Activating the private sector
Adamou Labara is the Country Manager of the International Finance Corporation (IFC), the private sector arm of the World Bank Group (WBG),covering Ethiopia, Djibouti, Eritrea and Somalia,based in Addis Ababa since April 2011. He is responsible for IFC’s activities in these countries. Labara joined the IFC in 1998 as an Investment Officer for the Central Africa Region. He later moved to the Abidjan office, then on to Johannesburg and Dakar holding various positions and overseeing financing to different sectors, including financial markets, general manufacturing and services. He also worked asresident representative for the Democratic Republic of Congo (DRC) based in Kinshasa before moving to his current position in Ethiopia;but still continues to oversee IFC’s activities for the DRC. Labara holds Mastersin Business Administration from Henley Management College, United Kingdom, and another Masters’ degree in economic sciences from the University of Yaoundé, Cameroon. BirhanuFikade of The Reporter sat down with Labara at his office to learn the role of IFC in Ethiopia following the reform measures recently introduced by the Government of Ethiopia (GoE). Excerpts:
The Reporter: Following the introduction of the new reform measures by GoEIFC is becoming more forthcoming in financing projects under the PPP framework. Do you agree? And why is that?
Adamou Labara:There is a major shift in Ethiopia from the public driven kind of economic growth to the private sector led growth. IFC is established to support and develop the private sector. Back when IFC was established, in 1956, many people don’t know that Ethiopia was one of the founding members of the Corporation. It was the only African country present at the time of IFC’sestablishment. The mandate given to the IFC was clear: to focus on private sector development and complement the activities of the International Bank for Reconstruction and Development -IBRD or the World Bank.
The previous administration was also adamant about privatesector-led growth. Unfortunately, the economy still remains to be dominated by the public sector. What is the IFC seeing in the current administration which is different from its predecessor?
Ethiopia is still implementing the second Growth and Transformation Plan (GTP-II). It was enshrined in the GTP-II that the private sector will be leading the economic growth. As a continuation of what our CEO said during his recent visit to Ethiopia, IFC has to be boldand more involved in thisreform process. It is very much in line with what we have been doing here, so far. Prime Minister Abiy Ahmed (PhD) made announcements recently regarding the opening up of certain sectors for private sector investment. IFC will strongly support those sectors and work with the GoE to ensure that they will be opened in a strategic way. That is one of the main reasons why the IFC wants to become bold and support the process.
There are traditional thoughts thatsuggest the likes of the World Bank Group (WBG),IFC by extension,and the International Monitory Fund (IMF) are all about prescribing policy. Since the time of the Structural Adjustment Program (SAP), these institutions have lost certain degree of trust; and when Ethiopia says it will open up, many commentators advised Ethiopian authorities to be more careful of these institutions. Why do you think this concern still persists?
I would like to put it differently. For instance, what would be the difference between Development Bank of Ethiopia (DBE) and the IFC? It is very simple. In IFC, the government of Ethiopia is less than a 100 percent shareholder; and whatever we do, we focus on the private sector. We provide support to the private sector through project financing. We have two windows through which we support private sector development. The first one is financing and the other one is advisory services. In the advisory service window, we work at two levels. At the first level, we work with governments and administrations. We look at specific sectors or the economy in general and identify ways through which the sectors or the economy can be more business friendly. Then with both the local and foreign businesses and the government, we will look at channels such as the public private dialogue forum to discuss and agree on reforms to be implemented. The public private dialogue forum, which we initiated with the Chamber of Commerce and GoE some years ago,has indeed informed lot of reforms in Ethiopia. Those reforms were focused, for instance,on business registration (how many days and procedures it takes) and have had direct impact on local small and medium businesses. That is one example of thekind of work we do in the advisory services, from the investment climate perspective. The other level is advisory services directlylinked to private firms. Let’s say a company has maize or some other agricultural products that are valuable raw materials. We will work with that company on how to develop a sustainable supply chain through support to farmers. In summary, at one level, we work with the government and at the other level we also work with companies. We do provide financing services, too. Our mandate doesn’t allow us to request government guarantees when we finance a project. When a private company presents a project, we will look at its viability, financial soundness, environmental and social aspects and market considerations. We will assess the risks of the project and finally we decide to finance the project or not. Our financing doesn’t go to the government. It doesn’t add a dime to the overall public debt volume of the nation. Instead, it directly goes to the companies. Again, the main difference we have with DBE is that in DBE, the government has a 100 percent shareholding and it is less in IFC.
