Enhancing the financial position of Hargeisa

Urban wealth creation and public service delivery in fragile and low resource contexts

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Summary

The City of Hargeisa, despite being in the very early stages of enhancing its financial position, has achieved significant reform in just a few years since its democratic establishment in 2002. The successes achieved are even more remarkable, considering the fragile context of Somaliland after 30 years of civil war within Somalia, which left widespread destruction and devastation in the city. This is compounded by Somaliland’s lack of recognition as a sovereign state by the international community. The case provides an illustrative example of leveraging urbanisation to raise municipal revenues for public service delivery, and in building local government legitimacy to better deliver to the populace.

Given the context, the reforms are those that are easy to implement and effective, including the application of a simple digitised accounting and billing system, and a fit-for-purpose area-based property tax system. Where other cities have struggled to service more people with a stagnant revenue base, Hargeisa’s reforms have meant that population growth has resulted in increased revenues from property taxes and daily vendor collections. At the same time, private contributions of land on the peri-urban fringes offer an opportunity for in-kind land value capture and planned development in the future. Their successes are reinforced by the legitimacy built through participatory governance, which demonstrates what is achievable when communities, local government and the private sector work together.

While Hargeisa has made progress on the basics of own-source revenue, much more is yet to be done to finance future development. Local government capital expenditure, for instance, is often far below what is budgeted. This is influenced by public demand for current and visible service delivery over and above less visible long-term investments. Furthermore, due to Somaliland’s internationally unrecognised status as an independent country, Hargeisa received limited development assistance when compared to other cities in similar contexts. However, a small coordinated effort through a coalition of UN agencies has fundamentally shaped some of the city’s reforms. As the country begins to formalise its financial sector, opening up to commercial banking and international investment, development support will be needed to ensure local governments and the private sector are able to capitalise on the opportunities this presents.

Hargeisa at night—satellite imagery from 2015 and 2021. (Increased luminosity from nightlights is a highly correlated with local economic growth)

Hargeisa at night—click play for satellite imagery timespan from 2014 to 2021. (Increased luminosity from nightlights is a highly correlated with local economic growth)

Key messages

1) Simple, fit-for-purpose property tax systems ensure revenue can be collected without incurring large expenses and navigating complex procedures.

(Image of satellite image of Hargeisa's footprint)

2) Administrative reforms, such as digitising systems and streamlining the number of taxes collected, can have a significant impact on tax efficiency and accountability.

3) Planning for future expansion is not only useful for capturing the gains from rapid urbanisation through exaction, but also improves future urban investment.

(Image of Hargeisa's outskirts with land and future infrastructure demarcated)

4) Building and maintaining the social contract through participatory planning and visible service delivery is essential in increasing collection rates.

(Map of Waheen Highway Bridge, co-finaned by private enterprises)

5) International opportunities for finance may be severely limited both by an under-developed finance sector, as well as a reliance solely on Islamic banking.

(Image advertising lecture on development finance and unrecognition of Somaliland)

6) Well-coordinated development partners provide a strong enabling environment and an anchor for reform.

(Image of primary and secondary road network in the city)

Administrative and land value capture reforms

Introducing digital accounting, billing and financial management systems

To remedy out-dated and manual systems, new digital systems known as the Accounting Information Management System (AIMS) and Billing Information Management System (BIMS) were introduced. Although the implementation of AIMS took place in 2008 and BIMS in 2010, there was a long period of learning and adopting the systems, and therefore substantive revenue changes were only seen in 2014. Once taxpayers had been registered in the system after their first payment, it became much easier to target them for future payments. Detail outside the scope of this story is  available at Pg 10 here , but in short, the AIMS & BIMS systems have improved analysis capabilities and transparency in the city, underpinning much of Hargeisa’s financial improvement. 

Reducing the number of tax lines administered

Between 2014 and 2016, the number of unique local taxes being levied increased from 42 to 67, which is extremely high by world standards. The cost of many taxes collection and administration was actually larger than the revenues they brought in, additionally leading to tax fatigue of residents. Following recommendations from research, the municipality made a slight reduction in tax lines to 46 since 2017, yet there is still significant further progress that can be made. This reduction could help in unlocking existing capacity that would otherwise have been taken up in processing a large variety of different taxes, and would enable the city to focus on implementing more in-depth financial reform.

