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Privatization wheels turning

Privatization wheels turning

Following the announcement of Ethio telecom’s liberalization project, companies such as France’s Orange, South Africa’s MTN Group and Kenya’s Safaricom have all expressed interest in joining the industry which Ethiopia desires to uplift. So far, at least two operators are in the process of joining the sector, once they acquire licenses for operations.

Since the new administration came into power, privatization has been a bone of contention among the political elites as well as the public. On one side, some say certain sectors do not need to be privatized, while for some, they desperately need it. Among the sectors that call for much need assistance is the communications sector.   

Privatization wheels turning

 

After assuming leadership as the chairman of the then Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF) Abiy Ahmed (PhD) was able to garner support in the party’s Central Committee (CC), to endorse the privatization of heavily guarded State-owned Enterprises (SoEs).

Later on, the decisions of the party’s CC resulted in the total or partial privatization, deregulation and denationalization of SoEs. Among the institutions, the partial privatization of the Ethiopian Airlines Group and Ethio telecom has drawn criticism; and this has forced the government to reconsider how to go about the privatization process of these state giants.

The partial privatization measure of Ethio telecom is looking at the sale of at least 40 percent of the state monopoly. It was made clear that the Sugar Corporation, owning some 10 factories under it, will be totally privatized along with the energy, logistics, and railway sectors that have proceeded with asset valuation reviews. 

Following the announcement of Ethio telecom’s liberalization project, companies such as France’s Orange, South Africa’s MTN Group and Kenya’s Safaricom have all expressed interest in joining the industry which Ethiopia desires to uplift. So far, at least two operators are in the process of joining the sector, once they acquire licenses for operations.  

Nevertheless, many argue that not everyone is convinced privatization is the best path forward and critical economic problems are not going to be solved, as intended, by the government. Earlier this year, with growing debates over the privatization of SoEs, media reports have suggested that the government is looking to earn somewhere in the region of USD eight billion, from the resulting transactions.

Last week, when the official invitation for expression of interests was announced, Brook Taye (PhD), senior advisor for the Ministry of Finance, told The Reporter that the government is expecting billions of dollars from the issuance of two operating licenses while opting not to mention the specifics. The government has hired both KPMG, for valuations of the assets of Ethio telecom, and the International Finance Corporation (IFC), the private sector arm of the World Bank Group, as a transaction advisor. The Ministry of Finance has set a target to finalize telecom licensing and awarding process for two multinational companies, by July.

In order to do that, the government has also setup a regulatory agency, the Ethiopian Communication Authority (ECA), which is tasked with overseeing the activities of companies and issuing licenses to telecom operators. Balcha Reba, director general of ECA, told The Reporter that the first stage has already been initiated and after a month, the second phase of the licensing process will commence which is to request the submission of qualifications.

In the expression of interest, companies are required to present at least a two year validated and audited financial report, ownership detail and physical addresses, where the companies are legally registered. In the second stage, most of the technical evaluation will be undertaken within one month, to let qualifying firms to submit their financial offers.

The process is assumed to take between six to nine months until the final two winners of the bid process are selected, to obtain telecom licenses. However, in his presser with foreign media outlets, Eyob Tekalign (PhD), State Minister of Finance, stressed the need for the process to be completed by July, this year.  

Back in September 2019, the government was under fire for its proposed SoE privatization. The former president of the Addis Ababa Chamber of Commerce and Sectoral Association, Kebour Ghenna was one of the critics against the measure.

Kebour, a private sector advocate and a noted businessman, argued that the government’s haste to denationalize public assets would probably undermine the sovereignty of Ethiopia. According to him, the privatization approach the government has taken “will do no good, but rather drag the nation into a messy passage. If once entered, there will be no way out.”

But for Brook, privatization as he pointed out is part of the whole economic reform agenda that has been wheeling for months now. He sees the privatization process as having to do with mending the inept public enterprises that lack good corporate foundations.

