Commentary: Beyond Safaricom: Foreign Direct Investment, diversity and miscalculated decisions

By Ayele Gelan (Ph.D.) @AyeleGelan

Addis Abeba: No sooner than when Safaricom arrived in Addis Abeba did it encounter turbulence. It seems Safaricom’s managers did not consider the differences between the business environments in Ethiopia and Kenya.

The company was engaged in undertaking preliminary duties to settle in its new marketplace. These included recruiting local staff to serve Ethiopia’s massive market and undertaking publicity campaigns to announce their arrival.

They went about accomplishing both tasks in the most farcical ways. This was a recipe for disaster in a country like Ethiopia where society has so many fault lines along political and social domains.

In this piece, I will argue that the Safaricom incident is just the tip of the iceberg. I will begin by highlighting the Safaricom incident and then proceed to deeper policy issues regarding the privatization of public enterprises, specifically that of Ethio-telecom.

The Safaricom Turbulence

Safaricom managers apparently sought assistance from local business entities for conducting preliminary tasks in terms of recruitment and the overall process of setting up shop.

Whoever was entrusted to assist with recruitment seems to have compromised the process. The composition of incoming staff has revealed a systematic bias, this was more evident when Oromos, who constitute well over 40% of Ethiopia’s population, making them the largest ethnonational group, were absent in Safaricom’s new staff makeup, according to social media commentators. This inevitably triggered sentiments of discrimination within the Oromo community.

even the existing local public company which has enjoyed a monopoly for a long, Ethio telecom, eventually became cognizant of language diversity and began providing some of its services in Afaan Oromo.

The public relations campaign proved to be as troublesome as the recruitment process. It is a known fact that Ethiopia is a multilingual country, nominally and legally, Amharic is the federal working language, but the largest proportion of Ethiopians by far are Afaan Oromo speakers. For this reason, even the existing local public company which has enjoyed a monopoly for a long, Ethio telecom, eventually became cognizant of language diversity and began providing some of its services in Afaan Oromo.

Accordingly, there were rational expectations that Safaricom could have, at the very least, emulated Ethio-telecom and included Afaan Oromo in their publicity materials. However, Afaan Oromo was not used in any of Safaricom’s publicity materials.

Therefore, the combination of reckless recruitment and language choice in creating the publicity materials ended up in creating a Molotov cocktail. The Oromo community was enraged, causing an over week-long social media campaign through which Oromo social media activists began to encourage members of the Oromo community to boycott Safaricom services.

Eventually, Safaricom did come to the realization that they shot themselves in the foot. On the 16th of August, 2022, the company tweeted the following: “We met with representatives of a recent social media campaign, yesterday, and listened closely to their concerns. We assured them that we are building a company that represents all of Ethiopia without any biases or prejudice and are available for discussions anytime.”

Awareness and Responsibilities

There are lessons to be learned from Safaricom’s entry into Ethiopia’s telecommunication market. The first lesson concerns Safaricom itself. A primary understanding from the events that unraveled is first that Safaricom was quick enough to listen to public grievances. I expect they would fix the problems that infuriated the Oromo community in a timely manner and then plan future activities with a great deal of awareness and corporate social responsibility (CSR).

The second group to draw lessons from the incident were other foreign investors already operating in Ethiopia or those that have newly arrived like Safaricom or potential entrants who are contemplating investments in Ethiopia.

Ethiopia has been rocked by social unrest for nearly a decade. The most fundamental cause of the turmoil can be traced to economic injustices, which are also wedded to political demands, partly rooted in the way foreign direct investment (FDI) has been invited and then allowed to operate in the country.

For instance, the persistent Oromo protests, which ended up with ousting by the Ethiopian People’s Revolutionary Democratic Front (EPRDF) government in 2018, were essentially fuelled by the eviction of hundreds of thousands of Oromo farmers from their ancestral lands in and around Addis Ababa. In the course of the social movement, a good number of foreign companies have gone bankrupt. This happened besides occurrences of foreign investors being discouraged from investing and even targeted, as a result of the tense relationship between the local community and companies.

Oromos and the rest of the Ethiopian ethnonational communities are highly sensitized to injustices and exclusions associated with FDI. Foreign companies must not be oblivious and act consciously of the situation on the ground for not only societal harmony but also their own self-interest.

