The Role of Public Enterprises in Ethiopia
Ethiopia’s economic policies of the past two decades indicate the growing role and significance of state-owned enterprises (SOEs). Essential services such as electricity, telecommunications, shipping and logistics, and transport are mainly provided by SOEs. In addition to giant public enterprises, like Ethiopian Airlines, Ethio Telecom, and Ethiopian Electric Power, there are also SOEs engaged in railways, industrial parks, hotels, sugar, and other manufacturing industries. Although SOEs are increasing in the volume of transactions they involve, most remain inefficient and unable to service their debts. Their accumulated debt is especially skyrocketing, putting a huge stress on the national economy. The current accumulated debt of 21 SOEs is ETB846 billion, which is more than half of the total national debts. EBR editors explore the issue.
Privatization of state-owned enterprises has been one of the major contentious issues in Ethiopia. In recent times, the topic has resurfaced once again when the administration of Abiy Ahmed (PhD) announced to the world plans to gradually privatize state assets and sell shares of public enterprises including the national carrier, Ethiopian Airlines and the sole telecom provider Ethio Telecom. Though some plans have been modified, including the cancellation of Ethiopian Airlines and Ethiopian Shipping and Logistics Service Enterprise share sales, as well as the telecom infrastructure licenses, the privatization moves are progressing.
The decision to partially and fully privatize SOEs is part of the Homegrown Economic Reform initiative intended to overcome the structural and institutional obstacles facing the country by accommodating opportunities presented by both a free market economy and the developmental state ideology. The denationalization of several public enterprises is intended to bring much-needed foreign currency and boost the economy. Although the initiative shows the current administration’s attitude in so far as disentangling itself from ideological attachment and a commitment to correct past wrongdoings, the road ahead seems bumpy.
Of course, the government’s recently announced price evaluation to expedite the privatization process in the telecom sector is completed. “We are waiting for the final decision,” Ahmed Shide, Minister for Finance said during the press conference held on October 18, 2020. “The privatization process will be carried out in the second half of the current fiscal year.”
When it comes to Ethiopian Airlines, however, the government has preferred to delay the process. “The government is pushing the airline to maintain its current capacity and efficiency as it has a significant contribution to the country’s economy,” said Ahmed.
The government’s decision to delay the privatization process of the national carrier seems justifiable as the airline is one of the top performing SOEs in Ethiopia and Africa’s largest airline in terms of passengers carried, destinations served, fleet size, and revenue.
During the 2018/19 fiscal year, its revenue reached USD4.2 billion when many African airlines were struggling to survive. Even during the coronavirus pandemic-induced crisis, Africa’s largest carrier managed to cover all its fixed costs and became one of the few successful airlines in the world.
Of course, as a public entity, revenue and profit are not the only motives propelling Ethiopian Airlines. The national carrier is also successful in terms of achieving its societal purposes. In addition to being a symbol of national pride, its 230 destinations worldwide and the connectivity advantages the airline offers to travelers has facilitated the influx of tourists to Ethiopia, supporting the lives of millions directly and indirectly.
Ethiopian Airlines is a top-performing public entity that managed to establish an effective and efficient economic organization functioning as a private company with a profit motive, all the while serving the public’s interest as an SOE at the same time. But the other SOEs are not as effective as the national carrier when it comes to balancing the economic and social aspects of such organizations.
A case in point is the state run Ethio telecom, the sole provider of phone and internet services for more than 100 million Ethiopians. Currently, 46 million people have subscribed to their mobile phone service while 19Pct of the population have access to internet. Even though the company operates without competition, telecommunications service in Ethiopia is poor and unreliable.
According to the Global Connectivity Index, Ethiopia is the bottom-ranked country in the world in terms of telecommunications services. Despite this poor performance, the government claims, as justification, that Ethio Telecom is a cash cow providing endless revenue for other developmental objectives. Of course, the annual revenue of the company has now reached ETB47.7 billion. However, given its poor and unreliable service as well as massive debt, it is safe to say that Ethio Telecom is becoming a liability and not an asset for the country.
Other SOEs, operating in monopoly markets such as logistics, electric power, sugar production, and railways, are also performing below expectations and their accumulated debt is skyrocketing. The accumulated debt of 21 SOEs under the supervision of the Public Enterprises Holding and Administration Agency (PEHAA) is currently ETB846 billion. Out of the total debt, ETB485 billion is borrowed from domestic sources with ETB361 billion from external lenders. There are an additional 22 SOEs supervised by various other government institutions.
The Commercial Bank of Ethiopia (CBE), under PEHAA, is the biggest loan provider to SOEs. CBE is owed ETB370 billion by Ethiopian Electric Power (EEP), ETB120 billion by Ethiopian Railways Corporation (ERC), ETB70 billion by Sugar Corporation, and ETB74 billion by Ethio Engineering Group (formerly known as Metals and Engineering Corporation), among leading figures.
“Since our loan portfolio has been concentrated on SOEs, CBE is unable to have a healthy credit portfolio. The bank lends to SOEs at lower interest rates,” says Muluneh Aboyeh, Vice President of Risk and Compliance at CBE. “If we could partially allocated their loans to the private sector, we could have a healthier portfolio and register better profits.”
Of course, SOEs revenue has jumped from ETB235 billion during the 2018/9 fiscal year to ETB301 billion in 2019/20. Profit has also doubled from ETB28.7 billion to ETB56 billion. Yet, during this period, only seven SOEs managed to pay ETB15.3 billion to their domestic creditors, and USD604 million to foreign lenders. Compared to their large debt, their annual repayments are insignificant.