The IFC and perhaps other development financing entities are primarily focused on export-oriented business. The country is a net importer; the export sector remains to be an underperformer generating very small amount of hard currency. What would you say to that?
When we invest, we provide hard currency. We expect the payments to be made in hard currency as well. So, the first thing that comes to mind will be the export sector. But,the export sector doesn’t operate in isolation. You need a local supply chain. You need to work on the supply chain to ensurethat raw materialsare available locally. That helps to avoid importations of raw materials. You will remember that during the visit of IFC’sCEO, one of the agreements signed was local currency financing. That will serve this purpose. Wealso have the import substitution approach. For example, today, Ethiopia imports edible oil. But,the country has the potential of being a net exporter in that particular commodity. As long as the IFC doesn’t have a local currency facility available in Ethiopia— a different type of facility where we provide funds in hard currency and get paid in local currency—those companies that would borrow from the IFC in foreign currency will still need to exportsome of their products(even if the local demand is not fully satisfied) in the context of hard currency shortages. They will need to export to generate their own hard currency, to cover their spare partsand equipment needs and to service their debts. In summary, we support both export-oriented firms and those firms that help to substitute importations of goods.
Let’s talk about macroeconomic matters. There isan ever increasing costs of living and inflation in Ethiopia. We also have unemployment rates that led the country to a political crisis. The ever widening current account balance and the critical shortages of hard currency have been the hallmark of Ethiopia’s macro economy.So, do you see the IFC playing an advisory role in macroeconomic matters?
This is how we see ourselves;we view ourselves as a contributing partner to bigger matters of the economy. When you finance a company, for instance, which instead of importing edible oil manufactures it 100 percent locally, you help minimize the burden on the balance payment. It also helps to increase foreign reserves and reduce the import bill. That is just one area we could talk of contribution to the macro economy. Exports of certain products also help to generate some hard currency as well. Thecompanies IFC support will create direct jobs and pay taxes. Their operations will also help to create induced jobs too. When you look at the supply chain and the distribution networks, the figures will tell you how much those companies have helped to stabilize the economy. That is how we consider our contribution: from firm level to the broader macro economy.
You have touched up on the local currency based credit facility. There is also a global trade finance agreement signed a few weeks ago. Tell us the developments of those agreements and how the banks are reacting to that arrangement?
The global trade financing program is both a financing and an advisory program. It supports the trade sector. We will support local banks with the view of improving their trade financing abilities. We will provide guarantees because that is the easiest way to start the program. The guarantees are provided for Letter of Credit (L/C) the banks open on behalf of importers. Today, for many banks in Ethiopia, when they open an L/C, it needs to be confirmed by an external or correspondent bank. Those foreign banks in order to givetheir confirmation to the L/C either they have a confirmation line formthe local bank or they will request a 100 percent cash deposit to be made for the amount of the L/C. The IFC guarantee, in this case, will substitute the deposit requirements. Let’s say a foreign bank X has anL/C confirmation line of 10 for a local bank Y. Perhaps the local bank Y needs 15 due to increase of business, and the foreign bank X is not ready to add the extra five. In this case, IFC will provide guarantees for the additional five on behalf of the local bank Y. The other area we would help local banks is by providing trainingsin trade related issues, which are very critical. In Ethiopia, banks predominantly use L/C as a trading instrument. But, there are many other trade instruments out there. Local banks would be very comfortable using other instruments only when they are well trained and understand the instruments.