There lies a need to contextualize CSR to Ethiopian society; Foreign investors have the responsibility to contribute to the alleviation of problems rather than aggravating already-existing inter-community conflicts.

Economic Reform

The Safaricom incident gives us the opportunity to reflect on the way Ethiopia’s privatization has been conceived and put into practice. When the Ethiopian government announced the privatization of a few state enterprises, many commentators expressed their concerns regarding the lack of evidence-based decisions in relation to the privatization of public enterprises.

I wrote a series of pieces trying to articulate the way forward. Each of them trailed to raise concerns about the privatization measures, two important examples include:

1. Ethiopia Needs Evidence-Based Economic Reform (Addis Fortune, October 05, 2019) was meant to raise awareness about the desperate need to root policies according to the reality on the ground.
2. In another piece, Ethiopia’s ‘Homegrown’ Economic Reform: An Afterthought (Addis Fortune, October 12, 2019), I have explained domestic public opinion should be given priority over pressure from foreign bilateral and multilateral agencies.

At the time, I still hoped the authorities would reconsider their position in response to the then mounting public pressure against the decision to privatize the public enterprises. The rush to privatization was alarming because, at times, it manifested actions of fixing that which was not broken, chief of which was Ethiopian Airlines. As time lapsed though, it has become increasingly clear that the urge to privatize was unstoppable, and it was primarily driven by the desperation of the new administration to acquire hard [foreign] currency.

“Leaky Bucket”

It was abundantly clear that selling public enterprises to foreigners for the sake of earning foreign exchanges was trading long-term pain for short-term gains. Demissie Girma, Professor of Telecommunication Engineering with decades of experience, brought together important notions and succinctly presented them in Plugging the Leaky Bucket: A Technologist’s View of Ethio Telecom’s Proposed Privatization.

For instance, Safaricom entered the Ethiopian telecommunication market by making a payment of US$850m at the beginning. However, it is part of a contractual agreement that Safaricom, for the decades of its future operation in Ethiopia, will earn revenues in birr and then remit its profits in dollars to its parent company in Kenya.

In just a few years, Safaricom would remit more than the initial payment, and the overall remittance outflow would be considerably larger than the payment at the outset. That is why the sensible pundits would label the situation as ‘long term pain for short-term gain’.

If the process of privatizing Ethio-telecom ends with merely the introduction of Safaricom, then it would amount to moving from a pure monopoly to an oligopoly, an arrangement in which only two companies share a market

Two-horse Race?

Ethiopia’s telecommunication has so far been a public monopoly. Only one government-owned company, Ethio telecom, operated the entire service provision in Ethiopia’s huge market.

The rationale for privatizing Ethio telecom should not have been to earn foreign exchange but rather to break up a colossal public monopoly. Breaking up public monopoly would inevitably lead to efficiency gain through improvements of services, reduction in costs, and passing on the benefits through reduction in tariffs to resident households and businesses; ultimately improving social welfare.

Elsewhere,I have proposed ways to break up Ethio telecom and introduce competition in Ethiopia’s telecommunication market. Breaking up a public monopoly through privatization is required essentially to allow many operators to enter the market and compete among themselves to attract customers with enhanced services.

If the process of privatizing Ethio-telecom ends with merely the introduction of Safaricom, then it would amount to moving from a pure monopoly to an oligopoly, an arrangement in which only two companies share a market. In such a market, the companies would inevitably reach an agreement to fix tariffs.

To fix tariffs, Safaricom and Ethio telecom should not hold meetings or any other formal engagement to avoid competition. Oligopolist companies can tacitly agree, by reaching a mutual understanding and recognizing the fact that it is in the interest of each company not to reduce tariffs.

The Ethiopian authorities should swiftly move to allow more operators to enter the market to avoid a two-horse race situation in Ethiopia’s telecommunication market.

For instance, the number of operators is five in Kenya, eight in Tanzania, thirty-five in Uganda, and two in Rwanda. Ethiopia needs a greater number of operators given than each of these countries, in that Ethiopia is three to four times the size of these forenamed East African countries, geography and demography wise.

