Business Case

Summary Sheet

Title:
UNLOCKING PROSPERITY IN THE HORN OF AFRICA
Programme Summary: Investment in the Horn of Africa’s trade and economic growth
through transport infrastructure, trade efficiency and local economic development. This
will result in increased trade capacity and competitiveness and increased opportunities
for UK businesses in Ethiopia, Somaliland and the Horn of Africa.
Programme Value: £25 million Country/ Region:
Ethiopia / Horn of Africa
Programme Code: Start Date: 1 October 2018 End Date: 31 December
300650 2022

Overall programme risk Major

rating:
Vault Number: 29614607
INTERVENTION SUMMARY
Prosperity Fund Approval
1. This programme is a Prosperity Fund (PF) intervention. The PF Board approved the
Business Case for ‘Unlocking Prosperity in the Horn of Africa’ on 17th July 2018. In
line with PF procedures, the lead Department – in this case DFID – requires internal
Ministerial approval. This business case is seeking that approval.

Background
2. The Horn of Africa is a poor and complex region; but with great potential. It is
strategically located on one of the worlds’ busiest shipping lanes and trading routes,
including via Berbera Port in Somaliland. The Horn’s trade corridors provide access to
the sea to land-locked countries including Ethiopia – home to over 100 million people,
one of Africa’s fastest-growing and diversifying economies, and a major potential
market for the UK.

3. The Horn is also unstable, and poverty rates in the target area for this intervention are
high: 37% in rural and 30% in urban Somaliland, and 27% in Ethiopia. And yet, stellar
growth performers like Ethiopia offer an alternative vision. The Horn’s strategic trade
routes underpin Ethiopia’s and the region’s ability to realise its promise of prosperity
and stability, including in Somaliland. However, an increased volume of Ethiopian
trade demands at least two alternatives to the dominant trading corridor that passes
through Djibouti and its port. The historic land-based trade route that connects
Berbera port in Somaliland with Addis Ababa in Ethiopia – the Berbera Corridor – is the
most urgent and strategic investment alternative for increasing trade capacity and
efficiency with a view to inclusive economic growth. Berbera port, alongside
neighbouring Djibouti, has the potential to carry the lion’s share of rapidly expanding
Ethiopian imports and exports over the coming decades.
4. The port is undergoing upgrading, but as yet related interventions to ensure a
functioning trade corridor have not been carried out. This includes major infrastructure
routes: e.g. the feasibility and design study for the Berbera to Tog Wajaale Road in
2014 estimated costs at $275 million. This PF investment will target key areas in which
the UK has a demonstrated track record (e.g. DFID work on road infrastructure in
Somaliland) to the Berbera corridor’s import/export capacity, increase its efficiency,
and ensure greater competitiveness with neighbouring Djibouti. This will finally
connect Ethiopia and other landlocked areas of sub-Saharan Africa (e.g. Uganda) to
the wider region and the UK. Coupled with UK investment in local economic
development to spur job creation among the most marginalised, this can offer a path
towards increased regional stability and mutual partnership for prosperity with both
Ethiopia and Somaliland.
Intervention
5. The programme will fund three components:
a) Hard Infrastructure Pillar [£18m]: contribution to upgrading critical road infrastructure
along the Berbera corridor (mainly in Somaliland) – for example, a by-pass around
Hargeisa and seven permanent river crossings on the Berbera-Tog Wajaale road. This
component will involve a partnership with the UAE Abu Dhabi Fund for Development
(ADFD) who have ear marked funding for the road and with which this programme will
coordinate. Infrastructure under this pillar will be ‘climate smart’ – using cutting edge
design to ensure it is resistant to shocks, and materials that do not damage the
environment.
b) Trade Pillar [£2.25m]: support to faster, more efficient cross border trade between
Somaliland and Ethiopia via one stop border posts, customs process improvements,
cargo tracking systems and regulatory work on tariff and transit agreements. This pillar
will draw on the latest DIT trade facilitation tools and services to help UK companies
better understand local markets and investment opportunities.

2
c) Local Economic Development Fund [£2.75m]: to link large “anchor” businesses in both
Somaliland and Ethiopia with small and medium-sized enterprises, via financing and
development interventions. This will include targeting and leveraging investment from
the large Somali-UK diaspora which is keen to ‘build back better’ in Somaliland.

Beneficiaries and Results

1. A more competitive economic development corridor, with an improved and modernised
investment climate for local and international (including UK) businesses, will help
improve jobs prospects for the 2 million Somalilanders and 13 million Ethiopians who
live within 50km of the corridor. Robust monitoring and evaluation will track:
 Somaliland: GDP, small and medium-sized enterprise growth, and job creation
 Ethiopia: Growth rate of exports of manufactures, levels of women's employment in
manufacturing, and Berbera corridor factoring in investment decisions
1. The programme represents a small percentage of the Single Departmental Plan for
DFID Somalia and DFID Ethiopia results on: improving resilience, inclusive growth
(including women’s economic empowerment) and the investment climate, and tackling
drivers of extreme poverty. Women and youth are currently systematically excluded
from the benefits of growth for a range of reaons. Our approach will ensure gender
and young people are considered extensively in programme design, and will set
ambitious targets in the logframe to track inclusion.
Delivery
2. The 4 year programme will be delivered by TradeMark East Africa (TMEA). TMEA was
established by DFID in 2010 as an ‘aid-for-trade organisation’ aiming to increase
prosperity in East Africa through increased trade. The UK is the main shareholder in
TMEA, has a permanent seat on its board, and is currently Chair of the board. TMEA
acts as a special purpose vehicle for other donor contributions in the region. Building
on its experience, TMEA will now work with the authorities in Somaliland and Ethiopia
and the business sector. Its main focus will be to help eliminate non-tariff barriers,
technical barriers to trade, and improve the business environment for trade. The
programme will help the private sector improve its competitiveness to export, and
create job opportunities and access to finance for business development.
Strategic Fit with HMG Priorities
3. The progamme is consistent with the Prosperity and Climate Pillars of the Africa
Strategy. It will: champion growth and trade; stimulate investment and job creation,
especially for women and youth; mitigate climate risks by investing in climate smart
infrastructure; and engage with major players (e.g. Ethiopia) as key trading partners’
post-Brexit. It will support the UK presence in Ethiopia – a key economic horizon
market – and provide both direct and long-term potential benefits for UK businesses in
the region. This programme is consistent with HMG’s strategies in Somalia and
Ethiopia in the promotion of inclusive economic development, improving critical
infrastructure, aid for trade, and delivering against the latest DFID Somalia CDD which
states: “the development of the Berbera Corridor could provide potential for growth if
well managed”. It represents a shift from humanitarian support to prosperity and jobs.
Coherence and Exit Strategy
4. The programme is aligned with both government and donor responses to the problem.
For example, it is clearly aligned with Ethiopia’s economic transformation agenda and
Somaliland’s development plan. The Berbera Corridor is as yet unfunded by other
donors, but the ADFD has earmarked US$90 million for work on the road. UK funds
will therefore coordinate with and complement this investment, steering and guiding it
in creative ways to ensure the best VFM (e.g. climate smart infrastructure). In addition,
the proposed option of using TMEA allows the UK to maximise other donor
contributions, with a coherent and coordinated plan and instrument for delivery. The
programme complements ongoing DFID, FCO and DIT investment, products and
services in Ethiopia designed to increase the competitiveness of Ethiopia’s markets. In
particular, it will mutually benefit our wider HMG investments in revenue and customs
reform, infrastructure, economic recovery, and job creation through private sector
3
 development, in both Ethiopia and Somaliland. There is a clear exit plan for UK funds,
including further engagement from the UAE and other donors, building the capacity of
key authorities on roads and ports, and generating more income for both Ethiopia and
Somaliland to plough back into the corridor.

Working with HMG Departments and Cross Government Funds

5. This programme builds on 5 years of DFID Somalia’s work on infrastructure and
building Somaliland capacity. The corridor has always been identified as a potential
game-changer for Somaliland and the region. The PF has allowed DFID Somalia to
build on its experience and design, with DFID Ethiopia in the mix, to develop a truly
cross government intervention that provides a unique opportunity for DFID to achieve
its goals and those of OGD’s simultaneously. The PF design process has enabled
sufficient attention to be paid to regional issues for both aid and trade against the
backdrop of the Africa Strategy. The design and implementation have ‘hardwired’ this
into the delivery approach, ensuring we deliver primary and secondary benefits in a
region which is strategic for the UK.
Learning and Adjusting to Changes in the Context
6. A core part of the programme focuses on learning. This includes monitoring and
evaluation (M&E), supported by the PF’s own M&E section, which will test key
assumptions for the development of PF financing in the future. For example, it will
assess how much impact a small amount of UK funds canhave in a relatively small
economy vs. large UK PF investments that are small relative to the focus country
economy. In addition, the programme will be delivered by partners with strong M&E
and learning expertise and provide real-time evidence of the context and results. Key
areas to be measured include the impact of interventions such as one stop borders on
trade efficiency, and investment in SMEs along the corridor for job creation, especially
for women and youth. As learning from the M&E is fed in to the programme, the SRO
will make relevant adjustments.
Risk
7. The risk for this programme is major The level of risk is, however, within the appetite
established for HMG in the region.
Communications Strategy and Branding
8. Strategic communications and UK branding will promote our inclusive growth focus
and ensure key messages – e.g. women’s / youth opportunities, climate smart
investments that showcase UK expertise – reach target audiences. Angles that
support the wider delivery of the Africa Strategy will be crafted. Any political risks
associated with this project will be mitigated by using a communications strategy with
careful 1HMG-coordinated political handling. Branding and the UkAid logo will be used
on all relevant investment purchases.
Quality Assurance, & the Skills and Capability to Deliver
9. The programme has been quality-assured by the PF Joint Finance Unit and Board;
DFID Somalia Staff and Leadership Team; DFID’s Accountability and Results Team
(Nairobi), and DFID and DIT Ethiopia staff. It has been widely consulted on and
supported by wider HMG, including DIT and FCO, regionally and in the UK. HMG is
well-positioned in the region to take this forward as part of the Africa Strategy
Prosperity strand. The programme management approach is bespoke. It straddles
traditional HMG activity at country level with a much wider regional remit. The SRO for
this programme will be the DFID Somalia Economic Development team leader,
bringing experience of wider economic recovery and upgrading infrastructure in
Somaliland. Three new positions will be financed by the programme, in line with PF
rules: A2 Horn of Africa coordinator: delivering regional coordination and results; A2
infrastructure adviser: overseeing infrastructure investments; and B2 management:
grant and PF administration. HMG Ethiopia and HMG Nairobi will provide advisory and
administrative support from their existing teams and additional DIT resource will be
forthcoming via the Africa Strategy uplift. It is designed to draw on a complementary
range of HMG skills and resources in Ethiopia, Somalia and Kenya, in close
4
 coordination with the Africa Strategy uplift. This complies with PF and wider HMG
rules on staffing costs, budget profiling and financial reporting. The programme will be
delivered primarily using DFID staff resources and in accordance with DFID financial
controls and Smart Rules.

STRATEGIC CASE

Context, Needs and Opportunities

10. The Horn of Africa is a poor and complex region; but with great potential. It is
strategically located on one of the worlds’ busiest shipping lanes and trading routes,
including via Berbera Port in Somaliland. The Horn’s trade corridors provide access to
the sea to land-locked countries including Ethiopia – home to over 100 million people,
one of Africa’s fastest-growing and diversifying economies, and a major potential
market for the UK.

11. The region is also of great geo-political interest. Its proximity to Yemen and the
growing east African economies actively influence the internal dynamics of the
countries of the Horni. The Horn itself affects the wider world in several ways,
including through: its position on the Gulf of Aden seaway; the large Somali and
Ethiopian diasporas; Somali commercial networks across the globe; security concerns;
being a source of distressed migration; and not least the scale and impact of Ethiopia
on Africa, with 10% of the continent’s population and one of the most dynamic, if still
fragile, economies.

