OPINIONBy Kalkidan Yibeltal and Kiya Tesgaye
In Ethiopia government and the
party's interest in doing business is protected by the law and defended by the
party's loyalty to a developmental state ideology; but beyond that five
outstanding factors characterize Ethiopia's potential failure to become an
investor friendly destination.
While the regime in Ethiopia cannot
be accused of squandering every opportunity to show off the country's recent
economic development (perhaps rightly), its selective euphoria holds no water
when the subject at hand is the involvement and contribution of the private
sector in the country's economy.
Speaking at a side event during the
Third International Conference for Financing for Development held in July this
year in Addis Abeba, Ethiopia's Prime Minister Hailemariam Desalegn conceded
that his administration needs to engage the private sector more than it had
done so far if the country is to attain its ambitious aspiration of becoming a
middle income country by 2020, and the continents' manufacturing hub by 2025.
In theory, the regime in Ethiopia
portrays the private sector not only as essential ingredient to the economy but
also its engine of growth; government officials are not short of commitments
and often say they are dedicated to design private sector friendly policies and
create an all-inviting investment atmosphere both for local firms and
international ones.
It is a pledge that comes as music
to the ears of some members of the private sector on the ground (many of whom
accept as true words from government officials); and a pledge foreign investors
often hold on to. But undoubtedly it's a pledge cautious Ethiopia minders
consume with a grain of salt, not without a good reason.
Despite a decade old hyperbole on
the double digit GDP growth, several looks into various indicators ranking
Ethiopia - from the ease of doing business to corruption and investment freedom
indices - reveal unflattering details.
The latest report in Ease of Doing
Business (DB) released by the World Bank, for instance, paints a gloomy
picture: Ethiopia ranked 132nd - a three spot slip from the preceding edition -
out of 189 countries surveyed. It scored 56.31 in Distance to Frontier (DTF), a
score that benchmarks economies with respect to regulatory practices showing
the absolute distance to the best performance, 100 being the best.
Meanwhile, Paul Kagame's Rwanda,
something of an ideological sibling for the incumbent Ethiopian People's
Revolutionary Democratic Front (EPRDF), achieved a remarkable 46th with 70.47
on the DTF.
A comparison between Ethiopia and
Rwanda in a 2015 index of economic freedom by the Heritage Foundation shows
Ethiopia trailing Rwanda by all indicators from business freedom to monetary,
labor, property and investment freedom. (See chart below for comparison in
investment freedom).
Ten-year 'investment freedom'
comparison between Ethiopia and Rwanda
Source: The Heritage Foundation
Multiple actors
There are multiple actors playing
against Ethiopia's stated wish to become an economic wunderkind in the content.
To start with, unlike government officials' repeated promise, the bedrock of
Ethiopia's economy remained at odds with where market forces play big roles -
the private sector.
It is a well established cliché that
the economy in Ethiopia is either dominated by state-owned enterprises (SOEs)
or is run by a private sector deeply affiliated to the regime in power. "I
will have a hard time to believe you if you tell me businesses outside these
two frontiers can survive and flourish in Ethiopia," a foreign investor
told this magazine.
His business is suffering under
Ethiopia's endless "bureaucratic bottleneck, from license registration to
dealing with customs authorities," he conceded, unsure if it was a good
thing to reveal his name and the type of his business. There too, he has a
point.
The government and the party - often
one and the same - see nothing wrong with a state reining over the economy;
their examples in this are the Asian Tigers - China being a favorite darling.
What's more, the government and the party's interest in doing business is
protected by the law and defended by the party's loyalty to a developmental
state ideology in which doing business, first and foremost, is the affairs of a
state and a party in power.
But five outstanding factors
characterize Ethiopia's potential failure to become an investor friendly
destination and a favorite destination for FDI: confusion and failure to
enforce existing rule of law; slow moving bureaucracy; mediocre administrative
capacity; asymmetrical relationship between the federal government and regional
states; and medieval banking sector.
Confusion and failure to
enforce existing rule of law
Asrat Birratu (name changed), is a
former University law professor who is now a senior legal advisor working
mainly for foreign businesses entering Ethiopia. For Asrat, who has a firsthand
knowledge about the country's investment law, the bottlenecks begin from the
law itself.
There are only 104 investment areas
listed under the 'Investment Regulation No. 270/2012', which identifies
investment incentives and areas restricted from foreigners.