Emulate the Private Banks

The Safaricom episode may serve as a wake-up call for the Ethiopian government. First and foremost, the authorities must curb the overzealous commitment to seek foreign investors for every business opportunity within the country. Normally, inviting foreign investors becomes necessary only after ensuring there are no domestic entrepreneurs capable of taking up the available opportunity.

Ethiopia has a considerably large number of competent engineers and business managers both at home and abroad, scattered all over the world, running away from the hostile domestic environments that prevailed during the previous decades.

After all, Ethio telecom has been manned by Ethiopians for several decades of its existence. In my opinion, the government can emulate existing banks in privatizing and introducing competition into Ethiopia’s telecommunication market.

During the last decade, I have written extensively criticizing the economic policies of the EPRDF government. However, I must admit that the EPRDF government has followed a commendable policy regarding the protection of the domestic market in the banking sector.

Ownership of private banks has been reserved for domestic businesses. However, I would argue, that EPRDF did the right thing but perhaps for the wrong reasons. They wanted privileged access to bank credit for their crony and party-affiliated businesses, giving instructions to get debts written off as they wished.

The wicked motivation aside, reserving the financial sector for domestic entrepreneurs was the right decision. The commitment to stick to this policy despite huge pressure from the multilateral institutions was a courageous effort for which EPRDF deserves credit.

For that reason, private banks flourished, and their branches proliferated throughout Ethiopia. Ethiopia’s private banks have succeeded against all odds, including the discrimination they suffered vis a vis public banks and numerous restrictions imposed on them from expanding their markets.

By far the most important lesson from the existing banking policies in Ethiopia has been the check and balance they have literally “invented” in Ethiopian society. Ethiopian society is highly diversified. In such circumstances, a sense of belongingness plays a critical role. For instance, existing banks have been established as share companies and originally formed by different communities.

Ethiopia’s private banks proved most commentators wrong in that they have served all communities and enhanced community cohesion more than any other public or private intuitions in the country.

People opened accounts with bank branches nearest to their neighborhood, never bothering about the names or origins of the banks. Additionally, most banks opened branches in most cities and towns throughout Ethiopia, for instance, Awash Bank had a presence in Bahir Dar and Mekele.

It is through such grassroots business practices that Ethiopia’s nation-building will progress. If telecommunication operators followed suit, then it would mean yet another sector would come into existence to enhance community cohesion.

In a Nutshell

The Safaricom incident epitomized Ethiopian society at many levels. For instance, foreign companies have often been used as tools by one group against another.

I strongly urge the government to refrain from recruiting yet another foreign telecommunication company. It is a short-term gain that would lead to long-term pain.

During the EPRDF era, millions of Oromo farmers were evicted from their ancestral lands to offer fertile agricultural land to flower growers, as well as property developers. This time round Safaricom was misled into marginalizing Oromos.

The politics aside, the introduction of Safaricom does not come anywhere near to bringing competition to Ethiopia’s telecommunication market. Ethiopia needs at least three more telecommunication companies.

I strongly urge the government to refrain from recruiting yet another foreign telecommunication company. It is a short-term gain that would lead to long-term pain.

There are compelling cases offering a stake to foreign firms becomes sensible and beneficial. This becomes necessary when the business requires technological capability beyond the reach of domestic entrepreneurs, but telecommunication is not one of them.

Undeniably, one technologically advanced foreign company should be allowed to operate with venture capital and as a regulated monopoly to install and maintain telecommunication infrastructure in partnership with the government or a domestic company, e.g. Safaricom with Ethio telecom.

The remaining companies will be service providers, accessing and paying rent to the infrastructure operators. For telecommunication services, namely SIM cards and airtime, the government should give priority to domestic entrepreneurs to establish new telecommunication companies and compete among themselves as well as with the existing operators.

For this, the government should model the telecommunication sector after the ownership pattern and the operating procedure followed in establishing and regulating Ethiopia’s existing private banks. AS.

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Editor’s Note: Ayele Gelan (Ph.D.) is a research economist working at the Kuwait Institute for Scientific Research (KISR). He researches, studies and shares perspectives on economic modelling and practices on Ethiopia, Kuwait and Scotland. He tweets at @AyeleGelan.