drop- is a large private company with multiple is assigned if no disclosure is required; 1 if shareholders. disclosure on the terms of the transaction down list. This methodology was developed in Ė Has a board of directors and a chief execu- is required but not on Mr. James’s conflict Djankov, McLiesh and Shleifer (2007) and is tive officer (CEO) who may legally act on of interest; 2 if disclosure on both the adopted here with minor changes. behalf of Buyer where permitted, even if terms and Mr. James’s conflict of interest this is not specifically required by law. is required. PROTECTING INVESTORS Ė Is a manufacturing company. Ė Whether disclosure in the annual report is required. A score of 0 is assigned if no dis- Doing Business measures the strength of Ė Has its own distribution network. closure on the transaction is required; 1 if minority shareholder protections against Assumptions about the transaction disclosure on the terms of the transaction directors’ misuse of corporate assets for is required but not on Mr. James’s conflict personal gain. The indicators distinguish 3 Ė Mr. James is Buyer’s controlling share- of interest; 2 if disclosure on both the dimensions of investor protections: trans- holder and a member of Buyer’s board terms and Mr. James’s conflict of interest parency of related-party transactions (extent of directors. He owns 60% of Buyer and is required. of disclosure index), liability for self-dealing elected 2 directors to Buyer’s 5-member board. Ė Whether disclosure by Mr. James to the (extent of director liability index) and share- board of directors is required. A score of 0 holders’ ability to sue officers and directors Ė Mr. James also owns 90% of Seller, a is assigned if no disclosure is required; 1 if for misconduct (ease of shareholder suits company that operates a chain of retail a general disclosure of the existence of a index). The data come from a survey of cor- hardware stores. Seller recently closed a conflict of interest is required without any porate and securities lawyers and are based large number of its stores. specifics; 2 if full disclosure of all material on securities regulations, company laws, civil Ė Mr. James proposes that Buyer purchase facts relating to Mr. James’s interest in the procedure codes and court rules of evidence. Seller’s unused fleet of trucks to expand Buyer-Seller transaction is required. The ranking on the strength of investor Buyer’s distribution of its food products, a Ė Whether it is required that an external protection index is the simple average of the proposal to which Buyer agrees. The price body, for example, an external auditor, re- percentile rankings on its component indica- is equal to 10% of Buyer’s assets and is view the transaction before it takes place. tors (figure 13.6). higher than the market value. A score of 0 is assigned if no; 1 if yes. Ė The proposed transaction is part of the To make the data comparable across econo- company’s ordinary course of business The index ranges from 0 to 10, with higher mies, several assumptions about the busi- and is not outside the authority of the values indicating greater disclosure. In ness and the transaction are used. company. Poland, for example, the board of directors DATA NOTES 69 must approve the transaction and Mr. James for the damage the transaction causes to Mr. James cannot be fined and imprisoned is not allowed to vote (a score of 2). Buyer the company. A score of 0 is assigned if (a score of 0). Direct or derivative suits are is required to disclose immediately all infor- the approving body cannot be held liable available for shareholders holding 10% or mation affecting the stock price, including or can be held liable only for fraud or bad less of share capital (a score of 1). Adding the conflict of interest (a score of 2). In its faith; 1 if the approving body can be held these numbers gives Panama a score of 4 on annual report Buyer must also disclose the liable for negligence; 2 if the approving the extent of director liability index. terms of the transaction and Mr. James’s body can be held liable when the trans- ownership in Buyer and Seller (a score of action is unfair or prejudicial to the other Ease of shareholder suits index 2). Before the transaction Mr. James must shareholders. The ease of shareholder suits index has 6 disclose his conflict of interest to the other Ė Whether a court can void the transaction components: directors, but he is not required to provide upon a successful claim by a shareholder Ė What range of documents is available to specific information about it (a score of 1). plaintiff. A score of 0 is assigned if rescis- the shareholder plaintiff from the defen- Poland does not require an external body to sion is unavailable or is available only dant and witnesses during trial. A score review the transaction (a score of 0). Adding in case of fraud or bad faith; 1 if rescis- of 1 is assigned for each of the following these numbers gives Poland a score of 7 on sion is available when the transaction types of documents available: informa- the extent of disclosure index. is oppressive or prejudicial to the other tion that the defendant has indicated he shareholders; 2 if rescission is available intends to rely on for his defense; infor- Extent of director liability index when the transaction is unfair or entails a mation that directly proves specific facts The extent of director liability index has 7 conflict of interest. in the plaintiff’s claim; any information components:5 Ė Whether Mr. James pays damages for the relevant to the subject matter of the claim; Ė Whether a shareholder plaintiff is able to harm caused to the company upon a suc- and any information that may lead to the hold Mr. James liable for the damage the cessful claim by the shareholder plaintiff. discovery of relevant information. Buyer-Seller transaction causes to the A score of 0 is assigned if no; 1 if yes. Ė Whether the plaintiff can directly examine company. A score of 0 is assigned if Mr. Ė Whether Mr. James repays profits made the defendant and witnesses during trial. James cannot be held liable or can be held from the transaction upon a successful A score of 0 is assigned if no; 1 if yes, with liable only for fraud or bad faith; 1 if Mr. claim by the shareholder plaintiff. A score prior approval of the questions by the James can be held liable only if he influ- of 0 is assigned if no; 1 if yes. judge; 2 if yes, without prior approval. enced the approval of the transaction or Ė Whether both fines and imprisonment Ė Whether the plaintiff can obtain cat- was negligent; 2 if Mr. James can be held can be applied against Mr. James. A score egories of relevant documents from the liable when the transaction is unfair or of 0 is assigned if no; 1 if yes. defendant without identifying each docu- prejudicial to the other shareholders. Ė Whether shareholder plaintiffs are able to ment specifically. A score of 0 is assigned Ė Whether a shareholder plaintiff is able to if no; 1 if yes. sue directly or derivatively for the damage hold the approving body (the CEO or the the transaction causes to the company. A Ė Whether shareholders owning 10% or less members of the board of directors) liable score of 0 is assigned if suits are unavail- of the company’s share capital can request TABLE 13.6 What do the protecting investors able or are available only for shareholders that a government inspector investigate indicators measure? holding more than 10% of the company’s the Buyer-Seller transaction without filing Extent of disclosure index (0–10) share capital; 1 if direct or derivative suits suit in court. A score of 0 is assigned if no; Who can approve related-party transactions are available for shareholders holding 10% 1 if yes. Disclosure requirements in case of related-party or less of share capital. transactions Ė Whether shareholders owning 10% or Extent of director liability index (0–10) The index ranges from 0 to 10, with higher less of the company’s share capital have Ability of shareholders to hold interested parties and values indicating greater liability of directors. the right to inspect the transaction docu- members of the approving body liable in case of Assuming that the prejudicial transaction ments before filing suit. A score of 0 is related-party transactions was duly approved and disclosed, in order assigned if no; 1 if yes. Available legal remedies (damages, repayment of profits, fines and imprisonment) to hold Mr. James liable in Panama, for Ė Whether the standard of proof for civil Ability of shareholders to sue directly or derivatively example, a plaintiff must prove that Mr. suits is lower than that for a criminal case. James influenced the approving body or A score of 0 is assigned if no; 1 if yes. Ease of shareholder suits index (0–10) acted negligently (a score of 1). To hold the Direct access to internal documents of the company and use of a government inspector without filing suit other directors liable, a plaintiff must prove The index ranges from 0 to 10, with higher in court that they acted negligently (a score of 1). The values indicating greater powers of share- Documents and information available during trial prejudicial transaction cannot be voided (a holders to challenge the transaction. In Strength of investor protection index (0–10) score of 0). If Mr. James is found liable, he Greece, for example, the plaintiff can access Simple average of the extent of disclosure, extent of must pay damages (a score of 1) but he is not documents that the defendant intends to director liability and ease of shareholder suits indices required to disgorge his profits (a score of 0). rely on for his defense and that directly 70 DOING BUSINESS IN HARGEISA 2012 prove facts in the plaintiff’s claim (a score of The ranking on the ease of paying taxes is FIGURE 13.7 Paying taxes: tax compliance for a 2). The plaintiff can examine the defendant the simple average of the percentile rankings local manufacturing company Rankings are based on 3 indicators and witnesses during trial, though only with on its component indicators, with a thresh- prior approval of the questions by the court old being applied to one of the component Number of hours per year Firm tax liability as % indicators, the total tax rate (figure 13.7). The to prepare, file returns of profits before all (a score of 1). The plaintiff must specifically and pay taxes taxes borne identify the documents being sought (for ex- threshold is defined as the highest total tax ample, the Buyer-Seller purchase agreement rate among the top 30% of economies in the 33.3% 33.3% ranking on the total tax rate. It will be cal- Time Total of July 15, 2006) and cannot just request tax rate categories (for example, all documents culated and adjusted on a yearly basis. This related to the transaction) (a score of 0). A year’s threshold is 32.5%. For all economies 33.3% shareholder holding 5% of Buyer’s shares with a total tax rate below this threshold, the Payments can request that a government inspector total tax rate is set at 32.5% this year. The threshold is not based on any underlying review suspected mismanagement by Mr. Number of tax payments per year theory. Instead, it is intended to mitigate the James and the CEO without filing suit in effect of very low tax rates on the ranking on statements and assumptions about transac- court (a score of 1). Any shareholder can the ease of paying taxes. tions made over the course of the year. In inspect the transaction documents before deciding whether to sue (a score of 1). The each economy tax experts from a number Doing Business measures all taxes and con- standard of proof for civil suits is the same as of different firms (in many economies tributions that are government mandated that for a criminal case (a score of 0). Adding these include PwC) compute the taxes (at any level—federal, state or local) and these numbers gives Greece a score of 5 on and mandatory contributions due in their that apply to the standardized business and the ease of shareholder suits index. jurisdiction based on the standardized case have an impact in its financial statements. In study facts. Information is also compiled doing so, Doing Business goes beyond the tra- Strength of investor protection on the frequency of filing and payments as ditional definition of a tax. As defined for the index well as time taken to comply with tax laws in purposes of government national accounts, an economy. To make the data comparable The strength of investor protection index is taxes include only compulsory, unrequited across economies, several assumptions the average of the extent of disclosure index, payments to general government. Doing about the business and the taxes and contri- the extent of director liability index and the Business departs from this definition because butions are used. ease of shareholder suits index. The index it measures imposed charges that affect ranges from 0 to 10, with higher values indi- business accounts, not government ac- The methodology for the paying taxes indi- cating more investor protection. counts. One main difference relates to labor cators has benefited from discussion with contributions. The Doing Business measure members of the International Tax Dialogue The data details on protecting investors can includes government-mandated contribu- and other stakeholders, which led to a refine- be found for each economy at http://www. tions paid by the employer to a requited ment of the survey questions on the time to doingbusiness.org by selecting the economy in private