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Deciphering privatization debate

Deciphering privatization debate

The far reaching impact of its policies has never weighed down on the Ethiopian government the way they are in the past few months. Stepping out of a destructive political conflict and devastating draught, compounded by a deteriorating export earnings, the Ethiopian economy has reached a point where it cannot finance its essential imports such as medicine and raw materials. Since a debilitating foreign currency shortage is at the center of this problem, last week, the government of Ethiopia has decided to let go some of its State Owned Enterprises (SoEs) to gain some FoREX. Asrat Seyoum explores the implications of this decisions.     

DECIPHERING PRIVATIZATION DEBATE

 

Tectonic shift is what can rightly explain the changes happening in Ethiopia in the past two weeks. Yet again, the level of reform taking place since the ascendance of the new Prime Minister, Abiy Ahmed (PhD) to power is simply mind boggling. In fact, the speed with which the new PM is going to places and making decisions is highly unprecedented.

Well, just last week, Abiy has added his party colleagues in the 36-people Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF) Executive Committee to this vibe while deciding two of the most controversial decisions of his young administration. As the ramifications of the decision to fully honor the Algiers Agreement between Ethiopia and Eritrea is still being debated; the second decision which is the plan to liberalize selected State Owned Enterprises (SoEs) has sent shockwaves across the business environment.

The decision came out of nowhere as most commentators reflected in the wake of the shocks. The announcement did little to settle the nerves and address the concerns. If there is one thing that is clear, it was that the privatization of the SoEs would be partial with the state still retaining the controlling interest in the enterprises. On the other hand, the decision was also clear in a sense that some of the biggest and most profitable SoEs were where the privatization process would start.

Hence, national flag carriers such as Ethiopian Airlines and Ethiopian Shipping and Logistic Services Enterprise (ESLSE), and highly profitable SoEs like Ethio Telecom and Ethiopian Electric Utility (EEU) were said to be slotted for privatization. This very fact is one of the points raised by commentators in opposition to the decision to privatize the enterprises.

DECIPHERING PRIVATIZATION DEBATE

 

For starters, what this decision means for the economy; is it a signal for more economic liberalization to come is also a bone of contention for pundits. Traditionally, privatization is one element in the overall economic liberalization package pushed by international organizations like the International Monetary Fund (IMF). The Government of Ethiopia had its own run-in with this reform package, dubbed the Structural Adjustment Program (SAP), in the early 1990s.

Accordingly, the then privatization agency unloaded a number of SoE enterprises including the lucrative Legedembi Gold Mine which was sold to the Saudi-Ethiopian business tycoon Mohammed Al Amoudi for a record price back in 1997: costing USD 172.3 million. The 20 - year mining concession was in fact the largest until Diageo a British spirit maker- took Meta Abo Brewery, another SoE, for USD 225 million in 2012.

After the two, the biggest acquisition was made much recently in 2017 and 2018 where Japan Tobacco International (JTI) acquired another SoE, Ethiopian Tobacco Enterprise, for a staggering USO one billion coming on top of the privatization game. In between, the agency and its offshoot ministries through time sold a total of close to 400 State Enterprises in Ethiopia. 

Ermias Amelga, founder of the embattled Access Real Estate, is one of the then diaspora returnees who acquired a state owned enterprise under the then privatization program.

“In the early days of EPRDF, grappling with large accumulation of foreign debt inherited from the previous war economy, Ethiopia was forced to implement liberal economic policies to get the support of IMF and get the economy moving,” Ermias remembers. And he says, one of the first steps taken to liberalize the economy was to massively engage in the privatization of its SoEs.

The pace of the privatization did not continue the same, however. In fact, with the adoption of a developmental state path around the turn of the new millennium, the government of Ethiopia without officially stopping the privatizing, started to establish new ones. This effectively put an end to the economic liberalization policy pursued in Ethiopia and the state started to build on its holdings.

The recent decision to privatize selected SoEs in Ethiopia hence seems to have revived the deeply buried aspiration of the private sector to see all-out the economic liberalization of the country. The likes of Ermias are adamant about the need to follow the privatization process with economic wide reforms: Liberal reforms such as the liberalization of exchange rate regime, opening up of the capital account and the rebalancing of the Private-State roles in the economy.

For an anonymous expert, the decision to privatize selected SoEs is nothing more than the government’s ploy to overcome its severe foreign exchange shortages and has nothing to do economic liberalization and improving the efficiency of these companies. “This gives off the false image of liberalization,” he said. He says the plan is to apportion the monopoly right held by the government to selected private investors with ample cash; preferably foreign currency.