Somaliland
12. Somaliland reflects features of the wider Horn and has its own particular history
and characteristics. Civil war within Somalia during the 1980s (following unification in
1960) led to Somaliland’s emergence in 1991 as a self-declared autonomous region of
Somalia (which is still unrecognised internationally). There was also to a civil war within
Somaliland itself which was ended in 1997 at the Hargeisa Conference with a political
settlement. This settlement, while laying the basis for 20 years of relative peace,
shows features of a limited access order, creating a power structure which
economically and politically marginalises many Somalilanders.

13. The port of Berbera has long represented Somaliland’s most valuable asset.
After years of false starts investment in the Port is now happening; in 2016 Somaliland
granted a 30-year concession for the Port of Berbera to Dubai Ports World (DPW), the
port was transferred in early 2017, and expansion is scheduled to start in November
2018. Ethiopia entered a tripartite arrangement in 2018, securing a 19% share in the
ownership of the port. The DPW concession includes investments totalling $442
million in three phases, with each phase based on staggered increases in road
capacity and in trade volumes. Against the background of so small an economy, the
scale of the investment in the port and corridor is very large, as are the potential
economic rents associated with it. Berbera and the corridor have the potential to
transform prospects for inclusive growth in Somaliland and improvements to the wider
investment climate and opportunities for women and young people.

14. The Horn, especially Somaliland, also presents a daunting developmental

challenge. It is one of the world’s poorest regions, with high absolute poverty rates
(27% in Ethiopiaii and 37% and 30% in rural and urban Somaliland respectively) iii.
Somaliland itself is rooted in a cycle of underdevelopment with its roots in fragility. The
cycle comprises interactions between Somaliland’s small post-conflict economy with a
limited natural resource base, exclusionary aspects of its political settlement, weak
state capacity, lack of legal, regulatory and policy frameworks for growth, limited
infrastructure, and the absence of international recognition as a state. There is
potential for broader-based growth in Somaliland, but the small economic base
interacts with the absence or weakness of public goods that are needed to underpin
5
 growth. Several assessments, some of them UK-funded, confirm that moderate
growth potential exists in particular production-based sectors and sub-sectors, notably
value-adding in livestock, fisheries, and agriculture, with likely potential in minerals and
hydro-carbons, along with a range of services, including trade and transport.iv

15. Berbera and the corridor have the potential to transform prospects for inclusive
growth in Somaliland; but this outcome cannot be taken for granted. Investment
in initial hard infrastructure is essential but is only one part of a bigger need. At the
most fundamental level, greater responsiveness to the needs of its own people is a
responsibility that should weigh on the relatively new government and there are signs
that its approach to negotiations on a trade agreement with Ethiopia is being
recognised. Somaliland’s “limited access order” has both strengths and weaknesses.
Somaliland has underpinned peace, stability and a Constitution that has seen several
orderly transfers of power, and has created conditions for at least some economic
growth. But the concentration of power in few hands has meant that what growth there
has been to date has not been inclusive, with its benefits and opportunities poorly
distributed.

Ethiopia
16. Ethiopia is a regional powerhouse. The combination of strong fundamentals and
government commitment has led to a number of high profile investments and
significant global interest in Ethiopia as the ‘new frontier’ for light manufacturing.
Ethiopia was for the first time included in the list of top up-and-coming buying locations
for apparel in 2015v. Foreign direct investment (FDI) has been growing rapidly over
the last few years, almost tripling from $1.5 billion in 2015 to $4.1 billion in 2017 vi, with
the manufacturing sector the largest recipient of FDI vii. One of the most notable
investments to date is the Hawassa Industrial Park, which the government completed
in less than 18 months at a reported cost of at least $250 million, and with strong UK
support. At scale the park will employ 60,000 workers, an estimated 80% of whom will
be young women, and is one of five such ventures planned in regional cities.

17. Ethiopia’s scale and significance in particular mean that it is central to the future
of the Horn as a whole. Landlocked Ethiopia has a population more than twice as
large as any of its neighbours in north-east and east Africa, and accounts for some
85% of the population of the Horn. The dynamism of its economy, if sustained, can
help to pull up those of its neighbours, including Somaliland, Southern areas of
Somalia, and Kenya. But while progress to date has been impressive, Ethiopia will
have to find a new engine to sustain growth over the next decade, especially in light of
population pressures. Growth since 2003 has largely been driven by public investment
(including in infrastructure), agriculture and services viii. Economic under-performance
in the region risks fuelling conflict and instability, contributing to global security
concerns and driving international migration.

18. Ethiopia must find alternative trade corridors and sea access to sustain growth
and deliver on prosperity opportunities. Currently a precarious 95% of Ethiopia’s
external trade passes through Djibouti whose capacity is insufficient to cope with
estimated trade potential. Demand and potential for trade are extremely high making
the development of a more effective trade route a high priority for players in the region.
Ethiopian container demand alone is likely to rise fourfold to reach close to 2.5 million
twenty-foot equivalent units by 2035, and non-containerized cargo rising threefold to 30
million tonsix. The geographical competitiveness of the Berbera corridor vs.
neighbouring Djibouti is shown in the map below.

6
 Berbera Corridor versus Djibouti Corridor

19. Seeing Berbera as the main serious alternative, Ethiopia is forging ahead with a
strategy for diversifying its sea access. It is implementing a “70:20:10 policy”: a
trading regime where 70% of its trade is routed through Djibouti, 20% through Berbera,
and 10% through Port Sudan. The recent thaw in relations between Ethiopia and
Eritrea may have an impact on this policy over time but the majority of Ethiopian
manufacturing geographically suits the north eastern ports of Djibouti and Berbera.
And Ethiopia has an insatiable appetite for ports and access to global markets and
requires ports across its borders catering for future, and as yet unmet, demand.
Ethiopia ranks 126th out of 160 countries in the World Bank logistics performance
index. This is a key constraint to its trade potential cited by UK and other firms.
Berbera is central to the diversification of Ethiopia’s trade routes. In a 2017 review of
corridor opportunities in the Horn of Africax, the World Bank concludes: “It is evident
from an initial screening of the corridor options in the Horn of Africa that the Berbera
corridor is well placed in terms of population served, investor interest, political
consensus, potential traffic and readiness.”xi

20. Investment in the Port itself is already happening, and funds are in the process
of being secured for the road but more is required to secure the Berbera corridor
as a functioning trade route. The last few years have seen:
 A road feasibility study estimating a full upgrade would cost some $275 millionxii.
 Somaliland granting a 30-year concession for the Port of Berbera to DPW. This
includes investments of $442 million in three phases.
 Ethiopia securing a 19% share in the ownership of DPW Berbera.
 Diagnostic work concluding that phased development is possible, and that for
substantially less financing the corridor could become a functioning trade route.
 The Abu Dhabi Fund for Development committing US$90 million to the Berbera
road, with a feasibility study due in 2019.

1. Further investment in the Berbera Corridor to make it competitive is central to

the implementation of wider growth and poverty-reduction strategies within the
region. A successful development corridor has the potential to raise living standards

7
 for the population of over 2 million along the route in Somaliland, and for the 13 million
citizens in Ethiopia who live within 50km of the corridor. For Somaliland with its limited
immediate economic options, the port and corridor represent transformational potential
for bringing about inclusive growth and diversification, generating jobs, especially for
youth and women, and strengthening inter-sector linkages. For land-locked Ethiopia,
investment in the corridor can generate benefits for those living along the corridor, but
also central to diversifying Ethiopia’s means of access to the rest of the world,
increasing economic resilience and sustaining growth.

UK investment
2. A UK investment will deliver for poverty reduction and UK interests. The UK will
establish a creative partnership with the UAE – a major non-traditional partner and one
of the major players in the Gulf and Horn of Africa region. This partnership will
influence the design of the corridor upgrading based on the TMEA corridor diagnostic,
and through the inclusion of high quality climate smart requirements for hard
infrastructure investments and a clear timeframe for investments sequenced via a new
Berbera Corridor management body. To make the corridor more than an extractive
thoroughfare, complementary investments in stronger customs services, trade
facilitation, revenue management, and local economic development for a growing
youth population and for women are essential. Managed badly, the Corridor and
accompanying investments risk exacerbating existing rivalries, instability, and
inequalities whilst offering little to those who most need its potential benefits.

3. A major justification of UK involvement is that it is an influential and actively

involved player explicitly seeking to address inequality. The UK has experience in
economic corridor development and can address basic physical infrastructure and
trade facilitation bottlenecks. An existing UK portfolio of economic recovery activities
will maximise this PF investment, and drawing on experience from targeted
interventions that have resulted in catalytic inclusive growth benefits and poverty
reduction, will contribute to stability.

4. This PF investment will, along with other complementary investments,

address the needs on both sides of the border, and support the development of
both hard infrastructure and trade facilitation, as well as broader economic
development. The World Bank (2017) recognises this point: “For the Berbera corridor,
efforts now need to turn to the complementary activities that can extend the benefits to
the population of over 15 million living along the corridor. The identified interventions
include strengthening the regulatory and operational frameworks for the corridor,
improved trade facilitation, assistance to the private sector to supply the range of
transport, logistics, hospitality services that will be required, support to livestock value
chains, provision of cheap and reliable energy through a mix of an interconnector and
renewable resources, installation of additional fibre-optic data transmissionxiii capacity,
and increasing the provision of banking and insurance services”xiv.

Impact and Outcome

5. This is a critical additional investment that will both bolster and benefit from the
existing HMG portfolio with the following impact and outcome.

Impact Inclusive, sustainable, climate- and gender-sensitive economic growth in a

more peaceful Horn of Africa
Outcome More competitive economic development corridor with an improved and
modernised investment climate for local and international (including UK)
businesses (which for Somaliland means local SME growth and job
creation and Ethiopia means more jobs – including for youth and women –
and resilience in external trade)
8
 Robust monitoring will track: GDP, local SME growth, and job creation in Somaliland
and the growth rate of exports of manufactures, levels of women's employment in
manufacturing, and Berbera corridor factoring in investment decisions in Ethiopia

Fit with UK priorities and Comparative Advantage

6. This investment aligns with all major strategies across HMG. The table below
highlights the relevant strategies and the priorities to which this investment responds.

STRATEGY/GOAL MATCHING PRIORITY

Prime Minister’s and “a prosperous, safer, healthier sub-Saharan Africa which sees the UK as
NSC’s vision to 2030 the partner of choice for peace, trade and economic development, is
less reliant on aid and is more resilient to shocks and stresses”

SDG Goal 8: Decent Work and Economic Growth

Goal 9: Industry, Innovation and Infrastructure

HMG Africa Strategy Championing growth and trade, stimulating investment and job creation,
(2018) especially for youth; climate change (climate smart infrastructure);
engagement with major players (e.g. Ethiopia) as key trading partner
post-Brexit

DFID Economic Major focus on trade, job creation and SME development
Development Strategy
(2017)

DFID Somalia Strategy Continue to work closely with the authorities in Somaliland to ensure…
(2016) the effective use of aid (including through the Somaliland Development
Fund), and improved regional trade and economic links.

DFID-Ethiopia Trade for aid, specifically through manufacturing and trade; encouraging
Business Plan (2016) regional integration and diluting barriers to trade

DIT priorities High Value Campaign

Economic Horizons (Ethiopia priority)

Prosperity Fund The investment will contribute directly to all three of the top-level impacts
leading to growth-promoting relationships: higher rates of sustainable
growth, greater investment flows, and greater trade flows.

New relationships with the UAE, and new X-HMG regional relationships

7. The UK’s involvement reflects our diverse concerns, including: helping to achieve
the SDGs and reduce the flow of economic migrants, the Horn as a locus for radical
Islam, support for unhindered use of the sea-lanes and for anti-piracy measures, the
substantial Somali and Ethiopian diasporas in the UK; and the priority given to
expanding trade and investment and building new relationships post-Brexit. The UK
engages diplomatically with all major players in the region, including increasingly the
Gulf States, to contribute to the long-term task of stabilising the Horn and bringing
about acceptable solutions to the challenges of building viable and recognised states.

8. As illustrated in the diagram below, investment in the Berbera Corridor builds on,
and will mutually benefit, our wider investments across HMG (see Annex B).

Why DFID / UK?