pension fund or workers’ insurance pay taxes, the collection of additional data on the drop-down list. This methodology was de- fund. The indicator includes, for example, the labor tax wedge for further research and veloped in Djankov, La Porta and others (2008). Australia’s compulsory superannuation the introduction of a threshold applied to the guarantee and workers’ compensation insur- total tax rate for the purpose of calculating ance. For the purpose of calculating the total the ranking on the ease of paying taxes (see PAYING TAXES tax rate (defined below), only taxes borne discussion at the beginning of this section). Doing Business records the taxes and man- are included. For example, value added taxes are generally excluded (provided they are not Assumptions about the business datory contributions that a medium-size irrecoverable) because they do not affect the company must pay in a given year as well The business: accounting profits of the business—that is, as measures of the administrative burden of Ė Is a limited liability, taxable company. they are not reflected in the income state- paying taxes and contributions. The project If there is more than one type of limited ment. They are, however, included for the was developed and implemented in coop- liability company in the economy, the lim- purpose of the compliance measures (time eration with PwC.6 Taxes and contributions ited liability form most common among and payments), as they add to the burden of measured include the profit or corporate domestic firms is chosen. The most com- complying with the tax system. income tax, social contributions and labor mon form is reported by incorporation taxes paid by the employer, property taxes, Doing Business uses a case scenario to lawyers or the statistical office. property transfer taxes, dividend tax, capital measure the taxes and contributions paid by Ė Started operations on January 1, 2009. gains tax, financial transactions tax, waste a standardized business and the complex- At that time the company purchased all collection taxes, vehicle and road taxes, and ity of an economy’s tax compliance system. the assets shown in its balance sheet and any other small taxes or fees. This case scenario uses a set of financial hired all its workers. DATA NOTES 71 Ė Operates in the economy’s largest busi- Ė Is subject to a series of detailed assump- and payments are more frequent. For pay- ness city. tions on expenses and transactions to ments made through third parties, such as Ė Is 100% domestically owned and has 5 further standardize the case. All financial tax on interest paid by a financial institution owners, all of whom are natural persons. statement variables are proportional to or fuel tax paid by a fuel distributor, only one Ė At the end of 2009, has a start-up capital 2005 income per capita. For example, payment is included even if payments are of 102 times income per capita. the owner who is also a manager spends more frequent. 10% of income per capita on traveling Ė Performs general industrial or commercial Where 2 or more taxes or contributions are for the company (20% of this owner’s activities. Specifically, it produces ceramic expenses are purely private, 20% are for filed for and paid jointly using the same form, flowerpots and sells them at retail. It does entertaining customers and 60% for busi- each of these joint payments is counted not participate in foreign trade (no import ness travel). once. For example, if mandatory health insur- or export) and does not handle products ance contributions and mandatory pension subject to a special tax regime, for ex- Assumptions about the taxes and contributions are filed for and paid together, ample, liquor or tobacco. contributions only one of these contributions would be Ė At the beginning of 2010, owns 2 plots of included in the number of payments. Ė All the taxes and contributions recorded land, 1 building, machinery, office equip- are those paid in the second year of op- ment, computers and 1 truck and leases 1 Time eration (calendar year 2010). A tax or truck. contribution is considered distinct if it has Time is recorded in hours per year. The indi- Ė Does not qualify for investment incentives a different name or is collected by a differ- cator measures the time taken to prepare, file or any benefits apart from those related to ent agency. Taxes and contributions with and pay 3 major types of taxes and contribu- the age or size of the company. the same name and agency, but charged tions: the corporate income tax, value added Ė Has 60 employees—4 managers, 8 as- at different rates depending on the busi- or sales tax, and labor taxes, including payroll sistants and 48 workers. All are nationals, ness, are counted as the same tax or taxes and social contributions. Preparation and 1 manager is also an owner. The com- contribution. time includes the time to collect all informa- pany pays for additional medical insurance Ė The number of times the company pays tion necessary to compute the tax payable for employees (not mandated by any law) taxes and contributions in a year is the and to calculate the amount payable. If sepa- as an additional benefit. In addition, in number of different taxes or contributions rate accounting books must be kept for tax some economies reimbursable business multiplied by the frequency of payment (or purposes—or separate calculations made— travel and client entertainment expenses withholding) for each tax. The frequency the time associated with these processes is are considered fringe benefits. When ap- of payment includes advance payments included. This extra time is included only if plicable, it is assumed that the company (or withholding) as well as regular pay- the regular accounting work is not enough to pays the fringe benefit tax on this expense ments (or withholding).. fulfill the tax accounting requirements. Filing or that the benefit becomes taxable in- come for the employee. The case study Tax payments TABLE 13.7 What do the paying taxes assumes no additional salary additions for indicators measure? The tax payments indicator reflects the total meals, transportation, education or oth- Tax payments for a manufacturing company in 2010 number of taxes and contributions paid, the (number per year adjusted for electronic and joint filing ers. Therefore, even when such benefits method of payment, the frequency of pay- and payment) are frequent, they are not added to or ment, the frequency of filing and the number Total number of taxes and contributions paid, includ- removed from the taxable gross salaries ing consumption taxes (value added tax, sales tax or of agencies involved for this standardized goods and service tax) to arrive at the labor tax or contribution case study company during the second year Method and frequency of filing and payment calculation. of operation (table 13.7). It includes con- Time required to comply with 3 major taxes Ė Has a turnover of 1,050 times income per sumption taxes paid by the company, such (hours per year) capita. as sales tax or value added tax. These taxes Collecting information and computing the tax payable are traditionally collected from the consumer Completing tax return forms, filing with proper Ė Makes a loss in the first year of operation. agencies Ė Has a gross margin (pretax) of 20% (that on behalf of the tax agencies. Although they Arranging payment or withholding is, sales are 120% of the cost of goods do not affect the income statements of the Preparing separate mandatory tax accounting books, sold). company, they add to the administrative if required burden of complying with the tax system and Total tax rate (% of profit before all taxes) Ė Distributes 50% of its net profits as so are included in the tax payments measure. Profit or corporate income tax dividends to the owners at the end of the Social contributions and labor taxes paid by the second year. The number of payments takes into account employer Ė Sells one of its plots of land at a profit at electronic filing. Where full electronic filing Property and property transfer taxes the beginning of the second year. and payment is allowed and it is used by the Dividend, capital gains and financial transactions taxes Ė Has annual fuel costs for its trucks equal majority of medium-size businesses, the tax to twice income per capita. is counted as paid once a year even if filings Waste collection, vehicle, road and other taxes 72 DOING BUSINESS IN HARGEISA 2012 time includes the time to complete all neces- minus administrative expenses, minus other FIGURE 13.8 Trading across borders: exporting sary tax return forms and file the relevant expenses, minus provisions, plus capital and importing by sea transport Rankings are based on 3 indicators returns at the tax authority. Payment time gains (from the property sale) minus inter- considers the hours needed to make the pay- est expense, plus interest income and minus Document preparation, ment online or at the tax authorities. Where commercial depreciation. To compute the customs clearance and technical control, port taxes and contributions are paid in person, commercial depreciation, a straight-line All documents required by and terminal handling, the time includes delays while waiting. depreciation method is applied, with the customs and other inland transport and agencies handling following rates: 0% for the land, 5% for the 33.3% 33.3% Total tax rate building, 10% for the machinery, 33% for the Documents Time to to export export and The total tax rate measures the amount of computers, 20% for the office equipment, and import import taxes and mandatory contributions borne by 20% for the truck and 10% for business 33.3% the business in the second year of operation, development expenses. Commercial profit Cost to export amounts to 59.4 times income per capita. and import expressed as a share of commercial profit. Doing Business in Hargeisa 2012 reports the The methodology for calculating the total tax total tax rate for calendar year 2010. The US$ per 20-foot container, rate is broadly consistent with the Total Tax no bribes or tariffs included total amount of taxes borne is the sum of all Contribution framework developed by PwC the different taxes and contributions payable percentile rankings on its component indica- and the calculation within this framework for after accounting for allowable deductions taxes borne. But while the work undertaken tors (figure 13.8). and exemptions. The taxes withheld (such by PwC is usually based on data received as personal income tax) or collected by the Local freight forwarders, shipping lines, cus- from the largest companies in the economy, company and remitted to the tax authori- toms brokers, port officials and banks provide Doing Business focuses on a case study for a ties (such as value added tax, sales tax or information on required documents and cost standardized medium-size company. goods and service tax) but not borne by the as well as the time to complete each proce- company are excluded. The taxes included The data details on paying taxes can be found dure. To make the data comparable across can be divided into 5 categories: profit or for each economy at http://www.doingbusiness. economies, several assumptions about the corporate income tax, social contributions org by selecting the economy in the drop- business and the traded goods are used. and labor taxes paid by the employer (in down list. This methodology was developed in respect of which all mandatory contributions Djankov, Ganser and others (2010). Assumptions about the business are included, even if paid to a private entity The business: such as a requited pension fund), property Ė Has at least 60 employees. taxes, turnover taxes and other taxes (such TRADING ACROSS BORDERS as municipal fees and vehicle and fuel taxes). Ė Is located in the economy’s largest busi- Doing Business measures the time and cost ness city. The total tax rate is designed to provide a (excluding tariffs) associated with exporting Ė Is a private, limited liability company. It comprehensive measure of the cost of all and importing a standardized cargo of goods does not operate in an export processing the taxes a business bears. It differs from by sea transport. The time and cost neces- zone or an industrial estate with special the statutory tax rate, which merely provides sary to complete every official procedure for export or import privileges. exporting and importing the goods—from the factor to be applied to the tax base. In the contractual agreement between the 2 Ė Is domestically owned with no foreign computing the total tax rate, the actual tax parties to the delivery of goods—are re- ownership. payable is divided by commercial profit. corded. All documents needed by the trader Ė Exports more than 10% of its sales. Commercial profit is essentially net profit to export or import the goods across the bor- before all taxes borne. It differs from the con- der are also recorded. For exporting goods, Assumptions about the traded ventional profit before tax, reported in finan- procedures range from packing the goods goods cial statements. In computing profit before into the container at the warehouse to their The traded product travels in a dry-cargo, tax, many of the taxes borne by a firm are departure from the port of exit. For importing 20-foot, full container load. It weighs 10 tons deductible. In computing commercial profit, goods, procedures range from the vessel’s and is valued at $20,000. The product: these taxes are not deductible. Commercial arrival at the port of entry to the cargo’s Ė Is not hazardous nor does it include mili- profit therefore presents a clear picture of delivery at the warehouse. The time and cost tary items. the actual profit of a business before any of for sea transport are not included. Payment is made by letter of credit, and the time, cost Ė Does not require refrigeration or any other the taxes it bears in the course of the fiscal and documents required for the issuance or special environment. year. advising of a letter of credit are taken into Ė Does not require any special phytosanitary Commercial profit is computed as sales mi- account. The ranking on the ease of trading or environmental safety standards other nus cost of goods sold, minus gross salaries, across borders is the simple average of the than accepted international standards. DATA NOTES 73 Ė Is one of the economy’s leading export or that neither the exporter nor the importer FIGURE 13.9 Enforcing contracts: resolving a import products. wastes time and that each commits to com- commercial dispute through the courts pleting each remaining procedure without Rankings are based on 3 indicators Documents delay. Procedures that can be completed All documents required per shipment to in parallel are measured as simultaneous. Days to resolve Attorney, court and commercial sale dispute enforcement costs as export and import the goods are recorded The waiting time between procedures—for through the courts % of claim value (table 13.8). It is assumed that the contract example, during unloading of the cargo—is has already been agreed upon and signed by included in the measure. 