“True liberalization would be to open up the economy for competition and allow the private sector to provide services together with the SoEs,” he argues. On the other hand, the prospect of these enterprises to be privatized to the public and contribute to income redistribution is quite slim, he asserts. “It perhaps could be redistribution between the government and selected investors; hence it has nothing to do with liberalization or efficiency or benefiting consumers,” he added.

Assuming that it is just selected privatization of some SoEs, the next question would be “why” and “how”. Surprisingly, the “why” seems to be the one thing that most commentators agree on. As far as, Ermias is concerned currently “the ground is shaking in context of the Ethiopian economy.” In a recent article that he wrote authored, Ermias has made a bold statement claiming that the Ethiopian economy is currently suffering from an economic condition called stagflation: a persistent high inflation combined with high unemployment and stagnant demand.

It is rather straight forward, argued Ermias in an exclusive interview with The Reporter this week, “the shortage of raw materials is a crippling problem. Our economy is highly import-intensive; our investment is highly import-intensive, so is our consumption”. “The foreign exchange problem is far more debilitating than we usually think,” he continued to argue and it is fairly straightforward to see that economic activities are actually slowing down in Ethiopia.

“We have to ask why we could not access diabetic shots or construction of condominium houses have stopped or basic consumer goods like bread and egg have skyrocketed in price in a short amount of time,” reiterates Ermias.

In fact, the government as well is not shy about the current foreign currency problem choking Ethiopia. In a recent presser, Minister of Government Communication Affairs Office, Ahmed Shide, admitted that the shortage of foreign currency facing the nation is one of the factors contributing to the decision to privatize the SoEs. Yinager Dessie (PhD), Commissioner of National Planning Commission, dealt with this issue at length in his interview with Fana Broadcast Corporate.

The commissioner left nothing unsaid in this regard; he admitted that the delay in some of the government projects and the fact that they were unable to generate foreign currency, the widening of the country’s trade imbalance, the crippling external debt accumulation has cornered the economy. “We have selected these enterprises precisely because they are valuable and can generate foreign currency,” Yinager stated.

Regardless, there are pundits who could not swallow this logic at all. For the anonymous expert, if foreign currency is the main problem, it is not really clear how sustainable foreign exchange earners like Ethiopian Airlines and ESLSE are included among the SoEs slotted for privatization. “It is particularly surprising to see sustainable dollar earners like Ethiopian privatized,” he argues; and if foreign currency is a real problem he asks why the government is not ready to open up the banking sector to foreign investors which stand a far better chance of improving the foreign currency position of the nation.

For a seasoned tax professors like Fisseha-Tsion Menghistu (PhD), problems like foreign currency could not justify selling most prized properties of Ethiopians to foreigner investors. “This decision is a fundamental shift from government’s growth path if you ask me. In my opinion, privatizing a company like Ethiopian Airlines which is growing every year and is the pride of Ethiopia and Africa is senseless,” he argued strongly.

If you look at Ethio Telecom, it is a company that is making profit and supporting other government projects, Fisseha-Tsion argues. “When we say we are privatizing this ‘cash cow’ we are passing over this benefit to foreign investors,” he stated. Apart from that, Fisseha-Tsion is adamant about investigating the exact socio-economic impact of privatization in Ethiopia and the world.

“I have been following various developed countries and their SoEs in the 1970s and 80s. Before Margaret Thatcher come to power, British telecom, British power, British Railway and the like were all under the state control,” Fisseha-Tsion stated. According to him, at the beginning, everybody become optimistic regarding the prospect of improved services that is supposed to come with privatization. “However, at the end, these countries will fall hostage to these privatized monopolies.

Arkebe Equbay (PhD), long-time economic advisor to the Prime Minister, while addressing the diplomatic community in Ethiopia today was reported to have said that the privatization move was something that the party has believed in long ago and that each SoEs have its own reason for being privatized.

According to sources close to the matter, Arkebe noted that the Airliner and the Telecom Company are not being privatized for foreign currency but because they need a strong capital given their vision to expand out of Ethiopia and into the continent. Sources also said, the transfer of shares in other SoEs is to aid the nation secure a much needed capital for investment both in local and foreign currency.

Arkebe also cited the management and other technical knowhow that would come with privatizing the partial shares of some of the SoEs, sources added.

On the flip side, Ermias, given the current state of the economy, is convinced that “Privatization” is the silver bullet. His view revolves around the fact that the current status of the Ethiopian economy is quite worrying. He argues that, if nothing is done soon, perhaps in less than six months, Ethiopia could lose the growth momentum it has built up in the past decade and paid dearly with external debt amounting to USD 24 billion.

