20 April 2014

Ethiopia: Ambitious Plans Overlook Disposable Capacity - Unsustainable!

The pre-1991 Ethiopia was largely known as a country that lacks the basic economic and social infrastructures to push the economy forward. Whatever it had was constructed for the militaristic interest of the pseudo-socialist military dictatorship. There was little in the form of public investment on infrastructure tailored to facilitate economic growth.

As a result, the economy has been on a degrowth path. Whereas gross domestic product (GDP) was witnessing a negative rate of expansion, a large proportion of the public investment was financed by external debt, coming from the global socialist camp, mainly from Soviet Union. Worsening the case was the fact that the economy was under a central planning regime wherein everything is controlled by the state, leaving almost nothing to the market.

It was, therefore, with the downfall of the military junta that the nation's infrastructure sphere started to feel some sense of hope. It was immediately after they came to power that the ruling EPRDFites recognised the importance of infrastructure development.

Under their transitional economic plan, issued in 1992, they boldly stated that infrastructure development will be their priority. Reconstructing whatever is damaged in the extended war and constructing new ones is essential to consolidate the economy, their argument goes.

Ever since, infrastructure development remains the economic sanctuary of the statist EPRDFites. It cherishes their incessant fiscal generosity, amounting to billions of Birr in direct public expenditure at both regional and federal level. This, eventually, made it the most important driver of economic growth in the nation. There is every indication that it will stay that way for the foreseeable future.

If there is anything new in this respect, it is the expanding portfolio of infrastructure that the state is getting involved in. Under the latest flagship project - the Growth & Transformation Plan (GTP) - the portfolio has expanded to involve toll roads, mega hydropower projects, sugar plants, and fertiliser, as well as chemical factories. Certainly, this involves a huge public investment.

As it is the case with efforts that involve heavy state intervention, which embraces inherent inefficiency, the infrastructure development history of the EPRDFites has not been smooth. It rather has been full of ups and downs. Temporal lag, cost overrun, quality problems and poor project integration continue to distress the public investment regime with huge unforeseen costs.

A latest case to the downsides has been the gap between the ambitious plans of the administration of Hailemariam Desalegn, which seem to have inherited the political will to push the limits of the state as much as possible from its policy godfather - the late Meles Zenawi - and its achievements.

Achievements in almost all of the economic infrastructures are failing to meet the planned targets. These include sluggish works in sugar factories federal roads, Universal Rural Road Access Program (URRAP) and telecommunications.

For critics, the major problem is a state trying to chew beyond what it can actually swallow. It is all done without accounting the economic fundamentals, they argue. Their contemplation goes far to deduce that it is all done for political purposes.

Of course, economic history is rich with experiences of governments trying to buy votes through promises of infrastructure development. This extends even far to deprive localities that fail to support an incumbent of essential infrastructures. It further precipitates to a pattern that electoral results directly relate to spatial distribution of infrastructure investment, especially in least developed countries.

Little evidence is there to accuse the ruling EPRDFites for such a bias. However, what can be said is that they are disproportionally fanatic about infrastructure, even when witnessing that the hot money they are creating through this machinery is feeding the inflationary supercycle. If one is to go by the latest evidences, nevertheless, the ruling Revolutionary Democrats are failing victim to their own zeal.

On the one hand, the expanding portfolio of infrastructure that the state under their leadership is getting involved in is spreading inefficiency within the system. By and large, this measure is also disguising private investment and crowding out whatever is there. Examples of this effect is the sugar plants and fertiliser factories that the state is trying to build on its own, although there is enough evidence that the investments could be made attractive to private investors.

On the other hand, the infrastructural plans of the state are growing well beyond the disposable capacity within the economy. This is what is happening with federal roads and the URRAP. Whereas the construction capacity available in the economy is very low, the plans are getting bolder.

As it stands, the disposable construction capacity in the economy is limited. Progressive upping of the entry requirements is disguising investors. Frequent changes in the contract administration system of the state are also posing a huge challenge for the few contractors that are trying to survive.

The human resource base being produced in the expanding public higher education system is not employable. Still, theory dominates the curriculum in most engineering studies. Workshops without machines and machines without operators are common features of the practical education workshops of many of the public institutions.

Undeveloped finance and insurance sectors also pose their own challenge on contractors. Most of the local contractors are unable to compete in high return, mega projects for they could not access comprehensive insurance in the local market, due to the undercapitalisation of the industry. Accessing loans is also challenging for the current financial system of the nation is not able to analyse contracts and use them as collateral. No vendor financing system is available either.

Hence, the infrastructure sphere remains to see limited competition. Due largely to the establishments available to support them in Beijing, Chinese companies dominate it. Little is there in the sphere in the form of local private investment, especially on the upper rungs of the ladder.

It is on top of these complicated problems that the ruling EPRDFites are imposing their ambitious development plans on. By and large, it seems that they give little attention to the structural problems. As the saying goes, they would like to see the flour regardless of where the mill is located.

But their infrastructure development history shows that what is thoughtfully designed could bring sustainable change in the system. That is exactly why the transitional government's economic plan was successful in revitalising the war-torn economy, of course, discounting for the huge resources funnelled by the international financial institutions that were happy about the change of government and the new local economic order.

The time demands for the government to focus on resolving the structural problems of the sector. Putting in place strategic solutions for the heavy entry barriers, financing hurdles, insurance related issues, poor skills base and unfair competition within the sector is important. It is only through creating an able and competitive development capacity that the ambitious infrastructure plans of the GTP could be realised.

Beyond all, though, the state ought to limit its infrastructure development portfolio to those areas that the economic nature of the goods does not permit competition and that the market fails to live up to its inherent expectations. After all, the state has also its own limits.

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