9
9. HMG is well-positioned operationally to deliver this investment. The argument for
UK financing is compelling given: DFID Somalia has a demonstrated track record of
upgrading existing road infrastructure in Somaliland since 2013 and informed this
intervention; our priority interest in the region; our position to deliver operationally
especially across government for our shared objectives; the chance to create a UK
branded Corridor and provide secondary benefits for UK companies; the opportunity to
engage with new partners; and the expertise to strengthen the inclusive growth impact
of the investment.

10. The UK’s strengths include strong presence and experience: decades of
involvement and relationship-building in Somaliland, Ethiopia and the Gulf; DFID and
the FCO have a presence in Ethiopia, a platform/British Office in Hargeisa as well as
representation in the UAE; and DIT has a major footprint in the region, and has done
analysis of key market sectors for the UK to expand into and increase market share.
The UK-based DIT infrastructure team is preparing to funnel all major infrastructure
projects in the region via DIT’s Africa Infrastructure Board where UK companies are
poised to bid for new opportunities.

11. DFID created a special purpose vehicle – TradeMark East Africa (TMEA) – to
support trade facilitation and upgrading transport infrastructure in 2010. TMEA
is an aid-for-trade organisation with the aim of growing prosperity in East Africa
through increased trade and will manage all components of this programme. TMEA
works with regional institutions, national governments, the private sector and civil
society organisations. TMEA has helped eliminate non-tariff barriers and technical
barriers to trade, improved the business environment to trade, and helped the private
sector to improve its competitiveness to export. Trade facilitation results range from
ports, roads, one stop border posts, improvements in customs, and IT systems such as
single customs territory and cargo tracking systems.

12. UK investment offers the potential to catalyse further financing from key
partners, more than doubling the value of our investment to achieve UK goals.
This investment will coordinate with:
i. Abu Dhabi Fund for Development – including a US$90 million contribution towards
the Berbera corridor road upgrading.
ii. World Bank – which identified the Berbera corridor as “the most promising of the
existing corridor opportunities” in the Horn of Africa. Coordination with the World
Bank will be crucial and this project can benefit from its technical expertise and
potentially re-directing part of its US$150 million Ethiopian loan on trade logistics.
iii. EU – and influence the shape of EUR83 million ‘Inclusive Local and Economic
Development Project’, some of which will be focused on the Berbera corridor.
iv. Wider UK – draw on assets and networks to assist with attracting commercial
investments, including through CDC and the UK Somali diaspora.
v. Other donors (tbc) – the proposed option of using TMEA is specifically chosen to
maximise the potential for other contributions.

Risks and Political Economy

1. While there are diverse gross risks, some deemed Severe or Major there are also
a range of mitigation measures available which bring all residual risk ratings to
Moderate or Minor. Recognising the risks inherent in any option (including that of
doing nothing), DFID has invested in developing an understanding of the political
economy of the Horn, and of Ethiopia and Somaliland. The UK’s Policy Practice
reviewed the political economy factors influencing the prospects for the proposed
corridor development and the dimensions of cross-border trade between Somaliland
and Ethiopia. It highlights the shifting international and regional context, considering
inter alia the interests of Ethiopia, Djibouti, the FGS, the UAE and several international
players. It sets the trade agenda in the context of international and regional influences,
political and economic processes on both sides of the border, and the particular
10
 characteristics of the border by examining three market chains. Awareness of these
complexities and of changes over time under the impact of the port and corridor
development will be augmented by the monitoring, evaluation and learning, and will
inform the design and adaptive implementation of UK-funded activities. Direct
engagement with the Somaliland haulage and transport companies – who cannot
formally access the Ethiopian state monopoly market – will be one of many issues that
a trade and transit agreement will seek to address.

Evidence

2. There is strong evidence that economic growth is the most powerful means of
reducing poverty. Economic growth accounts for more than 80% of poverty
reduction, and has lifted 500 million people above the poverty line since 1980 [DFID
2008]. Trade in countries in the earlier stages of economic development is expected to
increase over time as a share of GDP. Therefore, if the forecasted growth in Ethiopia
continues, even if this is below the 10% per annum achieved in the last ten years, it
can be expected to lead to large increases in trade. Opening up to trade increases a
country’s GDP because it allows each country to use its resources more efficiently by
specializing in the production of the goods and services that it can produce more
cheaply, while importing the others.

3. Export-based growth can contribute directly to poverty reduction, if focused on

labour-intensive sectors. Investment in the manufacturing sector for export markets
can lead to structural changes in the economy that increase employment of low-skilled,
poor workers in the informal sector.

4. However, there is an inverse relationship between trade costs and income — the
poorer countries are, the higher the trade costs they face — this underlines the
need to do more on this front. It is impossible to be precise about the changes
which may result from falling trade costs. However, at a general level it can be said
that the strengthening of trade capacities to access new markets and enter new global
value chains, the reduction of constraints to export competitiveness, accompanied with
investment in export market development, can help set in motion a virtuous growth
cycle.

5. Productivity growth is higher in countries with an adequate and efficient supply

of and access to infrastructure services [World Bank 1994]. This suggests there is
a role for infrastructure to promote economic growth, and higher rates of growth not
only lead to more poverty reduction but also to reduced levels of inequality. The
economic benefits of developing strategic transport infrastructure in landlocked
countries – i.e. Ethiopia – are particularly strong.

6. In Somaliland, partnerships are needed to reduce the barriers to trade. For

example, to strengthen public policy and institutions it is important to work with the
grain of powerful interests and support reform. Cross border customs systems at Tog
Wajaale (the main border crossing between Ethiopia and Somaliland) are deeply
inefficient and an investment in trade facilitation could foresee an agreement to install
some Somaliland customs officials in Addis Ababa as a clearing house for the majority
of freight and potentially a no-stop border crossing being put in place. There are very
good grounds for assuming that a sustained reduction in trade costs (understanding
the term in the widest sense) will stimulate private investment which will generate
employment, tax revenue and other benefits. The prohibitive costs of energy are a
trade barrier and a trade and transit agreement could include an energy interconnector
with Ethiopia; an agreement that would lead to a very large reduction of energy prices
to consumers and SMEs and also a degree of political insurance provided by
interdependence between Ethiopia and Somaliland.

11
7. Important considerations for effective operation and management of corridors
include: the need for a coordinating body for all corridor development and operations;
corridor management that achieves a balance between competition and coordination;
for transnational corridors, such as the Berbera corridor, a key challenge is to negotiate
and manage a balanced cross-border agreement; corridor management institutions
require separate, sustainable and reliable sources of income; and efficient border
crossings are vital. Each corridor investment undertaken has distinct and different
features in terms of geography, economic potential and political economy so it is
necessary to be cautious in making inferences from experience elsewhere.
Nevertheless, the evidence reviewed and the findings reported by the World Bank’s
2017 review of Corridor Opportunities in the Horn of Africa suggest the likelihood of
substantial benefits, if the corridor is upgraded and subsequently operated to tolerable
standards, is high.

Climate and Environment

8. Somaliland and Ethiopia are both vulnerable to repeated climatic shocks with
the latest drought in the Horn of Africa hitting Somaliland and Ethiopia hard. For
both countries the diversification of the economy and of livelihoods should help to
reduce the vulnerability to drought-induced shocksxv.

9. This programme will pay attention to climate and other environment issues
throughout design and implementation. There are mitigating actions that HMG can
enforce and innovate by virtue of our engagement, directly and through influence and
engagement with relevant governments and other funders. These can reduce the
impact of the corridor development throughout its lifetime, and deliver a corridor
investment that is genuinely climate-smart in its local economic development impact.

10. Key strategies to be adopted are:

 Climate risk and safeguarding will be incorporated as central to feasibility studies
and implementation of infrastructure.
 Climate smart corridor branding and approach: the programme will specify in
tenders, and communicate as a brand, a climate-smart infrastructure method.
 Embed climate and environment perspectives within local economic
development activities, to ensure as a bare minimum to ‘do no harm’.
 There is potential for Ethiopia to supply renewable electricity (hydro) to
settlements along the Berbera corridor via an energy interconnector.

Gender, Equality and safeguarding

1. This programme has the potential address some of the structural barriers to
gender inequality in Ethiopia and Somaliland where poor women, especially young
women, face severe disadvantages in terms of economic participation. Specific efforts
and resources will be deployed in the course of design and delivery of this programme
to ensure this programme is compliant with the Gender Equality Act. The evidence on
gender and inclusion in relation to trade and development corridors is highlighted as
part of the broader review of evidence and highlights some of the key areas for
concern and investment. The UK support in East Africa has initiated other specific
interventions that target the benefits of trade for women such as support for informal
cross-border trade (dominated by women), through targeted capacity building and
advocacy at the policy and regulatory level (to empower women), and to increase
awareness (to address gender bias in regulation). The UK-funded health programme
(SHINE) may contribute to medical aspects of the impact, including STD prevention.
This programme will observe the DFID and TMEA gender and safeguarding guidelines
and subject to approval a detailed gender appraisal will be undertaken – see Annex D.

12
2. Young people in Somaliland and Ethiopia are also specifically disadvantaged in
terms of participation, in both the economy and the political sphere.
Underemployment is high. The perception of growth without their inclusion is a source
of instability, especially in urban centres in Somaliland, where riots occurred in the
2017 elections, motivated by frustrated, marginalised youth. Under component three,
this programme will carry out analysis to understand the reasons behind economic
exclusion of youth from different clans in Somaliland; understand the sectors that
appeal to youth and that have serious potential, and work with other DFID programmes
(for example, in access to finance) to ensure support can target and support them in
employment opportunities. Communications on youth and female employment will
build on strong evidence that highlights the importance of visible role models. The
programme will explore the potential for both youth and women participants on key
governance boards, or in any research and/or M&E in the programme, and
relationships with universities if relevant.

3. Disability is a dimension of exclusion about which relatively little is known in

Somaliland or Ethiopia, especially where it relates to economic inclusion. The
programme will work with DFID Somalia and DFID Ethiopia’s existing programmes
which cover disability (e.g. SNAP) to ensure that data is collected and disaggregated,
as well as specific targeting and communications if appropriate. Partner organisations
that DFID works with in Somaliland, such as Handicap International, could be used to
ensure an appropriate communications strategy is used to reach people living with
disabilities.

Counter Terrorism

4. This programme has robust measures in place, to ensure compliance with rules on
counter terrorist financing. We will be working through experienced partners, ensuring
due diligence is done downstream, as well as periodic asset reviews and audits of sub-
grantees. Most financing under this programme will be focused along the Berbera
corridor.

APPRAISAL CASE

Theory of Change

5. The theory of change posits that to make progress towards more inclusive, climate and
gender sensitive economic growth that contributes to peace in the Horn of Africa
(impact), the UK should invest in the development of an economically competitive
growth corridor in close partnership with UK companies (outcome).

6. Development of the port at Berbera and the transport corridor between Ethiopia and
Somaliland, offers significant prospects for economic transformation. The combination
of diversified transport options, and an improved investment climate reducing the costs
to trade, will potentially lead to an increase in the volume of trade passing through the
Berber corridor, stimulating growth. Initial support is also envisaged to attract
additional investments from the private sector bringing directly some US$0.5 billion in
infrastructural investment and potentially catalysing much more; the investment is also
directly intended to expand Somaliland’s trade.

7. Beyond the direct economic effects, the investment will provide opportunities to
strengthen key relationships with Ethiopia and the UAE, both top priorities for the PF.
The hard infrastructure and trade facilitation investments will also contribute to at least
four of the five Intermediate Outcomes in the Prosperity Fund Theory of Change:
investment in infrastructure, a strengthened policy and regulatory environment,
strengthened capacity for policy and regulation, and strengthening government
13
 commitment to improving the institutional and business culture. Across all of these, the
investment will promote sustainability in terms of environment, self-financing and
inclusiveness.