Simply administered property tax

The City of Hargeisa uses an area-based property tax system, designed to match the available capacity and realities of the context. This relative simplicity makes it far easier to maintain and update the register on a more frequent basis and allows the city to enhance its financial position at low cost. This system was employed following the development of a basic cadastre using satellite imagery and surveys conducted between 2004 and 2005. Hargeisa’s property tax system only requires information on the building’s width and depth, the number of floors, and the location

Expanding the land and property tax registers

In order to capture the city’s growth, Hargeisa municipality has been expanding its registered properties through Geographical Information Systems (GIS) mapping. This entails geolocating each property in an area of space and outlining it on the city map. It was first done in 2005 and then again in 2017, at both points showing considerable increase in the tax roll. In 2005, the number of properties increased from 15,850 to 59,000, resulting in an increase in revenue of over 250 per cent. In 2019, nearly 200,000 plots were registered in the GIS system, including commercial and vacant land. Of these, only 80,000 were built upon.

In-kind value capture from exaction

the city government has been very progressive in implementing a system of ‘in-kind’ land value capture.Thislandcaptureisaformof exaction, whereby the development of land comes with specific conditions for the benefit of the municipalities. In this case, landowners on the outskirts of the city applying to convert their land from rural to urban use, must provide the city government with 30 per cent of their land if their application is approved. In this way, the city can access land for needed public infrastructure to service a growing city. At the same time, rent from this land can offer the city a valuable source of additional income to pay for the required infrastructure.

Priorities for current and future reform

Mobile money payment systems:

Collecting relatively small fees from many vendors every day is a well- known inefficiency in tax collection. UN-Habitat is currently supporting the government of Somaliland with the introduction of a mobile money payment system, wherein citizens will be able to pay tax via mobile phones, a reform that will hopefully facilitate higher revenue collection, accountability, and transparency. It is promising that currently, 26 per cent of the population use mobiles to pay other bills – the highest in the world. Further down the line, leveraging the mobile money market as a vehicle for financial investments could also be a useful way of widening the base of investors at the community level.

Integrated financial management system

The outstanding challenges since the implementation of the AIMS and BIMS systems, such as the system’s automation and coordination with other local government departments as well as the national government, are currently being alleviated through the introduction of the Financial Management Information System (FMIS). The FMIS is an automated and integrated accounting system linked with all arms of goverment with unified Chart of Accounts (CoA) and budget codes. UN-Habitat is supporting the implementation, and Hargeisa will be targeted as thefirst district to facilitate a unified accounting system for Somaliland, which will greatly aid the country’s overall decentralisation process. Further digitisation and automation reforms are also underway to connect various elements of city operations through an integrated dashboard, with text messages keeping citizens informed of progress. The hope is that this will further increase compliance and trust in government accountability.

Capturing the value of land appreciation in land and property tax

With urban expansion, land value increases due to a combination of factors. These include the connectivity to infrastructure, proximity to local services, and expectations associated with future use. Currently, Hargeisa’s property tax system does not and cannot fully account for these increases in land value, only differentiating between land in the city centre and outside it. This means that if the municipality delivered similar infrastructure to a specific area of the city, the property owner would fully gain from the increase in associated land value. Using more detailed property location bands to capture land value increases would be a beneficial future aim of reform, as would adding these location factors to the vacant land tax. This undertaxed asset could be a key area for reform. Not only would increasing the tax on vacant land bring in revenues, but depending on why it is vacant, it could prompt owners to invest and develop the land or reallocate it to a more efficient use.

Clarity over decentralisation of taxes

The lack of clarity around taxation results in both loopholes and double taxation. Stakeholders mentioned the examples of income tax and business licenses, and in particular, the property transfer tax which is designed to be split. Legislative and institutional clarity on who should be collecting and maintaining these areas of revenue is critical to ensuring there is no further revenue loss or double taxation.