33.3% 33.3% Time Cost both parties. Documents required for clear- ance by government ministries, customs Cost authorities, port and container terminal Cost measures the fees levied on a 20-foot 33.3% authorities, health and technical control Procedures container in U.S. dollars. All the fees associ- agencies, and banks are taken into account. ated with completing the procedures to ex- Since payment is by letter of credit, all docu- port or import the goods are included. These Steps to file claim, obtain judgment ments required by banks for the issuance or and enforce it include costs for documents, administrative securing of a letter of credit are also taken fees for customs clearance and technical into account. Documents that are renewed Ė The dispute concerns a lawful transaction control, customs broker fees, terminal han- annually and that do not require renewal per between 2 businesses (Seller and Buyer), dling charges and inland transport. The cost shipment (for example, an annual tax clear- located in the economy’s largest business does not include customs tariffs and duties ance certificate) are not included. city. Seller sells goods worth 200% of the or costs related to sea transport. Only official economy’s income per capita to Buyer. costs are recorded. Time After Seller delivers the goods to Buyer, The time for exporting and importing is Buyer refuses to pay for the goods on the The data details on trading across borders can recorded in calendar days. The time calcula- grounds that the delivered goods were not be found for each economy at http://www. tion for a procedure starts from the moment of adequate quality. doingbusiness.org by selecting the economy it is initiated and runs until it is completed. in the drop-down list. This methodology was Ė Seller (the plaintiff) sues Buyer (the de- If a procedure can be accelerated for an developed in Djankov, Freund and Pham (2010) fendant) to recover the amount under additional cost and is available to all trading and is adopted here with minor changes. the sales agreement (that is, 200% of companies, the fastest legal procedure is the economy’s income per capita). Buyer chosen. Fast-track procedures applying to opposes Seller’s claim, saying that the firms located in an export processing zone ENFORCING CONTRACTS quality of the goods is not adequate. The are not taken into account because they are claim is disputed on the merits. The court Indicators on enforcing contracts measure not available to all trading companies. Sea cannot decide the case on the basis of the efficiency of the judicial system in resolv- transport time is not included. It is assumed documentary evidence or legal title alone. ing a commercial dispute. The data are built Ė A court in the economy’s largest business TABLE 13.8 What do the trading across by following the step-by-step evolution of a borders indicators measure? city with jurisdiction over commercial commercial sale dispute before local courts. cases worth 200% of income per capita Documents required to export and import (number) The data are collected through study of the decides the dispute. Bank documents codes of civil procedure and other court Customs clearance documents regulations as well as surveys completed by Ė Seller attaches Buyer’s movable as- sets (for example, office equipment and Port and terminal handling documents local litigation lawyers and by judges. The vehicles) before obtaining a judgment be- Transport documents ranking on the ease of enforcing contracts is cause Seller fears that Buyer may become Time required to export and import (days) the simple average of the percentile rankings insolvent. Obtaining all the documents on its component indicators (figure 13.9). Ė An expert opinion is given on the quality Inland transport and handling The name of the relevant court in each of the delivered goods. If it is standard Customs clearance and inspections economy—the court in the largest busi- practice in the economy for each party Port and terminal handling ness city with jurisdiction over commercial to call its own expert witness, the parties Does not include sea transport time cases worth 200% of income per capita—is each call one expert witness. If it is stan- Cost required to export and import (US$ per container) published at http://www.doingbusiness.org/ dard practice for the judge to appoint an All documentation independent expert, the judge does so. In ExploreTopics/EnforcingContracts. Inland transport and handling this case the judge does not allow oppos- Customs clearance and inspections Assumptions about the case ing expert testimony. Port and terminal handling Ė The value of the claim equals 200% of the Ė The judgment is 100% in favor of Seller: Official costs only, no bribes economy’s income per capita. the judge decides that the goods are of 74 DOING BUSINESS IN HARGEISA 2012 adequate quality and that Buyer must pay and 1 procedure for economies that allow resolving insolvency to more accurately reflect the agreed price. electronic filing of the initial complaint in the content of the indicators. The indicators Ė Buyer does not appeal the judgment. court cases. Some procedural steps that take did not change in content or scope. The data Seller decides to start enforcing the judg- place simultaneously with or are included in are derived from questionnaire responses by ment as soon as the time allocated by law other procedural steps are not counted in the local insolvency practitioners and verified for appeal expires. total number of procedures. through a study of laws and regulations as well as public information on bankruptcy Ė Seller takes all required steps for prompt Time systems. The ranking on the ease of resolv- enforcement of the judgment. The money Time is recorded in calendar days, counted ing insolvency is based on the recovery rate is successfully collected through a public from the moment the plaintiff decides to (figure 13.10). sale of Buyer’s movable assets (for ex- file the lawsuit in court until payment. This ample, office equipment and vehicles). To make the data comparable across econo- includes both the days when actions take place and the waiting periods between. The mies, several assumptions about the busi- Procedures average duration of different stages of dis- ness and the case are used. The list of procedural steps compiled for each pute resolution is recorded: the completion economy traces the chronology of a com- of service of process (time to file and serve Assumptions about the business mercial dispute before the relevant court. A The business: the case), the issuance of judgment (time for procedure is defined as any interaction, re- the trial and obtaining the judgment) and the Ė Is a limited liability company. quired by law or commonly used in practice, moment of payment (time for enforcement Ė Operates in the economy’s largest busi- between the parties or between them and of the judgment). ness city. the judge or court officer. This includes steps to file and serve the case, steps for trial and Ė Is 100% domestically owned, with the Cost judgment and steps necessary to enforce the founder, who is also the chairman of Cost is recorded as a percentage of the claim, judgment (table 13.9). the supervisory board, owning 51% (no assumed to be equivalent to 200% of income other shareholder holds more than 5% of per capita. No bribes are recorded. Three types The survey allows respondents to record shares). of costs are recorded: court costs, enforcement procedures that exist in civil law but not Ė Has downtown real estate, where it runs costs and average attorney fees. common law jurisdictions and vice versa. For a hotel, as its major asset. The hotel is example, in civil law jurisdictions the judge Court costs include all court costs and expert valued at 100 times income per capita or can appoint an independent expert, while in fees that Seller (plaintiff) must advance to $200,000, whichever is larger. common law jurisdictions each party sub- the court, regardless of the final cost to Seller. Ė Has a professional general manager. mits a list of expert witnesses to the court. To Expert fees, if required by law or commonly Ė Has 201 employees and 50 suppliers, indicate overall efficiency, 1 procedure is sub- used in practice, are included in court costs. each of which is owed money for the last tracted from the total number for economies Enforcement costs are all costs that Seller delivery. that have specialized commercial courts, (plaintiff) must advance to enforce the judg- Ė Has a 10-year loan agreement with a ment through a public sale of Buyer’s movable TABLE 13.9 What do the enforcing contracts domestic bank secured by a universal indicators measure? assets, regardless of the final cost to Seller. business charge (for example, a floating Procedures to enforce a contract through the courts Average attorney fees are the fees that Seller charge) in economies where such collat- (number) (plaintiff) must advance to a local attorney to eral is recognized or by the hotel property. Any interaction between the parties in a commercial represent Seller in the standardized case. dispute, or between them and the judge or court If the laws of the economy do not spe- officer cifically provide for a universal business The data details on enforcing contracts can Steps to file and serve the case charge but contracts commonly use some be found for each economy at http://www. Steps for trial and judgment doingbusiness.org by selecting the economy other provision to that effect, this provi- Steps to enforce the judgment in the drop-down list. This methodology was sion is specified in the loan agreement. Time required to complete procedures (calendar days) developed in Djankov and others (2003) and is Ė Has observed the payment schedule and Time to file and serve the case adopted here with minor changes. all other conditions of the loan up to now. Time for trial and obtaining judgment Ė Has a mortgage, with the value of the Time to enforce the judgment mortgage principal being exactly equal to RESOLVING INSOLVENCY the market value of the hotel. Cost required to complete procedures (% of claim) (FORMERLY CLOSING A BUSINESS) No bribes Doing Business studies the time, cost and Assumptions about the case Average attorney fees outcome of insolvency proceedings involving The business is experiencing liquidity prob- Court costs, including expert fees domestic entities. The name of this indicator lems. The company’s loss in 2010 reduced Enforcement costs set was changed from closing a business to its net worth to a negative figure. It is January DATA NOTES 75 FIGURE 13.10 Resolving insolvency: time, cost and Time Recovery rate outcome of bankruptcy of a local company Time for creditors to recover their credit is The recovery rate is recorded as cents on the Rankings are based on 1 indicator recorded in calendar years (table 13.10). The dollar recouped by creditors through reor- period of time measured by Doing Business is ganization, liquidation or debt enforcement Recovery rate is a function of time, cost and other (foreclosure) proceedings. The calculation factors such as lending rate and the likelihood of the from the company’s default until the payment company continuing to operate takes into account the outcome: whether the of some or all of the money owed to the bank. business emerges from the proceedings as a Potential delay tactics by the parties, such as going concern or the assets are sold piece- the filing of dilatory appeals or requests for meal. Then the costs of the proceedings 100% extension, are taken into consideration. are deducted (1 cent for each percentage Recovery point of the value of the debtor’s estate). rate Cost Finally, the value lost as a result of the time The cost of the proceedings is recorded as the money remains tied up in insolvency a percentage of the value of the debtor’s proceedings is taken into account, including estate. The cost is