INPUT INTERVENTION OUTPUTS OUTCOME IMPACT

Climate smart Improvements in trade More competitive
infrastructure for key volumes, speed and
bottlenecks economic
costs
development
DFID,
Trade Facilitation Pillar: corridor with an
DIT,FCO, Increased efficiency of Inclusive,
transit, trade, customs cross-border trade and improved and
OGD staff support improvements,
time (incl governance bodies (NOC, customs clearance modernised sustainable,
from Africa SOC, BC Management investment climate climate- and
Board) Increased UK for local and
Strategy
uplift investments in Ethiopia international gender-sensitive
Local SL Economic and Somaliland (including UK) economic growth
Development Corridor
Platform (strategy and businesses (which in a more peaceful
Increased capacity and
ODA Funding coordination capacity support, for Ethiopia means
catalytic fund for SME funding for development
more and
Horn of Africa
development with gender and of the local economies
youth focus improved jobs and
Non-ODA Key learning and data resilience in
funding
Corridor Learning and produced to inform external trade and
Financing support governments and donors for Somaliland
(targeted M&E and and actual and potential
fundraising) means local SME
business investors, and
are used to inform
growth and job
decisions creation)

PROBLEM: Berbera Corridor dysfunction and very limited capacity prevents expansion of trade and inclusive growth due to inefficiencies and lack of
competition; weak capacity to coordinate and negotiate transit and trade agreements; lack of coordination, capacity and strategy on the SL side to
capitalise on Corridor investments and other local economic development activity; limited evidence and data on investments and approaches to corridor
development.

Options for Appraisal

8. We appraise three feasible options for the UK with indicative scale of funding by
the Prosperity Fund for Options B and C, to a total of £25 million. The logic of the
three options is shown in Figure 1 below: possible UK-supported interventions are
intended to move the corridor along the curve towards the upper right.

Figure 1: Evolution of Corridor Developments

14
 Option A. The Counterfactual: The UK does not invest
9. Under this option, investment in the Berbera Corridor goes ahead without UK
engagement. Port development proceeds, and trade flows are likely to increase.
However, investments in the port are slower or might not ultimately reach full potential,
as Phases 2 and 3 depend on DPW’s being satisfied that the quality of the inland
infrastructure warrants full development of the port’s capacity. The road is currently
well below the standard required to carry the significant traffic increases that would
result from full port development. The pre-feasibility study commissioned by the EU in
2014 has led to little progress, and prospects for significant upgrading of the road by
other parties are uncertain.

10. In June 2018 the Abu Dhabi Fund for Development (ADFD) announced it would
invest US$90 million in the road: sufficient to bring the road towards a
‘Developing Corridor’ stage. However this contribution represents only one-third of
the estimated $275 million investment in the road required to support a rise in truck
numbers from an estimated 80,000 pa in 2013 to 830,000 pa in 2020 and 1.2 million pa
in 2035. Moreover, the timing of the ADFD investment is uncertain. EU funds for
infrastructural improvements across the Horn are in principle available but remain
undisbursed. To date, the main improvements along the corridor have been brought
about by the UK-led Somaliland Development Fund, though these remain modest.

11. The full potential of the port to contribute to inclusive growth in Somaliland will
be unrealised in three respects: the build-up of trade, and therefore growth of the
economy and of revenues, will be more gradual; the distributional and therefore

15
 possible political effects are likely to be adverse; and the development impact will be
limited, bringing the possibility of doing harm.

12. Under this option, there is a higher risk that Somaliland negotiates arrangements
with Ethiopia which fail to realise the benefits of the port and road investments
fully. This could be a consequence of cumbersome border procedures, inappropriate
tariff rates and scope for revenue leakage. This could also result from weak or absent
trade facilitation, or opportunities to develop job-creating linkages with the local
economy leading to local populations feeling marginalised and resentful.

13. It is an unfortunate truth that for reasons of weak capacity or lack of

prioritisation, Somaliland has missed several opportunities to (a) negotiate
robustly with Ethiopia to ensure that Somaliland’s interests are fully taken into account
in trade and transport arrangements, and, (b) plan to make full use of the potential of
the port and corridor to promote inclusive development. In respect of the first, a transit
agreement (which is Ethiopia’s priority) has been negotiated but not signed; to take
forward a trade agreement (of greater significance to Somaliland), the administration in
Hargeisa has established a Cabinet Committee, but negotiations are said not to be
active. In the absence of UK support, and the establishment of an honest broker
function, these disappointments are likely to continue.

14. Populations in the locality of Berbera and along the corridor, but also more
widely in Somaliland, especially towards the east, see fewer benefits and are
likely to be less well-disposed towards the development, although DPW could do
much to build good relationships in the immediate locality. The Hargeisa authorities
are likely to face criticism on the grounds that they have failed to realise the potential of
the single project that has the greatest transformational potential in Somaliland.

15. Under option A, Ethiopia is likely to benefit from some level of inclusive growth,
including jobs, and domestic revenue, as a result of the increase in trade.
However, the flatter trajectory of trade slows the realisation of these benefits. Ethiopia
may also face criticism from within Somaliland (where Ethiopian ownership of 19% of
the port is already a sensitive issue) if there is a growing perception that the benefits of
the port and corridor are skewed towards it. Such tensions can be fed by historic
rivalries between Somali clans across the border, exacerbated over the past decade by
complaints from Somaliland over alleged brutality by the police of the Ethiopian Somali
National Regional State (ESNRS). Within Ethiopia, the largely ethnic Somali residents
of the ESNRS along the border may come to feel that the principal benefits from the
corridor are accruing to other ethnic and religious groups elsewhere in Ethiopia.
16. In terms of secondary benefits, UK companies see very limited opportunities for
contracts under option A (including in the ADFD-funded road upgrading) and limited
increases in import/export without any dedicated UK brand and approach to the
corridor. The UK also passes up the opportunity to engage strategically (a) with
partners, including the UAE, and (b) in wider changes in the Horn, including possible
resetting of the Ethiopia/Eritrea relationship which may progress further under the new
leadership of Ethiopia. Wider considerations also include the perspective of the FGS
which has hitherto expressed concern about the involvement of the UAE in developing
the port of Berbera. The opportunities on both sides of the border to address climate
aspects of the development are lost, as is the chance to promote the interests of
women in the way the investment proceeds.

Option B. £22million Prosperity Fund Investment:

Infrastructure and Complementary Systems
17. Option B moves the project onto a trajectory from being an improved transport
route under Option A to becoming a trading (or logistics) corridor. Under this
option, the UK provides funding for: a hard infrastructure pillar (indicative funding £18
million) and trade facilitation pillar (indicative funding £2.25 million). The UK’s
investment complements that of other potential investors in the road, notably the
16
 ADFD, and is planned on the basis of a mutually agreeable feasibility study (to be
conducted in 2018/19).

18. The UK investment forms part of a strategy to address critical constraints to the
capacity of the corridor (including bottlenecks such as river crossings and the
Hargeisa by-pass identified in the TMEA diagnostic), and to realise the corridor’s
potential over time for inclusive growth of both Somaliland and Ethiopia. The specific
UK-funded elements are designed in close coordination with other stakeholders,
notably the ADFD, and potentially the EU and other possible contributors to the cost of
the development of the corridor, as well as the authorities in Somaliland and Ethiopia,
and with DPW which as port owner and operator should have a strong incentive to
expedite corridor development. However, the UK-funded hard infrastructure
investments have been identified on the basis that they address priority pinch-points
and are economically justifiable even if other elements of the road improvement are
delayed.

19. For Ethiopia, reduced costs and time from the improved corridor will generate
economic benefits, both for Ethiopia’s rapidly-growing industrial sector and
exports, and for consumers (the consumer surplus should increase as costs fall).
Ethiopia’s aim of progressively diversifying its export and import routes, with a
consequent reduction in risk of disruption to its external trade, will be boosted. A trade
facilitation pillar (indicative funding £2.25 million) will support the overarching
regulatory work on trade, transit and customs on both sides of the border. Specific
areas to be addressed include: trade policy and trade facilitation, the transit regime,
and non-tariff barriers; and customs regulations, organization, operations, IT
infrastructure, and coordination. It will also include financing for key governance
structures: an Ethiopia National Oversight Committee, a Somaliland Oversight
Committee, as well as an overarching coordination mechanism such as a Berbera
Corridor Management Board, which would include Ethiopia and Somaliland
stakeholders as well as key donors. Depending on live risk analysis this may also
include UAE or other investors.

20. The evidence for the potential benefits of the trade facilitation component is
strong, based on the experience of TMEA over the past decade across eastern Africa.
This shows that the returns on investments in physical infrastructure are greatly
magnified if accompanied by systems development. Within both Somaliland and
Ethiopia, the benefits take the form of greater cost-reductions for trade (as time in
transit is reduced), and less scope for corruption within customs and revenue collection
as systems are digitised. The UK is uniquely well-placed to assist in development of
the trade facilitation pillar because of its involvement with capacity-development of
several crucial parts of the Somaliland authorities over several years and its close
working relationships with the IFIs.

21. As part of this engagement, the UK’s leverage is substantial, in several

dimensions. It is able to influence the much larger investment project on such matters
as climate and gender sensitivity, construction and workplace standards, as well as to
press all parties to ensure development is as inclusive as possible. Moreover, the
UK’s interlocutors include partners (such as the UAE and Ethiopia) identified as
priorities for Global Britain. Participation in the much larger project also creates
substantial opportunities for UK-based companies to engage in the construction and
associated wider developments in Ethiopia and Somaliland. The improvements in the
road and associated infrastructure under Option B allow for more rapid development of
(a) the port as DPW progresses to phases 2 and 3, and (b) the build-up of trade. For
Somaliland, economic benefits include job creation, both directly in the port and road
infrastructure, and indirectly through linkages to sectors including trucking, finance,
hospitality and other services. Potentially enhanced revenues to government (whether
from customs or from its part-ownership of an expanded port) are a crucial dimension
(contributing to the UK-supported strategy to diversify away from the present over-
reliance on customs by expanding other revenue sources), but will require robust and
17
 well-informed negotiation with Ethiopia (which the UK currently supports via its Trade
Advocacy Fund).
22. The political significance of the port and corridor for Somaliland is substantial.
This is principally because control of the port, Somaliland’s principal economic asset,
was a crucial element of reinforcing the informal political settlement that ended the civil
war during the 1990s and has underpinned stability for 20 years. The transfer of the
port to a company based abroad has been controversial. Well-distributed economic
gains may help to reconcile stakeholders, including local clans, to the change.
By contrast, continuing concerns that the political settlement has not been respected
could serve to undermine Somaliland’s fragile stability.

23. If Option B contributes to stability in Somaliland, it could also contribute to wider

stability in the Horn of Africa in the longer-term. Diplomatic engagement with the
FGS by the UK and others may help to bring about the desired acceptance of this new
reality, potentially helped by the recent more active engagement by the Government of
Ethiopia to try to resolve regional disputes with Eritrea and Somalia. However, under
all Options envisaged for the Prosperity Fund investment, greater stability in the region
is not a foregone conclusion, not least because fractious relationships within the Gulf
are contributing to already difficult relationships between the FGS and Somaliland.

Option C. £25million Prosperity Fund investment:

Option B + £2.75 million Economic Development Corridor Platform
24. Option C broadens and deepens the impact of the development corridor on both
sides of the border in terms of greater inclusivity, creating more opportunities
for local and international businesses, large and small, and supporting
innovative relationships in the region and internationally. Shown in Figure 2,
Option C helps to move the corridor towards the right-hand end of the diagram by
strengthening ‘economic activity that benefits surrounding regions.’
Figure 2: Investment in physical and soft infrastructure

25. Option C will include two additional sub-components: 1) Economic Development

Corridor Board – to catalyse inclusive growth in Somaliland and Region 5 in Ethiopia,
and 2) Local Economic Development Fund – to identify and implement catalytic
investments for the promotion of local economic development in the context of the
corridor.

26. The pillar will work both through stimulating local enterprise and resources, and
through bringing in foreign, including UK (among them Somali diaspora),
businesses, including the larger-scale anchor investors shown to be crucial in
the review of evidence from other corridors. There will be a focus on women and
SMEs and on the creation of formal and informal jobs for young people which are
expected to be the priority for much of the funding under Option C. This Fund will be

18
 designed in the light of lessons from local economic development interventions along
corridors elsewhere in Africa and Asia. The benefits of the UK investment will be
measured in terms of its contribution to ensuring that the corridor development is as
inclusive as possible. They will be manifested in jobs, informal incomes, the growth of
SMEs and the return on investment. But in addition, the pillar will contribute to growth
in Ethiopia and Somaliland that is well-distributed geographically and in terms of
ethnicity and clans, dimensions that should over time contribute to more balanced and
harmonious development.

