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Money TalksA peek to Ethiopia’s maiden sovereign fund takeoff

A peek to Ethiopia’s maiden sovereign fund takeoff

The Ethiopian Investment Holding (EIH), the first sovereign fund in the country, is set to takeoff after it was established with a whopping 100 billion birr authorized capital in January 2022. But little is known as to where it will start work and its uncharted future, except for the superb national objectives it wishes to uphold. Even though there are a few companies with such a huge resource in Ethiopia, capital alone cannot guarantee success.

And EIH leaders are looking around the world for lessons.  

Ethiopian governments in this century have exhibited an affinity to establish state owned enterprises (SOEs), an unsurprising move where “liberal economy” is a foreign concept. The bulk of these businesses, which were over 360 SOEs, were privatized in the past three decades, beginning right after the fall of the communist regime in 1991.

But PM Abiy Ahmed’s Prosperity Party is taking a different path; embarking on deregulations and consolidation of SOEs concurrently. Today, only 36 SOEs are in the hands of the government. These enterprises constitute around 10 percent of the GDP. But now, the government envisages to leveraging its role through its holding company.

This week, the EIH disclosed that 27 state owned enterprise are coming onboard with the rest eight that are either reporting losses or have huge debts, expected to join the company through time.

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The rest of the Enterprises, have more of government missions, than pursuing pure business, which is incompatible with the company’s ‘pure business’ principle. Gross assets of the 27 that joined the holding company is estimated at over two trillion birr, almost half of the country’s GDP.

The company does not only own the SOEs now, but also partners with each to co-invest in their respective sectors as well as in new frontiers, locally and abroad. Last month, the EHI and Ethiopian Petroleum Supply Enterprise co-invested in a fuel terminal in Djibouti, becoming the company’s first investment portfolio.

It eyes seven star hotels, tertiary hospitals, and other huge projects across all sectors to invest in.

Mamo Mihretu, CEO of EIH and PM Abiy’s macro-economic advisor, admits the company’s vision is very broad but mainly targets intergenerational wealth creation. “Many developing countries including Ethiopia think they are poor. They forget about government assets, which is a huge resource. Ethiopian government’s asset is estimated to be 246 percent of the GDP, if well accounted and professionally utilized.”

The holding company is tasked with financing development in Ethiopia. Budget has been the sole source of development financing in Ethiopia but the country’s tax revenue remains to be low.

The first target of the company is to serve as a strategic investment arm of the Ethiopian government. Before, the government could not go abroad and invest. The second is to consolidate government assets, provide oversight, unlocking the potential of these assets and add value. The EIH plans to do this, by running government assets just as a private for-profit business.

The third target is attracting investments, both FDI and amongst the SOEs themselves. Many SOEs are not utilizing their potential, because they could not attract foreign investors and add more value on their assets. The company plans to bring capital from abroad, and channel into adding values on these assets.

The EIH aims to bring substantial amount of foreign investment into Ethiopia, according to Mamo, who has no experience of running business entities but worked in international organizations including the World Bank. He says Singapore’s Temasek is a good example of a successful sovereign fund.

The company will generate its own capital by issuing local and international bonds and contributions from member SOEs will be mainly in kind, including land. Among other things the company will have a 25 percent stake in the Ethiopian Securities Exchange (ESX), which will be established in a year’s time, listing the SOEs among other IPOs. EIH also plans to invest in leading stock markets globally, in addition to its ambitious plan to invest especially in African economies.

Nonetheless, there are tangible concerns weighing on the minds of experts, policymakers and leaders of the SOEs themselves, regarding the holding company’s scope, point of departure, and point of intersection with SOEs, among other concerns. The fact that the SOEs were established with the aim to serve public goods, is also considered incompatible with the company’s ‘pure business’ approach.