“How many factories are closing down every month due to shortage of foreign currency and lack of raw materials and inputs,” he asked. “We don’t know but I can tell you even one is damaging and this could hurt the nation’s image as a frontier investment economy,” he states. Ermias fears that, although very difficult to build this credibility, it could be very easy to lose it.

The recommendation of the paper Ermias authored is also more concerned about not losing this growth momentum and to that end, he says privatization is the silver bullet that can resuscitate the tittering economy and carry it to a sustainable growth path. “For one, the most immediate needs of the Ethiopian economy now is foreign currency and in that we need to raise from USD 5 to 7 billion to get the ball rolling again and not lose the momentum,” told The Reporter.

In the paper, he estimates that some USD 4 billion will be required to absorb the accumulated foreign currency demand for the first year and additional two for the second year in case there are residual demand for foreign currency. But that was it, he argues, after that the economy can start to get things to work and eventually become a self-sustaining economic foreign currency wise.

However, there is a catch to Ermias’s remedy; which is a need to augment privatization with foreign exchange regime liberalization and capital account opening up in short and medium term while implementing policies that would rebalance the roles of the Public and Private sector in the economy.

In fact, Ermias’s staunch support to privatization also depends on this “rebalancing act” which he said is very critical if the nation is to sustain its growth trajectory in the coming years. “The government has tried to substitute the private sector for many years and to do that it has borrowed heavily with no financial plans insight to repay the debt or continue in its investment,” he argues strongly. So, he is of the view that, whether local or foreign, private sector growth is the only way out. 

The “how” of this privatization decision, however, is far more divisive an issue. For starters, a number of local scholars believe these SoEs should be privatized to local investors if they have to be privatized. Fisseha-Tsion is also not comfortable with the proposition of inviting foreign capital to be invested in Ethiopian SoEs.

“Basically I am not against the FDI and foreign investment in Ethiopia. But, you have to understand that local and foreign investors; and government and private sector institutions have different goals in the economy,” he told The Reporter in an interview. I have always had problems with comparing SoEs and Private companies and FDIs, he argues. “This is a fallacious comparison since they have fundamentally different objectives and norms.”

“When it comes to matters that are essential to us like transferring technology; I don’t think that they are willing to genuinely assist us and transfer technology like management knowledge to developing countries; nobody wants to create another competitor. So, I believe only in Joint ventures, it should happen,” he sate.

Ermias has a problem with this assessment and argues that itis an exaggerated fear of the international market and FDI. There is a large ocean of funds and capital in the world waiting for the right kind of investment, he says. “We are a primary investment destination and yet are still closed down from the global market; running monopolies. When we say private sector, if it is not local, we view it with suspicion. It is not an invasion,’ he pronounces.  We are now saying there is no foreign investment in trade, telecom, banking and the like, he argues,“…but most of these sectors were actually pioneered by these foreign investors back in the days; this is highly unreasonable”.

On the other hand, he claims those who argue Ethiopian investors should be allowed to buy these shares, are people with no working knowledge of the Ethiopian private sector.  “For one, if you take the most lucrative shares in Ethiopia today, which is banking shares, it has managed to sell only 10 billion birr or USD 300 million worth of shares in the past 20 years.  Now, even banking shares are saturating and capital is not enough to purchase additional shares,” he argues.

So, how can we find adequate investment capital in Ethiopia in a condition where the return of the likes of Ethio Telecom might not be more than 10 percent or so, he asks. Plus, he states that if he had the capital he would rather buy more lucrative bank shares than Ethio telecom. 

Furthermore, Ermias argues that even in advanced nations some of the big companies when they float their shares to the public, the public will not buy more than 10 out of the total. “The bulk of shares go to the so called institutional investors such as venture capitalists, investment banks etc..,” he concludes.

The statement of government ministers and recent one from Tigray Peoples’ Liberation Front (TPLF) Central Committee show that the party sees the privatization move as having no problems with the developmental state ideology they champion. In fact, they seem to suggest that the move is a logical prequel to developmental state model which is being implemented in the past decade. Meanwhile, Ermias believes that the move might even give the party the opportunity to correct the wrongs it has done by excluding the private sector form the equation.

“It is a good opportunity to kill two birds in one stone; while providing the needed funds to heal economy by raising up to 30 billion dollars form the sales of the shares of the SoEs, it will also correct the historical imbalance between the public and private sector in Ethiopia ergo privatization as the silver bullet,” he concludes.