Tuesday, April 23, 2024
Money TalksTurning AGOA ban into opportunity: Industrial Parks continue to defy odds

Turning AGOA ban into opportunity: Industrial Parks continue to defy odds

When US President Joe Biden terminated Ethiopia from benefiting from the African Growth and Opportunity Act (AGOA) in January 2021, the Ethiopian government and investors were caught off guard, fearing that the industrial parks would close before they could complete their mission of transitioning Ethiopia’s economy from agricultural to manufacturing.

Six investors inside the industrial parks were forced to lay off workers after losing orders from the American market, which used to buy duty free export of majority of Ethiopian apparel, garments, and leather products exported from the 13 government-developed industrial parks rented out to international brands such as Calvin Klein, H&M, Zara, Tommy Hilfiger, Warner’s, and others.

Nonetheless, a year into the AGOA ban, industrial parks reported a significant increase in earnings.

The industrial parks also defied the odds, despite the closures of Mekelle for the entire year, as well as Kombolcha, Semera, Bahir Dar, and Debrebirhan partially, due to the war in northern Ethiopia.

The industrial parks produced a total profit of 340 million birr in the fiscal year that recently ended, a 396 percent increase over the previous year. This year was also the first year that Ethiopia’s industrial parks turned a profit after operating at a loss for the previous seven years.

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The parks’ operational transactions achieved a threshold of breakeven this year. However, the Ethiopian government is still paying off the foreign loans incurred in the construction of the industrial park infrastructure. This means the profit came after replenishing the year on year operational costs, not the investment cost of the industrial parks’ development.

The Hawassa Industrial Park contributed 563 million birr, Bole Lemi 186 million birr, and Adama 172 million birr of the 1.22 billion birr total revenue generated by industrial parks this year, a 36 percent surge.

In fact, for the first time, total revenue topped one billion birr.

Factory shed rental accounts for 639 million birr of overall earnings, up 126 percent from last year and above this year’s target of 505 million birr.

In the 13 public industrial parks, 136 of the 162 production sheds are occupied. The World Food Programme (WFP) rents Semera Industrial Park as a warehouse rather than a manufacturing hub.

This year’s shed rental price brought in a lot of money, attributable to the fraction of  lease rate increment annually.

Currently, the cost of renting a shed fluctuates between USD one and USD three, per square meter. For example, shed rates at Hawassa Industrial Park were USD 2.75 per square meter, up from USD one when the park first opened in 2017.

Nonetheless, the shed leasing fee is heavily subsidized.

“The shed rent price does not even cover one percent of its cost. The most expensive shed, for example, costs 150 birr per square meter. However, the sheds’ construction cost was 7,000 birr per square meter,” said Addisu Mamo, the Industrial Parks Development Corporation’s (IPDC) deputy CEO for corporate resource management. The IPDC is a state-owned corporation that develops and administers public industry parks.

The exchange rate gain was also another significant source of profit.

As the central bank continues to weaken the Birr, which has fallen from 38 birr per USD last year to 52 birr today, the corporation has reaped net gains from its exporting investors. This year, the industrial parks generated USD 196 million, up from USD 83 million registered in the previous year.

This windfall from exchanges aided the park’s performance.

The other revenue source was business consulting services, which brought in 34.6 million birr. Despite the fact that the corporation has 11 revenue streams within the industrial parks, shed renting and exports remain the primary sources of revenue.

The IPDC is still unable to collect USD 12 million from the shed lease due to the investors’ failure to pay due to COVID-19 and, in part, the conflict in the country. It also filed a lawsuit against six investors.

To compensate for the AGOA market loss, the industrial parks slashed costs and relocated their export markets to Europe and Asia.

The AGOA ban has had an impact on Ethiopia’s industrial parks in terms of job prospects. Following the war in northern Ethiopia, external funding has been suspended, particularly World Bank funds.

The investors inside the parks have been forced to lay off approximately 5,000 workers. The government aimed to create 75,000 jobs inside the 13 industrial parks this year, but only 57,000 were created.

“The increasing high turnover is partly due to decline in orders. When international purchasers place large orders, the investors in the industrial parks hire in large numbers,” Sandokan Debebe, CEO of the IPDC, told Ahmed Shide, Minister of Finance, and officials from the Public Enterprise Holding and Administration, which regulates the industrial parks.

“When there are no orders, the investors inside the industrial parks laid off employees. Another reason is employees’ low salaries. We are attempting to improve this,” Sandokan added.

On September 1, 2022, officials met at the Hilton Addis hotel to assess the operation of the industrial parks. The IPDC and the Ministry of Industry have also completed research on the effects of the AGOA embargo on Ethiopian investors and developed alternative venues.

“Among the alternatives is that we can reduce taxes for investors to compensate for the taxes they suffer when entering the US market because we are barred from participating in AGOA. They could absorb the US tax if we gave them a tax cut. However, this does not guarantee them a price edge in the US market,” Addisu explained.

He believes AGOA reduces the cost and boosts acceptance in the United States.

“The other option is for our exporters and their US buyers to divide the tariff imposed following the AGOA prohibition. They normally bear an equal portion of the tax burden. In the long run, we intend to seek more markets throughout the world. AGOA is a US government political instrument. It is not a contract. The US administration has made a unilateral offer. As a result, we should not rely on it in our financial activities,” Addisu elaborated.

Another goal of the administration is to focus on the domestic market. Following the AGOA ban, manufacturers in industrial parks sold items worth USD 161 million to the local market, effectively replacing imports.

This also represents a paradigm shift from the previous 100-percent export policy prior to the AGOA restriction, towards import substitution. The industrial parks have set ambitious aims for the fiscal years 2022–23, in keeping with IPDC’s strategy for 2025.

The parks are expected to generate a total revenue of 2.34 billion birr and a net profit of 830 million birr. The export revenue target is set at USD 322 million.

The war in northern Ethiopia not only resulted in Ethiopia’s exclusion from the AGOA but also exploited the country’s ability to manage on its own.

Because of the conflict, the government was compelled to change from mass-developing industrial parks to offsetting the output of existing ones. The corporation must also adjust its focus from constructing and operating industrial parks to being an agile commercial entity.

The foreign direct investment (FDI) inflow into industrial parks in the months following the unilateral ceasefire has been significantly larger than the total inflow last year, according to Sandokan.

“It’s a blessing in disguise,” Sandokan said, describing how they used the war to their advantage.

“The shocks of losing AGOA as well as the war were completely outperformed by industrial parks. The transformation must continue to incorporate the output of industrial parks into economic value. We have been waiting for this moment to reap the benefits of the massive public investment made to establish industrial parks,” Ahmed stated.

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