27. On the two sides of the border, the approach taken will need to reflect local
realities. In Ethiopia, the approach will reflect the Federal nature of the country, the
active role of the state in the economy, and the need to ensure buy-in from a range of
stakeholders in the ESNRS where capture by elite interests is a possibility. In
Somaliland, it will work through bringing together key private and public-sector actors
to develop and implement a local economic development strategy around Berbera,
along the corridor, and potentially more widely.

28. Initial work has identified a number of productive economic sectors based on
their market growth potential, attractiveness including competitiveness, jobs
(especially for youth and women) and trade potential: livestock; fisheries, energy,
extractives, agriculture, supply & service inputs and capital goods for the above
activities, financial services, particularly micro finance and micro-insurance, to support
businesses listed above and market entry for women and youth, and a range of other
services, including trucking and hospitality. An early role for the Board will be (a) to
explore the case for a Corridor Development Strategy, and (b) to initiate sector and
spatial analyses to provide a sound basis for stimulating future investment and growth,
some undertaken by UK-based, including diaspora, companies, details of which are
provided in the annexed appraisal of secondary benefits.

Economic and Social Appraisal

29. Evidence on corridor development indicates that the development of the Berbera
Corridor is likely to bring significant economic and social benefits. The most
important benefits relate to the reduction in costs to importers and exporters and the
induced increase in economic activity in value chains connected to export and imports
that can benefit both Ethiopia and Somaliland. The case of the Berbera Corridor
presents a particular opportunity to diversify Ethiopia’s sea outlets by offering an
additional corridor to neighbouring Djibouti as trade expands. Enhanced competition
with the Djibouti corridor is likely to drive down costs for all of Ethiopia’s import and
export routes and further increase trade volumes.

30. Corridor development can be a major driver of local economic development,

particularly for tradable sectors and transport, logistics and hospitality services.
This is particularly relevant for the Berbera Corridor, where 15 million people live within
50km of the corridor, and livestock production within 10km of the corridor is estimated
at US$637m. Additional local benefits may arise from the connection of the corridor to
the electricity grid and ICT infrastructure. This needs to be planned carefully to ensure
coherent spatial planning and that the benefits of the corridor are well distributed taking
account of regional, gender and income inequalities. International experience
suggests that delivering the full range of social and economic benefits from corridor
development requires more than investment in hard infrastructure. Trade facilitation
that supports the flow of goods along the corridor and across borders is also essential.
In addition, measures to promote local economic development are required to take
advantage of new opportunities brought by improved access to global markets. For
more detailed analysis of the broad range of economic and social benefits that are
likely to arise from the three options for investing in the Berbera corridor see Annex L.

31. Following guidance on the use of Cost-Benefit Analysis for PF investments, future
benefits are discounted at the conservative rate of 10% per annum, and future costs at
19
 3.5% per annum. The methodology, scenarios and assumptions are documented
more completely in Annex H alongside the Net Present Value of the Proposed UK
Investment under different scenarios. The simulations show that option B should
generate positive returns in nearly all scenarios. However, the returns are highly
sensitive to assumptions about the future traffic volumes and changes in
transport, port and customs related costs. Under a situation of low traffic growth
and where trade facilitation measures have limited impact (scenario 5) it is possible
that the project will not generate a positive net present value at a 10% discount rate.
However, the project is still viable at a 5% discount rate. This demonstrates the
importance of trade facilitation benefits to ensuring the viability of the project. The only
scenario under which the investment is definitely not viable is in a situation where the
Ethiopia-Somaliland border is permanently closed (scenario 9) with the corridor only
functioning on the Somaliland side.

32. The cost-benefit analysis makes a strong case for option B instead of option A.
However, it does not distinguish between options B and C. The main difference
between these two options is the additional local development activities that would be
included under option C. These estimates indicate that returns to investment in local
development projects in Somaliland are likely to be viable at a 10% discount rate in
most cases, alongside the evidence that local economic development projects are
essential to ensure that the corridor functions as a ‘development corridor’ with widely
distributed benefits along the length of the corridor and not simply a ‘transit corridor’ for
moving goods. Proposed local development projects would help to support the supply
response in tradable sectors that is required to maximise benefits from the corridor. It
is likely that the corridor will initially be dominated by import trade and there is a
particular need to stimulate production of exports. Well selected local development
projects targeted at boosting export sectors can help to address this imbalance.

33. Investing in local economic development projects in Somaliland could help to

shift the benefits of the corridor towards Somaliland. While Ethiopia would not
lose out, ensuring that Somaliland receives sufficient benefit from the corridor is
vital for ensuring sustained political support for the project. Local economic
development projects can also be targeted in ways that benefit poor and marginalised
groups leading to more equitable benefits including more favourable outcomes for
women. Without such investment there is a risk that the economic effects of the
corridor could act to widen inequalities.

Secondary Benefits Appraisal

34. Based on extensive consultation with DIT the secondary benefits are structured around
three tiers of UK companies, as follows:

Tier Likely Outcome

Tier 1: 2018-2020 UK companies bid for and have the opportunity to win immediate
contract opportunities, specifically for climate smart
infrastructure; and on logistics.
Tier 2: 2020-2023 Successful UK companies (targeted companies and diaspora
companies) benefit from improved efficiencies of the Corridor,
through uplift in volumes, and reduction in the cost of trade.
Tier 3: 2020:2028 More UK companies are attracted to invest in Ethiopia and the
Horn of Africa based on the visibility and success of UK
showcase anchor projects, accessibility of Ethiopian and
Somaliland markets, and Berbera port becoming a regional
transit point linking Africa with global markets and its Arab
neighbours

20
35. An analysis of UK companies considering investments in the Horn of Africa can be
found at Annex K. Interventions will be designed to engage at different phases with
different tiers of company and results will be modelled and measured over different
timeframes. To further appraise secondary benefits the joint financing unit developed
an Action Plan to guide secondary benefit analysis – this business case draws heavily
on that Action Plan and our full appraisal is at Annex K. DIT is collaborating with UK
Export Finance (UKEF), the UK’s award-winning export credit agency, to design and
test new tools in Ethiopia, and create a model that can be used across the DIT
network, including the high value campaign model. We will use: British Investors
Group in Ethiopia, Kenya and the UAE, Somali community networks in UKxvi, DIT’s
Africa Infrastructure Board, UKEF and CDC to coordinate our support for UK
companies. The secondary benefits will be realised by DIT promoting and innovating
with its trade facilitation tools including: guarantees, loans, balancing the risk with CDC
investment and insurance, de-risking, un-locking and facilitating deals, project viability,
bankability, value addition, credit guarantees, direct loans and grants to buyers,
underwriting with UK sovereign guarantees to help banks lend.

Preferred Option

36. Reviewing the three options, based on our theory of change, analysis of the evidence,
experience in the Horn of Africa, HMG influence and comparative advantage, and risk
mitigation, our Preferred Option is C.

Option Likely outcome Result for

outcome
A: Counterfactual Road upgrading leads to a transport corridor Low
with gains likely captured by elites. Limited
secondary benefits.
B: Hard Infrastructure Improved capacity of the corridor leads to Medium
and Trade Facilitation cost-reductions for trade and an increase in
economic activity in export and imports
benefitting both Ethiopia and Somaliland.
Significant Tier 1 secondary benefits.
C: Option B + Economic By 2023 an economic corridor leads to High
Development Corridor investments along the Berbera-Addis corridor
Platform with increased economic activity benefitting
the surrounding regions. Corridor efficiency
(time + cost) means that Ethiopia uses the
corridor of choice for goods such as sand and
steel. Significant Tier 1 and 2 secondary
benefits.
Delivery Partners’ Appraisal

37. As a means of determining the best means of delivering the programme a set of
criteria were developed to interrogate the best delivery partner(s). Criteria
included: a) understanding of the Horn and wider East African political economy and
operational context, b) working with HMG, c) understanding of issues arising in
economic corridor development and the ability to deliver substantial engineering
projects (hard infrastructure), d) experience in systems development, especially
customs and border arrangements (trade facilitation), e) understanding of, and ability
to help build, institutional arrangements for corridor management and cross-border
coordination, and f) experience in setting up and operating local economic
development arrangements in environments comparable to those prevailing in Ethiopia
and Somaliland.

Option Strengths Weaknesses Prefer

Component 1: A hard infrastructure pillar
Accountable  Understanding of infrastructure-  Over reach beyond their core Y
grant with trade-growth in east Africa mandate in east Africa region
21
 special  Delivery in complex political  Limited exposure to
purpose economy and operational contexts Prosperity Fund secondary
vehicle  Timely implementation and quick benefits
(TMEA) start up and openness for other
partners to engage
 Procurement system in place
Private sector  Tried and tested firms delivering  Limited local political N
provider via infrastructure for DFID regionally networks would require
OJEU  SOPs for sub-contracting extensive sub-contracting
infrastructure  Slow implementation and
 Understand the institutional and limited experience with the
financial arrangements for road infrastructure market
maintenance

Agreement  Lead for the Horn of Africa  No multilateral organisation N

with single strategy has the HR capacity to deliver
Multilateral 
In depth analytics across at pace
infrastructure-trade-growth
Component 2: A trade facilitation pillar
Accountable  A central part of TMEA mandate  Limited politically experience Y
grant with and its raison d’etre in the Horn and neighbouring
special  Ability to ensure integration of Arab states
purpose hard and trade facilitation
vehicle elements
(TMEA)  Given this mandate, there are no
viable alternative delivery models
 Quick start up and tried and tested
coordination mechanisms
Private sector  Firms with high quality technical  Lack the hands on capacity to N
provider via expertise and ability to provide TA deliver consistently in this
OJEU region and limited experience
of working on both sides of
border crossings
Component 3: Economic development corridor platform
Accountable  Experience of issues arising in  Requires significant uplift in Y
grant with economic corridor development HR and sub-contracting
special  Understanding of the full range of
purpose possible institutional
vehicle arrangements for supporting local
(TMEA) economic development
 Experience in linking infrastructure
development with local economic
activity and job creation
Private sector  Understanding of the range of  Would fragment the approach N
provider via institutional arrangements for and break down the links
PF or DFID supporting local economic between infrastructure and
framework development. local economic development
agreement  Experience in setting up and
managing local economic
development funds in the region
Agreement  Experience in setting up and  Would fragment the approach N
with single managing local economic and break down the links
Multilateral development funds in the region between infrastructure and
local economic development

Value for Money

1. Given the uncertainties in the context for this programme, two approaches will
be adopted to optimise VFM: a significant inception phase to ensure that thorough
analysis and consultation inform programme design; and a flexible and adaptive
approach to management, building on strong feedback loops for effective decision-
making and resource allocation.

2. Economy will be achieved by ensuring that the goods and services required to deliver
the project are procured using competitive tendering using suitable thresholds for
international tendering, national tendering and direct purchasing. When evaluating
bids, unit costs should be compared against relevant regional benchmarks (e.g. cost of
22
 road construction per km, international and national consulting rates). The timeliness
and quality of the delivery of goods and services will also be closely monitored to avoid
cost overruns and substandard work.

3. Efficiency will be achieved by ensuring that the project makes the right kind of
investments in hard infrastructure, trade facilitation and in local development projects.
For hard infrastructure, it is recommended to focus UK funds on particular pinch points
that cause congestion, transport delays, accidents and environmental problems. For
trade facilitation, efficiency can be achieved by identifying the administrative
bottlenecks in cross-border trade that impose the greatest financial and time costs, and
developing cost effective solutions to address these. A wide variety of trade facilitation
options will be developed during the inception phase and assessed according to which
can reduce the costs of trading across borders at lowest cost. For local development
projects, it will be essential to develop and apply selection criteria for candidate
projects that strike an appropriate balance between ensuring high returns and
delivering social, gender and environmental benefits. Additionally, local development
projects will need to be monitored throughout implementation, subjected to adaptive
and corrective measures as needed and thoroughly evaluated on completion.

