Ethiopia's-Ambitious-SOE-Reform

Ethiopia’s Ambitious SOE Reform

The Uphill Battle of Dealing With Historical Baggage of Inefficiency, Corruption, and Political Interference

Ethiopia’s State-Owned Enterprises (SOEs) are currently in the midst of a significant transformation. The government’s ambitious reforms, which encompass privatization, enhanced governance, and financial discipline, have the potential to reshape these entities into efficient and profitable organizations. However, this journey is not without its challenges, including addressing legacy issues, ensuring social equity, and navigating complex political dynamics. The results of these reforms will determine whether Ethiopia’s SOEs will experience a renaissance or a decline. EBR’s Munir Shemsu reports on this pivotal moment in Ethiopia’s economic history.

The Ethiopian parliament was recently presented with a draft proclamation that could have profound financial implications. The proposal, which suggests issuing an 845-billion-birr bond to settle years of non-performing loans from the state-owned Commercial Bank of Ethiopia (CBE), was put forth for final voting without prior vetting by the relevant standing committees. Despite this, it received only one contention from the House of People’s Representatives, underscoring the weight of this financial decision.

Desalegn Chane (PhD), an MP representing the National Movement of Amhara (NAMA), cast the opposing vote after critiquing the draft bill on several fronts. He raised concerns about the propriety of pushing a bill with significant economic implications without adequate public debate, emphasizing the need for transparency and public participation in such crucial decisions. The opposition MP also questioned the financial legitimacy of an institution reporting soaring profits for several decades without transparent communication of its troubles.

“This amount of money could have serious implications for the whole financial ecosystem,” Desalegn noted.

He expressed disappointment in the lack of accountability for individuals or institutions that may have led to such financial wastage. He recalled pronouncements of trailblazing State-Owned Enterprises (SOEs) that still need to live up to their initial hype. The MP also referenced sugar corporations and highly publicized mega projects for poor financial management.

“Most of these projects were either understudied or poorly executed,” Desalegn noted.

However, the MP’s concerns were a mere hiccup to an economic overhaul intimately tied to the country’s overall fiscal and monetary destiny.

Eyob Tekalign (PhD), State Minister for Finance, assured the Parliamentarians that a significant overhaul of all SOEs would prevent similar issues. He compared the previous SOE administration to setting up ten stoves while failing to produce a single meal.

“Everyone knows about the degree of mismanagement in the SOEs,” the state minister noted.

Eyob referred to the resurrection of several SOEs into profitable waters over the past six years to highlight a progressive evolution in their operations. The state minister acknowledged the possibility of massive fallout across the financial industry if CBE were left undercapitalized.

“CBE is anchor of Ethiopia’s financial institution,” he noted.

Eyob explained that the ten-year bonds poised for issuance by the Finance Ministry would be preceded by a three-year grace period, easing long—term servicing burdens. As the government moves to settle SOE debts that would have equalled the country’s GDP seven years ago, identifying which forces exacerbated the financial misconduct in their operations remains critical.

The alignment of incentives between the SOEs and the central government, while several essential commodities and services remain inaccessible to most Ethiopians, requires thorough insights.

Just three loss-making, nonfinancial SOEs (Ethiopian Electric Power (EEP), Ethiopian Railway Corporation (ERC), and the Ethiopian Sugar Corporation (ESC) accounted for 90% of the birr-denominated SOE debt at the end of 2022/23, highlighting the delicate balance required[.

While Prime Minister Abiy Ahmed (PhD) has laid out goals to transform Ethiopia’s SOEs into well-oiled economic operators, a historical, legal, and political backdrop must be overcome for significant success.

Macroeconomists like Tewodros Mekonen (PhD) point out a nexus of forces contributing to the performance, sustainability, and management of Ethiopia’s SOEs over several decades. He refers to the political philosophy, development model, divestiture policy, legal structure, and management set-up as just a few of the pillars that dictated the operations of Ethiopia’s SOEs.

“Several dimensions might need to be revised when thinking about reforms,” Tewodros noted.

He further recalled that Ethiopia’s SOEs have historically performed twin objectives of realizing the government’s social targets while ensuring continued viability.

Tewordros highlights the difficulty of assessing the market dynamics and feasibility of the enterprises without having to reevaluate them, considering the legal substructure that underpins them. He also recalled that systemic inefficiencies in operations compounded the pervasive impacts of corrupt practices during certain epochs of SOE history in the country.

