EBR: Before coming to Ethiopia, you worked as a country program officer in Rwanda. These two nations share similar economic outlooks. Do you thinck that this is working for them?
Mr. Barow:Yes, I think by and large it is working for them because what stands out really between these two countries is strong ownership and domestication of policies; very organized governments and public sector; clear vision about the development objectives and strategies and very strong leadership. So, these two countries are doing well in terms of achieving the Millennium Development Goals and registering high economic growth. They have also made significant progress in reducing poverty with in a relatively short time.
But, in the Bank’s Strategy Paper for Ethiopia, it says, and I quote, “Developmental state ideology has the potential to distort market competition and result in alocative inefficiencies.” Is this ideology creating a challenge for the private sector and the economy as a whole?
Well, it could where adequate space is not given for the private sector in terms of different parts of the economy and also in terms of the risk of not having adequate balance in the economic landscape, particularly having to do with the role of the state and the role of the private sector in economic activities. This is where the risk lies.
Do you think the public sector is crowding out the private sector?
Yeah, it is a danger that can happen because if the role of the public sector is not properly defined and focused, it can get expansive and extensive and really test its capabilities, capacities, and resources which hinder it from delivering on its aspirations.
Supporting economic and governmental reforms is one of the strategic areas that the African Development Bank has placed a greater emphasis since 2006. In this regard, what kind of engagement do you have with the Ethiopian government?
The Bank is a strong partner of the Ethiopian government because it supports its development programs and projects. Every three or five years, the Bank prepares its Country Strategic Paper which is informed by consultation with various stakeholders in Ethiopia including the government. In the context of preparing the Country Strategic Paper, we identify the key development challenges and issues for policy dialogue; not only in regard to Macro-economic policies but also very particularly in the sectors that the Bank supports. Regarding Ethiopia, the bulk of the Bank’s support is in the area of infrastructure, particularly in road sector; in power and water and sanitation. As part of the process of preparing the Country Strategy, the Bank also prepares analytic products to study the economy which takes in-depth analysis of the challenges in the sectors. Findings of reports and studies are used as the basis of informing our policy dialogue particularly around the issues of efficiency, access and the role of the private sector and around the GTP.
Ethiopia is said to have lagged behind when it comes to the public private partnership. And the Bank has recently presented research to Ministry of Finance and Economic Development on the issue. Tell me about it.
I am not sure if Ethiopia has lagged behind. Relative to some countries in Southern Asia and few other African countries, maybe the case can be made. I think there have been distinct innovations promoting the public private partnership. That should be recognized. For instance, the concept of the Ethiopian Commodity Exchange is established under the notion of public private sector partnership. In the energy sector, you have elements of public private partnership. May be it’s the range of instruments that are not being brought. Telecom also has examples of public private partnerships. The public private partnership that we are preparing in collaboration with the government of Ethiopia is essentially to distill the lessons learned from other countries that came together in Ethiopia. The potential that public private partnerships can bring particularly in the key infrastructure sectors in terms of mobilizing private sector investment; in terms of bringing in skills; also in terms of fostering efficiency and quality in service delivery. And these are what the study is seeking to do as well as to look at the landscape in terms of the policy and institutional framework and the regulatory complex to put in place very robust institutions; very effective regulatory framework and policy to be able to promote public private partnership in a greater aspect. That has been the case.
According to the Bank’s Country Strategy Paper, its intervention in Ethiopia will focus on generating power. Is AfDB 0providing loans for some of these projects, say for the Grand Renaissance Dam (GRD)?
The Bank is not currently financing any power generation projects at the moment. We have been looking at supporting one power generation project, but the govern ment’s preference is that we support the strengthening of the transmission system because even if power is generated it will need to be conveyed and the strengthening and upgrading of transmission systems is as equally as important as the power generation. The Bank is open to considering the financing of all the power generation projects including GRD, but at the moment I think the government’s strategy is to mobilize the resources from domestic sources and from the Diaspora rather than through multi lateral institutions.
So the government is not willing to get any kind of finance from the bank, and that is why you are not involved in the project.
Right now they are not looking for funding from multi-lateral institutions. However, we have been involved in supporting the studies, back when they were being prepared for the development of the Dam through the Nile Basin Initiative.
There are signs that the Ethiopian economy at this time, especially the private sector is suffering some sort of a credit crunch. As a prime financial institution in the continent, what can you do to help?
I believe that our first point of entry is through policy dialogue in the areas of monetary policy and financial sector development. There is scope for fostering competition and the consequent financial innovations to expand outreach and availability of services. Some deregulation, perhaps through gradual and selective entry of foreign banks, could contribute to a deepening and broadening of the financial system. It will also have beneficial effects to the private sector, job creation and economic development via inter-mediation.
Another option that is open and available, particularly as we do to the private sectors is through lines of credit to financial institutions. Admittedly, there has been very little appetite in the past by the Ethiopian financial institutions, particularly the commercial banks, to borrow off shore in terms of lines of credit. I think this could be a very viable effective instrument that will help small and medium scale enterprises. There are also other opportunities in terms of private equity funds. The bank is an investor in many of these private equity forms, some of which include Ethiopia as a target market and are aggressively looking for investment opportunities. These are all the possibilities that have been pursued and we are looking at also financing on a direct lending basis several investment proposals in industry, mining and also in agro industry.
Experience shows that your engagement with the Ethiopian private sector is limited to well reputed and resourceful companies like the Ethiopian Airlines and Derba Cement, which obviously, can access other sources. So, why are other original initiatives not receiving finance from AfDB?
