Fail to Start Operation

Fail to Start Operation: Why?

More than Half of the Registered Investment in Ethiopia

Foreign Direct Investment (FDI) has many advantages to host countries. Especially in developing countries like Ethiopia, FDI provides scarce resources – finance, technology and management expertise.
Ethiopia has realized these decades ago and has since implemented structural reforms and trade liberalisation to attract more FDI. Accordingly, it has managed to attract a good deal of investment particularly in recent years. However, the number of licensed foreign investment projects and those projects that have started operation vary significantly. Out of the 5,461 foreign companies that have taken investment licenses between July 1992 and February 2017, only 2,635 have become operational. This represents 48Pct of the total registered investment. In the same period, out of the total 75,959 domestic investors who took license, only 6,730 projects -8.9Pct – have become operational.
EBR’s Ashenafi Endale spoke with investors to find out which factors are forcing them to abandon and delay investment projects. He has discussed with government officials to learn more about what is being done to solve the problems.

When EBR visited his company that is still under construction in the afternoon of March 1, 2017, Mehmet Yesilday, a Turkish investor, was frustrated because the construction of his factory located at the gate of Debre Birhan town, located 120 kilometer north east of Addis Ababa was lagging. Yesilday’s company, My Shoe and Leather Manufacturing Plc, is under construction with USD35 million investments.

Even though the ground work has started four months ago, Yesilday says the construction machineries are struggling with the rocky ground, which delayed the foundation work. “The progress is still at early stage,” he told EBR. “We have chosen a wrong plot, because we had no prior information.”

In fact, Yesilday recalls that the only initial information he had before starting construction was getting the supply of reliable electric power is the main problem hunting investors. So, he and his team chose the current plot because it is near to the industrial park the government is planning to establish. However, Yesilday’s solution for the lingering electricity supply brought him another obstacle.

“There is a lot of rock in the plot; we dug out 30,000 cubic metric tone of stone so far,” he explains. “Even though it is good for the power, we did not know that the earth under the plain field is rocky stone.” Yesilday’s plot covers 70,000 square meters.

Yesilday is a medical doctor by profession but for the last 16 years he has been engaged in a business shoe production. He already has other shoe factories in China and Brazil. He came to Ethiopia after his company signed an agreement to supply for Zahra, Tesco, Wal-Mart, and other big global retailers.

“This factory must start production at least by October, 2017, and I must meet the deadline,” he says. “We are new to Ethiopia and we have faced a lot of challenges here. However, we have to work hard under all the circumstances because the customers are waiting and pushing. The company is already incurring additional costs because of the delay.”

After starting operation, his company, which will produce 40,000 different types of shoes per day, will import about 50Pct of its raw material, which also worries Yesilday because of the hard currency shortage in the country. “There is no quality raw material supply locally for synthetic and genuine shoe products,” he says. “The obvious reason I am investing in Ethiopia is because of the availability of cheap labor.”

Just 20 kilometer from Mehmet’s factory lays another factory, Sino Steel Plc. It’s a Chinese metal industry which managed to accomplish only 30Pct of the project while deciding to solve the power shortage on its own way.

Out of the USD40 million total cost of the factory, the company has allocated USD6 million to establish its own 230kv power substation. The construction of the steel factory started in July 2016 and is expected to be finalized in June 2017. It will produce 400,000 metric tones of rebar per year.

Jiangsu New International Trade, which owns 97Pct of Sino Steel decided to enter the east African market, following its studies that indicates there will be huge demand for building materials, since there will be huge infrastructure developments.

However, Robin Wang, general manager of the company says, even though the company has solved the power problem by itself, there are still other problems challenging the progress, some of which started when the company applied for licensing. “The state of Amhara has given us the land and the the Metals Industry Development Institute has also supported us to start implementation,” says Wang. “However, the service and business environment for investors still needs improvement.”

“It takes time to get foreign currency and import machineries and raw materials. However, the critical problem in Ethiopia is the bureaucracy and clumsy procedures for investors,” Alan Feng, spokesperson of the company explains. “In developing countries like China, you get everything from a single government office. But in Ethiopia, you go to many places to get license, land and electricity as well as pay tax.”

The unfavorable investment and business environment that is filled by many obstacles is not only causing delay, rather, it is forcing investors to withdraw from investing. Even some of those already in production phase stop production. Yared Abebe (PhD), (name changed), currently is a director at a government office. Before he started working for the government three years ago, he has been running his own company engaged in agriculture sector on 600 hectare farm land located in the state of Oromia. “After I took ETB5 million loan from the bank and expanded the farm, officials of the region came and told me to leave the area because it is needed for the construction of sugar factory,” he claims.

“I tried every legal method I had but I was forced to leave without replacement, compensation or even without any consideration for the loan I took from a bank,” he argues. “Real entrepreneurs are not getting the right support. Government always says private sector should lead the economy, but that must go beyond lip service.”

Indeed, because of various challenges, many foreign as well as domestic investors that received licenses are unable to start production with a reasonable time. This can be verified by the information obtained from the Ethiopian Investment Commission (EIC).

Between July 1992 and February 2017, a total of 5,461 foreign companies took investment licenses. About 1,565 of them are joint venture with domestic investors. Out of the total, only 2,635 investments have become operational. This represents 48Pct of the total ETB98.23 billion worth investment. On the other hand, 1,389 projects are at implementation level, while 1,437 are at pre implementation level, according to data obtained from the EIC. Out of the total projects at operational level, 44Pct are involved in manufacturing, 29.3Pct in construction, machinery rental and consultancy, while 26.7Pct are engaged in agriculture.

