Privatization and its challenges in Ethiopia

By IndepthAfrica
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Aug 21st, 2014
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By Ezana Kebede

The purpose of privatization is to limit the involvement of government in the productive sector of the economy so that it makes public sector reforms to relieve scarce resources and re-deploy them to higher priority poverty reduction programs. In the case of Ethiopia the government has undertaken privatization programs at the risk of consolidating the state owned enterprises in the hand of few oligarchs.

Early in 1994, Ethiopian Privatization Agency (EPA) was established by proclamation No. 87/1994 to ensure an orderly implementation of the privatization program. As recently as December 2013, the EPA re-organized and became the Privatization & Public Enterprise Supervision Agency (PPESA). Currently, PPESA, which is chaired by Deputy Prime Minister Aster Mammo, intends to sell 11 more public companies to the highest bidders.

PPESA has so far implemented asset sales for retail outlets and restaurants and mining enterprise, as well as implemented employment management buy-outs, joint venture, management contract, competitive sale and restrictive tender. The agency has earned up to USD 1 billion to date.

The African Development Bank (AFDB) reports that during the first phase of privatization in Ethiopia the EPA privatized 176 small enterprises using in house expertise and government resources. For the implementation of the second phase of privatization for more complex government enterprises, the Government of Ethiopian (GoE) had asked assistance from the African Development Fund, German Development Agency (GTZ) and the World Bank. GoE has been awarded a grant of 3 million USD from it drawing right (Units of account) equivalent of 4 million USD.

However, the AFDB according to its “Project Completion Report”, state that the main advisory in Ethiopia’s privatization program, GTZ, has pulled out due to budgetary constraints. But most importantly, the same report does not mention how the stated owned enterprises were valued to be sold to the highest bidder.

According to a WikiLeaks US Embassy Cable on 01/11/2008 to the US Treasury, “While the vast majority of enterprises in terms of numbers– 233 of 254 — have been either sold to employees in a Management/Employee Buyout (MEBO) arrangement or purchased by individual Ethiopians, these are mostly small shops and hotels. In dollar terms, nearly 60 percent of enterprises have been awarded to Al Amoudi-related companies.” https://www.wikileaks.org/plusd/cables/08ADDISABABA82_a.html

During the years1999-2001 Washington institutions have been pushing for the privatization of the banking sector in Ethiopia and opening of the financial sector to foreign banks, particularly interested in the sale or break up Commercial Bank of Ethiopia (CBE). Considering CBE is ranked the 46th largest bank in African based on asset size, the pressure for the break-up of the government bank at the time did not make sense. Having a large efficient indigenous large bank for Ethiopia is important, especially if the GoE decides to open the banking sector to foreign competition. But this does not mean the government owned banks in Ethiopia should abuse public money by lending freely to the Ethiopian-Oligarchy.

One issue amongst others that the International Monetary Fund (IMF) had with Ethiopian authorities were they were not allowing a market determined interest rates. The second reason was making an early payments of Ethiopia airlines debt using the National Bank of Ethiopia reserve, without consulting with the IMF, the IMF felt Ethiopian authorities were not serious about reform. In which the IMF temporarily suspended the Enhanced Structural Adjustment Facility to Ethiopia on the ground that the country had failed to meet some of the agreed upon conditions (BBC News).

Eventually, IMF reinstated Ethiopia back into the program and withdrew the demand for the breakup of the CBE into three parts to allow competition. Thus rather than breaking up the government owned banks and opening the financial sector to foreign investors, GoE allowed the opening of local private banks i.e., Awash, Bank of Abyssinia, Dashen Bank to mention the few. For IMF’s change of heart Professor Jospeh Stiglitz, the former member of the Council of Economic Advisers under President Clinton, and at the time the World Bank chief economist, takes full credit for the IMF’s change of heart in his book “Globalization and Its Discontent”.

Some of the other structural adjustment programs pursued included the establishment of guidelines to sell a minority stake in Ethio-Telcom with the help of the World Bank by April 1999; bringing ten state farms and two large enterprises (brewery and cement) factory to point of sale by December 1998; Initiate privatization of the Construction Business Bank by September 1998, again with the help of the World Bank; and to bring at least 80 other enterprises to point of sale by June 2001.