Evaluating the efficiency of local taxes

Although some progress has been made, there is still an urgent need to critically evaluate the cost- effectiveness of the city levying such a high number of individual taxes. For many of the low revenue taxes, costs for collection may be close to or even higher than the revenues that these taxes bring in, not to mention the tax fatigue experienced by citizens. Instead, focusing efforts on increasing the efficiency of taxes with high poten- tial such as land and property taxes, is likely to be a far more effective way of reaching revenue goals.

Reducing barriers to business formalisation

Given the enormous size of Hargeisa’s informal economy, incorporating it into formal planning is necessary. Even though they are not large businesses, they contribute significantly to economic stabilisation. Nationally, the informal sector is not planned as a key driver of the economy, being absent from Somaliland’s National Development Plan. One way to encourage formalisation could be through lowering the cost and complexity of the business licences. In 2012, Hargeisa had the highest minimum capital requirement in the world to begin formal enterprise, with 50 per cent of business start-up costs attributed to the required licence.

Improved investment expenditure

Capacity in revenue spending continues to be a challenge in Hargeisa. Limited capital expenditure and poor quality investment in visible areas are starting to affect both voluntary compliance and trust in government. To combat this, there is a need to focus on longer-term investments, specifically incorporating long-term issues into community plans, as these often focus disproportionately on the issues of the day. Furthermore, if these investments can be connected to increases in land value, some of the investment could be recouped through land and property taxes.

Local government creditworthiness

Most of Somaliland’s local governments are not creditworthy; however, Hargeisa is the most financially buoyant. Creditworthiness is critical in order to engage with the growing options for financing. The city has relatively low revenues at US$9 million, and therefore the size of loans may initially be small. However, in order to undertake longer-term borrowing at affordable rates in the future, significant improvements in creditworthiness, particularly revenue and cash flow forecasting, would be necessary. Stakeholders cited cross-city learning and study visits to take stock of successful investment management practices taking place elsewhere, as an area of need. A particular interest was how best to leverage and manage PPPs, given that they are one of the few options currently available.

Mobile money payment systems:

Collecting relatively small fees from many vendors every day is a well- known inefficiency in tax collection. UN-Habitat is currently supporting the government of Somaliland with the introduction of a mobile money payment system, wherein citizens will be able to pay tax via mobile phones, a reform that will hopefully facilitate higher revenue collection, accountability, and transparency. It is promising that currently, 26 per cent of the population use mobiles to pay other bills – the highest in the world. Further down the line, leveraging the mobile money market as a vehicle for financial investments could also be a useful way of widening the base of investors at the community level.

(Image of mobile money payment option in Hargeisa restaurant)

Integrated financial management system

The outstanding challenges since the implementation of the AIMS and BIMS systems, such as the system’s automation and coordination with other local government departments as well as the national government, are currently being alleviated through the introduction of the Financial Management Information System (FMIS). The FMIS is an automated and integrated accounting system linked with all arms of goverment with unified Chart of Accounts (CoA) and budget codes. UN-Habitat is supporting the implementation, and Hargeisa will be targeted as thefirst district to facilitate a unified accounting system for Somaliland, which will greatly aid the country’s overall decentralisation process. Further digitisation and automation reforms are also underway to connect various elements of city operations through an integrated dashboard, with text messages keeping citizens informed of progress. The hope is that this will further increase compliance and trust in government accountability.

(Image of paper accounts being input into the digital accounting system AIMS/BIMS)

Capturing the value of land appreciation in land and property tax

With urban expansion, land value increases due to a combination of factors. These include the connectivity to infrastructure, proximity to local services, and expectations associated with future use. Currently, Hargeisa’s property tax system does not and cannot fully account for these increases in land value, only differentiating between land in the city centre and outside it. This means that if the municipality delivered similar infrastructure to a specific area of the city, the property owner would fully gain from the increase in associated land value. Using more detailed property location bands to capture land value increases would be a beneficial future aim of reform, as would adding these location factors to the vacant land tax. This undertaxed asset could be a key area for reform. Not only would increasing the tax on vacant land bring in revenues, but depending on why it is vacant, it could prompt owners to invest and develop the land or reallocate it to a more efficient use.

