Are they a magic bullet for fast industrialization?
In an attempt to harness Ethiopia’s manufacturing potential, the government has plans to establish industrial parks for facilitating fast industrialization. These parks offer a number of privileges for the companies that operate on them. The benefits include provision of basic infrastructure, duty free import of machineries and tax holidays. Government officials argue that the parks allow for increased manufacturing capacity. Others, however, say that the companies who occupy these parks, many of which are owned by foreign investors, are doing little to contribute to the development of technical knowledge and capacity among local businesses and employees, which could prove less advantageous to the nation in view of huge investment made to establish them. EBR’s Ashenafi Endale spoke with industry insiders to learn more about the potential and pitfalls surrounding the development of industrial parks in Ethiopia.
As a result of the low level of industrialization in the country, the Ethiopian government has been designing various policies to uplift the agrarian-based economy in the past decade. One such policy focuses has been on the construction of industrial parks that are equipped with full facilities, including financial institutions and government offices. This tactic has become central to Ethiopia’s ambitious plan to build an industrial base, with textiles and garments and agro processing seen as key sectors.
To that end, the opening of the Industrial Parks Development Corporation (IPDC) last year under the leadership of Sisay Gemechu, formerly state minister of industry, took the government’s plan one step further. Sisay is now tasked with constructing industrial parks on 2 million square meters of land across the country within the second phase of the Growth and Transformation Plan (GTP II), 2015/16-2019/20.
The plan, for which the Corporation is still searching for financing options in cooperation with the Ministry of Finance and Economic Development (MoFED), is estimated to cost the government USD1 billion each year. But the government only managed to obtain loans for the development of the second phase of Bole Lemi and the first phase of the Kilinto industrial park, as well as an industrial park that will be constructed in Hawassa. In addition to these, the government has also set out a plan to develop industrial parks in cities like Dire Dawa, Mekelle and Kombolcha.
The challenges, however, are not just financial. In principle, the expansion of industrial parks contributes to the growth of industrialization, generation of employment opportunities, boost export revenue and facilitate knowledge and technology transfer through the creation of backward and forward linkages between the companies that operate within it and the agriculture sector. However, experience demonstrates that the companies operating within industrial parks towards these goals have been generally disappointing.
This reality is demonstrated by the experience of Shints ETP Garment PLC, one of the five companies residing in the Bole Lemi Phase One Industrial Park, which sits on 156 hectares of land. Owned by Shin Textile Solutions, a South Korea-based company, Shints focuses on making sport garments.
Having started production six months ago, Shints, which leased five sheds from the government exports 100Pct of its products to the USA, Europe and South Korea.
But managers of the company find it difficult to access raw materials. “It is impossible to find a sustainable raw material supplier locally,” argues Mike Park, the company’s production manager. As a result, the company prefers to look for raw material suppliers abroad.
Much like Shints, four other companies currently operating in the Bole Lemi Phase One Industrial Park import input materials from abroad, according to Mengistu Regassa, administration head of the park.
According to Sileshi Lemma, director of the Textile Industry Development Institute (TIDI), “although it is advisable to link foreign companies operating within industrial parks with the agricultural sector [for raw materials],” he argues that it is not a must. ‘‘Countries like Indonesia and Bangladesh do not grow cotton but they are the major producers and exporters of textile products in the world,” he says.
“Creating a supply value chain with the agricultural sector is difficult,” Mengistu admits. “For now, the export revenue the country receives from products with the ‘Made in Ethiopia’ tag is a big success.”
But even the revenue the country receives by exporting manufacturing products like textiles has not matched the goals the government set for itself during the first phase of the GTP. During the past five years, Ethiopia managed to earn a little less than half of the targeted USD1 billion.
This reality is not lost on industry insiders, but most remain hopeful about the sector’s future. “Most foreign companies engaged in the textile sub-sectors did not perform as expected,” admits Sileshi. “This is despite the fact that 34 foreign companies joined the textile industry since 2010/11.” Such underperformance, says Selashi, should not discourage the country because more and more foreign companies are coming to Ethiopia.
Mengistu echoes Sileshi’s sentiments: “Even some of them are relocating from Kenya to the park[s] because we offer them [lower] rent prices and there is also a cheap labour force.”
The reality on the ground supports their arguments. For instance, all of the 20 companies that leased sheds within the Bole Lemi Industrial Park came from China, India, Malaysia, Taiwan and South Korea. These companies are currently migrating to Africa, in search of cheap labour.