Pressured by such a burden, the government has decided to restructure the accumulated debt of SOEs and have it managed by the Ministry of Finance (MoF), rather than by the individual enterprises. The decision came after the national macroeconomic committee convened with the Prime Minister on July 30, 2020. “We are restructuring SOEs’ debt of ETB600 billion, as part of the reform,” said Abiy, later on September 14, 2020.
In addition to restructuring the debt, MoF is also tasked with establishing another public entity, solely to handle SOEs’ distressed debt. This public entity is expected to manage SOEs’ assets and investments as well as convert their debts into long term bonds. A regulation to establish the public entity is under-preparation, according to sources. The law will determine how much debt the SOEs should repay from their own operations and how much should be transferred to the new entity.
“Some of the SOEs have requested us to clear their debts, as they are unable to access additional finance to finalize their projects,” explains Wondafrash Aseffa, Director of communication at PEHAA. EEP has requested half of its ETB400 billion debt to be cleared, according to insiders.
Senior managers at CBE have welcomed the massive debt restructuring move. “It is good news for CBE because it will help the bank have a healthier loan portfolio mix,” says Muluneh.
The government stresses the restructuring of SOEs debt will help them start afresh and finalize their projects. “It will have an economy-wide impact because SOEs have a large role in Ethiopia’s economy,” Ahmed, MoF Minister, emphasizes . “The debt restructuring is mainly to clear SOEs’ accrued debt and enable access to additional loans, allowing them to finalize their projects as well as start new ones.”
According to the recently introduced Ten-Year Perspective Plan, SOEs’ annual profit is targeted to blossom to ETB125 billion in ten years, up from the current ETB56 billion. The plan foresees these companies to undertake quality projects and become internationally competitive, among other targets.
Yet, experts are not hopeful as the government. “It is difficult to fundamentally reform SOEs while they are under government control,” argues a macroeconomist with decades of experience who spoke with EBR on the condition of anonymity. “Although it is rational for the new administration to remedy mistakes of the past regime, it should not be limited to debt restructuring.”
Teke Alemu (PhD), Lecturer of economics and finance at Addis Ababa University (AAU), agrees. “The government has been rescheduling SOEs’ debt for long time and it is no different this time,” he argues. “The first priority for the government should be leaving business for the private sector and becoming an effective regulator.”
The experiences of many economically advanced nations reveal that balancing state intervention in the economy and creating ample room for the private sector is essential to accelerate economic growth and achieve sustainable development. This is because both the public and private sectors have their own part to play.
The private sector has a role that cannot be substituted by the state—producing and supplying goods and services efficiently. In order to take on its duty and responsibility of advancing the life and welfare of its citizens, however, the government might also have to engage in industrial and commercial activities. For instance, when there is a market failure such as an inadequate supply of goods and services by the private sector, the government will be forced to intervene in the economy by establishing SOEs to correct the mismatch. However, state intervention should be concentrated and limited to fundamentally public driven activities such as addressing market deficits and capital shortfalls as well as promoting economic development and reducing mass unemployment.
Taking these factors into account, governments in various countries created public enterprises, especially after World War II. The history of SOEs in Ethiopia also coincides with this trend. Although SOEs started emerging in the early twentieth century, it was during Emperor Haile Selassie’s reign that many public enterprises were established in the hotel, banking, and logistics sectors, among others.
When socialism became the nation’s political philosophy in 1975, most private companies were also nationalized and transformed into public enterprises. Since SOEs were relatively large and their supervision inefficient, their performance was below average. After the fall of the Derg regime, the government declared a market-oriented economic policy and large-scale privatization of public enterprises ensued. Ethiopia privatized 360 enterprises between 1995 and 2002, generating ETB49.2 billion in the process.
Although the privatization effort in Ethiopia was not as destructive as observed in countries like Russia, its impact on the economy was minimal. So, the government continued to vigorously take part in the economy with a view of encouraging the private sector.
So, the government in Ethiopia continued to affirm its strong hold on the economy by maintaining its monopoly in sectors like telecommunications, aviation, electric power, and logistics, among others, especially after adopting a ‘state-led’ development approach in which SOEs play a fundamental role.
“The government used SOEs to monopolize sectors which it did not want to fall into the hands of the private sector,” says the macroeconomist. “So, the focus was never making SOEs productive, but rather to keep them alive at any cost.”
Beyene Hailemeskel, Director General of PEHAA, has a different perspective. “The problem observed in SOEs is related more with poor management, lack of skilled manpower, and weak controlling procedures,” he explains. “Many public projects implemented by SOEs failed because they were initiated without sound feasibility studies. Clearly, some SOEs squandered the huge amount of money they took in the name of investment.”
Ethiopia is also attempting to resolve the problem, according to Beyene. “Various studies are underway by local and foreign firms to privatize some SOEs and liberalize various sectors. The exact decisions and steps will be disclosed after the studies are finalized.”
Countries like China reformed the way SOEs operated by redeeming them from the bureaucratic control that hindered their performance. South Korea also changed the way it managed its public enterprises, dramatically. Although both countries applied privatization and liberalization step by step, the reforms implemented to improve the efficiency of SOEs was the chief factor that laid the foundation for the economic growth China and South Korea registered during the last three decades.
Citing the experiences of China and South Korea, Teke, Lecturer at AAU, argues privatization and liberalization are not the only solution. “If government must involve in the economy, it should enact major reform and create efficient SOEs. The debt restructuring must be attached to performance evaluation. Only unfruitful SOEs should be privatized.” EBR
9th Year • Nov 16 – Dec 15 2020 • No. 92