While the foundation of some SOEs like Ethio-Telecom stretches back to the 19th century, most adorned their current operational attire in the early 1980s under the stewardship of the socialist regime. Sweeping nationalization and consolidation of enterprises by the Derg regime gave way to the establishment of nearly 200 SOEs operating in various sectors. With the ascension of the Ethiopian People’s Revolutionary Democratic Front (EPRDF) in the 90s, a spirited bid towards privatization of SOEs took new life. A national treasury depleted by years of conflict sweetened the International Monetary Fund (IMF) proposition to privatize some SOEs. Instances of success interlaced with opaque business dealings while the EPRDF adopted a developmental state model after experimentation during its transitional episode.

Despite the privatization of nearly 166 SOEs in three decades starting from 1966, several large enterprises remained government-owned while the Agency established to administer their sale fused with the Public Enterprise Supervision Authority in 2004.

Some, like Ethiopian Airlines, Ethio Telecom and Ethiopian Shipping & Logistics, survived the onslaught of political shifts and endured as formidable companies. In contrast, others shrunk to mere vestiges of once-thriving businesses.

As a soft political transition brought Ethiopia’s current Prime Minister into the halls of power in 2018, partial and complete privatization of SOEs was among the early promises.  Abiy’s administration was confronted with a financial industry with nearly 60% of its outstanding credit in the hands of SOEs. Unraveling the CBE-SOE debt nexus to improve the financial viability of the state giant while ensuring the viability of the Enterprises quickly climbed high in the priority list of the first Home-Grown Economic Reform Agenda.

Unfortunately, the impetus towards privatization was derailed by conflict, global pandemics and slow economic growth, which required revision of strategies. Establishing the Liability & Asset Management Corporation (LAMC) to soak up and service the debts in 2021 with just domestic debt amounting to 9.3% of 2020/21 GDP proved futile. The Enterprises also accounted for nearly a quarter of Ethiopia’s external debt of around 28 billion dollars last year.

Despite establishing LAMC with nearly half a trillion birr in capital, it failed to ensure sustainable financial resources to continue settling the SOE’s debts.

The Ethiopian government formed its sovereign wealth fund in the same year, comprised of 28 massive SOEs with nearly 100 billion birr in capital. Helmed by Mamo Mihretu, the current governor of the National Bank of Ethiopia (NBE), this government investment arm came to life, portending sweeping reforms.

A few SOEs remained under the purview of the Public Enterprises Holding & Administration Agency (PEHA), while some of the biggest Enterprises fell under Ethiopian Investment Holdings (EIH) management.

EIH now manages nearly 45 billion dollars in assets as it spearheads another phase of SOE reforms in the country.

Brook Taye (PhD), the recently appointed CEO of EIH, has been busy in the past few months as he nudges the panoply of Enterprises towards a new age of productivity and efficiency. While he acknowledged the presence of sweeping reforms across the SOEs, he has underscored that it is not all about privatization.

“There is ongoing SOE reform, not privatization,” Brook said during last month’s Capital Market summit discussions.

At least five of the SOEs are expected to list on Ethiopia’s maiden securities exchange, and a shift towards transparency has been one of the early symptoms of the reform process.

Most SOEs within EIH’s purview have opened their annual reports to public scrutiny online; nearly all have been busy cleaning up their financial records to meet international standards, while companies like ethio tel have even issued shares to the public.

Even with the apparent wave of reforms to the SOEs, some onlookers question whether decades-old institutions treated preferentially by the state can profitably evolve into a new age.

Minase Hailu, an experienced lawyer and market analyst, points to the need to sift through the commercial viability of SOEs while reflecting on their legal personality. He says the government participates as a sovereign, private personality, or administrative entity within the state.

“It will be tough to reconcile the services of the SOE’s without thoroughly redefining their legal status,” Minase told EBR.

He recalled that Emperor Haileselassie’s foundation of Ethiopian Airlines was about creating access to remote parts of the country, not profits. The astute observer questions whether the twin objectives of continuing to provide subsidized services while ensuring profitability can be achieved without changing the legal architecture.

“An overhaul in the definition how an SOE aligns with the legal framework might be necessary,” he says.

Minase believes in treating each SOE regarding its services rather than a composite transformation of the entire assortment towards commercially motivated objectives. He cited the Suez Canal in Egypt as an example of an SOE that might underserve its citizens to become another company on the country’s exchange.

According to the analyst, decades of moral hazard could also lead to the underperformance of several Ethiopian SOEs if they are stripped of their preferential access.

