That Thin Foggy Red Line Between SOE and Industry

It is not a secret that state-owned enterprises (SOE) are not the cash cows they are portrayed to be by their owners, the state. They are usually beset by extreme incompetence, an almost normalised rent-seeking culture or, at the very least, financial problems. Even the best regarded of the bunch, who have a relatively substantial balance sheet, like the Commercial Bank of Ethiopia (CBE), or the Ethiopian Airlines, are not as pitch-perfect as their annual profits may suggest.

Both SOEs operate in secrecy, face little to no competition and make highly questionable corporate manoeuvres with only the short-term outcome in mind. For Ethiopian, especially with its latest decision to absorb the Ethiopian Airports Enterprise, this has been the case.

As an African carrier, it boasts of flights to five of the world’s continents, with over a hundred international destinations for passengers and cargo. Its fleet of Boeing, Airbus and Bombardier aircrafts are displayed as trophies to affirm the success of Ethiopian, especially in comparison to neighbouring country’s carriers.

Ethiopian, though, is not without some major faults.

Despite the expanded number of flights, despite the aircraft gadgets, and acceptance into the coveted Star Alliance, Ethiopian has come to amass massive liabilities. The carrier owes over 60 billion Br according to its own 2015/2016 performance report.

For Ethiopian, whose total assets according to the very same report stand close to 88 billion Br, this much liability presents a problem. Although low-interest liabilities are seen as positive, too much often brings financial problems to any commercial entity.

But Ethiopian is not just any commercial entity. It wholly and unabashedly brandishes a 100pc stake by the Ethiopian government. It is one of the big five financial life lines, dubbed the ‘Big-5’, of the country which the government owns and monitors very closely together with CBE in banking, Ethiopian Insurance Corporation in insurance, Ethiopian Shipping & Logistics Services Enterprise (ESLSE) in shipping and, of course, Ethio Telecom in telecommunication.

Thus, protecting Ethiopian, as officials would surely try to inform the public, is in the nation’s interest. It facilitates tourism and amasses much-needed foreign currency. It also employs well over 13,000 people.

For the last several years, it has reported an annual record-setting profit, as in the 2015/2016 fiscal year, where it reached over 6 billion Br. The airline also puts its money where its mouth is, having a passenger and freighter aircraft inventory that is close to a hundred, full flight simulators for technologically advanced aircraft under its aviation academy wing and a frequent flyer program to attract business travellers.

Its success has not been lost on international media, either, who have taken time from swooning over Qatar Airways or Lufthansa to admire Ethiopian. The British Broadcasting Corporation, in one of its Focus on Africa segments, examined the airline’s success in an effort to gauge out why Ethiopian is far more successful and profitable than most – and in some cases, all – of its African counterparts. Winning accolades such as the SKYTRAX World Airline Award for Best Airline in Africa, just this year, at the highly regarded Paris Air Show have not hurt.

As the de facto gateway to the country, it paints an Ethiopia in great health and prosperity. It welcomes foreigners with better-nourished pilots and flight attendants with a broad smile. Commercial flights alight at the Bole International Airport, headquarters to the carrier, where transport services safely ship away visitors to luxurious hotels through Addis Ababa’s better-paved roads and adequately maintained streets.

Such facts are hard to deny.

But, although state-run entities such as Ethiopian and others should be looked after, they also should not be spoon fed. There are ways of fixing financial and structural problems. There are measures that could be taken to make the carrier competitive in the international market and attract international clientele. It is not entirely unthinkable to minimize debt while increasing equity.

Even the most primitive of sane financial advisers, or economist, would attest that the best solution would be to open-up the market for private competition. As has been pointed out, an arrangement between public and private sectors (called public-private partnership), where the latter is allowed a certain stake in large public institutions, could go a long way to bring competency and efficiency, and thus debt relief by way of increased business, to the airline.

Nonetheless, the government has been reluctant to privatise certain sectors especially those that deal with transport and telecommunication. It prefers to solve problems not by consulting the public, but clandestinely, without the involvement of either the most directly invested parties, like private air services, or others that could be indirectly affected, which in the case of Ethiopian, a mammoth player in its field, is the general public.

Last month, Ethiopian merged with the Ethiopian Airlines Enterprise to form the Ethiopian Airlines Group in a process that was as top secret as it was significant to the aviation industry. Mangement teams at the Enterprise, private flight services, international carriers who operate in the country or even the Ethiopian Civil Aviation Authority were said to have not been privy to the full details of the marriage between the two giants in the industry.

The Group now oversees most of the state-run bodies who make up aviation in Ethiopia. From Ethiopian Hotel & Tourism Services to the Cargo Airline & Logistics Company, the Ethiopian Aviation Academy to the Passenger Airline, and the airport Enterprise very recently, the Group can now almost be used interchangeably with the aviation industry itself.

The logic behind the merger – claimed a committee headed by an adviser to the Prime Minister, Sofian Ahmed, and chief executive officer of Ethiopian, Tewolde Gebremariam – was that the Enterprise was failing badly enough to affect the efficiency of the airline.

It is, of course, hard to argue with the rationale. Indeed, the nation’s airports are in need of a restructuring. Although the number of operational airports around the country has expanded to 20, the expansion has been geared too much towards quantity instead of quality. This must have inevitably affected the national carrier. Travelers may be surprised to depart unto poorly maintained airports with sloppy customer service after flying on the relatively better administered Ethiopian or other carriers.

The merger, in this case, could be seen as a win-win situation in the state’s eye, especially as an industry almost wholly maintained by the government. The airports, as the committee points out, may now be able to obtain loans to cover various restructural costs. The airline, on the other hand, which considers itself credit-worthy, can greatly minimize expenses, and save some money, by owning the very same airport it used to pay landing, parking and hangar service fees to.

Nonetheless, although this may actually bring some type of solution to some of the industry’s glaring problems, it is by no means an antidote. The government is willing to do almost anything to avoid to either liberalize the industry, as it did with the country’s financial sector; invite private investors with years of experience and novel insight into the industry; or do a complete overhaul of the system.

What most fail to notice is that both state-run entities, not just the Enterprise, have problems. This is not the first time such SOEs belonging to the same industry have been disparately successful. It is also not the first time this has cost the state time and resources, so much so the government has chosen to merge them in an effort to avoid losses and hold the enterprises afloat.

A similar thing has already occurred to the shipping industry in the formation of Ethiopian Shipping & Logistics Services Enterprise. The Enterprise used to be three different bodies – the Dry Port Enterprise, Maritime & Transit Services Enterprise and the Ethiopian Shipping Lines – before it merged to become a state giant almost as big as the shipping industry itself. The financial sector, to a lesser extent – lesser because the private sector has better footing in banking than almost anywhere else in the commanding heights of the economy – was another victim when CBE swallowed its state kin, the Construction & Business Bank of Ethiopia.

This is not to say that all state enterprises fail, or that the private sector always succeeds in its endeavours. In fact, there is the widely held assumption that state-owned enterprises, whether merged or not, are, at the end of the day, state owned (without the hyphen).

But everyone should be able to agree that while the ideal alternative is for most industries to include a vibrant private sector, the least the government should do is ensure the independence of SOEs, especially those that are in the same playing field. This is somewhat similar to what privatisation would have created – maintain enterprises independent enough to compete with one another.

Otherwise, with every coming consolidation and mergers, the country is creating enterprises that are too big to fail. A recipe for an economic disaster to a country that is highly susceptible to currents by global economic downturns.

Published on Aug 19,2017 [ Vol 18 ,No 903]



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