Ministers, EIH leaders, CEOs of the SOEs and other top officials and experts; all turned students, during discussion sessions held on June 23, 2022, inside CBE’s new high rise. Dubbed the “EIH On-boarding Summit,” the event was attended by CEOs from the 27 SOEs selected as EIH subsidiaries.

Dag Detter, former president of Stratum, state holding company of Sweden; a banker and internationally acclaimed expert for assisting various countries setup sovereign funds, was a speaker at the event. When Dag took the stage, everybody was forwarding questions, including Ahmed Shide, Minister of Finance, and Yinager Dessie (PhD), governor of the central bank, just to name few.

Ahmed asked the relationship of a sovereign fund with contingent fiscal liability, national debt, and macro-economic management. Dag shortly briefed proper balance sheet of EIH can help Ethiopia surf through economic crisis, and also improve Ethiopia’s soundness for external debts in the eye of rating agencies. “But you must allow the big four international accounting firms to come and operate here.”

Yet, the EIH itself is a vague entity even for Girma Amente (PhD), former minister of the former Ministry of Public Enterprises. “Government expects the SOEs to fill private sector gap and bridge development purposes. Now the EIH expects SOEs to do only business. The objectives clash,” Girma said

However, Abe Sano, president of CBE, now subsidiary of EIH is confused as to how a purely business oriented government arm can fit into the political context of Ethiopia.

“The politics focuses on short term targets, responding to public social, economic and political problems. SOEs are made to facilitate government’s intervention to deliver on public goods. But business is a long term decision making. The corporate structure of the EIH is also a dilemma for me. It is good the most powerful SOEs are coming together. But there are also risks of amalgamating SOEs from non-related sectors,” said Abe.

Detter, much optimistic about the EIH shares Abe’s concerns.

“Obviously there will be pressure from politicians, when SOEs under the EIH shifts towards pursuing pure businesses. There will be a mess of politics, corruptions and scandals. The CEOs of SOEs and the EIH must be from a business and commercial background. Stop politically assigning political officials to run SOEs. Top officials including the PM, should not directly involve, through joining the board,” said Detter.

Detter believes the Ethiopian government made the right move, in establishing a holding company and putting SOEs under it. Previous trends of keeping SOEs under Ministries, agency or any regulatory body, were wrong. For him, SOEs can be successful only under a holding company.

Comparing progress towards launching its maiden sovereign fund with other countries, Detter says Ethiopia is different. “The political will in Ethiopia to establish the EHI is strong. It took just a year to establish it. Some countries took eight years to finalize the same process.”

However, many experts fear the company might face risks in inefficiency, high level corruption and SOEs closed corporate culture, hindering them from fully integrating with the EIH.

Experts that talked to The Reporter on conditions of anonymity stated “there is no mechanism to protect such public entities from political vandalism every time there is regime change. Why is the government placing every resource under its new arm? Why is it controlling every resource, shrinking the private sector?” asked the expert.

“For instance, land is one of the biggest resources the EIH is planning to commercialize. This means the government keeps the land policy forbidden for privatization, a key for productivity and private sector growth in Ethiopia,” added the expert.

Some also say the EIH is a result of Ethiopia’s changing foreign policy, claiming the government established the EIH in response to America’s sanctions that have dried up Ethiopia’s financial resources.

Detter agrees Ethiopia needs deregulation, which he says the government is already doing. He agrees the EIH’s success is not guaranteed, without discharging all the details required to run a sovereign fund.

“The EIH should not be an extension of government policy. Neither should it be forced to serve as government subsidy channel. The government must separate asset management from policy. Accrual accounting, valuation of SOEs and the EHI are key. Objective of any sovereign fund including the EIH is all about commercializing government assets,” Detter said

“The EIH can serve the public without using tax revenues. If everything is done accordingly, EHI can become a model for other countries’ sovereign fund. It can share government’s budget deficit and turn failed firms. It can exceed capital market. Simply, it will be Ethiopia’s Tesla. But all machineries must work precisely,” added Detter.

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