First of all I will ascribe it to an issue of scale, for direct lending activities with the private sector; the projects need to be sufficiently large in scale in a range of USD 10 million and above. It is important in this regard that the projects are bankable meaning that they are not only technically feasible and with strong sponsors and a track record either by the project itself or by the sponsors but also they are viable in that they can be able to service the debts that they attract given also issues of a currency mismatch. Ideally export oriented ventures are more favorable because much of the lending is given in foreign currency and they have to have a debt service coverage capacity.
So, beyond all these things, we also look at the additionality that the Bank can bring in. Because we feel that there are certain investments that could best be financed wholly or to a greater extent by the domestic financial institutions, instead of the Bank coming in. Because we are looking at projects throughout the continent, we have to really be selective. So, in Ethiopia specifically, there has been a challenge to find very bankable projects. I am pleased to hear that in recent months we have received some very interesting proposals that we are currently looking at. Some are more advanced than others. I am pleased that they are in line with the government’s objectives to enhance industrialization. Many of them are very interesting efficient import substitution industries, or more export oriented in some particular cases. So, I think the opportunities will grow as the private sector becomes more mature and projects being promoted to a sufficiently large scale. Otherwise we have to look at the option of having a reach through lines of credit with some of the private commercial banks.
Can you mention some of the projects that are on the table?
Well, I can’t for reasons of confidentiality. However, I hasten to add that these projects are in the industrial sector, mining, agro-industry, and of course, the services industries.
How much fund do you plan to avail for the Ethiopian private sector until 2015?
I think Ethiopia has fairly sufficiently high head room in terms of private sector lending and financing of private projects compared to many of African countries. We don’t have a strict limit or strict allocation to Ethiopia that must be committed. But, there is adequate head room to be able to lend to two or three operations in the range of up to around USD 300 million on an annual basis for the next three years. So, I think the challenge is not the resources but having bankable projects that can be and up-raised with all the necessary due diligence work to be able to reach to the financing stage. But we currently have a robust pipeline we are looking at.
The Indian company Karuturi has requested a loan from the Bank for its investment in the Gambella regional state. However, its request is yet to be approved. Some say, the disputed land administration, villagization and land grabbing allegations in the region and other related issues are hindering the loan approval. What do you say?
We are looking at their request in terms of our due diligence processes. First of all it has to do with the scoping of the investment and to ensure that it is technically feasible and that the necessary due diligence in terms of environmental licensing; the resettlement and social impact issues are addressed as well as the capability of the firm to service its debt. So, we are considering the proposal and taking into account the policies of the government in terms of resettlement and also the Bank’s own policies, procedures and guideline with regard to resettlement, environmental and social impacts. So, the project will be assessed based on its own merits and of course with due regard to the issues I have mentioned.
So, in a way the issues are a challenge for the process.
They are certainly a major factor in our financing decisions.
Africa is still in agricultural stress. And yet, in 2011, the Bank availed only 3.5 pct of the loans and the grants for the sector. Does the sector have no strategic importance for the Bank?
I think quite the contrary. I think this estimate of 3 pct is really underestimated because of the way we count. For instance, projects financed in the road sector, many of them are really geared towards not financing roads as any reason but as a means to an end. I cited examples of projects we finance in Ethiopia. These are projects opening up rural areas with vast agricultural potential. So really, when you count it you look at it like a road project, but essentially it is going to support the agricultural sector.
But, these projects are not as such invested in increasing productivity or directly in the agricultural sector. Rather, they facilitate the marketing segment of the agriculture.
Yes, admittedly, I also agree. You see what we do is in every country the Bank agrees with the government based on consultations with all the stakeholders to determine its areas of cooperative advantage. By and large, in many countries infrastructure is our main area of cooperative advantage and that’s why you see the bulk of projects financed in infrastructure. But, there are other countries where we have substantial investments in financing agricultural projects. For instance in Ethiopia, the Koga irrigation and water shade management project is a huge irrigation scheme that is developed to support more than 3 thousand hectares of irrigation in agriculture.
The Agricultural Sector Support Project finances the development of small scale irrigation schemes and related infrastructure, water shade management in many locations within Ethiopia. On the Bank’s new long term strategy, which has recently been approved by the board, we will focus increasingly on agricultural sector interventions recognizing the critical role the sector has to play. An example would be providing extension services, and also micro credit and rural finance, so that we can be very effective. This is also in line with the effort to help countries in transition to green economies.
So, going forward you will see more of finances but with integrated and thematic approaches so that we also address the problem on the reporting of support of the agricultural sector interventions.
Does the Bank have any special relation with the AU? Say, in policy synchronization? And what does AU’s 50 years of institutional experience and existence mean for the Bank group?
The Bank has enjoyed very strong partnership; two way partnership with the Africa Union as well as the Economic Commission for Africa. We have a long standing cooperation that is culminated in establishing joint secretariat between the three institutions to enhance the coordination and strategic partnership on various issues and themes as well as emerging development challenges facing Africa. We also have several other initiatives aimed at enhancing regional integration and also developing effective response to problems of climate change. In this regard, we have set up the Clean Energy Initiative which envisages specific roles for each of the three institutions for bringing more synergy and harmonization as well as effective responses to Africa’s development challenges. In fact, a couple of months ago, three principals of these institutions met in the context of the joint secretariat and are preparing a paper that will be presented to the heads of states, outlining the key strategies and priorities that will be pursued by these institutions to support Africa’s transformation in the next 50 years.
We very much appreciate the strong political leadership provided by the Africa Union strong convening power to mobilize African stakeholders. And we are the financing arm and knowledge arm provided by Economic Commission for Africa to articulate and champion Africa’s development aspirations and also forging consensus on key global issues such as the form of international financial systems; negotiations related to climate change and NEPAD infrastructure program. We have a very strong relationship with the African Union as well as the Economic Commission for Africa.