Brook Taye (PhD), Senior Economic Advisor to the Minister of Finance
Brook Taye (PhD) is part of the pragmatist team serving Ethiopia’s swift economic reform and privatization process with great zeal. After concluding his education in comparative law and economics and high growth firms in three European universities, he worked as a regulatory analyst for an equity firm in Miami and other companies.
He argues that the telecom privatization which garnered a lot of interest only ended up with two bidders mainly because they failed to fulfil the requirements. He in fact claims that only four of the 12 interested bidders fulfilled requirements. He also argues the shift from state-led growth to a private-led one is not the result of Western pressure to liberalize the economy but a dire necessity to revamp and create a sound economy. The following are excerpts from EBR’s time with him.
When the Ten-Year Perspective Plan (TYPP) recently launched, both the Growth and Transformation Plan II and Homegrown Economic Reform (HGER) programs were not evaluated. What were the baselines for TYPP?
In the last fifteen years, SOEs were the major drivers of economic growth. The state has had a crucial role in the economy. But this came by highly suppressing the private sector. So HGER targeted liberalization and privatization. Now, the share of credit and finance going to the private sector has exponentially increased. HGER was a pragmatic answer to economic problems that rolled down from the last two decades.
The government’s role is still high in the economy and the new administration has not adopted an ideology for the new approach. Is it still a developmental state model?
The question is who should drive growth in Ethiopia, private or state. We are a developing country so we cannot have a different concept outside of the developmental state approach. But government has numerous other pressing issues.
We do not concur that this shift from state to private should be bound by ideology. Ideology is a fragment. It narrows your perspective. There are many venues to achieve growth. But once you stick to an ideology, it is difficult to be flexible or correct your mistakes in time. So, pragmatism is essentially necessary for Ethiopia. Plus, the economic potential and dynamism of the regional states in Ethiopia varies and the same prescription would not work for all.
Do you think macroeconomic distortions, supply shortages, and import substitution can be solved with pragmatism? How can factors of production be balanced without a model?
Pragmatism is about capitalizing on potentials and bridging shortcomings. Import substitution was the leading recommendation since the 1960s. The question is what do we want to substitute? We do not have the knowledge and material required to locally manufacture cars. So, we started with wheat—a low hanging fruit. We will substitute sugar, edible oil, and other agro-industrial products soon. We can also look at the IT sector immediately but this requires a perfect network connection. We cannot substitute manufacturing products at once. The know-how gap is wide and it takes time.
Inflation has worsened over the last two years. Which tenets of HGER have you achieved relatively better?
The economy thrived even under COVID-19 because we structurally solved underlying problems in the financial sector. Even the IMF has projected Ethiopia to achieve growth of 8.2Pct in 2021. Inflation has many tentacles and it cannot be solved with one stone.
We minimized debt distress because government unilaterally decided to stop taking commercial loans two years ago. Currently, the debt-to-GDP ratio is 51Pct, down from 56Pct two years ago. We reached an agreement with Chinese banks to extend debt repayment deadlines. That is actual saving. We can use that for other projects.
Is liberalization or privatization better?
Liberalization ends monopoly. But privatization is a political decision, usually done when a government needs money to fill its budget deficit. Ethio telecom is being partially privatized and the sector is being liberalized.
Ten sugar factories are being privatized to make them productive under the private sector. The technical assessment and marketing strategy have already been already undertaken. The sugar proclamation is at a draft stage and we are processing to hire a transactional advisor.
In the energy sector, partial privatization is underway. Studies are ongoing to determine whether to liberalize the sector or which parts should be privatized.
For the railway division, we are looking at whether to privatize the wagons, lines, or service management. We are exploring how foreign companies can be engaged and which modality is preferred by looking at partial or full privatization, concession, and other modalities. This includes the Addis Ababa light railway and others.
As a strategic asset, shipping lines will never be privatized. It is Ethiopia’s port door. Yet, the sector needs further liberalization. Freight forwarding, dry port warehouse management, and other subsectors that have been closed to domestic and foreign investors should be opened.
Ordering goods from abroad, shipping, and delivery to your warehouse takes 140 days. So, an importer cannot import more than twice or three times a year. This constraint must be halved.
Studies undertaken have determined that privatization does not work for logistics, but liberalization does. For sugar, transferring to the private sector is better than the government again investing billions of dollars. The windfall revenue is also much better.
How much revenue is government expecting from these privatizations?
Government expects big revenue but the implications are more important than the numbers. Specific evaluations are still underway.
SOEs are carrying huge debt. Are they feasible enough to sell?
All SOEs’ debts have now been consolidated through the Liability and Asset Management Company (LAMC). The buying company will not inherit the debt, but will buy a clean asset that can easily be turned to profit. For example, railways is only using six pairs of train per day. Its operations can be doubled if privatized. But as of now, it is not able to purchase additional locomotives because it is carrying crippling debt. A private owner can inject more capital and make it highly efficient.