4. Effectiveness will depend on maximising complementarities between hard

infrastructure, trade facilitation and local economic development projects, leveraging in
additional investment from other sources, successfully navigating the political economy
risks of the project and putting in place arrangements to ensure that infrastructure is
maintained and benefits are sustained. The estimates of Net Present Value under
different scenarios shown in Annex H indicate that the project is likely to deliver VFM
effectiveness. However, ensuring that this value is actually delivered will require
effective implementation arrangements, close supervision, regular monitoring of
changes in the political and economic context, early assessment of economic and
social benefits, as well as acceptance of the need for flexibility and adaptation in
project delivery.

5. Equity is at the heart of the case for the UK’s involvement in the corridor, from the
perspective both of achieving developmental benefits and contributing to stability. A
key consideration is to ensure that the benefits of the project are well distributed
regionally and between clans, between income groups and between women and men.
Special consideration will be given to promoting forms of trade benefitting lower
income groups (e.g. those reliant on livestock) and women (e.g. urban markets and
informal cross border trade). A key consideration is the distribution of economic costs
and benefits between Somaliland and Ethiopia. The success of the projects depend
on sustained political commitment, which can be eroded if one side perceives that it is
not securing a fair share of the benefits. Among aspects of this programme intended
to help bring about a stronger sense of equity are the UK’s support for Somaliland in its
negotiations over the trade and transit agreement, and the local economic
development platform on both sides of the border.

Sustainability

6. Financial. As the review of evidence from other corridors shows, the principal
challenge to financial sustainability will be the means of financing maintenance of the
improved road corridor. This applies both to Ethiopia and Somaliland; however, while
Ethiopia’s public finances and public debt are under strain, it is in Somaliland that the
problem is likely to be most acute. With domestic revenues at a very low 7% of GDP,
the ability of the authorities to fund maintenance is currently limited. However, the
Somaliland Development Fund 2 will focus on operations and maintenance of
infrastructure. This includes engaging with Ministries and parastatals’ operations and
maintenance systems and budgets. This will require tailored capacity building and
willingness by government to be transparent about its budgeting processes for
operations and maintenance. Several other issues arise. First, the UK is providing
pertinent assistance to Somaliland and Ethiopia that will over time address and
23
 improve tax compliance and increase revenues. Second, revenues and Somaliland’s
fiscal position should be greatly strengthened by a combination of (a) the economic
growth that the port and corridor are expected to generate over time, and (b) the terms
of the transit and trade agreements to be finalised. Third, the feasibility studies to be
undertaken as part of the ADFD investment (coordinated with DFID) should explore the
case for road-tolling to ensure that the full costs of transit traffic are recovered.

7. Environmental. There will be some limited negative impacts associated with loss of
habitat and biodiversity especially the destruction of floral communities, soil erosion,
loss of land and property, increase in dust levels, visual intrusion, increase in noise
levels and health risks, unplanned catering services, poor waste management, and
interference with livestock movements among other negative impacts.

8. Political. The risks of a narrowly-based and exclusive port and corridor development
destabilising Somaliland’s political settlement, and therefore its relative calm in a
volatile region, have been noted in the Strategic Case, and are a principal justification
of the UK’s involvement.

9. Social. The rehabilitation of the Tog Wajaale – Berbera road is likely to increase the
severity of accidents on people and livestock resulting from higher speeds following the
improvement of the road. With improved safety measures including installation of road
signs and bumps, and livestock underpasses potential accidents could be significantly
reduced. Loss of property is likely to be the most severe negative impact resulting
from the rehabilitation of the proposed road project. This will be associated with
demolition of buildings in towns like Tog Wajaale, Kalabaydh, Gabiley, Hargeisa,
Dhubato and Berbera among other villages where the local community has built too
close to the present road. Social stresses may also result from the presence in
Berbera and along the corridor of greatly increased numbers of foreign personnel,
including non-Muslim truckers with their expectations of entertainment, including
alcohol. The UK-funded health programme (SHINE) may contribute to medical
aspects of the impact, including STD prevention.

COMMERCIAL CASE

Proposed funding mechanism and development partner arrangements

10. The relative strengths and weaknesses of potential funding mechanisms and delivery
partners have been considered in the Appraisal Case. This section sets out the
commercial arrangements for managing the preferred Option C.

11. We propose delivering all three components through a single Contribution Agreement
with TMEA. Our proposed supply chain is shown below.

DFID

Component 1 Component 2 Component 3

Hard Infrastructure
12.
Upon
Accountable grant to
TradeMark East Africa
Trade Facilitation Local EcDev Platform and
Fund
Accountable grant to Accountable grant to
TradeMark East Africa TradeMark East Africa

submission of the Business Case, DFID will establish an Accountable Grant agreement
with TMEA under an existing overarching agreement that consolidates support from a
24
 number of DFID’s country offices in Africa into a single package. This has the benefits
of improving the coherence of UK support, reducing transaction costs and increasing
flexibility.

13. The Accountable Grant agreement will use the latest grant documents that set out the
grant minimum standards as specified by the UK Cabinet Office. Prior to awarding a
grant, DFID will fully scrutinise and challenge budgets and overhead costs in line with
the allowable costs policy, ensuring resourcing and balance of inputs is appropriate to
deliver the requirement. The grant award will demand consistent delivery across all
three components. Additionally, the grant will retain flexibility to scale activities up or
down depending on performance, judged against pre-agreed key performance (output)
indicators.

14. TMEA and DFID have established strong management/contracting systems which
have worked effectively to date. In line with agreed DFID requirements, payments will
be made directly by TMEA to suppliers/contractors using systems that will be focused
on driving value for money and climate smart innovation. This approach has been
effective in running large procurements in similarly complex political economy contexts.

15. A Due Diligence Assessment and subsequent Internal Audit Review of TMEA in 2017
recommended a series of actions which have since been followed up. These include
the development of new procurement regulations which set out when, what and how
due diligence of downstream partners should be carried out in addition to strengthened
internal audit functions. They also include refreshed fraud prevention, reporting and
response policies.

16. Additional programme specific due diligence will be conducted as appropriate,

including on safeguarding. TMEA will be required to submit a delivery chain map with
clear roles and responsibilities and due diligence assessments for all sub contracts.

17. In addition, DFID will retain £2 million for monitoring and evaluation and HMG human
resources (further detailed at paragraph 122). This additional resource will build on
TMEA M&E and ensure the evidence base is built around the proposed economic
corridor intervention; and ensuring sufficient attention is paid to the analysis across
core cross-cutting issues: gender, inclusion, environmental safeguarding and political
economy. This resource will also be used to interrogate the theory of change. DFID’s
EACDS framework will be used to ensure VFM. Our three financing routes are shown
below.

DFID

TMEA Monitoring & Evaluation Human Resources

Accountable Grant EACDS Framework Civil Service Jobs

Value for Money through Procurement

18. As far as is feasible, DFID will make use of commercial approaches including
incentives to achieve better VFM. Payments will be made upon satisfactory delivery of
activities set out in a pre-agreed work plan. We will focus on outcomes and scrutinise
TMEA budgets against benchmarks. Release of funds will be linked to results, where
appropriate, to drive quality.

19. TMEA has a strong track record of infrastructure procurement including the
construction of One Stop Border Posts and at the Port of Mombasa (involving the
25
 competitive recruitment of consulting design engineers and the subsequent contracting
of civil engineers through international tender). TMEA recognises, however, that as its
infrastructure portfolio expands, there is a need to further build its capacity in this area.
TMEA retains control of the procurement process and has developed clear and
comprehensive frameworks for infrastructure procurement, including safeguards that
ensure that where public entities are involved in the procurement process, no DFID
funds flow to government. These include:

 Standard documents for the procurement and management of consultants on:

feasibility studies; provision of legal and financial advice; project management;
civil works; purchase of equipment.
 Policies/processes for the procurement and management of consultants delivering
infrastructure services, including: advertising, prequalification, selection,
negotiation and dispute resolution.
 Advice on how TMEA’s infrastructure procurement policies and procedures are
affected by national procurement rules.
 Recommendations on the staff and other resources required for TMEA to
maximise VFM and minimise risk associated with its infrastructure procurement.

1. Additional sub-contracts will be selected by TMEA based on an assessment of internal

control systems, ability to deliver, results and remote management systems, financial
stability and governance arrangements in addition to management of downstream
partners and safeguarding measures. A risk mitigation plan will be developed and
monitored in partnership with the sub contracted implementing partner based on the
outcome of this assessment. TMEA will be expected to carry out due diligence
assessments on any sub-contractors, based on DFID’s framework.

Value for Money

2. In addition, TMEA will deliver VFM by:

 Requiring each specific project to be approved by the National Oversight

Committee [see Management case] and reviewed by the TMEA Board through
submission of a detailed Project Appraisal Report (PAR). PARs will need to
demonstrate intended and feasible impact on trade competitiveness and exports.
 Ensuring investments that provide measurable trade competitiveness benefits
directly (especially savings in transport time and costs benefits) are adequately
complemented and reinforced by investments in the capacity of government, civil
society, and the private sector which are required to maximise the gains.
 Monitoring the unit costs of delivering programme outputs to ensure they are
comparable with unit costs in other settings taking into account important
contextual factors.
1. DFID offices will periodically review the market and retain flexibility to explore
alternative/complementary implementation arrangements/partners for programme
components. Where implementation by any other partner is considered to provide
better overall VFM, DFID will ensure that effective and proportionate management,
contracting and delivery mechanisms are in place to safeguard funds and ensure
efficient programme delivery.

Delivery Risks

2. The Horn is the locus for intense and multiple global and regional interests xvii, some of
which play out in the complex relationships between the FGS and Somaliland.
Mitigation measures are mainly diplomatic. The FCO retains very close engagement
across Addis Ababa, Mogadishu, Hargeisa, Abu Dhabi and Dubai to ensure strategic
goals and priorities are understood across the region. If any component falls short of
the grant agreement DFID retains the right to terminate all, or part of, the agreement
based on poor performance and procure an alternative delivery agent.
26
3. Fiduciary risks related to corruption in procurement are severe at the gross level.
TMEA’s internal financial management systems are deemed as sufficient to bring
residual risk to moderate levels.

Key Cost Drivers

4. Key cost drivers are likely to include: (a) TMEA staff costs (b) infrastructure quality (c)
infrastructure delays (d) coordination. We will draw on DFID’s corporate relationship
with TMEA and wider Accountable Grant arrangements to ensure fees and salaries for
staff engaged in the programme are competitive and take into account the number of
years of experience, duration of engagement and levels of responsibility. Security
costs in Somaliland will also be a significant cost driver. DFID has clear benchmarks
for percentages of security costs as an overall investment to which we will adhere.

5. DFID will enter into an annual memorandum of understanding with the Government of
Ethiopia and separately, the government of Somaliland.

Early Market Engagement

6. TMEA will engage the market at an early stage to gauge existing capacity and
capability of organisations to deliver across all three components. This will be
undertaken through activities including market consultations drawing on the support
and expertise of the commercial manager. This work can begin immediately after
Business Case approval.

FINANCIAL CASE

Flow of Funds

7. A total of up to £25m will be allocated under this programme over four years from the
Prosperity Fund RDEL and CDEL budgets. The spend is estimated to be broken down
(£) as follows:

Component 2018/2019 2019/2020 2020/2021 2021/2022 Total (£)

1. Hard Infrastructure* 0 3,000,000 11,500,000 3,500,000 18,000,000

2. Trade Facilitation** 175,000 250,000 800,000 1,025,000 2,250,000

3. Local EcDev
0 750,000 1,000,000 1,000,000 2,750,000
Platform and Fund
Monitoring and
50,000 200,000 200,000 220,075 670,075
Evaluation costs
Programme costs
(including salaries,
64,225 355,900 454,900 454,900 1,329,925
travel costs and other
admin costs)
  289,225 4,555,900 13,954,900 6,119,975 25,000,000
*CDEL + Partly ICF Eligible
**Includes M&E that will be initiated by TMEA

8. Memoranda of Understanding, an Accountable Grant, and a Delegated Cooperation

Agreement will lay down the parameters and modalities for payments as well as annual
spending profiles, which will be determined when agreements are signed. These will
annex how the funds will be spread across the project life. All budgets will be
scrutinised to ensure proportionate overhead costs.

27
9. Payments for Components 1, 2 and 3 (£18m + £2.25m + £2.75m) will be channelled
from DFID to TMEA. Overhead costs are fixed corporately @ 9%. Other donors may
co-fund this platform.

