The Reporter (Addis Ababa)

10 May 2014

Ethiopia: It's Ethiopia's Time

interview

Zemedeneh Negatu is the Managing Partner of Ernst & Young in Ethiopia and Head of Transaction Advisory Services for Eastern Africa. He has a wide variety of clientèle including prominent investors from Africa and the Middle East.

Here in Ethiopia, he was instrumental behind the acquisition of Meta Brewery by Diageo and Ethiopian Airlines development roadmap Vision 2025.

He has extensive global experience advising clients in financial services, manufacturing, telecoms and airlines. Asrat Seyoum and Bruh Yihunbelay of The Reporter sat down with Zemedeneh for an interview at his office on Mega Building located off Bole Road and discussed about Foreign Direct Investment (FDI) to Ethiopia, inter-African trade, commercial farming and other pertinent issues. Excerpts:

The Reporter: What is your assessment of the FDI coming to Ethiopia in the past four years?

Zemedeneh Negatu: Generally, the trend in the past two or three years has been very encouraging. Last year, Ethiopia attracted one billion dollars which is the highest ever in the history of the country. On one hand, one can say, this is a very good achievement; and that we have done well.

While on the other hand, Ethiopia is the the fourth largest market in Africa which means that we have to do much more better. We still have to work hard to raise the volume of FDI coming to the country.

FDI is also becoming diversified across various economic sectors. Investors are now going to various areas like manufacturing, agro processing is one activity that is drawing a lot of attention.

A lot of investors are starting to go to those areas where Ethiopia has competitive and comparative advantages. Still it is in its early days, but is a good to see the sector becoming more diversified. The trend is encouraging. But diversified source is one other thing we need to worry about.

Thus far, it been coming primarily from the newly emerging economies, China, Turkey and the Middle East. However, one of the things we saw, for example, in 2012 was two very large FDI from western countries; from UK and the Netherlands represented by Diageo and Heineken.

These were tipping points in terms of really grabbing global attention. When you see the likes of Diageo and Heineken putting substantial amount of money to Ethiopia, you would understand that the global investment community is starting to pay attention.

So that was also very encouraging and, of course, since then, we see new investors every day in our office, potential new investors and people coming to inquire about the prospects of Ethiopia. We are saying that we have the opportunity, come take a look at us.

So, we need to stay focused on that because competition for FDI is fierce around the world. Every country from China to US to Europe is always look for investors. So we need to be aware, and make sure that we stay attractive to global investors.

As you have mentioned it earlier, the completion is fierce. How do you see this competition in Africa? Particularly, Ethiopia in comparison to other African countries?

We need to look at it from a different perspectives. If you look at bulk of FDI that is coming to Africa, it is aimed at countries that has natural resources like oil and gas, minerals and these are capital intensive businesses therefore they tend to account for very high volume of the FDI flow.

So, certain countries in Africa which are very rich in natural resources tend to attract large volume of FDI. We also have to look at it from different perspectives. One is how much FDI is coming to Africa; what sectors have they gone into and which countries they have gone to.

You have to start analyze that. If you look in to that, the figure that I have given you that is one billion is a respectable figure because Ethiopia has none of those natural; not yet. Oil and gas is a sector that is just starting and mining as well is at its early stages.

So, that billion dollar actually went to diversified non-resource sectors in Ethiopia. Coming to the question of competition, for example, to make Ethiopia one of the major manufacturing hubs of Africa, there is a lot of competition.

A lot African countries aspire to do that in Africa. From our neighboring Kenya down to South Africa and West Africa, there are lots of African countries who want to build a manufacturing hub.

There is a lot of competition for that FDI dollar that is why I said we need to be aware what other countries are doing and make sure that we make our country more attractive than theirs.

One way we do that is by making sure that the business operating environment is friendly and very smooth; the way we do that is by making our treatment as fast and smooth as possible. So that they set up shop here.

Once they open their factories and start producing, we then want them to be a good will ambassador for Ethiopia through their exporting; of course export must be made easy.

And, Ethiopia has started to do that. How? We do that by building the basic infrastructure. I will give you an example to be a manufacturing hub like China and Taiwan one of the needed ingredients is power and electricity, which must be readily available and affordable.