Out of the total 2,635 FDI gone operational over the last 25 years, 89Pct came to Ethiopia between 2004 and 2015. In fact, 240 investment projects came during this period annually, on average. This figure, however, has dropped to 123 in 2015 and 57 in 2016. In terms of capital, the highest investment inflow, which stood at ETB13.9 billion, was registered in 2011, which gradually fell to ETB4 billion in 2015 and ETB797 million in 2016.

Chinese companies, which are largely relying on financing from the Chinese government than credit from banks in Ethiopia, lead in terms of operational projects. As the Chinese government wants light manufacturing companies to move abroad so that they leave space for technology and capital intensive industries, the number of Chinese companies is expected to increase in developing countries in the near future.

In Ethiopia, Chinese companies lead both in terms of operational projects and investment capital, with 553 projects and ETB17 billion capitals, respectively.

There are also 79 Ethio-China joint projects with ETB5.2 billion. In terms of capital, Saudi Arabia investors are second to China, with ETB14.7 billion injected in to 44 projects. Turkish companies came third, with ETB8 billion in 86 projects.

Fitsum Arega, Commissioner of EIC recently admitted that the number of projects licensed and those operational are not equivalent while talking to the Ethiopian News Agency. “As a result, the government has decided to focus on anchor companies and attract them. This strategy will enable the nation to attract FDI that could be changed into reality and benefit the country through job creation as well as revenue generations.” He was quoted as saying.
“The ongoing direction is not focusing on increasing the number of participants coming in the name of investment. The country has prioritized attracting few giant, effective companies which can meet the targets the country has set [for export]”, he emphasized.

According to the Commissioner, by following this strategy, the EIC has changed its way it used to license projects; and priority has been given to high profile companies. “The way we approach and license foreign investors have changed during the past six months.” Fitsum stressed.

Teka Gebreyesus, Investment Sector deputy commissioner at the EIC also told EBR that the Commission has changed its old mentality and started doing large promotions to capture capable companies especially at international trade fairs, in which EIC officials involve directly by approaching and attracting targeted companies. “We have also started working with Ministry of Foreign Affairs and Ethiopian embassies abroad,” he explains. “Our promotion strategy now includes linking the investors to giant global retailers.”

As a result, officials say the country has attracted new investments worth USD1.2 billion during the last six months period, which is 34.3Pct of the USD3.5 billion it has planned to attract in the current fiscal year. The USD1.2 billion FDI obtained over the last six months, which increased by 35Pct compared with the last year same period, is an inflow in kind and cash, according to Teka.

“The EIC has introduced the ‘relationship building’ scheme last year, under which the Commission deploys officers for bigger licensed companies to follow up the challenges they face and solve their problems with the relevant government institutions and help the companies to start implementation,” stress Teka. “Higher officials of the Commission have also started evaluating their progress every week and the Commission has planned to expand the scheme to regional states.”

However, Teka admits that the new investors that do not want to through all the hassle prefers to operate, for instance, inside the recently opened industrial park in Hawassa. “Due to the large plug and play new investors coming, the EIC has built additional 11 sheds in the already inaugurated Hawassa Industrial Park (HIP),” he explained. “In order to further address the demand, the government has also decided to continue HIP phase two, which was not planned initially,” he explains.

Such efforts of the Commission has enabled 121 projects to start implementation over the last six months, with a total of ETB14 billion capital, a figure never registered even in full fiscal year so far. “Most of the investments that started implementation over the last six months have taken licenses over the last five years. [However] because we started to follow up licensed companies to start operation, [we see] a big difference now.” he added.

Among the investments which started implementation over the last six months, is Human well Pharmaceutical Group, a Chinese company which already erected the skeleton of its factory on 70,000 square meter area located 60 kilometer from Addis Ababa on road between the capital and Debre Birhan. The construction of the factory, which started in June 2016, will be finalized in three phases. The project which will consume a total of USD100 million, is expected to be one of the largest pharmaceutical factories.

The company will produce tablets, capsule, injections and syrups. Up on completion of the first phase of the project in six months, it will export for east African markets, according to Tang Yu Zhong, general manager of the company.

However, Zhong didn’t shy away from mentioning the challenges investors face in Ethiopia. “The main challenge now is the bureaucracy and the time it takes at the immigration department to bring in Chinese employees,” he says. “Accessing foreign currency also takes time but it is better for us because we have duty free privilege.”

Yet, the same data obtained from the EIC reveals a more disturbing fact about local investors, which are more affected by the unfavorable investment climate than foreign investors.

In the last 25 years, a total of 75,959 domestic investors have taken investment license from the EIC and regional investment offices. However, only 6,730 projects which represent 8.9Pct of the total have become operational to date, with combined capital of ETB37 billion. A total of 684,538 permanent and temporary jobs have been created by the domestic investors, which is 17Pct higher than the number of jobs created by foreign investors.

A breakdown of the domestic investments that are operational shows that 34.5Pct of them are engaged in construction, machinery rental and consultancy services; while 25.5Pct and 25pct are involved in agriculture and manufacturing sectors, respectively.

The anonymous local investor who abandoned his business attributes the low rate of project commencement by domestic investors to policy inconsistency in the country. “There is lack of uniformity and the treatment of local and foreign investors is also inconsistent.”

According to the World Bank 2017 Doing Business Report (DB) dubbed ‘Equal Opportunity for All’ Ethiopia ranked 159, out of 190 countries, for the third consecutive years since 2015. The country ranked 179 for ease of starting a business, 178 in dealing with construction permits, 127 in getting electricity, and 170 in getting credit. In terms of protecting small and medium investors the country holds 175th place.

Teka, however, says that especially services are getting better after the Commission has started one stop service recently, which includes licensing and work permit. “We are also conducting studies with the World Bank and other stakeholders to improve the bureaucracy. We have planned to improve our business doing ranking to less than 100, by the next year.” EBR

5th Year • April 2017 • No. 49

Ashenafi Endale

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