calculated on the basis of the loss of value due to depreciation of the Note: Time and cost do not count separately for the rankings. questionnaire responses and includes court hotel furniture. Consistent with international 1, 2011. There is no cash to pay the bank fees and government levies; fees of insol- accounting practice, the annual depreciation interest or principal in full, due the next day, vency administrators, auctioneers, assessors rate for furniture is taken to be 20%. The fur- January 2. The business will therefore default and lawyers; and all other fees and costs. niture is assumed to account for a quarter of on its loan. Management believes that losses the total value of assets. The recovery rate is will be incurred in 2011 and 2012 as well. Outcome the present value of the remaining proceeds, based on end-2010 lending rates from the Recovery by creditors depends on whether The amount outstanding under the loan International Monetary Fund’s International the hotel business emerges from the agreement is exactly equal to the market Financial Statistics, supplemented with proceedings as a going concern or the value of the hotel business and represents data from central banks and the Economist company’s assets are sold piecemeal. If the 74% of the company’s total debt. The other Intelligence Unit. business keeps operating, no value is lost 26% of its debt is held by unsecured credi- and the bank can satisfy its claim in full, or No practice tors (suppliers, employees, tax authorities). recover 100 cents on the dollar. If the assets If an economy had zero cases a year over the The company has too many creditors to are sold piecemeal, the maximum amount past 5 years involving a judicial reorganiza- negotiate an informal out-of-court workout. that can be recovered will not exceed 70% tion, judicial liquidation or debt enforcement The following options are available: a judicial of the bank’s claim, which translates into 70 procedure (foreclosure), the economy procedure aimed at the rehabilitation or cents on the dollar. receives a “no practice” ranking. This means reorganization of the company to permit its that creditors are unlikely to recover their TABLE 13.10 What do the resolving insolvency money through a formal legal process (in continued operation; a judicial procedure indicators measure? aimed at the liquidation or winding-up of or out of court). The recovery rate for “no Time required to recover debt (years) the company; or a debt enforcement or practice” economies is zero. Measured in calendar years foreclosure procedure against the company, Appeals and requests for extension are included This methodology was developed in Djankov, enforced either in court (or through another Cost required to recover debt (% of debtor’s estate) Hart and others (2008) and is adopted here government authority) or out of court (for Measured as percentage of estate value with minor changes. example, by appointing a receiver). Court fees Assumptions about the parties Fees of insolvency administrators NOT IN THE EASE OF DOING The bank wants to recover as much as pos- Lawyers’ fees BUSINESS RANKING Assessors’ and auctioneers’ fees sible of its loan, as quickly and cheaply as Other related fees EMPLOYING WORKERS possible. The unsecured creditors will do Recovery rate for creditors (cents on the dollar) everything permitted under the applicable Doing Business measures flexibility in the laws to avoid a piecemeal sale of the assets. Measures the cents on the dollar recovered by creditors regulation of employment, specifically as it The majority shareholder wants to keep the affects the hiring and redundancy of work- Present value of debt recovered company operating and under its control. ers and the rigidity of working hours. Since Official costs of the insolvency proceedings are Management wants to keep the company deducted 2007 improvements have been made to operating and preserve its employees’ jobs. Depreciation of furniture is taken into account align the methodology for the employing All the parties are local entities or citizens; Outcome for the business (survival or not) affects the workers indicators with the letter and spirit no foreign parties are involved. maximum value that can be recovered of the ILO conventions. Only 4 of the 188 ILO 76 DOING BUSINESS IN HARGEISA 2012 conventions cover areas measured by Doing Doing Business in Hargeisa 2012 does not pres- Rigidity of employment index Business: employee termination, weekend ent rankings of economies on the employing The rigidity of employment index is the aver- work, holiday with pay and night work. The workers indicators or include the topic in the age of 3 subindices: the difficulty of hiring Doing Business methodology is fully con- aggregate ranking on the ease of doing busi- index, rigidity of hours index and difficulty of sistent with these 4 conventions. The ILO ness. The report does present the data on the redundancy index. Data and scores for Benin conventions covering areas related to the employing workers indicators in an annex. are provided as an example (table 13.11). employing workers indicators do not include Detailed data collected on labor regulations the ILO core labor standards—8 conventions are available on the Doing Business website All the subindices have several components. covering the right to collective bargaining, (http://www.doingbusiness.org). And all take values between 0 and 100, the elimination of forced labor, the abolition with higher values indicating more rigid of child labor and equitable treatment in The data on employing workers are based on regulation. employment practices. a detailed survey of employment regulations The difficulty of hiring index measures (i) that is completed by local lawyers and public Since 2009 the World Bank Group has been whether fixed-term contracts are prohibited officials. Employment laws and regulations working with a consultative group—includ- for permanent tasks; (ii) the maximum cu- as well as secondary sources are reviewed to ing labor lawyers, employer and employee mulative duration of fixed-term contracts; ensure accuracy. To make the data compara- representatives, and experts from the ILO, and (iii) the ratio of the minimum wage for a the OECD, civil society and the private ble across economies, several assumptions trainee or first-time employee to the average sector—to review the employing workers about the worker and the business are used. value added per worker.8 An economy is as- methodology and explore future areas of signed a score of 1 if fixed-term contracts are Assumptions about the worker research.7 prohibited for permanent tasks and a score The worker: of 0 if they can be used for any task. A score The guidance of the consultative group has Ė Earns a salary plus benefits equal to the of 1 is assigned if the maximum cumulative provided the basis for several changes in economy’s average wage during the entire duration of fixed-term contracts is less than the methodology. The calculation of the period of his employment. 3 years; 0.5 if it is 3 years or more but less minimum wage ratio was changed to ensure Ė Has a pay period that is the most common than 5 years; and 0 if fixed-term contracts that no economy can receive the highest for workers in the economy. can last 5 years or more. Finally, a score of score if it has no minimum wage at all, if Ė Is a lawful citizen who belongs to the 1 is assigned if the ratio of the minimum the law provides a regulatory mechanism wage to the average value added per worker for the minimum wage that is not enforced same race and religion as the majority of is 0.75 or more; 0.67 for a ratio of 0.50 or in practice, if there is only a customary the economy’s population. more but less than 0.75; 0.33 for a ratio of minimum wage or if the minimum wage Ė Resides in the economy’s largest business 0.25 or more but less than 0.50; and 0 for applies only to the public sector. A threshold city. a ratio of less than 0.25. A score of 0 is also was set for paid annual leave and a ceiling Ė Is not a member of a labor union, unless assigned if the minimum wage is set by a for working days allowed per week to ensure membership is mandatory. collective bargaining agreement that applies that no economy benefits in the scoring from to less than half the manufacturing sector or excessive flexibility in these areas. Finally, Assumptions about the business does not apply to firms not party to it, or if the calculation of the redundancy cost and The business: the minimum wage is set by law but does not of the annual leave period for the rigidity of Ė Is a limited liability company. apply to workers who are in their apprentice hours index was changed to refer to the aver- period. A ratio of 0.251 (and therefore a age value for a worker with 1 year of tenure, Ė Operates in the economy’s largest busi- score of 0.33) is automatically assigned a worker with 5 years and a worker with 10 ness city. in 4 cases: if there is no minimum wage; if years rather than the value for a worker with Ė Is 100% domestically owned. 20 years of tenure. the law provides a regulatory mechanism Ė Operates in the manufacturing sector. for the minimum wage that is not enforced A full report with the conclusions of the Ė Has 60 employees. in practice; if there is no minimum wage set consultative group is available at http:// Ė Is subject to collective bargaining by law but there is a wage amount that is www.doingbusiness.org /methodology/ agreements in economies where such customarily used as a minimum; or if there employing-workers. agreements cover more than half the is no minimum wage set by law in the private sector but there is one in the public sector. manufacturing sector and apply even to This year Doing Business collected additional data on regulations covering worker protec- firms not party to them. In Benin, for example, fixed-term contracts tion. The data will serve as a basis for devel- Ė Abides by every law and regulation but are not prohibited for permanent tasks (a oping a joint analysis of worker protection by does not grant workers more benefits than score of 0), and they can be used for a maxi- the World Bank Group and the ILO and for mandated by law, regulation or (if appli- mum of 4 years (a score of 0.5). The ratio developing measures of worker protection. cable) collective bargaining agreement. of the mandated minimum wage to the value DATA NOTES 77 added per worker is 0.58 (a score of 0.67). permitted workweek is less than 5.5 days or the employer needs to notify a third party to Averaging the 3 values and scaling the index more than 6 days; otherwise a score of 0 is terminate a group of 9 redundant workers; to 100 gives Benin a score of 39. assigned. For question (iv), if the answer is (iv) whether the employer needs approval no, a score of 1 is assigned; otherwise a score from a third party to terminate 1 redundant The rigidity of hours index has 5 compo- of 0 is assigned. For question (v) a score of worker; (v) whether the employer needs ap- nents: (i) whether there are restrictions on 0 is assigned if the average paid annual leave proval from a third party to terminate a group night work; (ii) whether there are restrictions is between 15 and 21 working days, a score of of 9 redundant workers; (vi) whether the law on weekly holiday work; (iii) whether the 0.5 if it is between 22 and 26 working days requires the employer to reassign or retrain a workweek can consist of 5.5 days or is more and a score of 1 if it is less than 15 or more worker before making the worker redundant; than 6 days; (iv) whether the workweek than 26 working days. (vii) whether priority rules apply for redun- can extend to 50 hours or more (including dancies; and (viii) whether priority rules overtime) for 2 months a year to respond to For example, Benin does not impose any apply for reemployment. For question (i) a seasonal increase in production; and (v) restrictions either on night work (a score an answer of yes for workers of any income of 0) or on weekly holiday work (a score of level gives a score of 10 and means that the whether the average paid annual leave for a 0), allows 6-day workweeks (a score of 0), rest of the questions do not apply. An answer worker with 1 year of tenure, a worker with permits 50-hour workweeks for 2 months (a of yes to question (iv) gives a score of 2. For 5 years and a worker with 10 years is more score of 0) and requires average paid annual every other question, if the answer is yes, a than 26 working days or fewer than 15 work- leave of 24 working days (a score of 0.5). score of 1 is assigned; otherwise a score of 0 ing days. For questions (i) and (ii), if restric- Averaging the scores and scaling the result is given. Questions (i) and (iv), as the most tions other than premiums apply, a score of to 100 gives a final index of 10 for Benin. restrictive regulations, have greater weight in 1 is given. If the only restriction is a premium for night work or weekly holiday work, a the construction of the index. The difficulty of redundancy index has 8 score of 0, 0.33, 0.66 or 1 is given, depend- components: (i) whether redundancy is dis- In Benin, for example, redundancy is allowed ing on the quartile in which the economy’s allowed as a basis for terminating workers; as grounds for termination (a score of 0). premium falls. If there are no restrictions, the (ii) whether the employer needs to notify a An employer has to notify a third party to economy receives a score of 0. For question third party (such as a government agency) to terminate