The businesses have rented the sheds for 4-5 years at a cost of USD1.60 per square meter per month. More than 75Pct of the companies are involved in the garment industry, while the rest are in leather, textile and some in furniture.
Currently, there are four industrial parks operating in the country. The Eastern Industrial Park, located at Dukem; the Lebu Industrial Park, which is owned by the Huajian Group; and the Modjo Industrial Park, which was established by George Shoe-are owned by foreign companies. On the other hand, the Bole Lemi Phase One Industrial Park is government-owned.
The first phase of the Bole Lemi Industrial Park has a capacity to accommodate 20 factories. Upon reaching full capacity, additional 15 companies will join the Industrial Park. By then it will employ 25,000 people.
But considering the country’s investment in developing industrial parks, the forgone return of tax holidays the government is incurring, their involvement in only light industries, as well as the absence of a local supply value chain with the agriculture sector, experts are not as optimistic as the government on the return the nation might expect from the huge investment in the development of industrial parks.
“The government’s intention towards the development of industrial parks is far better than doing nothing, but hoping to transform the economy with this strategy might not bear fruit with the ongoing problems,” says an economist from the Addis Ababa University (AAU). The Economist even claims that some of the foreign companies in Ethiopia act like middlemen, as they often transfer the country’s property by exporting their products at a lower price to another affiliated company and this company sells it for a higher price.
Building on the economist’s opinion, Daniel Kitaw (PhD), associate professor of industrial engineering at AAU shares the experience of other countries: “Unlike the experience of South Asian countries that managed to build a strong industrial base using industry parks, the Ethiopian government only focuses on the FDI overseas companies are bringing in to the country. They just bring machines but take away more.”
The most successful industrial parks in the world have been located in Korea, Taiwan and China. But unlike the trend in Ethiopia, industrial parks in these counties were not solely seen as a mechanism to attract FDI, increase export earnings and create job opportunities. Rather, these parks were viewed as away to transfer technology and create spill over effects and backward linkages through joint ownership with local companies. With this understanding, these Asian counties managed to utilise more local inputs by involving more local companies.
The scenario in Ethiopia, however, seems reversed. There is low participation of the local private sector in the manufacturing sector, even in the context of collaborating with foreign companies through joint ventures, a fact both the government and the private sector admits, although they have their own explanation as to why.
The government repeatedly claims that the local private sector is not willing to involve itself in the manufacturing sector. Rather, they prefer to engage in the service sector, where quick profits and returns on investments are more common. “The problem is not only a lack of capital but also the poor mindset and short-sighted entrepreneurship ability,” Mengistu said.
On the other hand, the private sector points its fingers at the government for drying up the finances that should be made available to them. In addition, members of the private sector claim their disengagement from the manufacturing sector emanates from the long and hectic bureaucracy that exists in the country.
The experience of South Asian countries, however, tells another story. A study entitled ‘Africa, Industrial Policy and Export Processing Parks: Lessons from Asia’ reveals that in Korea, because of the government’s willingness to assign technical experts to local suppliers in order to upgrade the quality of the products sold to the companies residing in industrial parks, the percentage of locally used inputs grew to 44Pct in 2008 from 3Pct in 1971, when the parks were first established.
The same goes for China. According to the same study, in China’s Shenzhen Province, more than half the investment funds came from foreign sources in 1981. By 1993, however, that figure had fallen to 13Pct.
According to the study, industrial parks are not only an important conduit to create backward and forward linkages with the rest of the economy but also channelling foreign technology and managerial expertise to local companies.
But in Ethiopia’s case, it misses these important aspects. This is because most foreign companies only engage in light industries and do simple work, such as cutting and sewing. According to industry insiders, this is limiting the future contribution of industrial parks to the national economy. “This is because only foreign companies that are engaged in light industries come to Ethiopia,” says Tesfaye Alebachew, director of the Training Directorate at TIDI. “But if companies that employ heavy industries are not coming soon, we are planning to upgrade the local companies to that level.”
The Economist from AAU argues that sub-sectors such as textile do not necessarily require technological and skill transfer from foreign companies. “There are local companies [that have been] involved in textiles for the last 80 years and the technologies they are using can be easily transferred to new companies,” he says.
To be sure, Ethiopia is at the centre of development and the country is striving to build a foundation for industrialization. But experts stress that in order to sustain this advancement, flexible and responsive policy interventions should be placed to create an atmosphere that enhances the contribution of industrial parks to the economy. Otherwise, they argue, just building the industry parks will not take the country further in its drive to industrialize. EBR
3rd Year • August 16 – September 15 2015 • No. 30