Despite Impressive Growth

Despite Impressive Growth, Investors in Mekelle Still Face Hurdles

Mekelle is Ethiopia’s second largest city and is the seat of the Tigray Regional State. Over the last two decades, the city has witnessed an impressive amount of investment, especially in the service and construction sectors, which has brought in ETB5.7 and ETB6.6 billion in registered capital, respectively. In this way, the town is perhaps the most promising location for business outside of the nation’s capital. Still, local investors say that they face issues like a lack of finance and a dearth of quality raw materials, which hinder their abilities to operate their companies at full capacity. EBR’s Ashenafi Endale visited Mekelle and spoke with local business owners and regional government officials to better understand the issues plaguing investors and what’s being done to mitigate these problems.

On the morning of Friday, March 11, 2016, residents of Mekelle were celebrating at the headquarters of Mesfin Industrial Engineering (MIE), which is the engineering wing of the Endowment Fund for the Rehabilitation of Tigray (EFFORT). That day, hundreds gathered at the company’s headquarters to witness the launch of the automatic, heavyweight cargo truck that was assembled by MIE.
Though the company is not new to cargo truck assembly, this time was different, as it partnered with Germany’s MAN Truck & Bus, the largest subsidiary of the MAN SE Corporation and one of the leading international providers of commercial vehicles. MIE now has the capacity to assemble eight to ten trucks per day. The company has already agreed to supply 300 trucks for the Messebo Cement Factory, another subsidiary of EFFORT, located a few kilometres from the MIE factory.
Habte Haddush, General Manager of MIE, says the company has even greater ambitions. “We are establishing our own industrial base, which will start operation soon,” he told EBR. “But we partnered with MAN Truck & Bus because we have to enter the market as fast as we can.”
Mekelle, which is the political and economic hub of the Tigray Regional State, has made great progress in improving its social, political and economic environments since 1991, which marks the downfall of the Dergue regime’s 17-year military rule. Owing to these efforts and the many investment opportunities it offers, the city attracted the attention of local as well as foreign investors in a variety of sectors.
MIE is one of 769 companies that received license to engage in the manufacturing sector in Mekelle over the last 22 years. These companies have a combined registered capital of ETB10.8 billion.
Despite such progress, experts are concerned about the failure of those companies engaged in the manufacturing sector to start operation in a timely manner. “Although it has huge profits, because of challenges faced by manufacturers, most investments are shifting to the service sector,” says Azeb Tesfay, lecturer in the Architecture and Urban Planning Department of Mekelle University. She served as a member of the city’s Master Plan Revision Steering Committee with government officials and experts.
Hailemariam Negash, Head of the Mekelle Trade and Industry Office, admits that there are many challenges faced by investors, especially in the manufacturing sector. “Of the total projects licensed, only 182 (23.7Pct) of them are operational, while 165 (21.5Pct) are in the process of building factories,” he told EBR. “Seven licenses have been revoked and the remaining [projects] have been given one year additional time.”
Stakeholders and experts agree that the city has the right structure and resources required by the manufacturing sector. However, the extended bureaucracy, poor infrastructure, and the lack of industry linkages with agriculture and financing make the industrialisation process cumbersome for a city and country that are trying to establish robust industries.
“We have more than enough skill and our products have high demand in the market. We have also many engineering innovations,” said Feleke Melese, owner of a factory that produces agricultural and construction machineries as well as automotive parts. He established the company with ETB30 million capital, after working at MIE for ten years. “But most of my plans were [on hold] because of a shortage of finance.”
Tsigab Gebresellassie, owner of Tsigab Mam Garment, which operates in Mekelle and has the capacity to produce 500 T-shirts a day, concurs. “We have enough experience, academic skill and market,” he says. “Textile producers can only supply for big companies in bulk, but we do not have enough capital to meet such a demand or utilise our installed capacity fully.” Because of limited access to finance, Tsigab says he is currently dealing with traders in Mercato, to sell his company’s products instead of dealing with other international companies.
Hailemariam admits there is a problem of accessing finance. “The biggest challenge for this was that the Development Bank of Ethiopia did not start to accept land and other assets as collateral in the past when investors asked for loans,” he says. “But recently this was changed so investors can use assets such as land [as collatorals] to borrow money.”
Other manufacturers blame a lack of raw materials as a hindrance for industrialisation in the city. Some insiders told EBR that many companies, especially those engaged in processing meat and honey, halt production because of lack of quality domestic supply.
“Since they were forced to import raw material from abroad with additional cost, they decided to size production or migrate to other activities other than manufacturing,” says Azeb. “The lack of quality agricultural products supply affects the existence of the agro industry.”
But Hailemariam says the government has a solution to these problems. After the federal government chose Mekelle to be one of the industrial hubs of the country, it started establishing an industrial park on 500 hectares of land, according to the City’s Trade and Industry Office. Development on 100 hectares has already begun near the city.
In addition to the park, the city administration allocated three of its seven Districts – Hyder, Semen and Kuya – for the development of industrial zones, for which it has prepared site plans for clustered industries, on more than 400 hectares of land.
“International companies from India and Bangladesh are establishing textile factories inside the industrial zones,” reveals Hailemariam. “Even though the investments that will be implemented in all sectors have incentives, we give more to investors that will engage in the manufacturing sector, such as subsidised land prices.”
