Privatisation’s Challenges in Ethiopia

The purpose of privatisation is to limit the involvement of government in the productive sector of the economy, so that public sector reforms are able to release scarce resources and redeploy them to higher priority poverty reduction programme. In the case of Ethiopia, the government has been undertaking a privatisation programme. However, the Ethiopian programme of privatisation runs the risk of consolidating the state-owned enterprises in the hands of a few oligarchs.

Early in 1994, the Ethiopian Privatisation Agency (EPA) was established by proclamation Number 87/1994 to ensure the orderly implementation of the privatisation programme. As recently as December 2013, the EPA reorganised and become the Privatisation & Public Enterprise Supervision Agency (PPESA). Currently, the PPESA is chaired by the Deputy Prime Minster, Aster Mammo, and it intends to sell 11 more public companies to the highest bidders.

The PPESA has so far implemented asset sales for retail outlets, restaurants and a mining enterprise, as well as implementing employment management buy-outs, joint ventures, management contracts, competitive sales and restrictive tenders. The agency has earned up to one billion dollars to date.

The African Development Bank (AfDB) reports that during the first phase of privatisation in Ethiopia, the EPA privatised 176 small enterprises using in-house expertise and government resources. For the implementation of the second phase of privatisation for more complex government enterprises, the government asked assistance from the African Development Fund, the German Development Agency (GTZ) and the World Bank. Subsequently, it has been awarded a grant of three million (units of account) – equivalent to four million dollars.

However, the AfDB, according to its “Project Completion Report”, states that the main advisory in Ethiopia’s privatisation programme, GTZ, has pulled out due to budgetary constraints. But, most importantly, the same report does not mention how the state-owned enterprises were valued to be sold to the highest bidder.

According to a WikiLeaks, US Embassy Cable, dated November 1, 2008, to the US Treasury – “While the vast majority of enterprises in terms of numbers – 233 of 254 – have been either sold to employees in a Management/Employee Buyout (MEBO) arrangement or purchased by individual Ethiopians, these are mostly small shops and hotels. In dollar terms, nearly 60pc of enterprises have been awarded to [Mohamed Ali] Al Amoudi-related companies”.

During the years 1999 to 2001, Washington institutions have been pushing for the privatisation of the banking sector in Ethiopia and opening of the financial sector to foreign banks, particularly interested in the sale or break up of the Commercial Bank of Ethiopia (CBE). Considering the CBE is ranked the 46th largest bank in Africa, based on asset size, the pressure for the break-up of the government bank at the time did not make sense.

Having a large, efficient indigenous bank for Ethiopia is important, especially if the government decides to open the banking sector up to foreign competition. But this does not mean the government-owned banks in Ethiopia should abuse public money by lending freely to the Ethiopian oligarchy.

One issue amongst others that the IMF had with Ethiopian authorities was that they were not allowing market determined interest rates. The second reason was making early payments of Ethiopia Airlines debt using the National Bank of Ethiopia (NBE) reserve, without consulting the IMF. The Fund felt that Ethiopian authorities were not serious about reform. This led the IMF to temporarily suspended the Enhanced Structural Adjustment Facility to Ethiopia, on the grounds that the country had failed to meet some of the agreed upon conditions.

Eventually, the IMF reinstated Ethiopia into the programme and withdrew the demand for the breakup of the CBE into three parts to allow competition. Thus, rather than breaking up the government-owned banks and opening the financial sector to foreign investors, the government allowed the opening of local private banks and hence the coming to the scene of the Awash International Bank (AIB), Bank of Abyssinia and Dashen Bank, to mention just a few. For the IMF’s change of heart, Joseph Stiglitz (Prof.), the former member of the Council of Economic Advisers under United States President Bill Clinton, and at the time the World Bank chief economist, takes full credit in his book – “Globalisation and Its Discontent”.

Some of the other structural adjustment programmes pursued included the establishment of guidelines to sell a minority stake in the Ethiopian Telecommunications Corporations (ETC), now ethio telecom, with the help of the World Bank by April 1999; bringing ten state farms and two large enterprises (brewery and cement) to the point of sale by December 1998; initiate privatisation of the Construction Business Bank (CBB) by September 1998, again with the help of the World Bank, and to bring at least 80 other enterprises to the point of sale by June 2001.