Ethiopia today has the least electric power tariff in the world, which is around 4 cent per kilowatt hour. As a manufacturer, if I am an investor coming to Ethiopia, in textile and garment sectors for instance, these are the things I watch out for. So, this how we become competitive; by making it easy for investors to do business.

Apart from that, one of the major competitive advantage that Ethiopia has is cheap labor cost. Ethiopia also has the least costing labor in the world that is around 50 to 60 dollars per month, where in China it is as high as 600 dollars. That is why Chinese companies are setting up their factories in Ethiopia.

When we look at the figure that you have mentioned, a billion dollars, it is the just the registered investment capital. But, how do you evaluate the country's performance in terms of how much of that money goes to actual investment on the ground? And also how much of these companies become successful?

As I have mentioned earlier we are only getting started. To be able to accommodate this level of volume of investment, the first thing that we have to do is that we have to stream line our operation to start business in Ethiopia. It is only recently that the Ethiopian Investment Agency has started to make it easier for investors to come in and invest.

The second thing is as host to this companies we have to address the needs of the companies. The way I look at it, Ethiopia is just starting to put together the foundations today for the success of tomorrow.

It is an economy growing and that continues to grows, that is why investors, unlike four or five years ago, when we said please come, are actually coming to see what we offer. No question that we have started to get their attention now.

Now, we got their attention, how do you convert it in to the real business is the next question. One of the things we hear frequently from the investors is that the bureaucracy is sometimes very difficult.

You have mentioned that currently the bulk of FDI coming to Ethiopia is from China, India and Turkey or the Middle East. Although the trend is changing, with a number of FDI coming from the West these days, how can you explain difference apart from their fundamentally divergent foreign policies towards Africa?

All of them are emerging economies; all of them have achieved dramatical changes in one life time. Some 30 years ago China was very poor.

In 30 years they are now the second largest economy in the world. According to some estimates, this year and the following year, China will be the number one biggest economy in terms of GDP size on PPP basis.

China, Turkey or any of these BRIC countries have actually seen in their life time what it took to move from being a poor country to a middle income country and to the second largest economy. They have seen it, so they can sense opportunities early on.

So when they come to countries like Ethiopia it reminds them of China some 30 years ago; that was what they see. For Americans this is something they have seen a 100 years ago, for them this is something they haven't really seen in their life time.

So, obviously it takes the West a little while to come. However, even the Americans have now started to realize that Africa is the place to be. Once they started to realize that, mostly in the last three or four years, the next thing is to decided which countries to invest in as not all 54 countries are equally attractive.

So, to answer the question, the reason why the BRICS or other emerging economies are coming to Africa is because they could sense the opportunities just a little earlier than the westerners.

So are you saying that western countries are now threatened by BRICs?

China came here with in large numbers very focused and serious. China-Africa businesses interaction went from 20 billion dollars to 200 billion dollars in a span of 12 years.

Not just infrastructures, but a lot of other businesses flourished. I think the west have started to realize that, and that definitely accelerates their interest. I don't want to use the word threatened, but it certainly grabbed their attention.

In terms of ease of doing business, comparing these two groups of countries, do you think when the westerners come to Africa the competition is going to be fair?

It's a fact that they are coming from emerging economies so some of the risk perception over investing in Africa is quite different from those coming from the advanced economies like Untied States. Because what is on the surface might seem highly risky for those coming from America for instance. It is probably routine for the investor from China or Brazil because they also goes through some of the challenges in their own economies. But the ease of doing business is one of the areas Africa as a whole has to do a much better job.

Annually, the World Bank publishes report that is called the Ease of Doing Business. The report ranks about 185 countries, essentially measuring how easy or difficult it is to do business in countries around the world.

The new one that just came out had Ethiopia at 125th place out 185 countries. Our first reaction to that is very bad, but it until we realize that only five African countries rank higher than Ethiopia. All other 48 countries in Africa ranked lower than Ethiopia.

We are always talking about attracting businesses from Brazil, China or some of BRIC countries, what about inter-African trade relations?

This is one of the areas I have talked about repeatedly. At the moment inter-African trade is only 30 percent of total trade in Africa. It is the same percentage as it was in 2000. The volume has increased but the percentage didn't. We know there is something wrong and we need to fix it.

