The Optimist

‘[Ethiopians] will come together to transform the country’

Finding someone who staunchly promotes Ethiopia’s investment potential more than Zemedeneh is a difficult task. For the Ethiopian-American executive, whose client base ranges from Fortune 500 companies throughout the world to Ethiopian Airlines, it is always better for investors to come with a ‘glass half full’ mentality. He says optimism enhances the chance for success.
A regular guest at high-profile gatherings around the world, Zemedeneh has spoken on Wall Street at the New York Stock Exchange, Harvard Business School, the Dubai-Africa Summit, the Saudi-East African Business Conference, the Corporate Council on Africa Summit in Washington and numerous investment promotion summits. He has been interviewed about investment and the state of the Ethiopian economy by acclaimed international news organisations such as the BBC, Bloomberg, Al Jazeera and the Financial Times. In January 2015, he was also named among the top 15 ‘CEOs of Africa to Watch’ by the London-based African Business Magazine.
Zemedeneh argues that the government’s investment in infrastructure is an impetus for industrialisation. He says these investments don’t crowd out the private sector; rather, they create opportunities for it to flourish. EBR’s Amanyehun Sisay sat down with the numbers-driven investment consultant to discuss current investment trends in Ethiopia and the challenges and prospects of the country’s economic transformation.

We see a lot of public projects – dams, universities and hospitals, among others – being developed throughout the country. The finance for these investments is mostly sourced from bilateral and multilateral lenders. Do you think this strategy will take the country to its desired destination?

Since 2002, [the Ethiopian] economy started accelerating in every aspect, although it started from a low base. A lot of that growth is reflected in infrastructure development. A substantial portion of this huge investment in infrastructure has been coming from domestic resources, which was also expanding and growing significantly. A classic example of this is the Grand Renaissance Ethiopian Dam, which is financed 100Pct by domestic resources.
Of course, a [considerable] part is still coming from international financial institutions. But these investments will increase the share of the manufacturing sector in the future. Although [Ethiopia’s] per capita GDP is still small, it has been growing at a double-digit rate for the last 15 years.

The wealth created is also reflected in the purchasing power of the people. The GDP per capita (PPP based) currently stands at USD1,500, which was USD200 15 years ago. So, if you take pure measurable performances, the growth has been strong. By all measures, Ethiopia has done very well in the last 15 years.

Is this development reflected in improved quality of life for people across the country?
Ethiopia’s economy might look small but has progressed so much in recent years. You can take life expectancy [as an example]. If you go 20 years back, it was around 41 years. Today it is 64 years, which is much better than South Africa, the most advanced nation in Africa, with a per capita income of USD6,000. Yet, life expectancy in South Africa is 54 years. This is due to the massive investment Ethiopia has made in the social sector – health and education.

So, the government has brought meaningful change to the lives of citizens. Ethiopia might not have many resources, but it has made these tremendous investments. You can see the ambulances in each woreda, improving the health status of the society. We can see many more measurable items to show how peoples’ lives have improved because of the investment in public infrastructure.

In the United States, the wealthiest nation on earth, the biggest investment is in the education sector. Ethiopia is doing the same. Twenty years ago there were only two public universities. Today, they are 36 and there will be around [45] in the next five years. Education is the best leveller in the world, although the way you use the educated people in the workforce is still another issue.

What are the factors that enabled the Ethiopian economy to grow in the past decade? And where do you see the private sector in that growth?
You have to have a backward- and forward-looking analysis to see the whole picture. There is a huge investment by the state. Ethiopia has been one of the top five countries with huge public investments in the infrastructure sector. On average around 70Pct of the annual budget [of the government] goes to infrastructure development. The government even borrowed [USD1 billion] by selling a Eurobond to establish industrial zones. Other African countries have been doing the reverse, using borrowed money from the sale of Eurobonds to cover civil servants’ salaries.