Which one of the trade instruments are we talking about?
You have additional instruments that are useful for trade like documentary credits. Also, within the L/C range, there are different types: Green Clause L/Cs, Red Clause L/Cs and others. But, here in Ethiopia, we are using just one form of L/C. The training would also cover areas such as trade risk management, trade operations, liquidity management and etc. When a bank opens an L/C, what are the steps they should follow in terms of risk management, to ensurethat by the maturity of the L/C, the bank has built enough liquidity to cover the L/C. When we provide guarantees, we want to make sure bankshave a sound liquidity management skills and processes. The IFC Global Trade Finance Program has been in operation since 2008. Worldwide, USD 65 billion L/C based transactions have been processed with zero default. In Sub Saharan Africa, the major users of the program are Nigeria and Kenya. In Eastern Asia, we have Bangladesh and Vietnam as leading recipients.
At times, we hear our banks are facing issues with the L/Cs they have opened on behalf of companies. We hear there were incidents with overdue payments from Brazil. Some clients of local banks were facing difficulties to open L/C as the corresponding banks refused to confirm L/Cs and insisted businesspersons being forced to carry cash and settle payments upfront in Brazil. Since IFC has launched the trade financing program here, I am sure you must have come across similar incidents, right?
We have been discussing and working on the introduction of the global trade financing program in Ethiopia for about a year now. We have some 200 confirming banks in the program. It is typical that when an economy is growing, the needs also keep increasing. Sometimesyou might have up to ten or more confirming banks that are interested in a particular country. The confirmation lines they have for L/C might not be enough to cover the country’s needs. Once their limits are reached the correspondent banks may not have appetite to increase the lines for some countries. Therefore, the more a country grows, the more you need a bigger pool of confirming banks. We are not aware of the specific situation you have mentioned. But what I can tell you is that there have been some delays. But, Ethiopian banks always eventually make payments. There has never been any default from an Ethiopian bank.
How are the foreign companies operating in Ethiopia are considered to be part of the global trade financing program?
The Global Trade Finance Program is for the banking system. The guarantees are for the banks. We would agree on a list of sectors andproducts such as raw materials, equipment and machineries, fertilizer and others. As long as the transactions are made based on those criteria, be it local or foreign company, there would not be any distinction.
Do you have any figure on the size or the amount of money that the IFC could cover in the trade financing program? The authorities are assuming big figures.
We are still making assessments. Fertilizer importation is somewhere USD 400 to 500 million per year. If you take fuel importations, it’s also huge. When you add textile sector with the growing number of industrial parks, the import billis really significant. Some foreign banks told us that every year average outstanding amount for Ethiopia from one bank alone is estimated to be between USD 200 to 300 million. We are still assessing but the numbers are indeed very significant.
With respect to the solar energy developmentprojects IFC is attached with,that is two potential projects with a combined generating capacityof 500 megawatt (MW) solar power,can you tell us how they are progressing?
I think, the first phase of the scaling solar development is reaching the procurement stage and it is a very important stage. We have signed an advisory services agreement to support 500 MW in total and we will be doing the first 250MW at the first phase. At the Ministry of Finance, the Public Private Partnership (PPP) directorate general has been tasked to oversee the process.
The much needed financial and technical supportis coming to Ethiopia; but the question is at what cost?
I need to go back to what I have said initially. Remember the reference I made with regards to DBE and IFC. Sure, we finance projects. Indeed your returns should be commensurate with your risks. Since we have a local office here, we have a better understanding of the risks of businesses. We don’t rely on what we hear from foreign media. We know the reality on the ground. We have a different and a better view of the risks involved in this country. When we finance projects, we assess those risks adequately. For us, the idea is to set up a benchmark for others who don’t have operations or a physical presence here. Whenever, they see what we have assessed and presented as a benchmark, they can align themselves with our statistics for better judgments.