While sectors like telecommunication
are strictly reserved for the State, some others, such as finance, are
earmarked for domestic investors. "In other sectors there is room for
joint ventures. There are also permissible ventures for any interested party -
both local and foreign - to involve," Asrat told this magazine. But often
one is met with confusion "as there are business areas that are neither
forbidden nor allowed for foreign investors."
Confusion regarding the rule of law
is not endemic to local and foreign private businesses who want to invest in
Ethiopia; nor is it unique between various government institutions; but it is a
common phenomenon within the same government institution.
An even more frustrating issue for
investors, according to Asrat, is the absence of mechanisms to enforce
arbitrations.
Ethiopia is not a signatory to the
1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral
Awards, which seeks to provide common legislative standards for the recognition
and enforcement of arbitration agreements as a means of settling international
commercial disputes. "So investors are not confident if their agreement or
arbitration decision [they are awarded in other countries] is to be enforced in
Ethiopia," says Asrat.
A 2013 report by the US State
Department and Department of Commerce agrees with Asrat. "Both foreign and
domestic investors involved in disputes have expressed a lack of confidence in
the judiciary to objectively assess and resolve disputes.
Ethiopia's judicial system is
overburdened, poorly staffed and inexperienced in commercial matters." The
WB's Doing Business 2015 report says contract enforcement in Ethiopia
"takes 530.0 days, costs 15.2 % of the value of the claim and requires
38.0 procedures."
Although the WB report ranked
Ethiopia 50 out of the 189 economies surveyed, and said "Ethiopia made
enforcing contracts easier by reducing delays in the courts through backlog
reduction, improved case management and internal training... ," many
investors suffer paying unnecessary prices to see a court's decision
practically enforced. "You literary walk around for months, often in vain,
trying to locate relevant officials of a given institution who are in a position
to enforce a court's decision," says Asrat.
In his paper titled "Major
Problems Associated with Private Limited Companies in Ethiopia: the Law and
Practice", Nigusie Tadesse of the Addis Abeba University (AAU), describes
Ethiopia's Commercial Code of the 1960, the major legal commercial code
providing guidelines for doing business in Ethiopia of today,
"sketchy," and "incomplete". It is a commercial code in
urgent need of an overhaul, Nigussie recommends.
Aside from the inefficiency (and
easily corruptible manner) of the legal system to uphold the rule of law and
rules of engagement, this outdated commercial code doesn't have specific
sections dealing with joint ventures, the only exit strategy favored by foreign
investors who are not by law permitted to engage in many business areas.
Moving lethargically
From acquiring land to getting a
building permit; from renewing a business license to obtaining tax clearance,
the bureaucracy in Ethiopia moves lethargically. This happens despite the
Corruption Crime Proclamation No. 881/2015, which identifies undue delay of
matters by a government official to be a criminal act.
Investors (both foreign and local)
may get comforted by Article 18 of the Corruption Crime Proclamation which
declares "any public servant or employee of a public organization who with
intent to obtain an advantage, directly or indirectly... fails, without good
cause, to decide on or delays the matter... shall be punishable." But
practically, it is as good as it gets on paper.
In addition to that, as is the case
with most African countries, Ethiopia is not signatory to the Convention
Abolishing the Requirement of Legalization for Foreign Public Documents
(commonly known as "the Apostille Treaty"), which recognizes a
document issued in one of the cosigner countries to be certified for all legal
purposes in all other countries.
In order to earn a work permit, for
example, an investor in Ethiopia has to bring several documents, which must all
be authenticated at the Ethiopian Embassies or diplomatic missions abroad and
only the Ethiopian way. "The strain for potential investors starts very
early, maybe even before they set their foot in the country" says Asrat.
Ethiopia is a country where "it
is easier to be a tourist than a businessperson." Entry visa for tourists
can easily be obtained upon arrival at Bole International Airport, but as of
late, securing a business visa to enter Ethiopia has become an affair involving
the ministry of foreign affairs, investment authority and immigration and nationality
affairs, the later notoriously frequent in changing its directives.
The cost of mediocrity
Newcomer investors are often met
with a shocking revelation: a labyrinth of bureaucrats with no familiarity with
the laws and regulations essential, which often contributes to lack enforcement
of the rule of law.
The power to promote the expansion
of domestic trade and take appropriate measures to maintain lawful trade
practices, establish foreign trade relations, provide commercial registration
and business licensing services, as well as control the use of business
licenses for unauthorized purposes is bestowed upon a single ministry, the
Ministry of Trade (MoT).
Furthermore, it establishes and
follows up the implementation of comprehensive system for the prevention of
anticompetitive trade practices; it provides protection to consumers in
accordance with the law and others listed under Article 21 of Proclamation No.