Similar to the increasing productivity in the agriculture and manufacturing sectors, the service sector is also taking off. You can see the banking sector, which has 17 private banks. The private sector in Ethiopia was created just 20 years ago and its size is increasing. [I] see a lot of people in the private sector with fortunes worth billions.

How do you see the return on investment of huge government projects? Do you think the projects are worth the returns?
Absolutely. If there is no power, you cannot have a vibrant manufacturing sector and the investment environment cannot be inviting for foreign investors. Africa needs to shift from a commodity-based economy to manufacturing. You can see that when the oil price dropped to USD50 per barrel many African countries struggled. You can see Nigeria and others struggling with declining international commodity prices. Africa needs to start value adding and Ethiopia realised that early. Ethiopia started investing in power in the 2000s. The government realised they cannot establish industries without power.

There are many investments in power and today Ethiopia is the second largest electricity producing country in sub-Saharan Africa, after South Africa. Electricity is also the cheapest in Ethiopia, which is very good for those who want to join the manufacturing sector. And that is one of the returns on investment of public infrastructure development. You can also [say the same of] the investments in logistics and transport. So, the government’s investments will continue paying back as long as we stay focused, continue to invest and develop the domestic private sector.

These investments, which are mostly done by foreign contractors, require huge foreign currency which could put the country in debt stress. And as the economy keeps growing it needs more foreign currency to import machineries and even consumables. How do nations balance the need to continue investment in public sector while keeping enough foreign currency to cover imports to sustain the growth of the economy?
The investment in infrastructure must continue without any compromise. Maybe in 30 or 40 years, after building as much as what we want, we can slide from that. The question should be ‘is this creating a burden for the country?’ At the moment, the debt-to-GDP ratio is still low, around 25Pct. For now, 60 to 70Pct of government’s budget goes towards infrastructure: [Ethiopia is] borrowing to build dams, roads and so on, which eventually will pay off. My assumption is the huge part of the infrastructure investments will be passed on to the private sector gradually in the future.

Still, the imbalance between export and import will be solved, because I expect export to grow in the near future with the coming industries. But we need a lot of hard work and determination.

Of course, there is huge public investment, mostly in infrastructure, which has made Ethiopia the third fastest-growing country in the world. But beneath this lies another truth: Ethiopia has the sixth least developed private sector in the world. What do you say about this?
Take the Asian tigers, particularly China. Twenty-five years ago, more than 75Pct of the economy was owned by the state. And they started it from much higher base than Ethiopia did. They were already a large economy in the 1980s. You have to compare where we are now and the share of the private sector compared to China when they started their growth. We cannot expect a 20-year-old private sector to overtake the public sector.

However, the basic thing is government is getting out of the business of doing business. In 2000, there were more than 200 state-owned enterprises, now there are only 45. If you take out Ethiopian Airlines, Ethiopian Electric Power, ethio telecom and the Commercial Bank of Ethiopia (CBE), the rest are very small [enterprises].

But the government is creating new corporations, like the Biofuel and Oil Corporation, which they recently established with ETB4 billion. They’re doing this at a time when private investors engaged in the sector are complaining about the small profit margin they have, which is 1Pct. Furthermore, the government said it will establish oil retail shops throughout the country, which the private sector could invest in had their profit margin been improved.
I rely on data when I say the government is leaving it for the private sector. However, the government is investing in areas where the private sector could not invest huge money. It is not the government’s first option. With the exception of the few strategic assets like Ethiopian Airlines, the CBE and ethio telecom, my interpretation of the government policy and strategy is [officials] really do not want the government to be involved in every business.
In Brazil, the state owns the largest bank. So, every government has its own strategic assets.

In 15 years, the private sector will be the backbone of the Ethiopian economy. The biggest portion of job opportunities will also be created by the private sector. Foreign investors are playing a major role. But at the end of the day, Ethiopians will own the largest share of the economy.