Costs Incurred Directly by DFID

10. DFID will directly fund or co-fund all the anticipated primary costs of the programme.
DFID will also fund or co-fund annual reviews, due diligence assessments, mid-term
review costs, political economy analysis and strategic evaluations.

11. Overall monitoring and evaluation costs for the programme will be overseen by the
consortium (see management case). These will be discussed and agreed when
formalising agreements.

12. Funds will be channelled through third party organisations to the private sector for hard
infrastructure. UK companies are expected to bid for the climate smart infrastructure.
The key implementer will be TradeMark East Africa.

13. DFID funds will not be used, unless explicitly agreed by DFID in writing in advance, to
meet the cost of any import, customs duties or any other taxes or similar charges applied
by local governments or by any local public authority.

Cost Profile and Planning

14. The first year spend is expected to be slow given start-up of activities and signing of
agreements after proposals have been approved. This has been factored into the
financial spend by including minimal budgets during the first year.

15. Key codes for this programme and their allocation are defined as:

Funding Type: Non-profit, and private sector

Benefiting Country / State: Ethiopia and Somaliland
Component Input Sector Code Percentage
1: Hard Infrastructure Road Transport: Excluding Rural 21021 Core 50%
Feeder Roads ICF 50%
2: Trade Facilitation Trade Facilitation 33120 100%
3: Local Economic Local Economic Development Platform 108-21021 100%
Development Platform and and Fund
Fund

Accurate Forecasting

16. Each component has been allocated indicative costs for the life of the programme. This
may change during implementation. We will work closely with the TradeMark East
Africa in particular to ensure activities and forecasts are firmed up at the beginning of
each quarter. Monthly forecast discussions will be part of the standard agenda with
partners. As part of the annex to our TradeMark East Africa agreement, we will
request them to confirm to us any likely changes for future forecasts two months before
the forecasts are amended, which will in turn be communicated to the Finance
Manager.

Disbursement

17. DFID will make direct payments for any accountable grant quarterly in arrears.

Financial Aid to Governments

28
18. This programme does not provide financial aid to governments. Funding provided to
partners will not go through government systems.

ODA Eligibility

19. This programme will be funded from the Prosperity Fund Programme budget up to
£25m from October 2018 through December 2022 It has been factored into the Joint
Fund Unit forecasting. All the expenditure proposed is eligible for funding as Official
Development Assistance. The programme will spend across CDEL and RDEL
budgets.

Financial Risk and Fraud

20. The indicative fraud risk rating is moderate. The programme will be delivered through
TradeMark East Africa, a non-profit organisation. The main financial risks include:
funding does not present good value for money, fraud, and loss/lack of record for
assets. DFID will ensure partners have the necessary controls in place through a due
diligence assessment prior to disbursement. Annual audited accounts will be
submitted to DFID as per contract and all partners will be required to keep inventories
for all programme assets above £500. Implementers with downstream partners will be
expected to manage the partners and ensure they comply with financial requirements
requested by DFID.

21. To mitigate fraud risk, DFID will use a third party monitoring agent to verify activities on
the ground and flag any risks. Annual audits will be requested from the partners and
financial statements will be analysed with the help of DFID Ethiopia and DFID Somalia
finance sections. DFID will hold quarterly partner meetings and ensure regular activity
and financial reporting. DFID will also carry out annual reviews to assess progress
towards outcomes, VFM and risks.

Monitoring, Reporting & Accounting for Funds

22. Reporting will be on quarterly basis until project completion, which will require a final
report. This reporting will include detailed financial and narrative reporting.

23. Transparency. DFID will publish financial spending by all partners in the development
tracker. The suppliers will also be expected to publish on the International Aid
Transparency all DFID funding within six months of the start of any agreement.

24. DFID will agree on a list of key project assets to be procured at the start of the
programme with TradeMark East Africa. We will explore a transfer of any assets from
existing and/or closed projects (that are in good condition) to this programme to ensure
VFM.

25. DFID remains the custodian of all assets purchased with programme funds. Partners
are expected to maintain and control assets until the end of the project. At that time,
DFID will decide whether the assets will be transferred to other projects, or to partners
through internal approval by the Head of Department.

26. Fraud. Partners will be made aware through an initial meeting with DFID and explicitly
in their agreements on the responsibility to report suspicions of fraud during
implementation. Partners will be expected to report immediately occurrences or
suspicions to the DFID counter fraud and whistle blowing unit.

27. For the grant, prior to releasing subsequent disbursements, DFID will scrutinise
financial expenditure reports to ensure that funds have been used for their intended
purposes, that expenditure is properly accounted for, and that all expenditure during
that spending period represents good value for money.

29
28. Reporting requirements will be specified within the agreements for implementing
partners including project specific annual audited accounts, financial forecasts, annual
reviews and completion reports. In accordance with DFID standard agreement
provisions, each invoice will be supported by a financial breakdown for the costs being
claimed against the original budget line.

29. All partners will be expected to report on any expected return of funds in quarterly
reports. State the trigger points, timing of when funds will need to be returned to DFID
and estimated amounts. Where funds are controlled by third parties, set out
arrangements for monitoring and ensuring prompt return of unused funds.

Financial Accounting Considerations

30. Memoranda of understanding, the accountable grant and the delegated cooperation
agreement will act as the key agreements with DFID implementing partners. Any
further legal information will be clarified by DFID legal advisers where necessary.
Interest accrued from project funds with DFID’s prior written consent may be used to
fund additional project activities.

MANAGEMENT CASE

DFID Internal Management Arrangements

31. The Senior Responsible Owner for this programme will be the DFID Somalia Economic
Development Team Leader who will oversee and draw on a cross-Whitehall network
illustrated in Figure 3 on page 32. Coordination, Infrastructure and Administrative skills
are critical. Coordination across Posts (Nairobi, Addis Ababa, UAE, and Mogadishu)
and Whitehall requires an experienced HMG official to draw in the wider 1 HMG team
and deliver against the primary and secondary benefits. This position will play a
pivotal role working with the ADFD, a non-traditional donor, and with the DFID, FCO
and DIT leads in Abu Dubai. An infrastructure specialist is required to oversee the
major investments in this programme. Locating this position in Ethiopia is strategic
because of the crucial role the Ethiopian Ministry of Transport and Ethiopian Maritime
Agency will play in increasing the flow of trade up and down the Berbera corridor. A2
level advisory skills are required to also ensure HMG infrastructure investments are of
an appropriate quality, climate smart, and influencing the much larger World Bank
transport work in Ethiopia. Administration at B2 level will be sufficient to cater for the
management of the accountable grant with TMEA, and to deliver quality administrative
returns to meet JFU requirements. These three fixed term positions, including both
salary and platform costs will be programme funded:

- A2 Horn of Africa Coordinator based in Nairobi (DFID)

- A2 Infrastructure Adviser based in Addis Ababa (DFID)
- B2 programme Officer based in Nairobi (DFID SAIC)

Grade FY 18/19 FY 19/20 FY 20/21 FY 21/22

A2 HCS 49,500 198,000 198,000 198,000
A2 HCS (Infrastructure) 99,000 198,000 198,000
B2 SAIC 14,725 58,900 58,900 58,900
£64,225 £355,900 £454,900 £454,900
* Above costs include salaries, allowances (COLA, Hardship, medical, school fees, hazardous estimates etc.) and HMG
platform costs.

1. The X-HMG team – see Figure 3 on page 32 – includes a core programme team will
scrutinise the delivery, risks and finances through reporting and the project’s delivery
plan. This will be reinforced by support from relevant advisors in DFID, DIT and FCO
30
 teams in Somalia and Ethiopia (political, economics, conflict, governance, social
development, trade and private sector), and rich contextual and political analysis
provided by FCO and DIT colleagues. The Head of DFID Somalia will maintain an
overview of programme delivery and provide high level diplomatic support, along with
Senior FCO colleagues as required.

Figure 3 – X-HMG Horn of Africa Prosperity Fund team

Whitehall Support Team Technical Support Team

As required, support political Provide relevant technical
risk management and lobbying, support and network
engagement with UK engagement as required.
stakeholders, access to DIT 25% A2 (G7) Prosperity
sector teams and analysis. Advisor [DIT]*
Joint DFID/FCO Somalia Unit 10% A2 (G7) DFID Ethiopia
DIT, International Strategic Economist
Directorate

DFID Somalia Architecture Core Team

Professional advisory cadre
support (conflict, governance,
environment, private sector)
Accountability & Results Team
quality assurance and corporate support
Contextual analysis and support
Routine programme management
and oversight of delivery, risks and
finances; lead strategic direction and
convene input from others.
(SRO): A1 Head of DFID Somalia
Economic Development Team
A2 Horn of Africa Coordinator [DFID]
A2 Infrastructure Advisor (DFID]
B2 Administration [DFID SAIC]

31

*dependent on Africa Strategy uplift

TMEA Management Arrangements

2. All three components will be delivered through an existing Departmental level

agreement with Trade Mark East Africa (TMEA) based on their ‘Good Neighbour
Policy’ and managed in accordance with TMEA’s constitution. This policy enables
TMEA to work beyond the East Africa region; in this case making the argument for
connecting East Africa’s trading routes to the Ethiopian markets and access to the Red
Sea. These arrangements will be captured in the contribution agreement under which
DFID finance is channelled.

3. TMEA is registered in Kenya as a not-for-profit company limited by guarantee with

branches in all the East African Community (EAC) Partner States1. The UK and USA
are the legal company Members. TMEA has programmes in six countries, seven
development partners (Belgium, Canada, Denmark, Finland, Netherlands, UK and
USA) and a wide range of stakeholders. TMEA’s governance structure thus balances
stakeholder ownership and strategic oversight at national and regional levels. The
governance structure functions well and ensure that TMEA is a nimble, accountable
and effective organisation.

The Council
4. The Council comprises representatives of each of TMEA’s investors and is Chaired by
DFID. In this sense, Council members are effectively shareholders with an interest in
returns and impact and so are focussed on strategic issues. The Council ensures that
TMEA is delivering the strategic plan approved by the Council by receiving semi-
annual updates on progress, reviewing annual financial statements, and receiving the
reports of an annual review and other independent evaluations. Key responsibilities of
the Council are to:
- Recommend the appointment and dismissal of members of the Board of Directors
- Approve the TMEA Strategy and review implementation of the TMEA Strategy
- Commission outcome and impact evaluations
- Receive and accept the Annual Report of the Board and annual audited financial
statements.
- The Council has committees on evaluation and nominations. The DFID Board
member will attend the evaluation committee. The Head of DFID Somalia will
represent the views of this X-HMG team on the Council as required.

Board of Directors
1. The Board comprises up to 11 members, including a DFID representative (also the
Vice-Chair of the Board). The majority are drawn from the private sector and are
appointed for their expertise in trade facilitation, development, or other areas related to
TMEA’s operations and mission. Board members oversee management and help
TMEA achieve its vision. Key responsibilities are to:
- Oversee implementation of the TMEA strategy and the long-term development of
TMEA
- Appoint the Chief Executive Officer and Senior Leadership Team
- Approve the Annual Business Plan and Project Appraisal Reports
- Set management policies and targets
- Oversee financial management and performance

1 The Burundi and South Sudan offices have been significantly scaled back due to the current political/security
situation.
32
 - Oversee risk and mitigation measures

1. The Board reviews in detail the progress being made in delivering the TMEA
programme through scrutiny of quarterly progress and financial reports. It also
ensures that the programme is aligned with the approved TMEA strategy by reviewing
and approving all project proposals valued at $1million or more. The management
information system which TMEA has developed will facilitate this role through better
integration of results and financial information.

2. The Board has a number of committees: operations; finance, audit and risk; and HR
and remuneration. DFID is represented on the Operations Committee. A senior
adviser will represent DFID on the Board of Directors, and will attend the Operations
Committee (and the evaluation committee of the Council, as noted above).