The PPESA is determined that the transfer of these companies to the highest bidder, or to compatible companies that could bring in technology and knowledge transfer as it saw fit, go ahead. However, attempting to privatise the state-owned companies without proper valuation of the assets, such as future cash flows and proper disclosure of financial statements to the public is a misguided policy.

Offering these enterprises to the stock market will give a much broader engagement in the privatisation process by the public. The establishment of a stock market will not only address initial public offerings, but enhance transparency, accountability, proper valuation of government owed enterprises and the tax collection process. The government should, therefore, focus on much broader implications, instead of minimal gains in the sale of the government enterprises.

As long as there are proper regulatory requirements in place, such as capital structures, firm specific credit risk exposure, capital adequacy and transparency, there is no harm in privatising large government owned banks, such as the CBE. In fact, the privatisation of government owned banks in Ethiopia would lower “crony capitalism”.

Although it is not as visible as it was in early 2000, pressure by special interest groups to open Ethiopia’s banking and telecoms sector to foreign investors continues.

Even though opening the banking sector to foreign investors is outside the scope of the privatisation issue, surprisingly major foreign financial media outlets are also fixated on commenting that the banking and telecoms sectors in Ethiopia are not open to foreign investors. The same interest groups have failed in reporting on the privatisation of land from the state to the people of Ethiopia, which would capitalise agriculture.

“Ethiopia’s salvation lies on the formation of a middle class and the privatisation of land and tenure security,” states an Ethiopian economics professor Daniel Tefera, at Ferris State University, in the United States.

An indigenous Addis Abeba based transaction advisory group, Access Capital, have also gone as far as entertaining the sale of the Big-5 (also the cash cows for the government coffers), namely – Ethiopian Airlines, the CBE, ethio telecom, the Ethiopian Insurance Corporation and Ethiopian Shipping Lines – to raise 7.7 billion dollars to meet the government’s Growth & Transformation Plan (GTP). One of the arguments made by Access is to privatise these enterprises to curve the massive debt ratio and external borrowing.

The Big-5, in the eyes of the public, are considered national treasures. Especially privatising fully to meet the Growth Transformation Plan GTP to finance untested mega projects is an unwise measure. It would be like “killing the Goose that laid the golden eggs”. The government should privatise these large companies only if it identifies operational inefficiencies, to have a better management, technology transfer and transparency. Even then, it could privatise a portion of these public firms only to add value, and not to be sold to a single investor, but to the general public.

A good example is the controversial privatisation of the Lega Dembi Gold Mine in August 1998, which went to a single investor and was sold for 172 million dollars to MIDROC Gold Co – 98pc owned by Al-Amoudi. The Government of Ethiopia owns a minority stake of two percent. Since MIDROC acquired the Sidamo province mine in 1998, to date, the price of one troy ounce of gold has increased by 36.4pc.

The United States Geological Survey estimates the remaining life of the gold mines to be 13 years. According to the World Bulletin, during the last fiscal year Ethiopia earned over 456 million dollars from gold exports.

Privatisation, if carefully implemented, would improve the performance of state-owned enterprises. An impact and popular technique to privatise state owned enterprise is an initial public offering (IPO) or a distribution of ownership vouchers.

In conclusion, privatisation is a slow process, but Ethiopia should avoid the failure of the Russian privatisation experience, where large state owned companies ended up in the hands of a few oligarchs. In Russia, through the distribution of ownership vouchers, managers and employees gained control of two-thirds of the privatised firms.

The Government of Ethiopia can limit the number of shares sold to single investors, whereas management, insiders and single investors should not be allowed to own more than five percent of the initial offering.  That way the proportional stake of the privatised assets are widely distributed to local investors or the Ethiopian Diaspora has to come up with pooled growth-capital or a collective strategy to purchase the government owned enterprises.

By Ezana Kebede 
Ezana Kebede is a  banking professional and graduate student at John Hopkins University. He has formerly worked at World Bank Treasury. He can be reached at

Published on October 05, 2014 [ Vol 15 ,No 753]



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