25 October 2016

Ethiopia: Public Bailout As a Fix Not Best, Sustainable

opinion

Government is soon to put aside some fund to 'support', a cautiously coined term by way of implying compensation and keep the options open, the attacked businesses in full or in part. The Ethiopian Investment Commission (EIC) and the Development Bank of Ethiopia (DBE) are spearheading the initiative. The former in charge of studies, and coming up with policy options to be tabled to decision makers, and DBE active in dispatching technical team on the ground to do an independent assessment of the damage that will verify the individual claims of the companies.

The country's political unrest and protest have recently targeted private, big investments,- large scale farms, factories and resorts in Oromia and Amhara regions. No government bodies in regional and federal level have dared to officiate actual damage. Preliminary assessment of Oromia Region's Sebeta town which faced the brunt of the violent attacks has projected the damage to include 11 factories and no less than 60 vehicles, leaving close to 40 thousand people jobless. Yet to be verified the indicative is not simple to overlook of the magnitude.

It was following such damage and outcry of investors that the PM office along with regional and Federal Investment Offices had tabled multiple alternatives for supporting the companies. The government has proposed full or partial compensation, revising the new 50:50 equity share of FDI's back to the munificent of 70:30, with the government as the major stakeholder and providing the duty free privileges they have already enjoyed anew.

The proposals have already been presented to the companies with a stake and discussed. As described by some who were in the meeting it has left them with big hopes and expectations.

A distanced look into the process, the stage it has reached begs the question. Has the issue of government preparing to bailout in different forms being cleared? Was it beyond the question of fairness and equity to decide to inject the tax-payers money into the pockets of private companies, while risk associated with riots and political unrest are covered by Insurance policy worldwide?

Experts explain that there are two kinds of political risk insurance policies: contract frustration and asset protection. The first kind deals with companies that deal with foreign countries that default on payments, cancel licenses, or reject licenses. The second type of political risk insurance policy is more relevant to recent events in Ethiopia where violent protests have damaged properties owned by businesses. Such a policy covers, among others, physical damages and destruction of assets due to political unrests and violence. A fait accompli risk aversion mechanisms natural for private companies- particularly FDIs.

Due to the infancy of the insurance industry in the country and the dominant narrative of Ethiopia as one of the best destination for FDI in sub-Saharan Africa, which in 2015 was 2.1 billion dollars, had meant such political risk insurance policies were overlooked by investors and insurance companies operating in the country. The country's reputation as a hub of peace and security over the past two decades also made investors draw their guards against damages which may be caused by political risks.

Though the country has been under uncertainty for a good part of the past year, questioning the dominant narrative of stability, the insurance industry in the country had also failed to grab the challenge and turned into an opportunity by designing and selling the policy. Regional institutions such as the African Trade Insurance Agency had also failed to forecast the potential such policies being bought by customers in Ethiopia, though some multi-national companies operating in the country have these policies.

It is in this backdrop that the companies and the state are now faced with damages of properties worth millions, and they are negotiating bailout modalities - hushing the issue of whether the tax payers' money be injected to these private profit making institutions.

Both action and inaction associated with compensating the companies that incurred damages with tax payers' money. Champions of the two sides of the options are strong articulating merits and faults. The support will allow an extension of a lifeline for them to regroup and re-launch their production. This will, in the short-term at least, reinstate tens of thousands of people who lost their jobs. It may also harbor a positive impression on investors with FDI which currently accounts for 3.5pc of the country's GDP, in the long run, that the government will not abandon investment damaged by political unrests.

Conversely, however, the proposed compensation risks putting tax payers' money in the pockets of investors who did not necessarily take all the precautions a business should have taken before making decisions to invest in a given country.

The proposed support also risks falling in the hands of ailing businesses that were already losing out in competing on the international market for various reasons. Though their property may not have been destroyed, their fate as a profit making business had almost been sealed before the riots. Injecting public money into these 'sinking ships' would not be economically sound.

The compensation also does not address the issues at hand - a public uproar rooted in fundamental political and administrative issues, including issues of good governance, equitable distribution of wealth, fair compensation for land, and wider political space for diverse voices to be heard.

The investment playground as much as it was acclaimed for being stable has always been marred by its bureaucratic hurdles and poor performance. Ethiopia ranks 146 among 189 evaluated countries in the latest ease of doing business index.

Now faced by the challenge at hand the government is jumping on its coffers, opting for a short term, unsustainable approach of injecting taxpayers' money- public fund into bailing out private companies.

It goes without say that the country counts on FDI and private investment to drive its industrial development. It is attempting to maximize on its comparative advantage of high number of unskilled labor and vast land. Supporting businesses with the tax payers' money, despite its flaws will ensure the transfer of technology, massive employment opportunities and skills development.

Though there is no reason to suggest the financial support will halt similar riots from destroying property, making sure at all cost the companies stay has a ripple effect in the economy. Particularly in a setting where both the government and the companies reminded blindfolded to the dangers that had lurked on the horizon for the past one year, the best that could be done is facilitation in terms of financial loans.

This approach also does not guarantee the problem does not occur again in the future, without a concrete political reform. It sure is not sustainable, setting wrong precedence where the government prescribes the wrong solution for the problems it faces. It is also wrong for the tax payer to pay for companies that have made conscious decisions to enter a foreign country without adequate insurance policies to protect their assets in cases of political unrests.

The support even if used as a quick blanket fold fix, and not as an ultimate responses has to be done in a well thought and discriminated manner. There is little reason certain kinds of investments that have dominantly failed to be productive and have caused controversies with damage to the environment and locals, and in the case of various large scale commercial farms which have dropped in the middle of the process, the public support should not be extended to these ailing businesses. The questions have to be asked on general performance of the sector as well as a case by case performance of the companies in their stay and efficiency in the country.

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