National Oversight Committees / Programme Coordinating Committees

3. National Oversight Committees (NOCs) have been established in each country in
which TMEA operates in order to assure ownership and oversight at a national level. A
Programme Coordinating Committee has also been established with a similar purpose
for East African Community and regional programmes. These Committees have an
advisory role. They have responsibility for quarterly oversight and review of the
performance of TMEA programmes, and make recommendations to the Board relating
to these. The Committees are composed of key partner institutions implementing
TMEA programmes at a national level, private sector and civil society representatives
from the relevant country, and representatives of investors (including DFID).

4. NOCs raise issues or concerns through the minutes of their meetings which are
submitted to the Operations Committee of the Board or at meetings of the full Board of
Directors which NOC Chairs attend every six months. The Board also ensures that all
project proposals and business plans have received the endorsement of the relevant
NOC before being considered by the Board. In this way the NOCs play an essential
role in the delivery of the TMEA programme. DFID Somalia will explore how the
proposed programme can fit into and benefit from these structures.

5. Outside of this governance structure, DFID Somalia will hold monthly programme
meetings with TMEA to ensure closer and regular monitoring of the programme. There
are also ad hoc interactions which together provide sufficient assurance over
programme activities.

Management Arrangements for the Hard Infrastructure and Trade Facilitation

6. An Ethiopian National Oversight Committee and Somaliland Oversight Committee will
be established to allow detailed discussion with partners on progress and strategic
direction, including endorsement of decisions, such as possible changes in priorities,
related to the corridor.

7. DFID will support the establishment of Berbera Corridor Development Management

Agreement and Authority. With TMEA acting as the secretariat this will ensure a
productive space for Negotiating of Agreement between the authorities in Somaliland,
Ethiopia and DPW and over time, the establishment of the Berbera Corridor
Development Management Authority.

Management Arrangements for Local Economic Development Component

8. Detailed design work will take place during the first year of the programme to establish
and set an agenda for an Economic Development Corridor Board. The aim of the
Board(s) will be to catalyse inclusive growth in Somaliland and Ethiopia and ensure
coordination with other investments, some of them UK-supported, in economic
recovery, including: the second phase of the Somaliland Development Fund and the
Promoting Inclusive Markets in Somalia Programme which is improving value chains in
six productive sectors. In Ethiopia, this pillar will learn lessons from, and may
33
 cooperate with, the DFID-funded Private Enterprise Programme for Ethiopia which
aims to catalyse private sector development. The Board will be able to draw on a ring-
fenced fund to identify and implement catalytic investments for the promotion of local
economic development in the context of the corridor.

9. TMEA has developed expertise in spatial planning and linking infrastructure to local
economic growth through existing DFID programmes. The advantage of TMEA
managing all three components is the cohesion it will bring between infrastructure
development and local economic opportunities. It also streamlines the management,
monitoring and evaluation arrangements. The start-up phase is, however, an
opportunity to review TMEA’s performance undertaking these activities and there is the
potential to change the delivery agent if TMEA’s performance does not meet DFID’s
expectations.
Managing Risks

10. The overall risk rating for this programme is assessed as Major. However, the level is
within the appetite established for the portfolio; and consistent with existing HMG
engagements in the region, specifically our arrangements for working on economic
recovery in Somaliland over the last decade.

11. DFID, in the Horn of Africa, has led the way in developing enhanced risk management
systems that work at the cutting edge of new approaches to third party monitoring and
assurance, including through the widespread use of digital technologies and
beneficiary reporting and feedback. We are now able to operate with significantly
improved confidence in the levels of oversight and assurance we are able to apply to
UK aid flows in Ethiopia and Somaliland.

12. DFID, in the Horn of Africa, has a high risk appetite at the context, delivery and
operational level but a low risk appetite at the fiduciary, reputational and safeguarding
level. We mitigate risks by: working with established agencies with a strong track
record, up to date due diligence assessments on all partners, monitoring delivery
regularly including conducting site visits if possible, independent monitoring and
verification and reviewing the risks and our tolerance thresholds regularly at the
programme and portfolio level.

13. TMEA has its own risk management system, and will report regularly to DFID. The
main risks identified in this programme are detailed in the delivery plan. These will be
monitored and discussed on a quarterly basis with all partners and updated
accordingly. They will be managed or escalated in line with DFID Somalia’s Enhanced
Risk Management Strategy. See Annex C.

Partnership Principles

14. DFID uses an annual assessment of partnership principles to determine how closely
we work with government. This is also used to inform our choice of aid modality
particularly the extent to which we align our assistance with government strategies and
plans, and use government financial systems. The most recent analysis shows a
positive trajectory of progress against all of the partnership principles for both Ethiopia
and Somaliland albeit with clear outstanding challenges and from a low base with
regard to Somaliland in particular. DFID funding will therefore not be channelled
through government systems in Somaliland.

Monitoring, Measuring and Evaluating Results

15. Progress and results will be monitored, measured and evaluated through a single
logical framework (logframe). The logframe will track progress against measurable
indicators, determined in the development of this business case and monitored
quarterly. The completed logframe will provide the results against which the annual
34
 review and programme completion review will score the programme. These will be
maintained and subject to regular review with TMEA and its dedicated M&E team.
Impact and Outcome level indicators from the draft logframe include:

Impact Inclusive, sustainable, climate- and gender-sensitive economic growth

in a more peaceful Horn of Africa
i. Ethiopia: levels of women's employment in manufacturing
ii. Somaliland: rate of growth of GDP
Outcome More competitive economic development corridor with an improved
and modernised investment climate for local and international
(including UK) businesses (which for Ethiopia means more and
improved jobs and resilience in external trade and for Somaliland
means local SME growth and job creation)
i. Ethiopia: growth rate of exports of manufactures
ii. Somaliland: jobs created directly and estimated indirectly
through linkages
iii. Investors in Ethiopian industrial parks reporting Berbera
corridor as a factor in investment decisions

1. There will be two forms of M&E. The first will draw on standard TMEA reporting which
will track progress with regards to the logframe indicators and more generally in terms
of risk mitigation and associated performance. All TMEA programmes have a
programme monitoring plan which reflects a chain of expected results (as summarised
in programme logframes). Monitoring plans are agreed between the relevant
programme director and the knowledge and results director, and in all cases cover
activities and outputs. In the case of larger programmes, monitoring plans will also
cover expected outcomes. Reporting against these plans is provided quarterly with a
system of traffic lights to assess expenditure against budget, the achievement of
outputs and, if included in the plan, the achievement of outcomes. This reporting is
synthesised and consolidated for TMEA senior management. It provides the basis for
strategic decision making including adjustments to individual programmes and wider
programming.

2. DFID will also manage an external M&E contract on a call down basis. DFID will also
use its third party monitoring as an additional verification process on the Somaliland
side of the corridor. In compliance with DFID Smart Rules, the first annual review will
be carried out 12 months after the beginning of the programme.

3. Should the risk exceed agreed appetite due to changes in context and operating
environment or the programme cease to represent good VFM (based on trigger points
to be agreed during the inception phase), DFID will consider steps to exit from the
intervention. Contracts and agreements will be designed with clear break clauses to
provide the flexibility to do this in ways that will preserve critical relationships.

Monitoring and Reporting Arrangements

4. Monitoring of results will primarily be through a desk review examination of progress

reports, including through DFID monthly programme board meetings, and final reports,
as well as regular meetings with the partners in country. Field visits will be arranged
as and when required and in line with security advice.

5. In line with Joint Financing Unit (JFU) guidance, monthly financial reporting will include
progress made in expenditure and a forecast of potential over or under spend.
Significant risks will be highlighted to the JFU with clear mitigation plans. Quarterly
progress reports will be required from each direct implementing partner which will
include a narrative reporting progress against the agreed outputs, as well as:
 Progress against the agreed work plan
 Update on the funding position
35
  Update on key programme risks

Evaluation

1. The strength of the evidence base across this intervention will be assessed during the
inception phase. This will form the basis of an evaluation strategy. Likely areas of
evaluation and enquiry are:
 Climate smart infrastructure
 Trade and transit agreements
 Establishing the Berbera Corridor management authority
 Local economic development
 Inclusion, specifically on women, youth and disability within key elements of the
programme

1. Details of an evaluation plan will be reviewed annually to ensure it is responsive to

changes in the intervention and the issues flagged by programme monitoring. DFID
will explore the possibility for the plan to be revised to include the evaluation of the
proposed intervention (potentially alongside ongoing evaluation of Mombasa and Dar
es Salaam ports). All evaluations have an external reference group which includes a
donor representative. This group helps to agree the evaluation questions.

2. This will link up with TMEA’s wider evaluation plan which makes provision for:
 Thematic and project specific evaluations covering a sample of TMEA’s programme.
The purpose and scope of these is closely associated with need – for example to
understand why similar projects seem to have quite divergent outcomes or why there are
sharp differences between planned and actual performance.
 Impact evaluation to help develop a better understanding of the impact of TMEA’s
projects and programmes over the long term (intended, unintended, positive and negative).
TMEA’s impact evaluation approach is currently being developed with support from
external consultants. The work programme will include both programmatic and thematic
evaluation.
 VFM evaluation to help TMEA better understand both: the VFM (economy, efficiency and
effectiveness) of its activities, projects and programmes funds; and how well TMEA and its
partners have integrated VFM considerations into implementation. The approach to VFM
evaluation is also currently being developed with support from external consultants.

1. Externally TMEA’s funding partners take it in turn to manage an annual programme

review which is organised centrally in Nairobi to cover TMEA’s programme in full (i.e.
including the proposed intervention). DFID Ethiopia and Somalia will draw on the
findings for internal reviews and timed to feed into DFID’s annual review process.

List of Annexes

Annex A: Sources
Annex B: Complementary HMG programmes
Annex C: Risk matrix

Annex D: Logframe (attached)

Annex E: Summary of the evidence
Annex F: Key climate strategies
Annex G: Detailed gender appraisal
Annex H: Economic appraisal (attached)
Annex I: Expenditure profile (attached)
36
Annex J: Detailed strategic appraisal
Annex K: Detailed secondary benefits appraisal
Annex L: Detailed economic and social benefits

37
i Policy Practice (ibid.)
ii
iii

Annex A: Sources

i
Ethiopia 2015 data from https://data.worldbank.org/indicator/SI.POV.DDAY?locations=ET-SO . Older data (from 2011)
show that in ethnic Somali areas of Ethiopia poverty rates are somewhat higher than the national figure (33% compared
with 30%).
Data measure those living below US$1.90 per day. Data from ‘Somaliland Poverty Assessment’ (p.5), the World Bank,
June 2015. Alternative World Bank data suggest 50% of the population are below the poverty line (61% of the rural
population (Source: ‘Somali Poverty Profile 2016’ (p.8), World Bank 2017. https://www.unicef.org/esaro/2016-UNICEF-
Somalia-Poverty-Profile.pdf).
iv ‘Improving investment flows to Somaliland: identifying options for DFID intervention,’ ASI. August 2012; TMEA/MTBS
2018
v Source: McKinsey survey of Chief Procurement Officers, 2015.
vi IMF Article IV Staff Report 2016.
vii World Bank 4th Ethiopia Economic Update: Overcoming constraints in the manufacturing sector. 2015
viii “Ethiopia’s Great Run: The Growth Acceleration and How to Pace it” World Bank 2015.
ix These figures are provided by the TMEA/MTBS Diagnostic Study. Alternatives which foresee slower growth of container
traffic, and higher growth of non-containerised traffic, are provided by McKinsey. Both sets of data have been used in the
economic appraisal of this Business Case, and both indicate positive returns to the UK investment.
x World Bank, “Horn of Africa Initiative: Corridor Opportunities in the Horn of Africa”, paper #GTI01, June 2017
xi Ibid p5
xii ‘Berbera – Addis Ababa corridor. Feasibility study and detailed design for Berbera – Togochale road. Engineering
report’, Gauff Ingenieure, August 2014
xiii Ibid
xiv World Bank 2017 op.cit. pvi.
xv The impact of drought on poverty is noted in the World Bank poverty studies referenced earlier.
xvi ‘Improving investment flows to Somaliland: identifying options for DFID intervention,’ Adam Smith International.
August 2012
‘Berbera port and corridor in context: political economy factors influencing the prospects for the proposed development,’
(Section 2). Alex Duncan, Mohamed Farah Hersi, Sarah Vaughan and Dominik Balthasar. The Policy Practice, November
2016. Confidential.
xvii