According to Kebour, privatizing Ethio telecom, a state monopoly that has existed for 70 years, will seriously undermine Ethiopia’s “sovereignty”, saying that bestowing the telecom sector to private operators, will likely lead to damaging outcomes if these foreign companies exit on bad terms. Kebour recommended that the government should slowdown the process and let local enterprises and Ethiopian nationals acquire the public enterprises, instead of selling them to foreigners that predominantly seek profits with short-term objectives.

As many support the views of Kebour, there are others who equally accept the stance the government has taken in its privatization process.

Samuel Alemu, a partner at ILBSG LLP law-firm based in the US, a graduate of Harvard Law and Wisconsin-Madison Law School, says that there are pros and cons to privatization.

In his commentary article written to The Reporter, Samuel said,A good thing about privatization is that it increases the inflow of currency to the economy. This is particularly relevant for Ethiopia, which experiences a shortage of foreign currency and, for this reason, may fail to fulfill its corporate and political obligations,” he said adding, “By selling state corporations and putting them into the hands of private investors, governments can create better conditions for achieving sustainable efficiency and profit.”

Balcha, also diverging from Kebour’s views, believes telecom privatization does not infringe upon national sovereignty and said it was wrong to attach the process with security matters. He said that the best way to secure the telecom sector is to be able to have a well-built cyber security in place, emphasizing the need to work on real time data traffic controlling measures, live monitoring and threat aversion capabilities, as critical foundations of cyber security, which Ethiopia has longed for.

Ethiopia, together with Eritrea and Djibouti, are among the few countries that have maintained their monopoly over its telecommunications sectors. But until 2013, Myanmar used to be in the same boat as Ethiopia. Similar to what Ethiopia is trying to do now, Myanmar chose to privatize its telecom sector. It invited two private competitive bidders to operate the service and partially privatized the state owned operator. When the country saw immediate signs of progress, it went to look for additional operators to join its booming sector.

Half the size of Ethiopia and with a total area of 700,000 square meters, Myanmar was able to see its 3G internet coverage grow from five percent pre-privatization, to 90 percent after privatization. Mobile service prices fell by 300 percent and its telecom service coverage penetration or machine to machine operation went up to 103 percent from the previous, 13 percent.

Even though what was achieved there was quite admirable, the ECA director general wants to see more than that happening for Ethiopia. “Myanmar’s state telecom operator, after going through with its partial privatization process, was able to become more competitive than the three private operators,” Balcha said. “It is not the time to remain with the status quo, as the technology keeps moving quickly.” Balcha explained the need for ideas such as the World One Web, a company working on to create mobile internet services from a balloon, which would become a major disrupter to the existing telecom infrastructure, putting it under serious risks. 

Replying to inquiries such as how profits will be repatriated; tax exemptions are going to be appropriated, for how long telecom licenses will be valid for; Balcha and Brook shared with The Reporter some ideas the government has been considering. The companies will have 15 or more years to operate and provide telecom services through the licenses they obtain. That, however, is under review. For tax incentives and privileges, the government has hired Earnest and Young to consult on how to address such matters. Profit repatriation probably will remain as it is and in the case of generating hard currency, it is expected to earn once firms are able to establish data centers, host services, business outsourcing or the likes.

 That said, in addition to paying billions of dollars to acquire licenses, companies will pay annually for frequencies determinable in megahertz. 

As much coverage as the privatization of the telecom sector has received, the latest from France24, has come up with a the value of the two licenses which could exceed USD one billion for each and more in additional investment in the telecom infrastructure, “held back by years of underinvestment.” In fact, at least USD 4 billion had been invested so far, to serve its 44 million subscribers.

Despite growing calls for the privatization of the giant, whose revenue from international services has not yet reached USD 100 million, many maintain Ethio telecom should remain a national asset. The latest consideration by the government has indicated that Ethiopian nationals will have a five percent share from the 40 percent stake available for privatization, maintaining its majority share in the sector.