Of course, investment is needed in infrastructure. However, we see delays of projects and mismanagement of public funds. In fact, according to the World Bank, 60Pct of public projects in Ethiopia are delayed or require additional financing. Ethiopia is still a small economy and it doesn’t have resources to waste. But it is happening because of the poor institutional capacity of the government.
With the available institutional capacity of the state, very huge and complicated projects are being handled, which, compared to other African countries, is very impressive. Weeks ago I attended the inauguration of the Addis Ababa Djibouti Railway. It is a USD3.4 billion project finished with the desired quality, within the expected time frame and budget. The train looks like a train I took from Paris to London.

There are also other investments underway, like the construction of a huge airport terminal. In fact, in this country the aviation industry generates more hard currency than the export sector. The growth of the aviation industry is because of the investments in infrastructure. Ethiopia has more airports than any other African country. The Hawassa Industrial Park is another example, which is the largest in Africa.

You have to put all that in context. However, we still see delays, so there is a need to finish projects more quickly. Investing in capacity building, especially at the middle and lower levels of the public leadership structure is needed. Sustaining the growth registered in the past for the next 20 or 30 years is challenging. China did it for 30 years. I am confident that Ethiopia has the ability to do that.

But delays in government projects waste resources and creates dissatisfaction among taxpayers. It also exacerbates the unrest that has erupted throughout the country. One can argue that such failures could take the country back to where it was 20 years ago.
I have worked as an adviser for Ethiopian Airlines. Are any of other companies and institutions in the country trying to replicate the successful elements of Ethiopian Airlines? Why is the Grand Renaissance Ethiopian Dam progressing so beautifully? Employees and engineers are working 24/7 on the project, enthusiastically. Why is this not happening in other infrastructure projects?

Ethiopia’s future transformation to middle-income status relies on the relatively limited investment in human capital. We cannot depend on anything that comes from natural resources, such as oil, to make this country prosperous. The reason Japan and Germany became and remained wealthy is because they invested in their human capital.
Ethiopia has a population of 100 million. That is the backbone of our prosperity. Hundreds of thousands of students graduate from public and private universities and colleges [every year]. This number was limited only to a few thousand 20 years ago. But, this is only half of the road towards prosperity.

The things we are doing now are correct, although we do have challenges. The question is ‘how we can change the man power to economic power?’ Can you imagine that a poor country like China currently has the second largest economy in the world because they invested [in their] human capital? So, my answer is if we continue investing in the people … we can do anything.

Although the country is investing in human capital there is the issue of the brain drain. Trained professionals still go to other countries that pay better. On the other hand, those who graduate from higher institutions lack basic skills and a significant number remain unemployed for a relatively long time. Last year, the PM even said ‘we cannot continue producing half-cooked graduates’. As the economy keeps growing, it needs a skilled and capable human resource that can take it to the next level. Zemedeneh, do you really believe that Ethiopia is producing the right people to sustain the momentum of growth?
First, there must be an alignment with the education output and the demand of the economy. We need manpower in the manufacturing sector, so we need engineers. The government decided 70Pct of high school graduates should pursue the natural science stream.

The second thing is the quality of the education, which still needs improvement. The private sector must help in giving those graduates an opportunity. This can be done as a public-private joint venture. Universities only teach their students the basic skills. If I have a manufacturing industry, I need to have a training programme. In the United States, where the quality of education is much higher than Ethiopia, one or two years of on-the-job training is provided for recent graduates when they join the workforce. This is common, even if one graduated from Harvard. For me the first thing is the alignment and the second is quality.

I see there is challenge in education quality, but those graduates still need jobs. So, your concern cannot be an issue. The only point I share with you is that we have to create an education system and a private sector that can nurture entrepreneurship skills so graduates can become job creators instead of waiting to be employed.