Two months back, oilseeds, pulses, and spices exporters wrote a letter to the central bank’s governor, citing concerns over sidelining private commercial banks from sending items to China. For over a decade, Ethiopian exporters have used only CBE if they wish to export to China.  The decision for Ethiopian exporters to use only the CBE for exports to China stems from a government agreement between Ethiopia and China. This arrangement was established to facilitate a loan agreement. China agreed to grant Ethiopia loans on the condition that the payments be made through exports processed exclusively by state banks selected by both governments.

While this arrangement might have streamlined the loan process and provided certain benefits, it has also led to several drawbacks for Ethiopian exporters because of the bank’s service quality.

Some economists ascribe the perceived success of Ethiopia’s SOEs to their monopolistic control of several sectors and their privileged access as an auxiliary to government policy rather than their efficiency as companies. They cite telecom, logistics, and the import of several items to highlight the point.

However, the reform of Ethiopia’s SOEs has been accelerated and is unlikely to be paused or derailed by sceptics. The four-year economic programme prescribed by the IMF transforms the country’s SOEs into an integral element of the reform’s success. It also makes the financial health of SOEs crucial to addressing the country’s debt burden and prudent fiscal allocation.

A public sector obligations framework for SOEs, supported by the World Bank, is expected to disclose quasi-fiscal activities and fiscal risk management comprehensively. The reforms include the slow removal of fuel subsidies to unshackle the Ethiopian Petroleum Supply Enterprise; tariff raises to resurrect Ethiopian Electric Power, which accumulated close to 300 billion birrs in debts, and the potential sale of the imbittered Ethiopian Sugar Corporation, which has debts of over 101 billion birr.

Under the Public Enterprise Law ratified in January, EIH and PEEHA are expected to fulfil roles as commercially oriented shareholders on behalf of the state to ensure cost efficiency, good corporate governance, and transparency across SOEs. The Ministry of Finance’s SOE Unit also develops comprehensive digital reporting systems to monitor SOE sector financial flows, quasi-fiscal operations, contingent liabilities, and fiscal risk management.

As the central bank continues to restrict direct advances to the government, which fell by nearly 90 billion birr in 2023/24 from the prior year, SOEs will have to dig into new financial waters. Borrowing limits reinforced by stronger prudential regulation and CBE governance reforms are expected to usher in fiscal discipline and reduce risk stemming from fragile SOEs. Regular issuance of audited financial statements should also contribute to removing the opaqueness in business operations that have often contributed to bustling corruption in SOE activities.

However, lingering concerns over swift SOE reforms find footing in a populace freshly burdened by the impacts of a sudden transition into a market-based exchange regime policy. SOEs charging less than commercial (cost recovery) prices for goods and services, such as fertilizers, electricity, and fuel, might have been the last safety cushions keeping complete fallout at bay. Calibrating aspirations for debt restructuring under the Common Framework mechanism with the potential for severe public grievances is cautionary. Kenya, Ecuador and Argentina are recent instances of massive public fallout following pinching living costs after an economic programme. Ethiopia’s SOEs have evolved into mainly symbiotic and occasionally parasitic relationships with the social fabric. A maladaptive relationship that has cost the country economic points from international lenders has also managed to nurse, educate and fuel the nation of 120 million.

SOEs are vital in driving economic development, particularly in developing countries. However, they often face efficiency, governance, and financial sustainability challenges. To achieve operational efficiency and success, SOEs in Ethiopia can implement several strategies, such as appointing qualified and experienced managers who are driven by performance metrics and market principles, implementing performance-based compensation systems to motivate employees and align their interests with the organization’s goals, adopting lean principles to eliminate waste, streamline processes, and improve productivity, investing in modern technologies to enhance efficiency and reduce costs, and enhance collaboration with private sector partners to leverage their expertise and resources.

It’s also essential to take measures that would improve their governance and financial sustainability. This includes establishing robust corporate governance frameworks, including independent boards and transparent decision-making processes, and implementing robust financial management practices, such as budgeting, financial planning, and risk management. It requires reorienting them to a commercial mindset and focusing on profitability and market-driven strategies. Promoting transparency and accountability in financial reporting and operations is also crucial.

By implementing these strategies, SOEs in Ethiopia can improve their operational efficiency, financial performance, and overall contribution to the country’s economic development. However, it is crucial to recognize that achieving success requires a long-term commitment to reform and continuous improvement. It requires strong government commitment to understanding that achieving these would require leaving the enterprises to achieve their reason, not anything more or serve a political interest.EBR


13th Year • November 2024 • No. 135

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