That Illusive US Investment



The recently concluded 10th US-Africa Business Summit provided much opportunity for dialogue and networking among counterparts but it was not characterised by investment deals that signal the winds of change in Ethiopia's direction. The country's potential as well as limited institutional capacities continue to be acknowledged but as SOLIANA ALEMAYHU FORTUNE STAFF WRITER reports, the investments of other countries continue to outstrip those of the US in Ethiopia.


In the wake of the African Union Summit, Addis Abeba was busy yet again hosting another conference. But instead of political emissaries, this assembly was full of business delegates.

The Corporate Council on Africa (CCA) had its 10th US-Africa Business Summit from the February 1 to February 4, at the United Nations Economic Commission for Africa’s (UN ECA) Conference Centre. Some 1,200 business delegates came from around the continent to join their US counterparts in Addis.

CCA, an association of American businesses that have chosen to work in Africa, was first formed by a USAID grant, and its formative years were spent more on AIDS relief efforts. It later lobbied to get the African Growth & Opportunity Act (AGOA) into force.

The Act significantly enhances market access to the United States, for qualifying sub-Saharan African countries; the 10 year agreement has since been renewed until 2025.

“We are the driving force behind America’s awakening to African potential,” said Stephen Hayes, president and CEO of the CCA.

Twenty-three years after establishment, the Council comprises 200 American companies, or 85pc of the American business presence in Africa. And, according to the Financial Times’ 2015 report on foreign direct investment (FDI), the US is the world’s top source country of FDI.

In 2014, while still gradually stepping out of the effects of the 2008 financial crisis, the US spent over 70 billion dollars in foreign direct investments around the world.

It is also one of the top contributors of FDI to sub-Saharan Africa, although this counts for less than one per cent of total foregn investment.

FDI in sub-Saharan Africa from the EU, China, Japan and the US grew five-fold between 2001 and 2012, from 27.2 billion dollars to about 132.8 billion dollars, UNCTAD data show. But this growth was primarily driven by China, whose FDI grew at an annual rate of 53pc, compared with 29pc for Japan, 16pc for the EU and 14pc for the US. China’s stock in the region amounted to 18.191 billion dollars in 2012. These economies in transition invested 3.4pc of their FDI stock in sub-Saharan Africa that year.

In 2013, of the 778 million dollars China invested in developing economies, Ethiopia received 102 million dollars. In that same year, the US had invested just 10 million dollars.

China had surpassed the United States, despite the latter having a longer history in Ethiopia.

Ethiopia-US relations began in the second half of the 1940s, when the US administration recognised that Ethiopia met the necessary conditions to receive aid under the Lend-Lease Act, authorizing the US President to grant aid only to those countries, which belonged to the anti-Nazi coalition. The US decided it would earmark funds for the Ethiopian air transportation, which was at that time controlled by the British administration, and supplied a small number of aircraft with crew, which was supposed to improve domestic transport. They hoped that investing in the airlines would help obtain permission for setting up US air bases in Ethiopia.

The aircraft investments were followed by agreements for uniforms, cotton goods, rifles, automatic machine guns, artillery, passenger cars and lorries.

As part of Foreign Economic Assistance (later transformed into the US Agency for International Development – AID) a technical mission was sent to Ethiopia, to assess the country’s economic, agricultural and mineral potential. On the basis of the expert opinions prepared by the mission’s members, economic projects were prepared and later implemented by Emperor Haile Selassie’s government.

Close relations were stalled first during the Italian invasion in 1936, then again during the regime change in 1974.

Historically, the Emperor took a stance of non-alignment during the Cold War, but the Dergue’s Soviet-backed military regime brought a freezing of business relations between the US and Ethiopia until the economy was opened up after regime change.

Business relations have still not taken off satisfactorily. Of the 250 US companies that have made it through the US Embassy’s International Trade  Administration office in the year and a half since it opened, less that four per cent have got to the point of starting operations.

Data from the Ethiopian Investment Commission (EIC) show that in the past 22 years, 522 US companies have been licensed. Of these, 35pc made it to operation. The companies made a capital outlay of 7.5 million Br, and created 15,000 permanent jobs.

Yet these figures represent more than a product of historic alliances.

“It takes from two to four years to start operations [in Ethiopia],” the US Embassy’s Foreign Commercial Service Officer, Tanya L. Cole, told Fortune, adding that time is one of the biggest deterrents to FDI in Ethiopia.