a single redundant worker (a score (iii) a score of 1 is assigned if the legally terminate 1 redundant worker; (iii) whether of 1) as well as to terminate a group of 9 TABLE 13.11 What do the employing workers indicators measure? redundant workers (a score of 1), although Data for Score for the approval of a third party is not required in Benin Benin either of these cases (a score of 0). The law Rigidity of employment index (0–100) 29.66 does not mandate any retraining or alterna- Simple average of the difficulty of hiring, rigidity of hours and difficulty of tive placement before termination (a score 39 + 10 + 40 redundancy indices of 0). There are priority rules for termination Difficulty of hiring index (0–100) 39 (a score of 1) and reemployment (a score Fixed-term contracts prohibited for permanent tasks? No 0 of 1). Adding the scores and scaling to 100 Maximum duration of fixed-term contracts 4 years 0.5 gives a final index of 40. Ratio of minimum wage for trainee or first-time employee to value added 0.58 0.67 per worker Redundancy cost Rigidity of hours index (0–100) 10 The redundancy cost indicator measures Restrictions on night work and weekend work? No 0 the cost of advance notice requirements, Allowed maximum length of the workweek in days and hours, including 6 days 0 severance payments and penalties due when overtime Fifty-hour workweeks permitted for 2 months due to an increase in terminating a redundant worker, expressed Yes 0 production? in weeks of salary. The average value of Paid annual vacation days 24 days 0.5 notice requirements and severance pay- Difficulty of redundancy index (0–100) 40 ments applicable to a worker with 1 year of Redundancy allowed as grounds for termination? Yes 0 tenure, a worker with 5 years and a worker Notification required for termination of a redundant worker or group of with 10 years is used to assign the score. If Yes 2 workers? the redundancy cost adds up to 8 or fewer Approval required for termination of a redundant worker or group of No 0 weeks of salary and the workers can benefit workers? Employer obligated to reassign or retrain and to follow priority rules for from unemployment protection, a score of 0 Yes 2 redundancy and reemployment? is assigned, but the actual number of weeks Redundancy cost (weeks of salary) 11.66 is published. If the redundancy cost adds up Notice requirements, severance payments and penalties due when Yes 11.66 to 8 or fewer weeks of salary and the workers terminating a redundant worker, expressed in weeks of salary cannot benefit from any type of unemploy- Source: Doing Business database. ment protection, a score of 8.1 is assigned, 78 DOING BUSINESS IN HARGEISA 2012 although the actual number of weeks is construction permits), the security of prop- working-age population as a percentage of published. If the cost adds up to more than erty from theft and looting, macroeconomic the total population. 8 weeks of salary, the score is the number conditions or the strength of underlying of weeks. One month is recorded as 4 and institutions. There remains a large unfinished 1/3 weeks. agenda for research into what regulation constitutes binding constraints, what pack- In Benin, for example, an employer is re- age of reforms is most effective and how quired to give an average of 1 month’s notice these issues are shaped by the context of before a redundancy termination, and the an economy. The Doing Business indicators average severance pay for a worker with 1 provide a new empirical data set that may year of service, a worker with 5 years and a improve understanding of these issues. worker with 10 years equals 1.68 months of wages. No penalty is levied and the workers cannot benefit from any type of unemploy- NOTES ment protection. Altogether, the employer 1. Because the ease of doing business index pays the equivalent of 11.66 weeks of salary now includes the getting electricity indica- tors, procedures, time and cost related to to dismiss a worker. obtaining an electricity connection were removed from the dealing with construction The data details on employing workers can be permits indicators. found for each economy at http://www.doing- 2. The ranking is based on a straight average of business.org by selecting the economy in the points from the strength of legal rights index drop-down list. The Doing Business website pro- and depth of credit information index. vides historical data sets adjusted for changes 3. The scoring on this aspect was revised this in methodology to allow comparison of data year to bring it into line with UNCITRAL across years. This methodology was developed (2004, 2007) and World Bank (2011). in Botero and others (2004) and is adopted 4. This question is usually regulated by stock exchange or securities laws. Points are here with changes. awarded only to economies with more than 10 listed firms in their most important stock exchange. RANKINGS 5. When evaluating the regime of liability for The ease of doing business index ranks econ- company directors for a prejudicial related- party transaction, Doing Business assumes omies from 1 to 183. The aggregate ranking that the transaction was duly disclosed and is calculated as the simple average of the approved. Doing Business does not measure percentile rankings on each of the 10 topics director liability in the event of fraud. included in Doing Business in Hargeisa 2012: 6. PwC refers to the network of member firms starting a business, dealing with construc- of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, tion permits, getting electricity, registering individual member firms of the PwC network. property, getting credit, protecting investors, Each member firm is a separate legal paying taxes, trading across borders, enforc- entity and does not act as agent of PwCIL ing contracts, and resolving insolvency. or any other member firm. PwCIL does not provide any services to clients. PwCIL is not If an economy has no laws or regulations responsible or liable for the acts or omissions covering a specific area it receives a “no of any of its member firms nor can it control the exercise of their professional judgment practice” mark. Similarly, an economy or bind them in any way. No member firm is receives a “no practice” or “not possible” responsible or liable for the acts or omissions mark if regulation exists but is never used in of any other member firm nor can it control practice or if a competing regulation prohib- the exercise of another member firm’s pro- its such practice. Either way, a “no practice” fessional judgment or bind another member firm or PwCIL in any way. mark puts the economy at the bottom of the 7. For the terms of reference and composi- ranking on the relevant indicator. tion of the consultative group, see World Bank, “Doing Business Employing Workers The rankings are limited in scope. They do Indicator Consultative Group,” http://www not account for an economy’s proximity to .doingbusiness.org. large markets, the quality of its infrastructure 8. The average value added per worker is the services (other than services related to ratio of an economy’s GNI per capita to the 79 Doing Business indicators summary Sub-Saharan Global best practice Hargeisa Africa average Ease of doing business (rank) 1-Singapore 174 Starting a business (rank) 1-New Zealand 175 123 Procedures (number) 1 11 8 Time (days) 1 29 37 Cost (% of income per capita) 0.4 130.1 81.2 Min. capital (% of income per capita) 0.0 2,365.2 129.8 Dealing with construction permits (rank) 1-Hong Kong SAR, China 86 112 Procedures (number) 6 15 15 Time (days) 67 56 211 Cost (% of income per capita) 17.8 1,038.8 823.7 Getting electricity 1-Iceland 84 122 Procedures (number) 4 5 5 Time (days) 22 57 137 Cost (% of income per capita) 13.6 1,878.5 5,429.8 Registering property (rank) 1-Saudi Arabia / Georgia 79 119 Procedures (number) 2/1 6 6 Time (days) 2 25 65 Cost (% of property value) 0.0 / 0.1 5.7 9.4 Getting credit (rank) 1-United Kingdom / Malaysia / South Africa 184 110 Strength of legal rights (0-10) 10 0 6 Depth of credit information index (0-6) 6 0 2 Public registry coverage (% of adults) 0.0 / 49.4 / 0.0 0 3.2 Private bureau coverage (% of adults) 100.0 / 83.4 / 52.0 0 5 Protecting investors (rank) 1-New Zealand 181 112 Extent of disclosure index (0-10) 10 2 5 Extent of director liability index (0-10) 9 3 4 Ease of shareholder suits index (0-10) 10 1 5 Strength of investor protection index (0-10) 9.7 2 4.5 Paying taxes (rank) 1-Maldives 142 115 Payments (number per year) 3 34 37 Time (hours per year) 0 188 318 Total tax rate (% of profit) 9.3 101.9 57.1 Trading across borders (rank) 1-Singapore 127 134 Document to export (number) 4 6 8 Time to export (days) 5 22 31 Cost to export ($ per container) 456 1,940 1,960 Document to import (number) 4 7 8 Time to import (days) 4 25 37 Cost to import ($ per container) 439 1,920 2,502 Enforcing contracts (rank) 1-Luxembourg 124 117 Procedures (number) 26 52 39 Time (days) 321 281 655 Cost (% of claim) 9.7 40.4 50.0 Resolving insolvency (rank) 1-Japan 183 127 Time (years) 0.6 no practice 3.4 Cost (% of estate) 4 no practice 23 Recovery (cents on the dollar) 92.7 no practice 19.1 80 Indicator details LIST OF PROCEDURES Procedure 3. Obtain clearance from the Procedure 5. Apply for and obtain a Ministry of Commerce to incorporate commercial license at the Ministry of Following are the list of procedures and in- with the Attorney General’s Office Commerce dicator details for each indicator covered by Time: 6 days Time: 5 days Doing Business in Hargeisa 2012. All estimates Cost: No cost Cost: No cost are based on the case study assumptions as Comments: Before a company can be incorpo- Comments: According to Section 6 of the Com- detailed in the Data notes. rated by the Attorney General, it needs to obtain panies Law, if a company’s memorandum states clearance from the Ministry of Commerce. The that the company is to operate as a general company must submit the following: commercial company “the company should Note: If a procedure is marked with an aster- a. Application for clearance to incorporate (in- apply for a commercial license at the Ministry of isk, it can be completed simultaneously with Commerce.” Once incorporated, the company cluding information on the nature of business, previous procedures. ownership, and director identification and can apply for the commercial license. residence); The Director General of the Ministry of Com- b. Filled-out business categorization form merce issues a registration bill that must be 1. STARTING A BUSINESS (taken from the Ministry of Commerce); paid at the Ministry of Finance. The bill names the type of license for which the company has Hargeisa c. Notarized memorandum and articles of as- submitted an application. The commercial sociation; and license fee depends on the type of business and Standard company legal form: Limited Liability the type of license requested. A detailed fee d. Proof of an opened account with the Bank of Company (LLC) schedule is posted on the premises of the Minis- Somaliland showing a deposit of the paid-in Minimum capital requirement: $5,000 minimum capital. try of Commerce. Data as of: May 2012 The Director General or the Director of Com- The applicant shows the general receipt (GR) of merce of Ministry of Commerce reviews the payment from the Ministry of Finance and sub- Procedure 1. Notarize incorporation mits two photos of the company director. The documents and verifies the identity of the com- documents pany owners and their places of residence (he commercial license is issued once the Minister Time: 1 day may suggest modifications or corrections if he of Commerce signs it. The Minister occasionally judges the documentation incomplete). He/she delegates signing power to the Director General Cost: $20 also issues guidelines on next steps and clears of the ministry. The business registration num- Comments: Although the Companies Law of So- the request to incorporate. ber is displayed in the commercial license. maliland (Law No. 25/2004) does not require it, While the Ministry of Commerce is expected The Ministry of Commerce strongly recom- notarizing incorporation documents is common to forward the clearance to incorporate to the mends, and often requires, registration with practice and is also required in dealings with Attorney General’s Office, most entrepreneurs the Somaliland Chamber of Commerce (see the Ministry of Commerce and the Attorney pick up the documents themselves and submit Procedure 8). General’s Office. The incorporation documents are authenticated and formally witnessed by a them to the Attorney General’s Office. Usually notary public in order to verify identity of the the ministry does not notify applicants when the Procedure 6. Pay commercial license fee company owners and their respective signa- permission to incorporate is ready for pick up, so at the Ministry of Finance tures. The average cost of authentication is $20. applicants should follow up in order to find out Time: 1 day the case status. If a notary is to draft the memorandum and Cost: $21 articles of association, the cost rises to $200; Procedure 4. Obtain certificate of Comments: The Ministry of Finance issues a however, most companies in Hargeisa prefer incorporation from the Attorney general receipt (GR) of payment of the com- that lawyers draft the memorandum and articles General’s Office mercial license fee. The receipt displays a serial of association, given their legal expertise. Sec- number that will be used to identify the business tion 13 of the Companies Law requires that the Time: 4 days in future correspondence with authorities. memorandum and articles of association be Cost: No cost drafted either by a solicitor engaged in company formation (lawyer or notary public) or by a com- Comments: The company submits the following Procedure 7. Apply for local business pany secretary or company director/s. documents: license at the District Commissioner’s a. Business categorization form and clearance Office and receive an on-site inspection Procedure 2. Open a bank account with from the Ministry of Commerce; of the business premises the Bank of Somaliland and deposit the b. Notarized memorandum and articles of as- Time: 3 days minimum capital sociation; and Cost: No cost Time: 1 day c. Proof of an opened bank account with the Comments: In addition to the commercial Cost: $25 Bank of Somaliland showing deposit of the license issued by the Ministry of Commerce, a paid-in minimum capital. business needs to obtain a local business license Comments: The following documents are The incorporation documents are reviewed from the municipal authority of the city in which required: and an incorporation certificate is issued once it intends to operate. The issuance of such 1. Completed application form; license is mandated by the Regions and District signed by the attorney general. When the at- 2. List of company directors/owners and their torney general is not present in the office, longer Self-Administration Law (Law 23; amended in notarized signatures. waiting time occurs. 