The reason I say this is that today no single African economy is big enough as to stand alone. So, the solution is to look at it as a region.

The fact we don't trade among ourselves has to change because we have enormous potential and capital within Africa. There is no debate for me here; we can talk about the African Union (AU). I think in my view AU can do a lot more to make this happen.

There is a lot of discussion at the AU, heads of state summit, the regional workshops, but still today we are making it difficult to trade between ourselves.

Therefore regional integration should be our agenda item number one at the African Union and for every African heads of state. If we make it easy to trade among ourselves the volume of trade will come up.

It's actually common to hear characterization nature of investments that comes to Africa. For instance, it is claimed that Chinese companies are more focused on the extractive industries while companies coming from the west are interested in joining sector with job creating potential.

As a business consultant, what can you say about the characteristics of the nature of businesses of the two groups?

For example, nature of Chinese investment to Ethiopia is completely different from the picture drawn above. The Chinese are not pump oil in Ethiopia, they don't really mine; if they do it is very small. When we look at the what the Chinese are engaged in Ethiopia the primarily it is manufacturing.

They build this huge industrial park in Dukem, the world's largest women's shoe manufacturer Huajian is in Ethiopia, the Chinese own cars assembly plants in Ethiopia so actually Ethiopia goes completely counter to this argument. However, ten and fifteen years ago, the initial entry point of China into Africa has been resource, which is understandable because they need oil from Africa. So, they started importing from Angola and now they are importing from other African countries. But, I think

China's engagement in some countries over the next decade or so will change. They are looking for resources because probably there is nothing else to look for. But in countries like Ethiopia, it seems like they put a marker; they are saying that this is the place they want to be. I think they have shown that.

Other countries like Turkey are in the manufacturing sector, the Brazilians are just starting to come as well. So in my view, as the China or other investors go forward they will have two tracks.

In certain countries they will be engaged in natural resources, while in others they will be in broader sectors like consumers good, telecom, financial sector and so on. Nigeria is good a example here.

Commercial farming is one of your areas of expertise and I want you to comment on your experience with Saudi Star and the current status of the project. So how successful is Saudi Star?

My knowledge is Saudi Star is at a high level. I think the vision is fantastic and let me take a look at it from a broader perspective and say that FDI to Ethiopia in agriculture is a big plus.

I know this is not always acceptable to certain quarters outside of Ethiopia who are not sure this is the right way to go. The belief that agriculture investment and basic farming are not mutually exclusive is wrong since they are actually complementary.

We have seen these in the flower business when the Dutch came for the flower business in Ethiopia. Back then people were asking why Ethiopia is investing in what looks like a luxury good but look at where it is today. We are the second largest exporter of cut rose in Africa next to Kenya.

The same thing works for FDI in Ethiopian agriculture. Still, it needs to be managed carefully and the policy framework has to be smart but if we do that we actually have the potential to become an agricultural powerhouse.

At the same time whether its the Saudis or Chinese who are coming and investing Ethiopia is still a large country and we have 74 million hectares of arable land. I saw some statistics recently that there was about 4 million hectares allocating and prepared for foreign farmers and to date only four hundred thousand is being utilized.

Much is yet to be done and we have to make sure that we encourage foreign investment for Ethiopian agriculture and make it easy for them to come here.

So that we'll have is a win- win situation. We will marry two things, very rich people in the Middle East who are living in the desert with tens of billions of petro dollars at their disposal but can't grow anything there, and here we are a fertile country, a rich country which can produce and feed not only its people but the rich Middle Easterners and beyond.

Therefore, if we have the right policies, have the right monitoring system in place and are very careful about selecting the investors I believe that FDI in Ethiopian agriculture is transformational.

You have been a proponent of commercial farming but we don't see it progressing the way it is supposed to and there is the issue of land grab. What is your current stance on the issue?

I think having the debate was healthy, which was fine because as a country we were new to this kind of engagement.

We as a country are learning what it means to attract FDI in Ethiopian agriculture. When it comes to manufacturing it is completely different.

In my view, the debate was healthy; however, to a certain extent the headlines about land grab were grabbing a lot of people's attention, which was actually not the right way.

We as a country are evolving and five six years down the line we are learning how to handle foreign investment in agriculture and we have started reengaging new policies.

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