Usually it is recommended that the agricultural sector should take the lead in transforming a given economy by producing surpluses that can be used as raw material for industries. Do you think the government’s policy of focusing on manufacturing in recent years without making sure the agriculture sector produces enough surpluses is the right path? In fact, Ethiopia still imports agricultural products like wheat.
These things are parallel. A lot of the industrialised outputs such as textile and leather are based on agricultural products. Ethiopia has the largest cattle population in Africa, which can be used as raw material in the industries. When we talk about industrialisation, we have to keep in mind that the importance of vertical integration of the agriculture with manufacturing. This means industrialisation will be based on agriculture.

Still Ethiopia is the largest producer of wheat in Africa. In the next 12 years, it will be the largest net exporter of wheat. That is what is going to happen to sugar and coffee, too. Today we export raw coffee and import Nescafe. We will be net surplus exporters and an agricultural powerhouse in the next 15 years. Economic growth is not just a single linear line. What works is adopting the best practices, modifying them, and not losing focus.

There are a lot of promising investments coming to the textile and garment industries, but there is not enough raw material supply in the local market. So, what should come first, investing in the agricultural sector to produce enough cotton or building factories first?
The supply chain is basic for industrialisation. Today, you see imported packed juices throughout the country. However, the raw material is being exported. If you see other sectors like cotton, there is not enough production. Therefore, investment is needed in producing quality cotton. Most of the challenges in Ethiopia are addressable. The first challenge is vision. We got that one. We are cascading to the next level.

Recently industrial parks have been opening and foreign companies are joining the parks with lower fees and even getting tax grace periods for up to nine years. On the other hand, there is also a situation in which small local companies are being denied the chance to accumulate capital because they are required to pay 30Pct of their profit every year. Do you see the need for government to provide additional privileges and opportunities that allow small companies to survive, accumulate wealth and get involved in the manufacturing sector at a later time?
All privileges given for foreign investors are given to the Ethiopian investors. There is no differentiation. An Ethiopian company can get a nine-year tax holiday, just like a foreign investor. The law is the same for all.

Manufacturing is capital intensive. How can you accumulate wealth and evolve if you get stuck at the initial stages. Banks provide huge financing for big companies at low lending rates. You can go to government-owned banks and get a loan with a single-digit lending interest rate. But if you are smaller you have to go to a private bank and borrow money with a higher lending interest rate. This hinders smaller companies from growing.
The Ethiopian private sector is primarily concentrated in the service sector. To those who migrate from the service sector, manufacturing is a big challenge. Ethiopians have less experience in the manufacturing sector. It is [also] easier to get more profit in the service sector, as it requires low capital. But now, even that will not continue because the competition will heat up soon.

Ethiopians see manufacturing as pretty daunting because they are adapted to the service sector. That is why incentives are needed. That is what the Development Bank of Ethiopia is doing, supporting the local private sector, because local companies must [comprise the majority] of the industrial parks.

The private sector also has to think about becoming multinational. Look at Ethiopian Airlines, it employs not more than 10,000 and generates up more than USD3 billion dollars. It is also Boeing’s biggest customer in Africa. That is how we should think about our economy moving forward.

Do you think the current unrest in the country will affect its growth prospects? Investors are scared.
I believe we Ethiopians share some common values. We all agree on the move towards prosperity and transformation. If all the stakeholders come together and create more jobs, make domestic reform, attract more investment and transform, I do not think there will be a problem.

I believe in the core values we all share. We are a very proud, humble, decent people and also want our country to prosper. In my view, I believe our starting point to resolve the challenges we are facing is to try to solve them together.

In a mechanical way, the unrest we have been witnessing impacts investors’ decisions. But investors have very long checklists when they decide where to invest. They carefully choose destinations where they can mitigate risks and benefit more. So, it is too early to judge what will be the impact of the unrest on investors’ decision to invest in Ethiopia. But I am optimistic that [Ethiopians] will all come together and work to transform the country. EBR

5th Year • November 16 2016 – December 15 2016 • No. 45