2002). The following documents are required: INDICATOR DETAILS 81 a. Commercial license issued by the Ministry of Comments: Once the local business license fee a. Is not located in a public area; Commerce; is paid at the District Office, the District Office b. Does not interfere with public roads; and b. Certificate of incorporation; and notifies the Hargeisa Municipality Mayor’s Of- fice, which issues a business license. When the c. Has dimensions that coincide with the docu- c. Two photos of the company’s Chief Executive Mayor is out of town, signing power is occasion- ments submitted for application. Officer (CEO) or Director. ally delegated to the Deputy Mayor. Once the site surveyor has inspected the site, The applicant drafts an application letter stating the Chief District Surveyor, District Secretary, the nature of business, location of the business Procedure 11. Purchase a company seal and District Commissioner sign the land legal- premises and proof of the names of owners. Time: 2 days ization certificate. The application file is then Once the applicant submits these documents transferred to the Municipal Archives Section. and the application letter, the District Of- Cost: $20 fice sends an inspector from the Municipal Comments: Although it is not required by law, Procedure 3. Obtain land file number Department of Planning, but associated with purchasing a seal is common practice by most from the Municipal Archives Section and the district, to inspect the business premises companies operating in Hargeisa. All transaction have application file forwarded to the and ensure the description in the application documents or contractual agreements between Municipal Land Revenue Section form coincides with what is on the ground. The companies are stamped. In order to buy a seal inspector also determines what category the from an authorized seal shop, the company has Time: 3 days business falls into. to present the commercial license obtained Cost: No cost Once the evaluation and business categorization from the Ministry of Commerce and the local Comments: BuildCo obtains the land file num- is finished, the District Secretary signs a billing business license obtained from the Hargeisa ber from the Municipal Archives Section. This request form that is sent to the Geographi- Municipality. Within one month of the start date file number is used in all future correspondence cal Information System (GIS) section of the of operations, the company has to register its with various municipal and district departments. municipality. The business location is entered employees with the Department of Employee Affairs at the Ministry of Labor. Once BuildCo has obtained the file number, into the GIS and a local municipal license bill is the Municipal Archives Section forwards the released. The bill is picked up by staff from the application file to the Municipal Land Planning District Office. Department, which checks the technical plans 2. DEALING WITH CONSTRUCTION and verifies the location against current map- Procedure 8*. Register with the PERMITS ping of the plot; approves the application forms; Somaliland Chamber of Commerce and returns the documents to the Municipal Ar- Time: 1 day Hargeisa chives Section. The Municipal Archives Section Cost: $50 then forwards the documents to the Municipal Warehouse value: $357,500 Land Revenue Section. Comments: Although it is not required by law, Data as of: May 2012 most companies register with the Somaliland Procedure 4. Pay premium of land Chamber of Commerce. Applicants must submit Procedure 1. Apply for land legalization (building permit) fee at the Municipal the following documents: certificate and obtain “check-in form” Land Revenue Section a. Two photos of the company CEO or Director; from the District Office Time: 1 day b. Application form; and Time: 1 day Cost: $186 (approx. $0.20 per square meter) c. Notarized copies of the company bylaws Cost: $16 Comments: The premium of land (building (memorandum and articles of association). Comments: Since the end of the civil war, there permit) fee is fixed per square meter regardless A membership card is issued to the applicant have been major land disputes in Hargeisa. of the type of building being built. once the required documents are submitted Obtaining proper ownership documents is a and membership fees are paid. One copy of standard practice for the majority of build- Procedure 5. Get building approval from the membership card is kept in the Chamber ing projects in Hargeisa because the majority Hargeisa Municipality of Commerce files and another is given to the of empty land is not owned through proper applicant. documentation. The interaction with the district Time: 16 days office starts in order to obtain land ownership Cost: No cost Procedure 9. Pay local business license rights, define the land plot boundaries, and Comments: Once BuildCo has paid the premium fee at the District Office secure approval to build on it. of land (building permit) fee, the Municipal Land Time: 1 day At this point, BuildCo submits any documents Revenue Section forwards the application file to that prove ownership of the land, as well as all the Municipal Internal Auditor. The Internal Au- Cost: $140 architectural and technical plans, which become ditor checks the documents (receipts and other Comments: The Hargeisa Single Business Per- part of the application file. documents) to make sure they are genuine and mit Fee Schedule determines local business li- in order. The auditor also makes sure that all cense fees based on business categories. Within Procedure 2. Receive inspection by taxes on the property have been paid. each of the seven different categories there are a district surveyor and obtain land The documents are then sent back to the different grades that affect the fee. Once the lo- legalization certificate approval from the Archives Section, which forwards them to the cal business license fee is paid, the company can District Office and the Municipal Land Municipal Mapping Section for highlighting on start business operations. The local license fees were increased significantly in 2006. Planning Department the City Master Plan. Time: 5 days From the Mapping Section, the file is sent back Procedure 10. Obtain local business Cost: No cost to the Archives Section and then forwarded to license from the Mayor’s Office the municipal executive officer for signature. The Comments: The surveyor (geometer) checks executive officer cannot delegate power so in his Time: 5 days the site of the plot and makes sure that the land absence delays can occur. Cost: No cost plot: 82 DOING BUSINESS IN HARGEISA 2012 Once the executive officer has signed, the file Procedure 9. Apply for property title deed in Hargeisa. The distribution network’s current goes back to the Archives Section and is for- at the District Commissioner’s Office capacity is for 24,000 households. This covers warded to the Deputy Mayor for signature. The only about 25% of the population of Hargeisa. Time: 1 day Deputy Mayor cannot delegate power so in his The remaining 75% have no access to water. absence delays can occur. Cost: $16 The 25% that are covered usually get limited Once the Deputy Mayor has signed, the file is Comments: BuildCo has to submit the following water supply as heavy cuts are in place. In a sent back to the Archives Section and forwarded documents: best-case scenario, a typical household can to the Mayor’s Office for signature. Once the have running water for 8 hours daily, while the a. Full application file (including drawings); majority of households have running water once Mayor has signed (or the Deputy Mayor in the Mayor’s absence), the file is returned to the b. All payment receipts; in three to four days (information obtained from Archives Section. c. Two property title deed application forms; Hargeisa Water Agency management). BuildCo must now check with the Archives Sec- and Procedure 12. Receive inspection by an tion as to whether the signed application file is d. Signatures and approvals (from the munici- HWA technical team ready and pick it up. pality: Executive Officer, Deputy Mayor, and Mayor). Time: 1 day Procedure 6. Notify the District Office The District Office checks the documents and for- Cost: No cost of the intent to start construction and wards them to the Physical Asset and Land Tenure Comments: Each district in Hargeisa has an receive an on-site inspection by a District Department of the municipality for approval. assigned foreman who is in charge of an HWA Surveyor technical team that conducts inspections. The Time: 2 days Procedure 10. Obtain property title deed technical team inspects the site to determine from the Physical Asset and Land Tenure the closest water connection point and estimate Cost: $13 the installation costs. Department Comments: BuildCo submits the signed ap- Time: 4 days plication file to the District Commissioner. The Procedure 13. Pay installation fees and District Office sends a surveyor to inspect the Cost: No cost obtain water connection site and ensure that the lining and corners of the Comments: BuildCo must submit two photos to Time: 8 days plot match the technical plans. the Physical Asset and Land Tenure Department of the Municipality. The Physical Asset and Cost: US$ 195 [(US$ 86 deposit + $30 for two Procedure 7. Obtain land permit Land Tenure Department checks the documents 6-meter pipes ($15 each) + $4 for digging/ (approval to start construction) from the received from the District Office and attaches excavation ($5 per cubic meter –calculation: the two submitted photos to the two property 10-meter length * 0.4-meter depth * 0.2-meter District Commissioner title deed application forms. width= US$ 4) + $75 for meter (cost varies Time: 1 day from $50 to $100)] Cost: No cost These documents are then forwarded to the Municipal Executive Officer for signature. The Comments: The physical labor work is done Comments: Once the inspection is conducted, Municipal Executive Officer signs the deeds and by HWA staff, while costs are fully covered by the surveyor reports to the District Office and sends the files back to the Physical Asset and BuildCo. has all papers signed by the Chief Surveyor and Land Tenure Department, which forwards the the District Commissioner. Once the docu- documents to the Mayor for signature. Once the Procedure 14*. Build a septic tank ments have been signed, BuildCo picks up the Mayor has signed, the documents are returned Time: 18 days building approval and can start construction. If to the Physical Asset and Land Tenure Depart- construction does not start within 90 days of Cost: US$ 1,750 ment and BuildCo can pick the property title receiving this approval, BuildCo has to re-apply deed. Two copies of the property deed are is- Comments: There is no sewerage system in for this permit and pay the $13 fee again (see sued: one for BuildCo and another for municipal Hargeisa – BuildCo has to build its own septic procedure 6). records. Unlike a land ownership document, the tank. A septic tank with 5 by 3 meter dimen- property deed includes detailed information on sions and a 6-meter depth is typical for large Procedure 8. Receive on-site inspection the building as well. warehouses. BuildCo can build the tank within by the District Inspectorate the premises of the plot. If the tank is built Procedure 11. Apply for water connection outside the plot, permission from the municipal- Time: 1 day ity needs to be obtained and a fee of US$ 30 is Cost: No cost at the Hargeisa Water Agency (HWA) charged. Time: 1 day Comments: The number of inspections is not regulated by law. There is no building code or Cost: No cost Procedure 15*. Apply for and obtain construction administration law. Inspections Comments: BuildCo has to submit to the HWA telephone land line connection from the are random in Hargeisa. Typically, only one (a) a request letter showing the location of the telephone company (Telsom) inspection is conducted within two weeks of building and (b) a building approval file