(Image of high rise Hargeisa building next to vacant land plot in centre of the city)

Clarity over decentralisation of taxes

The lack of clarity around taxation results in both loopholes and double taxation. Stakeholders mentioned the examples of income tax and business licenses, and in particular, the property transfer tax which is designed to be split. Legislative and institutional clarity on who should be collecting and maintaining these areas of revenue is critical to ensuring there is no further revenue loss or double taxation.

(Image of Ministerial National Vision)

Evaluating the efficiency of local taxes

Although some progress has been made, there is still an urgent need to critically evaluate the cost- effectiveness of the city levying such a high number of individual taxes. For many of the low revenue taxes, costs for collection may be close to or even higher than the revenues that these taxes bring in, not to mention the tax fatigue experienced by citizens. Instead, focusing efforts on increasing the efficiency of taxes with high poten- tial such as land and property taxes, is likely to be a far more effective way of reaching revenue goals.

(Image of Hargeisa Municipality's opening plaque)

Reducing barriers to business formalisation

Given the enormous size of Hargeisa’s informal economy, incorporating it into formal planning is necessary. Even though they are not large businesses, they contribute significantly to economic stabilisation. Nationally, the informal sector is not planned as a key driver of the economy, being absent from Somaliland’s National Development Plan. One way to encourage formalisation could be through lowering the cost and complexity of the business licences. In 2012, Hargeisa had the highest minimum capital requirement in the world to begin formal enterprise, with 50 per cent of business start-up costs attributed to the required licence.

(Image of Business Center)

Improved investment expenditure

Capacity in revenue spending continues to be a challenge in Hargeisa. Limited capital expenditure and poor quality investment in visible areas are starting to affect both voluntary compliance and trust in government. To combat this, there is a need to focus on longer-term investments, specifically incorporating long-term issues into community plans, as these often focus disproportionately on the issues of the day. Furthermore, if these investments can be connected to increases in land value, some of the investment could be recouped through land and property taxes.

(Image of diaspora investment opportunity)

Local government creditworthiness

Most of Somaliland’s local governments are not creditworthy; however, Hargeisa is the most financially buoyant. Creditworthiness is critical in order to engage with the growing options for financing. The city has relatively low revenues at US$9 million, and therefore the size of loans may initially be small. However, in order to undertake longer-term borrowing at affordable rates in the future, significant improvements in creditworthiness, particularly revenue and cash flow forecasting, would be necessary. Stakeholders cited cross-city learning and study visits to take stock of successful investment management practices taking place elsewhere, as an area of need. A particular interest was how best to leverage and manage PPPs, given that they are one of the few options currently available.

(Image of Hargeisa Airport's stained glass ceiling)

Case study download

Please download the case study in English or Somali using the following buttons. Please cite as in Acknowledgements & citation.

Acknowledgements & citation

The following city case study has been developed as part of the initiative ‘ Supporting the Urban Dimension of Development Cooperation: Increasing financial capacities of cities from developing countries to deliver productive and sustainable urban development ’ requested by the European Parliament as a pilot project and funded by the European Union.

The content is based on both interviews and online research conducted between May 2019 and March 2020. For their contributions, we would like to thank the representatives of UN-Habitat in Somaliland; the Ministry of Planning; Ministry of Interior; Civil Service Institute; Local Government Institute; Association of Local Government Authorities of Somaliland; Hargeisa Municipality; the Inland Revenue Department; Somaliland Chamber of Commerce of Industry and Agriculture, and the University of Hargeisa.

All images under Creative Commons License, free to use as long as attributed (unless stated otherwise) to Oliver Harman

Please cite above as Please cite above as Delbridge, V., Harman, O., Yusef, A., with Haas, A., and Venables, AJ. (2021). Enhancing the financial position of cities: evidence from Hargeisa. UN-Habitat

Hargeisa at night—satellite imagery from 2015 and 2021. (Increased luminosity from nightlights is a highly correlated with local economic growth)