That timeline was confirmed by Fitsum Arega, Ethiopian Investment Commissioner. He said that it takes even the bigger, better prepared companies at least two years, despite having the Commission do most of the bureaucratic work through its single window, one stop shop initiative. The Commission handles procedures involving various ministries and offices in document authentication, registration, licensing, issuing of taxpayer identification numbers (TIN) and implementation of tax and customs exemptions. However, when applicable, finding and securing the required land takes its time-consuming toll.

“If the required land is unoccupied, things could go faster,” Fitsum said, “but if it is occupied, then people have to be resettled, compensation paid, and the area rehabilitated – all of which consume time.”

There are, of course, exceptions to the rule.

David Ellis is a 30-year-old American who came to Ethiopia five years ago. Attracted by the growing population and limited competition in the business he had envisioned, breeding and selling baby chicks to smallholder farmers – he left his life in Chicago to start out on his own.

He had went around what would have been a long process by acquiring the property he wanted himself – an existing chicken farm. Having all the necessary documentation meant that he was able to finish the EIC process in three weeks’ time.

Five years down the line, his business, EthioChicks, has grown. Whereas he initially employed 40 persons, the business now has 300 employees and revenue has grown five-fold.

“We are trying to shorten that time,” Fitsum said, “so we are getting three new deputy commissioners, each with their own group of responsibilities.”

If, however, a project is within the sectors prioritized by government, and is applicable in the industrial parks, then the record low time so far recorded is four months.

The flipside of this priority is felt in businesses that are not in the chosen sectors. Heavy industries, service industries, and businesses that produce for the local market are overlooked. They are not eligible for the privilege of incentives and are de-prioritized in the allocation of ForEx.

One disgruntled representative of a US company that supplies farming inputs said her company had trouble accessing finance because they do not export their products.

“The country’s primary priorities, in its current macroeconomic condition, are job creation and export earnings,” Fitsum said. “Those needs are met by light industries.”

A company’s readiness could also affect processing time. There is the requirement for a 200,000-dollar deposit of in a local bank account that will be blocked until the company starts operations. This measure was instituted to deter prospective investors that come in with fraudulent intent.

The recent debacle with an Indian flora-culture company that defaulted on its debts and failed to begin operations within the given time frame after acquiring massive landholdings serves as a caution regarding the downside of investment when there is laxity in due diligence.

“We have to build the Investment Commission’s capacity,” said Ethiopia’s Ambassador to the United States, Girma Birru, “or else we will be making a bad reputation for ourselves, and preventing other companies from showing interest.”

Areas of focus for capacity building were clearly voiced during the discourse of the US-Africa Business Summit.

The US Embassy’s Foreign Commercial Officer identified logistics, in terms of moving products both locally and cross border, as another costly undertaking in Ethiopia. Moving products across Ethiopia could take as much as 27pc of the total product cost and that adds to the total cost detracting from cost competitiveness, she asserted.

Misinformation is the one of the biggest problems new companies face, said a corporate executive who has come to Ethiopia several times on business.

“But this is an opportunity for an army of young business graduates to open up a consultancy and help businesses through this stage,” he said.

Access to ForEx was another oft-mentioned deterrent.

”Our biggest worry is how to get our money out,” said Justin Ancheta, who is working with Purenet, a year-old, foreign-owned company that deals in asset management.

Until the Commercial Bank of Ethiopia’s Christmas ForEx present last month, an automotive industry executive, whose name is being withheld by request, said, there was a backlog of seven months.

“No ForEx means no spare parts,” he said, “no spare parts means both you and your clients are stuck.”

“There isn’t much we can do about that,” Ethiopia’s Ambassador to the United States, Girma Birru, responded. “A country with our status of economy, and significant trade deficit can’t be expected to have more.”

Chinese investors have been able to circumvent the issue of foreign currency. In projects they wish to partake in, they bring their own foreign currency, giving them an unparalleled competitive edge as is seen in various projects across the continent.

Their construction of various large undertakings, of which the multi-million Birr industrial parks and the multi-billion Birr stadium, are but a few of the examples.

US investment in Ethiopia, still has no noteworthy projects to show. What is noteworthy is its ongoing humanitarian assistance and bilateral relations based on geo-politics more so than on business relations.



Published on Feb 08,2016 [ Vol 16 ,No 823]


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