But of the existing problems, according to Azeb, the underperformance of the manufacturing sector can hinder the growth of other activities in the economy. “Many activities in other sectors, like service and construction, can only grow as long as they are complemented by the growth of the manufacturing sector,” she argues. “Otherwise, the current growth observed in service or other sectors will only be a temporary phenomenon that will not bring overall growth.”
Indeed, data obtained from the city’s investment office reveals that construction stands tall in attracting investments to the city over the last 22 years, with 1,389 projects and a combined ETB6.6 billion in registered capital. On the other hand, the service sector attracted 386 projects with a combined registered capital of ETB5.7 billion.
Azeb says observing the figures might paint a clear picture to see which sectors are attracting more productive investors. “What matters is not the number of projects that received licenses,” she stipulates. “Rather, it is the number of projects that started operation that matters.”
Hailelmariam agrees with Azeb’s assessment. “Even if we don’t have concrete data, the success of projects to proceed to operation quickly is much higher in the service and construction sector’s than manufacturing,” he says. “While we see up to 70Pct success in the service sector, the manufacturing sector performance is below 50Pct.”
Despite such successes, those engaged in service-related activities say the sector would grow more if it weren’t for the lack of infrastructure.
“Many activities started in the town after 2008,” says Abel Gebresellassie, Marketing Manager of Axum Hotel in Mekelle. Following the boom in different economic activities in sectors like health and education, infrastructure developments and investment, Axum Hotel also has made expansion investments and built 15 conference halls according to Abel.
After the first Axum Hotel was opened in Addis Ababa in 1991, the owners began constructing a branch in Mekelle, with ETB15 million, which became operational after the war with Eritrea in 2000. “The owner made the investment just as a contribution, because he was born in Mekelle, not thinking of the return,” says Abel, who is also the son of the owner. “However, after 2008, tourist flow increased to destinations in the region and around it like to the historic city of Axum in the Tigray Region and Ert Ale Lake in the Afar Region. After that, many hotels started coming to the town.” Since 1995, 186 investors received licenses to engage in the hotel business, with a combined capital of ETB4.4 billion.
Certainly, within the surrounding of the city, there are fertile farmlands to the south, significant mineral deposits to the east and west and many of the major tourist attractions of Ethiopia, such as rock-hewn churches, the historic city of Axum, and the active volcanic lake of Erte Ale.
The city’s range of existing business enterprises covers areas from mining and cement, agro-processing to leather and textiles. However, the leading investment opportunities are in tourism, especially in the hospitality sector. Following the boom in businesses and tourism flow, Ethiopian Airlines also recently increased its domestic flights to the city to seven flights per day, the largest frequency of daily flights in the airlines route.
With a population of more than 300,000, Mekelle is the second largest city in Ethiopia after Addis Ababa which has more than three million residents. Established 135 years ago by Emperor Yohannes IV, Mekelle was once the political capital of the country for 17 years, during his reign. It was Emperor Menelik II who succeeded Yohannes who moved the capital to Addis Ababa.
Even though Ras Mengesha Seyoum, Governor of the region during Emperor Haile Selassie’s reign, made remarkable contributions in connecting the town with Asmara, now the capital of Eritrea, and 52 other towns for the purpose of facilitating trade, the city was largely ignored during the Dergue regime. The structural plan of the city, which was introduced in 1960 for the first time, was revised in 1997, years after the current government came to power.
Despite improvements over the last decade, the town still has no sufficient clean water supply and the asphalt roads are narrow and challenging for traffic flow. Additionally, there is a power supply shortage, which hinders the growth of businesses.
Though the exclusive attention given to Addis Ababa in the past has resulted in the absence of well-developed regional cities in the country, many agree that Mekelle has another reason for lagging far behind. This is because Mekelle had strong trade relations with Asmara, until the war with Eritrea began, which hurt its economy massively. In fact, it was not only Mekelle’s economy that started to slow down after economic ties with Asmara ceased, but also many towns in the region that were experiencing fast growth.
Although things seem suitable for those engaged in the service sector currently, stakeholders say it is much more challenging in reality. “It still takes patience to receive land from the authorities,” explains Getachew Abraha, General Manager of Desta International Hotel, which became operational one year ago, with ETB70 million capital. The four-star hotel, according to ranking results disclosed on March 18, 2016 by the regional Culture and Tourism Bureau, currently has a 50Pct occupancy rate.
Since the tourist season in the region is limited to four months per year, hotels are focusing on conference tourism. Currently, there are eight star-rated hotels in Mekelle, two of which have four-star ratings.
Despite its challenges, many agree that Mekelle is a city that deserves careful consideration by any investor interested in Ethiopia. Though the government is trying to remedy these problems through developing the city’s economic and infrastructural capacity, investing in the region, according to local investors, still requires a great deal of patience.
Take, for example, the burgeoning and promising hospitality sector in the city, even though the hotel investment in the town seems promising in the long run, it is not attractive for most investors, according to Abel. “I know many people who invested up to ETB400 million but went bankrupt from the start,” argues Abel. “In addition to the hustle before starting operation, running a hotel business needs skilled commitment to become successful,” he says. However, he argues this is lacking in the city and poses a threat to the sector. EBR

4th Year • April 16 2016 – May 15 2016 • No. 38

Ashenafi Endale

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