to prove Time: 2 days the start of construction. The inspectors check ownership of the property. if the lining/marking and foundation of the Cost: $20 building have been implemented in compliance The Hargeisa Water Agency is an autonomous Comments: The installation cost is $20 for with the initially submitted plans. Once the agency under the President’s Office. The water buildings that are no further than 200 meters building passes the foundation phase, no more source for Hargeisa is in Geedeeble, an area from the connection point. For any connections inspections occur. The inspectors are staff from 25 kilometers away from Hargeisa. There are beyond the 200-meter distance, there are extra the Land Planning Department of the municipal- 13 boreholes in Geedeeble. There are two main charges for each additional meter. ity, but are associated with the corresponding pumping stations, one in Geedeeble and another district where the buildable land is located. in a location 13 kilometers from Hargeisa. The transmission lines were built in the early 1970s and have depreciated significantly, so leaks are common. There are two main water reservoirs INDICATOR DETAILS 83 3. GETTING ELECTRICITY Comments: A transformer will be imported, registered owner of the plot. It is not neces- probably from Dubai. Some transformers are in sarily in the name of the current owner: the Hargeisa stock in Hargeisa, but their power capacity is Mapping Office of the Municipality does not usually lower than what is required for the case register the transfers of land and property, Data as of: May 2012 study assumptions. Public works can start as unless the new owner decides to go through soon as the transformer arrives. They are carried this process; Procedure 1. Submit application to the out by the utility officer, including the installa- utility and await site visit b. All the notarized deeds of sale for the plot of tion of the poles, wires, transformer and meter. land that is going to be sold (if other transac- Time: 2 days The connection is entirely overhead, and the tions occurred on the land); Cost: No cost transformer will be pole-mounted. c. All the official documents registering the Comments: BuildCo must go to the utility to fill Procedure 5. Receive external and previous transfers of the plot of land: form out, sign and file an application form containing signed by the Municipality for the transfer internal inspections, meter opening and information about (a) the power requirements fees, and receipts from the Municipality and of the electrical devices that will be connected electricity flow the Ministry of Finance for the payment of and (b) the location of the property. The Man- Time: 1 day transfer fees; ager of the utility generally signs the form on the Cost: No cost d. All the receipts of the yearly taxes paid to the same day, and sends it to the technical depart- District. ment. The utility will set a rate for consumption Comments: When all the material is installed, of electricity per KWh based on the total capac- the technical engineer inspects internal and These documents constitute the proof of owner- ity needed. There is no official fee, although an external wiring, in presence of BuildCo. The ship. They are opposable to a third party that electricity regulation is underway and it could content and the extent of the inspection are at would claim the plot of land. set a rate. the discretion of the technical engineer since The parties sign the deed of sale (the notary there are no regulations or company rules in adding his fingerprints and stamp), the payment this regard. Electricity can start flowing on the Procedure 2. Receive site visit from takes place between the buyer and the seller, same day. technical expert and await an estimate and the parties pay the notary for the service. Article 25 of the Somaliland Notaries Law states Time: 1 day that the fee for transfer of land should be Sl. Cost: No cost 4. REGISTERING PROPERTY Sh. 20,000 (around $3.5), but notaries do not Comments: After BuildCo has submitted the ap- apply it. The notaries argue the fee was set in plication, a technician from the utility office vis- Hargeisa 2001, and it does not reflect the inflation in the its the site in presence of BuildCo and estimates country since then. The price is set freely by the conditions for connection, including nearest Property value: $10,570 the notary, and it depends on the price of the connection point, type of wires and poles to be Data as of: May 2012 transaction. For example, notaries in Hargeisa installed, and whether a transformer is needed. generally charge between $40 and $50 for a Procedure 1. Prepare and notarize deed of transaction of $10,000, and around $150 for a The technician then estimates the costs and sale and related documents transaction of $100,000. decides how much will be paid by the utility and by BuildCo. Because there are no regulations or Time: 2 days company rules in this regard, the division of the Procedure 2. Pay the transfer tax at the Cost: $42 costs can vary from one client to another. municipal General Taxation Office and Comments: To issue a deed of sale, a notary obtain a receipt must first make sure that the seller is the real Procedure 3. Receive an estimate and owner of the land. A site visit is not strictly Time: 6 days make the payment necessary, but is more likely to occur when Cost: $221 [$211.4 municipality transfer tax Time: 3 days the notary does not know any of the parties (2% of the property value) + $5.3 stamp duty to the agreement. The notary usually asks the (2.5% of transfer tax) + $4.2 regional tax (2% of Cost: $3,971 [(BuildCo pays 50% of the follow- neighbors if they can confirm that the seller has transfer tax)] ing items: $800 wire + $532.5 poles (2 poles in iron and 2 poles in cement) + $110 meter + been occupying the land plot, and if there is Comments: The buyer goes to the General Taxa- transformer $6,500)] any conflict over the land. The signature of the tion Office of Hargeisa Municipality with the deed of sale can take place one day after this notarized deed of sale and the complete transfer Comments: The technician sends the estimate verification. file he obtained from the seller. The transfer file to the utility manager for signature. BuildCo is The Somaliland Notaries Law (Law No. should contain a copy of the original piece of not notified of the signature, and has to call or 18/2001) defines the procedures of the deed of master plan, all the notarized deeds of sale, and go to the Utility Office to verify that the docu- sale. The following parties must be present: the all the receipts of yearly taxes paid since the first ment is already signed. Once the estimate is buyer, the seller, a minimum of two witnesses, registration of the plot of land. signed, BuildCo pays at the cashier of the Utility Office. The utility will pay 50% of all the costs and the seller’s guarantor. The guarantor lists The buyer fills out a form with the Engineer of of material, including the transformer, and 100% the assets he owns in order to prove his capacity the General Taxation Office, stating the names of the works done by its employees. to refund the buyer if necessary, for example if a of buyer and seller, the location and surface third party claims the land in the future. of the plot, the district, and the details of the Procedure 4. Utility officer carries out The notary drafts the deed of sale on the same transaction. The buyer deposits the form and external connections works and installs day. It must include the names of the parties the transfer file, then pays the transfer fees in the meter listed above, the location and size of the plot, the same office. the description of the plot and property, the sale The Engineer of the General Taxation Office Time: 50 days (45 days for import of trans- price and the terms of payment. former and 5 days for public works) signs the form and forwards it to the Executive The seller must bring the following documents: Officer of the Municipality, who signs the docu- Cost: No cost ment. The Executive Officer then sends the form a. A copy of the original piece of master plan, for signature by the Mayor, or by the Deputy given by Hargeisa Municipality to the last 84 DOING BUSINESS IN HARGEISA 2012 Mayor if the Mayor is not available. The Mayor a. The new form signed by the Secretary of the signs the form and sends it back to the General District and the Geometer; Taxation Office. b. The form filed by the applicant; After obtaining the Mayor’s signature, the buyer c. The notarized sale agreement; goes to the General Taxation Office of the Mu- nicipality and picks up: d. The map of the land plot signed by the Ge- ometer; and a. The complete transfer file, which contains a copy of the original piece of master plan, e. The receipt for the Land Visit fee. all the notarized deeds of sale, and all the The Secretary of the District submits the file to receipts of yearly taxes paid since the first the Municipal Archives Section , which assign a registration of the plot of land; registration number. The Archives then send the b. The form signed by the Engineer, the Execu- file to the Director of Land Management of the tive Officer and the Mayor; and Municipality, who signs the form signed by the Secretary of the District and the Geometer. The c. A receipt for his payment. file is sent back to the Archives, which forward it to the GIS Office. After the GIS Office verifies Procedure 3. Pay the transfer tax at the the location of the land plot against the GIS digi- Revenue Office of the Ministry of Finance tal map, it returns the file to the Archives. The Time: 1 day buyer can pick up the complete file, although he is not notified when the documents are ready. Cost: $217 [$211.4 Ministry of Finance transfer tax (2% of property value) + $5.3 stamp duty (2.5% of transfer tax)] Procedure 6. Pay the registration fee to the Tax Authority and obtain a Comments: After picking up his file at the confirmation General Taxation Office, the buyer takes it to the Revenue Office of the Ministry of Finance, Time: 4 days located within the municipality. The buyer pays Cost: $112 two types of fees: the transfer tax of the Minis- Comments: After picking up the form from the try of Finance and the stamp duty. The buyer is Archives, the buyer goes to the General Taxation given a receipt on the spot. Office of the Municipality and pays a registra- tion tax of Sl. Sh. 1,200 per square meter. The Procedure 4. Apply for tax registration at fee is set by the Municipality on the basis of its the District Office forecast tax income. The General Taxation Office Time: 1 day keeps the form and sends it to be signed by both Cost: $9 the Mayor (or Deputy Mayor) and the Executive Director of the Municipality. The signed docu- Comments: The buyer goes to the District Of- ment is sent to the Archives, where the buyer fice of the Municipality with the notarized sale can pick it up. agreement. He files an application form that is submitted to the District Secretary. The buyer also pays a Land Visit fee of Sl. Sh. 51,000 in order to receive the visit from the Geometer of the District Office. Procedure 5. Receive visit from the Geometer of the District Office to register the property with the Geographic Information System (GIS) Mapping Office Time: 11 days Cost: No cost Comments: The Geometer of the District Office visits the land plot in the presence of the buyer and verifies that the location indicated in the form is in line with the general mapping of the city. After the verification, the Geometer goes to the GIS Mapping Office of the Municipal- ity, where the staff records in a computerized system the name of the building occupant and location of the land plot. It does not record the size of the land plot or the name of the owner. The GIS Mapping Office sets the yearly property taxes to be paid by the buyer. The Geometer prints a map of the zone where the land plot is located, signs the map and brings it back to the District Office. Then, the Secretary of the District prepares a file with: INDICATOR DETAILS 85 Getting credit Private credit Public credit Getting credit indicators bureau registry Score Depth of credit information index (0-6) 0 Are data on both firms and individuals distributed? No No 0 Are both positive and negative data distributed? No No 0 Does the registry distribute credit information from retailers, trade creditors or utility companies No No 0 as well as financial institutions? Are more than 2 years of historical credit information distributed? No No 0 Is data on all loans below 1% of income per capita distributed? No No 0 Is it guaranteed by law that borrowers can inspect their data in the largest credit registry? No No 0 Coverage 0 0 Number of individuals 0 0 Number of firms 0 0 Strength of legal rights index (0-10) 0 Can any business use movable assets as collateral while keeping possession of the assets; and No any financial institution accept such assets as collateral? Does the law allow businesses to grant a non possessory security right in a single category of No movable assets, without requiring a specific description of collateral? Does the law allow businesses to grant a non possessory security right in substantially all of its No assets, without requiring a specific description of collateral? May a security right extend to future or after-acquired assets, and may it extend automatically to No the products, proceeds or replacements of the original assets? Is a general description of debts and obligations permitted in collateral agreements; can all types of debts and obligations be secured between parties; and can the collateral agreement include a No maximum amount for which the assets are encumbered? Is a collateral registry in operation, that is unified geographically and by asset type, with an No electronic database indexed by debtor’s names? Are secured creditors paid first (i.e. before general tax claims and employee claims) when a No debtor defaults outside an insolvency procedure? Are secured creditors paid first (i.e. before general tax claims and employee claims) when a No business is liquidated? Are secured creditors either not subject to an automatic stay or moratorium on enforcement procedures when a debtor enters a court-supervised reorganization procedure, or the law No provides secured creditors with grounds for relief from an automatic stay? Does the law allow parties to agree in a collateral agreement that the lender may enforce its No security right out of court, at the time a security interest is created? 