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 destinatio.
Kalkidan Yibeltal and Kiya Tesgaye
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
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.”
Source: TradingEconomics/World bank
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.
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”.
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.