13 June 2018

Ethiopia: Why Open-Up Strategic Enterprises Now?

Photo: Ethio Telecom
Ethio Telecom is one of the entities that may see more private investment.

In what appears to be a dramatic reversal of three decades long policy, the government of Ethiopia has decided to partially and fully privatize big public enterprises.

The decision to initiate a new economic reform and allow both domestic and foreign firms to buy minority shares in big public-owned companies, like Ethio-telecom, Ethiopian Airlines, power generation utilities as well as Maritime and Logistics Enterprise, and fully privatize other public enterprises was made last week by the Executive Committee of the ruling Ethiopian People's Revolutionary Democratic Front (EPRDF). The question is: Why now?

Speaking to The Ethiopian Herald, Zemedeneh Negatu, an Economist and Manager of Private Equity Firm, says the change in the size and complexity of Ethiopia's economy, and its growing integration into the global economy are the major factors that effected the decision.

According to Zemedeneh, the timing is accurate. It might not have been appropriate to privatize these strategic enterprises some 15 or 20 years ago since the economy was small and there was no significant interest from global companies and local companies that were short of capacity, he argues.

"Ethiopia has been registering 8-10 percent annual GDP growth, and has become the third largest economy in sub-Saharan Africa with 80 billion USD. The economy is projected to hit the 100-billion mark in near future and that forces the country to follow a new approach in opening the economy."

Furthermore, citing the foreign exchange shortage the country is facing, he says, it is high a time for the country to acquire hard currency from the sale of companies. The Economist states that the partial ownership of foreign investors in big corporations like Ethio-telecom could bring in several billions of dollars that would help the government supplement the reserves.

Also, the transfer will help generate the resources needed to address the budget deficit caused by shortcomings in the export sector, he elaborates.

The Expert notes that the decision is a sign that Ethiopia's economy is shifting from state-controlled to private, and gives the private sector an opportunity to own and transform these big companies to a very efficient and globally competitive entities.

"Apart from the Ethiopian Airlines, which is the only Multinational Company (MNC) the country owns today, the others need to transform and operate at a world class level, and the private sector role would transform them to world class," Zemedeneh adds.

Another Economist, Mushe Semu believes that the government made the decision in order to stimulate the export sector, create new jobs and build and expand social service providing institutions as well as infrastructural facilities.

He notes that the reform was initiated to enhance the role and contribution of the private sector and build their trust on the government through Public-Private Partnerships, with the view of creating efficient and competitive public enterprises.

The Economist points out that EPRDF's decision to transfer shares of these large enterprises clearly shows the government's commitment to improve the private sector's unsatisfactory involvement in large scale investments. Mushe further states that the decision could be taken as a symbol of government's strong desire to materialize its vision of making the private sector an engine of economic growth.

"The decision showcased the fact that the government has built trust on the private sector, and ensures its readiness to work together. This encourages the business community to use its capital, knowledge and technology and spark service-driven competition," he adds.

The Economist indicates that the partial ownership of these big companies will have a wide-range impacts in helping the private sector to accumulate enormous wealth that could be redistributed to the public.

Development Economics Assistant Professor Dr. Teshome Adugna says on his part that the decision is aimed at enhancing the global competitiveness of Ethiopia's public enterprises and benefit from the rich technological and financial packages foreign firms would bring in to the companies.

The Assistant Professor notes that the shares will be transferred taking into consideration the role international companies would play in equipping the state-owned enterprises with new ways of doing business that would supplement country's vision of creating multinational institutions.

Stating how Ethiopia's economy has been become attractive for globally-renowned companies, Dr. Teshome says that the decision is targeted to open-up the economy for companies with immense managerial and technical skills, and world class service with affordable prices.

The scholar states that that the government's decision cannot be taken as a paradigm or ideological shift as the country has long history of transferring state-owned companies to private ownership in various sectors including beer, agriculture, tobacco, hotel and others. He says: "What is changing now is how much of share that the government decided to shift to the private sector in large companies like Ethiopian Airlines, Ethio-telecom, power companies and shipping company that were not in the list of previous privatization schemes."

Furthermore, the Assistant Professor notes that the recent move is only aimed at improving the public enterprises' international competitiv eness, and using the capital to stimulate the economic growth and ensure fair distribution of development projects.

Mentioning the companies' strategic importance for the national economy, Dr. Teshome stresses that strong regulatory framework should be put in place to avert the failure in change of ownership and regulate post-privatization proceedings.

The scholars highlight that meticulous studies needed to identify domestic and international companies with the desired capital, technology and expertise and consult local and international experiences in transferring big corporations. He also points out that as pricing poses challenge in transferring large enterprises, due attention must also be given to avert informal deals and frauds that will lead to illegal acquisition of public properties.

"International experience showcased that the absence of a sophisticated evaluation and monitoring mechanism lead to the creation of artificial business magnates that accumulate immense wealth by creating special and illegal connection with government officials."

Ethiopia's economy has grown rapidly in the past few years, and if the government keeps on adjusting its approach in accordance with country's economic complexity and size, it will enable to create a modern, flexible and dynamic economy that ensures the private sector's much-desired participation in years to come, they comment.

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