86 DOING BUSINESS IN HARGEISA 2012 Protecting investors Strength of investor protection index (0-10) 2 Extent of disclosure index (0-10) 2 What corporate body provides legally sufficient approval for the transaction? 1 Whether disclosure of the conflict of interest by Mr. James to the board of directors is required? 1 Whether immediate disclosure of the transaction to the public and/or shareholders is required? 0 Whether disclosure of the transaction in published periodic filings (annual reports) is required? 0 Whether an external body must review the terms of the transaction before it takes place? 0 Extent of director liability index (0-10) 3 Whether shareholders can sue directly or derivatively for the damage that the Buyer-Seller transaction causes to the company? 1 Whether shareholders can hold Mr. James liable for the damage that the Buyer-Seller transaction causes to the company? 2 Whether shareholders can hold members of the approving body liable for the damage that the Buyer-Seller transaction causes to the company? 0 Whether a court can void the transaction upon a successful claim by a shareholder plaintiff? 0 Whether Mr. James pays damages for the harm caused to the company upon a successful claim by the shareholder plaintiff? 0 Whether Mr. James repays profits made from the transaction upon a successful claim by the shareholder plaintiff? 0 Whether fines and imprisonment can be applied against Mr. James? 0 Ease of shareholder suits index (0-10) 1 Whether shareholders owning 10% or less of Buyer’s shares can inspect transaction documents before filing suit? 0 Whether shareholders owning 10% or less of Buyer’s shares can request an inspector to investigate the transaction? 0 Whether the plaintiff can obtain any documents from the defendant and witnesses during trial? 0 Whether the plaintiff can request categories of documents from the defendant without identifying specific ones? 0 Whether the plaintiff can directly question the defendant and witnesses during trial? 1 Whether the level of proof required for civil suits is lower than that of criminal cases? 0 Paying taxes City: Hargeisa Tax or mandatory Payments Time Statutory Total tax rate contribution (number) (hours) tax rate Tax base (% of commercial profits) Corporate income tax 1 36 10% Taxable income 16.3% Business license (central) 1 $ 25 0.2% Business license (local) 1 $ 25 0.2% Sales tax 12 72 5% Sales 73.7% Vehicle tax / Road tax 2 $ 68 0.5% Property rental tax 1 $ 28 0.2% Property transfer tax (central) 1 2% Sale price 1.2% Property transfer tax (local) 1 2% Sale price 1.2% Other labor taxes and mandatory 12 80 6% Gross salaries 6.8% contributions Advertising tax 1 $7 0.1% Stamp duty 1 3% Transaction values 1.5% Total 34 188 101.9% INDICATOR DETAILS 87 Trading across borders Hargeisa trading through the port of Berbera Export documents (6) Time Cost (days) (US$ per container) s Bill of lading s Packing list Export procedures s Commercial invoice Documents preparation 18 370 s Certificate of quality s Delivery order Customs clearance and technical control 1 200 s Customs declaration form Ports and terminal handling 2 270 Inland transportation and handling 1 1,100 Import documents (7) s Bill of lading Export total: 22 1,940 s Packing list Import procedures s Commercial invoice s Certificate of quality Documents preparation 18 350 s Certificate of origin Customs clearance and technical control 4 200 s Customs declaration form Ports and terminal handling 2 270 s Boarding list Inland transportation and handling 1 1,100 Import total: 25 1,920 Enforcing contracts City: Hargeisa Nature of procedure Indicator Procedures (number) 52 Time (days) 281 Filing and service 21 Trial and judgment 120 Enforcement of judgment 90 Cost (% of claim) 40.4 Attorney cost (% of claim) 10.0 Court cost (% of claim) 19.8 Enforcement cost (% of claim) 10.7 *Claim assumed to be equivalent to 200% of income per capita. 88 DOING BUSINESS IN HARGEISA 2012 Annex: Employing workers data Answer Difficulty of hiring index Are fixed-term contracts prohibited for permanent tasks? No What is the maximum length of a single fixed-term contract? (months) No limit What is the maximum length of fixed-term contracts, including renewals? (months) No limit What is the minimum wage for a 19-year old worker or an apprentice? (US$/month) 0 What is the ratio of minimum wage to average value added per worker? 0 Rigidity of hours What is the standard workday in manufacturing? (hours) 8 hours One-half hour every 5 consecutive worked What is the minimum daily rest required by law? (hours) hours and 12 hours between working days. What is the maximum overtime limit in normal circumstances? (hours) 48 hours/week What is the maximum overtime limit in exceptional circumstances? (hours) 48 hours/week What is the premium for overtime work? (% of hourly pay) 25% Are 50-hour workweeks allowed for 2 months a year in case of increase in production? No What is the maximum number of working days per week? 6 What is the premium for night work? (% of hourly pay) 25% What is the premium for work on weekly rest day? (% of hourly pay) N/A Are there restrictions on night work and do these apply when continuous operations are economically necessary? Yes Are there restrictions on "weekly holiday" work and do these apply when continuous operations are economically necessary? Yes What is the paid annual vacation (in working days) for an employee with 1 year of service? 24 What is the paid annual vacation (in working days) for an employee with 5 years of service? 24 What is the paid annual vacation (in working days) for an employee with 10 years of service? 24 Paid annual leave (average for workers with 1, 5 and 10 years of tenure, in working days) 24 Difficulty of redundancy Is the termination of workers due to redundancy legally authorized? Yes Must the employer notify a third party before terminating one redundant worker? No Does the employer need the approval of a third party to terminate one redundant worker? No Must the employer notify a third party before terminating a group of 9 redundant workers? No Does the employer need the approval of a third party to terminate a group of 9 redundant workers? No Is there retraining or reassignment obligation before an employer can make a worker redundant? No Are there priority rules applying to redundancies? No Are there priority rules applying to re-employment? No Redundancy costs (weeks of salary) What is the notice period for redundancy dismissal after 1 year of continuous employment? (weeks of salary) 0 What is the notice period for redundancy dismissal after 5 years of continuous employment? (weeks of salary) 0 What is the notice period for redundancy dismissal after 10 years of continuous employment? (weeks of salary) 0 Notice period for redundancy dismissal (average for workers with 1, 5 and 10 years of tenure, in salary weeks) 0 What is the severance pay for redundancy dismissal after 1 year of employment? (weeks of salary) 13 What is the severance pay for redundancy dismissal after 5 years of employment? (weeks of salary) 13 What is the severance pay for redundancy dismissal after 10 years of employment? (weeks of salary) 13 Severance pay for redundancy dismissal (average for workers with 1, 5 and 10 years of tenure, in salary weeks) 13 89 Acknowledgments Doing Business in Hargeisa 2012 was produced by a team Zheng provided valuable support at different stages of led by Pilar Sanchez-Bella. The team comprised Raian the project. Divanbeigi, Aikaterini Leris, Trimor Mici and Romain Svartzman, with the strong support of Najeeb Hashi, The dissemination and media campaign were led regional coordinator of the Somaliland Re-engagement and coordinated by Nadine Shamounki Ghannam, Phase II Program. The report was prepared under the Sushmitha Malini Narsiah and Hyun Kyong Lee. The general direction of Mierta Capaul. The report was website (http://www.doingbusiness.org/Hargeisa) produced as a component of the World Bank Group was developed by Preeti Endlaw, Graeme Littler, Somaliland Re-engagement Phase II Program, led Hashim Zia and Kunal Patel. The report was edited by Michael O. Engman under the direction of Peter by Christopher A. Marquardt and designed by Luis Mousley. Liceaga. The team is grateful for valuable comments provided by The study was produced thanks to the support of the colleagues across the World Bank Group. Peer review Ministry of Planning and Development of Somaliland comments were received from Ricardo Arias, Reynaldo and financed through a World Bank executed trust Bench, Thilasoni Benjamin Musuku, Alexander S. fund with contributions from the U.K. Department Berg, Frederic Bustelo, Dobromir Christow, Jaqueline for International Development (UKAID), the Danish Coolidge, Laurent Corthay, Santiago Croci, Nuria de International Development Agency (DANIDA) and Oca, Alejandro Espinosa-Wang, William John Gain, the World Bank’s State and Peace-building Fund (SPF). Heike Gramkow, Iva Hamel, Ankur Huria, Joyce Doing Business in Hargeisa 2012 would not be pos- Antone Ibrahim, Herve Kaddoura, Marcus Njehiah sible without the expertise and generous input of the Kimani, Jean Michel Lobet, Frederic Meunier, Ian over 80 lawyers, engineers, business consultants, W. Mills, Thomas Moullier, Joana Nasr, Mikiko Imai utility providers, entrepreneurs, freight forwarders, Ollison, Madalina Papahagi, Nina Pavlova, Maria judges, international experts and public officials who Camila Roberts, Anjum Rosha, Pilar Salgado-Otonel, contributed to the report. The team wants to extend Valentina Saltane, Shalini Sankaranarayanan, Rachel its special gratitude to the government officials and Shahidsaless, Heidi Stensland, Susanne Szymanski, members of the judiciary who participated in the proj- Tea Trumbic, Julien Vilquin, Barry Raymond Walsh, and ect. The names of those wishing to be acknowledged Alessio Zanelli. Ndeye Anna Ba, Claudia Contreras, individually are listed on the following pages. Jade Elena Garza Ndiaye, Mulu Woche and Yucheng 90 DOING BUSINESS IN HARGEISA 2012 PUBLIC OFFICIALS AND INTERNATIONAL ORGANIZATIONS ATTORNEY GENERAL OFFICE MINISTRY OF COMMERCE, INDUSTRY AND TOURISM Jamaal Cisman Haybe Barkhadd Omer Ali Abib Ahmed Jamal Ibrahim Hassam Adam Elmi Ahmed Ayan Ismail BANK OF SOMALILAND Huseein M. Jiciir Abdi Dirir Abdi MINISTRY OF FINANCE A’qaadir Omer Omar Y. Booh Weli Egal Rabile Omer Aw-Abdi Mohamed Tani Omar Ahmed Omar Hashi Jama Ahmed Mohamed REGIONAL COURT OF HARGEISA BERBERA PORT AUTHORITY Abdilaziz M. Samale Abdirashid Ismail Duran Eng. Ali Omar Mohamed Moh’ed Moh’ud Hirsi MINISTRY OF JUSTICE CHIEF STATE COUNCIL’S OFFICE Yahye Ali Idris Osman Abukur Ibrahim Eidle Suleiman Hussein Mohamed Jama Hussein Ahmed Aideed Hussein Mohamoud DAI Zaki Raheem MINISTRY OF LABOR & SOCIAL AFFAIRS Abshir Rabile Bashe Yusuf Ahmed SOMALILAND ELECTRICITY AGENCY DIASPORA RELATIONS OFFICE Mohamed Ahmed Ahmed M. Aden Abdiaziz Ahmed MINISTRY OF MINING, ENERGY & WATER Ilyas Daud Ibrahim DISTRICT COURT OF HARGEISA RESOURCES Abdirashid Mohamed Hirsi Beergeel Saeed Dualeh UNITED NATIONS DEVELOPMENT PROGRAM Simon Ridley HARGEISA WATER AGENCY MINISTRY OF PLANNING & DEVELOPMENT Hussein S. Adem Abdirhshid Ahmed Ibrahim Siyad Yonis Sa,ad Ali Shire Ahmed Ibrahim Suldan MUNICIPALITY OF HARGEISA INTERNATIONAL LABOR ORGANIZATION SOMALIA Mohamed Abdillahi Joel Asiago Said Ahmed Elmi Ilias Dirie Ahmed Osman Handulle PRIVATE PROFESSIONALS AL-HARBI TRADING AND SHIPPING COMPANY INTERNATIONAL MARITIME SHIPPING SERVICE SOMTEL Ahmed Farah Harbi Ahmed Abdullahi Awil Sharif Salah Abdirashid Haibeli AL-MANAL FURNITURE TELESOM Mohamed Abdi Daud KAABA MICROFINANCE INSTITUTION Abdul wahab Haji Ali Fadumo Alin Abdirahman Adam Ismail ALMIS PUBLIC NOTARY Fayad Ahmed Jama Qaasim Ismail Dualeh TRUST LEGAL FIRM KAAH ELECTRIC POWER & LIGHTING COMPANY Abdulhakim Abdi AMAANA & KAAH Abdi Ali Burkad Mohamoud Hussein Farah Kayse Ali Geedi MAANSOOR ELECTRIC POWER WARSAME SAEED CONSTRUCTION COMPANY BILAN AUDITING Seleban Faarah Habane Yusuf Warsame Saeed Hussein A. Farah MOHAMED RASHAD PUBLIC NOTARY WATERSHED LEGAL LAWFIRM CHAMBER OF COMMERCE Ahmed Rashad Sh. Yusuf Farhan Liban Ahmed Mohomoud Abdirahman Nuur Abdulahi Dirie Jama QIYAS PUBLIC NOTARY XAQDOON LAWFIRM Ahmed Farhan Liban Abdo Osman Ahmed Hibak Ibrahim Mohamed Ibrahim Hussein Guleid Ahmed Jama SHEEKH ISAXAAQ PUBLIC NOTARY DAHABSHIIL Abdulahi Elabe Warsame Abdulkadir Hussein Saeed Deeka Hassan Ahmed SOMALILAND LAWYERS ASSOCIATION DARYEEL CONSTRUCTION COMPANY Fardous Gahayr Abdillahi Shukri Jama Amina Osman Mohamed Saeed WWW.DOINGBUSINESS.ORG/HARGEISA