691/2010. But on the ground, there is a serious problem implementing the rules.
MoT is by far underfunded and understaffed.
The Ethiopian Investment Commission
(EIC) is delegated to perform some of the tasks of MoT such as register trade
names.
But "sometimes when an
internationally renowned brand comes to Ethiopia its representatives get
shocked to discover that the trade name is simply rejected by a low level civil
servant at EIC because some small local enterprise has already taken the brand
name," maintains Asrat. "We rip off other countries' intellectual
properties and get away with it."
Lack of professional bureaucrats
means "the system is very unpredictable; if you are lucky enough to sit on
the desk of an upbeat person, you might find the process smooth," confides
Asrat.
Non-party affiliated low ranking
bureaucrats (often the ones tasked to do the hardest part of the job), do not
have incentives rewarding excellence, nor the necessary skill as on the job
training opportunities are usually awarded based primarily on political
affiliations and participations.
"Many of these civil servants
live under the constant fear of committing a mistake and its
consequences." In other words, labor freedom is made to become the slave
of party business, which partly indicates why Ethiopia, once again, trails
Rwanda. (See chart below).
Ten years Labor Freedom comparison
between Ethiopia and Rwanda
Source: The Heritage Foundation
Land acquisition and the
federal-regional nexus
Federalism is the current
arrangement in Ethiopia. Accordingly, in addition to shared power, there are
powers designated both for the federal and regional governments.
According to Ethiopia's investment
proclamation, it is the federal government that registers and licenses foreign
and joint ventures in Ethiopia. Consequently after securing investment permits
from the federal government, investors must apply to the respective regional
investment commissions in order to acquire land.
This has been the case for nearly
two decades except in developing regions where the Ministry of Agriculture is
directly involved. It is logical that the process involves all levels of
government authorities.
But the enormously asymmetrical
relationship between the federal government and regional states (often
characterized by the former's excesses against the later) means regional
investment commissions have their own chain of commands that is often in
collision with the federal government's decision, a process which takes months,
if not years.
Medieval banking sector
Investors in Ethiopia live through a
constant nightmare of shortage of foreign currency caused by weak export
performance and high demand for foreign currency.
But the other, less acknowledged
problem related to their inability to take their hard earned cash out of
Ethiopia in any hard currency. As is stated in Investment Proclamation
No.769/2012, any foreign investor, for the purposes of her/his investment
activities, is allowed to open and operate a foreign currency account in
authorized local banks.
By law, an investor also has the
right to make remittance of profits and dividends from the investment,
principal and interest as well as payment related to technology transfer
agreement in convertible foreign currency at the prevailing rate of the date.
But in reality, an overregulated banking sector and an ever shrinking national
reserve in hard currency means hardly any investor is able to take any
convertible foreign currency out of Ethiopia.
The report by the US State
Department and Department of Commerce was unusually frank when discussing the
foreign currency conundrum. Importers, it says, often express their frustration
as they face difficulty in obtaining foreign exchange, "particularly those
importing goods or inputs destined for domestic sale.
Ethiopia's central bank administers
a strict foreign currency control regime and must approve all foreign currency
transactions. While larger firms, state-owned enterprises, and enterprises
owned by the ruling party have not typically faced major problems obtaining
foreign exchange, the remaining firms face burdensome delays in arranging trade
related payments".
Untapped potential
According to Ernst & Young's
2014 Attractiveness Survey, Ethiopia emerged as the 8th largest recipient of
Foreign Direct Investment (FDI) in Africa, up from 14th the previous year. The
Survey also said 32 projects were launched over that period, which provided
18.5% of the entire FDI jobs generated within Africa.
And according to the Economist
Intelligence Unit (EIU), this inflow reflects the attractiveness of Africa's
second-largest population, numbering 94 million, and an affordable workforce.
Of the total projects Ethiopia
attracted during the year in discussion, 43.75% (14 in number) involved consumer
products and retail (CPR), targeting the growing young consumers; two third of
Ethiopia's population is under the age of 25. Its growing population gives
Ethiopia a great leverage over many countries in the continent to surface as
one of the largest markets.
Of the major hurdles perceived by
investors to obstruct investment in Africa, Ethiopia has a relatively better
record on two of them: security and political stability, EY's report said. But
it is long overdue Ethiopia ends using its record of good security and
political stability as the only sellable factor to attract meaningful
investment, both foreign and domestic.
Source: allafrica.com
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