The debts are absorbed by LAMC, which will have its own revenue streams. Income generated from the sales will be injected into LAMC to pay off the debts it absorbed.
Especially for the sugar factories, we are receiving letters of interest almost every day.
Speculation is rife as to the exact destination of the revenue generated from the privatization program.
There is the Industrial Development Fund (IDF). All proceeds from privatization will be put into the IDF by the government. This is earmarked to pay off debts through LAMC, both domestic and external debt.
What are the direct and indirect benefits expected from the partial privatization of Ethio telecom? Why 40Pct?
In a country where 2 million new job seekers enter the labor market every year, we cannot employ them all in industrial parks. We cannot have 70 million factory workers aged under 30. If we have to encourage entrepreneurship, investment, and private job creation, the communication service sector must be efficient and competitive.
Two additional telecom operators can stimulate good competition in the Ethiopian telecom market along with Ethio telecom. But if we continue with only the incumbent with its inefficiencies and unlimited debt financing, competition and efficiency would be difficult to secure.
The 40Pct was decided after several simulations and considerations of alternatives. The one given was that government wanted to keep a majority holding in the company.
MTN, Africa’s largest telecom operator and the Global Partnership for Ethiopia, a consortium led by Kenya’s Safaricom, submitted bid documents to acquire the new licenses. Are the two new operators allowed to build their own infrastructure including towers?
We have not permitted the entrance of third parties that solely build infrastructure in order to encourage the operators to rent out Ethio telecom’s towers. The bid is only for telecom operators and not for tower builders.
They can still bring their own infrastructure. If the new operators share Ethio telecom’s existing infrastructure, however, they can share maintenance expenses. This will generate additional revenue for Ethio telecom but it is highly likely that the new operators will prefer their own.
Many potential bidders did not participate mainly because the Ethiopian government forced the international operators to rent out Ethio telecom’s towers. Does this complaint hold water?
Up to 60Pct of telecom operators in the USA and other countries do not have their own towers. There are companies specialized in developing towers. The operators just rent the infrastructure from the builders. This the global trend in telecom. Somebody builds the towers and the operator will then come and initiate their telecom service.
In terms of a business model, it is a transfer from capital expenditure to operational expenditure. If it is capital extensive, you need to rent land, develop the infrastructure, deploy backup generators, guards, and endure other costs. If it is an operational expenditure, you just pay your license rent. You do not carry any cost related to the infrastructure. This is what telecom operators used to do.
But in Ethiopia, we have already developed 7,000 towers 30,000 kilometers of fiber optics. We told them they should use this infrastructure. There is no need for another third-party infrastructure developer for Ethiopia. We decided to push the bidders in this direction using a policy framework. This move has resulted in certain perceptions and conflicts. But we cannot change this law. This is our policy, for now.
What caused the diminished number of bidders?
There were 12 companies which showed interest in the bid. The technical requirement demanded bidding companies have at least 30 million subscribers. The assumption here is that even after Ethio telecom secures its market share, the new operator will have up to 30 million customers. Unless they were previously experienced in handling so many customers, it would have been difficult in Ethiopia’s huge market. Most of the interested companies failed this requirement.
Others expressed their interest just out of excitement. For instance, one of the 12 was a call center company. Another had no telecom service experience at all. Some were expecting the permitting of telecom infrastructure and digital financial services licenses.
Realistically, only four of the 12 were qualified enough to bid. Out of the four, two participated. MTN is the largest African operator and the winning consortium has over 1 billion subscribers globally. They use the best of the best technologies in the UK, South Africa, Kenya, and most of Europe. So, we are not bothered about the number of participating companies. The best operators offered their bids.
Why didn’t the two others bid?
One of the potential bidders left because we refused to open the mobile financial service business. Ethiopia’s financial sector is closed-off to foreigners and we cannot change this for them. Government policy is stubborn. It opens when it opens. The other one, a big company in Africa, has no success story. In every country it entered, it left with failure. Their business perception and model is in contrast to the reality on the ground.
Vodafone, Vodacom, and Safaricom formed a consortium with other parties to submit a single bid. How are they going to operate?
These companies are somehow interconnected through parent companies. As a consortium, their interest in Ethiopia is very high. They also brought financing from the United States’ International Development Finance Corporation (DFC), the UK’s CDC, and Japan’s Sumitomo to maximize their capital offer. They will come to Ethiopia as one company. They might use one of the three names, or even create another name. But their Ethiopian operations will be under a new company.
China has provided over USD3 billion in loans to Ethio telecom’s infrastructure development. Has it been repaid? What is the interest of Western companies in the sector and does it clash with China’s interest? What is the competition between the two like?