The EPA determined the transfer of these companies to the highest bidder or to compatible companies that could bring in technology and knowledge transfer as it saw fit. However, attempting to privatize the state owned companies without proper valuation of the assets, such as future cash flows, proper disclosure of financial statement to the public is a misguided policy.

Offering these enterprises in a stock market will give a much broader engagement in the privatization process by the public. The establishment of a stock market will not only address initial public offering, but enhance transparency, accountability, proper valuation of government owed enterprises and tax collection process. The government should therefore focus on much broader implications instead of minimal gain in sale of the government enterprise. As long as there are proper regulatory requirements in place, such as capital structure, firm specific credit risk exposure, capital adequacy and transparency there is no harm in privatizing large government owned banks such as CBE. In fact, the privatization of government owned banks in Ethiopia would lower “crony capitalism”.

Although it is not as visible as it was in early 2000, the pressure by special interest groups to open Ethiopia’s banking and telecom sector to foreign investors continues.

Even though, opening the banking sector to foreign investors is outside the scope of the privatization issue. Surprisingly major foreign financial media outlets are also fixated on commenting that the banking and telephone sectors in Ethiopia are not open to foreign investors. The same interest groups, have failed in reporting on the privatization of land from the state to the people of Ethiopia, that would capitalize agriculture, “Ethiopia’s salvation lies on the formation of a middle class and the privatization of land and tenure security.” http://www.ethiomedia.com/17file/6026.html, states an Ethiopian economic professor at Ferris State University, in the United States.

Indigenous Addis Ababa based transaction advisory group have also gone as far as entertaining the sale of the Big-5 (also the cash cow for government coffer), namely Ethiopian Airlines, CBE, Ethio-Telecom, Ethio-Insurance and Shipping Lines, to raise $USD 7.7 billion to meet the government’s Growth and Transformation Plan (GTP). This was reported in Bloomberg, Reuters and Access Capital 2011/12 Macro Economic Hand book. One of the arguments made by Access Capital is to privatize these enterprises to curve the massive debt/ratio and external borrowing.

The Big 5, in the eye of the public are considered national treasures. Especially privatizing fully to meet the Growth Transformation Plan (GTP) to finance untested mega projects is an unwise measure. It would be like “killing the Goose that laid the golden eggs.” The government should privatize these large companies, if only it identifies operational inefficiencies, to have a better management, technology transfer and transparency. Even then, it could privatize a portion of these public firms only to add value, and not to be sold to single investor, but to the general public.

A good example is the controversial privatization of the Lega Dembi Gold mine in August 1998 that landed with a single investor and was sold for $172 million to MIDROC Gold Co. which is 98% owned by Al-Amoudi. The government of Ethiopia owns a minority stake of 2 percent. Since MIDROC acquired the Sidamo province mine in 1998, to date the price of 1 troy ounce of gold has increased by 36.4 % . US government geological survey estimates the remaining life of the gold mines to be at 13 years. According to World Bulletin, last fiscal year Ethiopia earned over $456 million from gold export. http://www.worldbulletin.net/todays-news/142600/ethiopia-earns-456-million-from-gold-exports

Privatization, if carefully implemented would improve the performance of state-owned enterprise. An impact and popular technique to privatize state owned enterprise is an initial public offering (IPO) or a distribution of ownership voucher.

In conclusion, privatization is a slow process, but Ethiopia should avoid the failure of the Russian privatization experience where large state owned companies end up in the hand of few oligarchs. In Russia through the distribution of ownership voucher, managers and employee gain control of two-third of the privatized firms.

The GoE can limit the number of shares sold to single investors, whereas management, insiders and single investors are not allowed to own more than 5 percent of the initial offering. That way the proportional stake of the privatized asset are widely distributed to local investors or the Ethiopian-Diaspora to come up with pooled growth-capital or a collective strategy to purchase the government owned enterprises.

Note:
2014 Special Drawing Right of ADB 1 Unit of Account = 1.34 USD


The author is graduate student at John Hopkins University. Email: ethiopia.capitalmarkets@gmail.com

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