I see their interest from the angle of their interest in Ethio telecom, not from an ideological perspective. The telecom bid was open to all. Both Western and Chinese companies participated. I do not think they are in an ideological war in Ethiopia.
Ethio telecom is servicing its loans for the supply credits it took. Even after the privatization, the debt will remain with the company.
Is there a probability one license is given to a Western bidder and another to a Chinese one?
We will license two operators in general, not for east and west. The cold war is over.
Corruption is usually present during the privatization of big state-owned enterprises. Is the telecom sector’s privatization clean of corruption?
I can tell you that the privatization process is 100Pct clean.
Some of the companies who expressed their initial interest but refrained from bidding complained the process was unclear.
There isn’t a single complaint that can be verified. They complained that the process was opaque. I do not understand their reason. They complained about the infrastructure. We clarified our policy from the beginning. If they say it is opaque because we are not willing to change our policy, that is another point.
The participants have complained, for instance, that the government has said that infrastructure is to be rented out from Ethio telecom without informing of the price.
That is false. We told them the price at first. They negotiated. Then it was revised. They also conferred with the Ethiopian Communications Authority. This is not a verifiable complaint and is fabricated.
The Safaricom consortium offered USD850 million to MTN’s rejected USD600 million. Under what parameters was this determination made?
It is a very big gap, USD250 million is not small money. It is big money. It can build another Omo Kuraz sugar project. Two telecom operators competed for similar licenses but one was too small. Why would we undercut our target?
The next bid for the remaining license will be floated in three to six months’ time. We will make the next bid more attractive by introducing different policy adjustments. For instance, we will allow foreign telecom operators to engage in mobile money services, starting from next year. We are not opening the entire financial sector, but just digital financial services will be permitted. However, we will not accept less than USD850 million from the next bidder.
Ethio telecom was a cash cow for the government. Noted that the government will secure lump sums ensuing the sale of licenses and shares as well as new revenue from infrastructure rentals. But will the government’s revenue stream lessen?
The telecom and economic efficiency will change various sectors including agriculture, manufacturing, telemedicine, IT, education, and others.
We are currently working to adopt the Indian model of health extension workers through a digital foundation. In rural India, there are health centers with terabytes of cheap internet funded by the World Bank and others. With their tablets the health extension workers are literally like IT technicians. Specialists in top hospitals operate online and cure patients in the most remote rural areas using telemedicine. Most Ethiopians cannot go to Bangkok or even Addis Ababa for treatment. Telecom’s development will end this.
In the education sector, many students complain that they do not understand calculus. If they have stable internet, there are more than 800,000 hours of calculus lectures on YouTube. You can educate yourself in an instant.
When is this efficiency in telecom going to be realized?
The services start as scheduled in the bid document once the license is awarded. The dates to start service, when to fully cover 3G, 4G, and evolve to 5G are all stated in the bid document. The coverage requirement states exact dates when the different types of network should reach certain urban and rural areas.
African governments are blamed for holding spectrum spaces in a bid to inflate prices on telecom operators. Is this true for Ethiopia?
We did it the other way around. We have allocated adequate spectrum for both operators. Usually, wide frequencies are used to reach rural and remote areas, with short ranges utilized for urban areas. We have assigned sufficient blocks for all areas for the two operators. Telecom privatization is an imperative necessity to develop the economy.
Pressure from the IMF and World Bank was high during current reforms. Many agree that the West is making inroads into Ethiopia through liberalization and privatization. Has the Washington Consensus overshadowed the privatization process?
Nobody should tell us that our telecom industry should be liberalized. Policies coming out of those multilateral organizations has brought crisis to many countries before. If we are bending for their interest, why hasn’t GERD stopped? Everyone from the World Bank to the USA is pushing Ethiopia to suspend the GERD project. But we have not bended to that pressure. These organizations are development partners. They have given us several concessional loans. But concerning Ethiopia’s economic policy, only the Ethiopian government decides. Had we given them an ear, we would have had a totally different economy by now.
The government has been highly engaged in the economy, leaving the private sector in its infancy. Now the government is suddenly saying that the private sector should takeover. To be specific, would it be the domestic or foreign private sector?
Definitely the domestic private sector. Even the new investment regulation favors the domestic private sector in many places. But there are some sectors in which foreign participation is essential. This is not binary, we support both. It is inconsequential to some sectors whether it is opened or protected. Protecting courier services, for example, makes no difference. Protecting retail, on the other hand, is critical. Under the new investment regulation, the government tells you what you cannot do. What you can do is determined only by your innovative ideas.
Many African countries are entrapped by foreign interests.
Partnership does not mean influence. For instance, The World Bank provides substantial amounts of finance for the Productive Social Safety Net program in Ethiopia. But is it influencing social safety in Ethiopia? It is a matter of setting the agenda. We are working for Ethiopia. EBR
9th Year • May 16 – Jun 15 2021 • No. 98