Will State Holding Company Encourage Private Participation?

Private participation in investment and business activities in the Ethiopian economy has been struggling for decades. Various administrations have done little to nothing when it comes to developing the private sector towards development and alleviating poverty. From communism to state developmentalism to the current administration’s ideology—the private sector seems to be always stuck on the back burner. One recent move by the incumbent is the establishment of the Ethiopian Investment Holdings (EIH). Creating this arm into the Ethiopian economy, the government hopes to counter the sluggish development of private-sector participation in the economy at large. EBR’s Selome Getachew looks into the missions of EIH and expected challenges which it will face to achieve intended results.

Rising hopes of the Imperial regime, in terms of private sector development through the flourishing of industries, were all but dashed with the oncoming of the communist Derg. Ruling Ethiopia between 1974 to 1991, the regime confiscated private investments and killed the little signs of a flourishing private sector that was just being enacted in a strategized manner in Ethiopia for the first time by Emperor Haile Selassie. Post-Derg, the Ethiopian People’s Revolutionary Democratic Party (EPRDF) somewhat resuscitated the dying private sector.

Already a follower of state developmentalism, in a decision that seemed to have followed the 2008 global economic crisis, Meles Zenawi, former Prime Minister and EPRDF’s Chief, went further into the belief that the nation could be saved by state-led investment in the economy. This would be in contrast to private-sector-led economies that were in dire health at the time globally.

To put it simply, the private sector in Ethiopia has never had it easy and moves by the state have been to the detriment of it.

“My economic model is capitalism,” Abiy Ahmed (PhD), Prime Minister, said in an interview with the Financial Times conducted in February 2019. “If you give me USD100 billion now, I can’t use it. It is not only about money; it is also about talent and experience. That’s why we need the private sector.”

Two years down the line, in early June 2021, Safaricom Ethiopia officially registered to do business in Ethiopia as the first private telecom company to ever operate in Ethiopia. Securing its license for USD850 million, Safaricom also pledged to invest a further USD8.5 billion in the coming decade. Through its first China-assembled data center, Safaricom made its first successful voice call using the code ‘07’, assigned to it by the Ethiopian Communications Authority (ECA). Mass operations are yet to begin, however.

Abiy has said that earning cash from a state monopoly was less important than launching services such as electronic money, e-commerce, and virtual government, in which African peers like Kenya are more advanced. In 2020, the government also announced plans to launch a stock exchange which seems to have been fast-tracked with the launch of FSD Ethiopia, led by Ermias Eshetu, Board Chairman of Zemen Bank and former CEO of the Ethiopian Commodity Exchange. Such happenings prove a gradual but decisive shift towards economic liberalization in this East African country.

In an attempt to attract increased foreign direct investment, boost its cash-strapped economy, and coordinate the numerous commercial operations of the government, Ethiopia launched its first sovereign wealth fund—Ethiopian Investment Holdings (EIH).

The Ethiopian economy has been heavily damaged due to Covid, conflicts, and natural disasters, among other challenges. Alongside such problems, rampant inflation adds to the image that government is not catching a break regarding the economy it leads. In April 2022, the Ministry of Industry (MoI) reported the halt in production of about 446 factories, sending further shivers in a struggling environment.

EIH is a government-owned investment company that aims to promote and facilitate foreign and domestic investment in the country. Its portfolio includes interests in banking, insurance, manufacturing, construction, real estate development, and tourism.

The administration has identified the development of a strong private sector as a key priority for economic growth and job creation. To this end, EIH is expected to play an important role in promoting foreign direct investment (FDI) into Ethiopia. The holding company has developed an extensive network of contacts with potential investors around the world and has been providing support services to help businesses get started or expand operations in Ethiopia.

In addition to its promotion activities, EIH also invests directly in businesses operating across a range of sectors including agriculture processing and packaging; agro-forestry; automotive assembly and parts production; construction materials; education services; food processing and storage; and hospitality and tourism infrastructure development, among others. The overarching goal is to create jobs and spur economic growth by stimulating private sector activity.

Accountable to the Prime Minister’s Office and headed by Mamo Mihretu, former Senior Policy Advisor and Chief Trade Negotiator at the office, EIH has an authorized capital of ETB100 billion, of which ETB25 billion is paid up. It sources funding from the pool of state-owned assets which it administers; returns and revenues on the investment of the proceeds of its assets; sales of its assets and enterprises; and loans and other facilities such as bonds. Structured as a sovereign wealth fund, it takes cues from 10 similar funds in Africa, according to Bilen Mamo, Deputy CEO of EIH.

This holding company is a strategic development wealth fund that also aims to maximize the value of state-owned assets through professional management, leveraging international best practices. Regardless of the holding percentage of the government, EIH, as well as sub-funds and companies set up by it or participants in setting up thereof, shall be considered private business organizations, according to the legal document of the establishment. Headquartered in Addis Ababa, the company will have branch offices in and outside Ethiopia.

Some of the basic operations of EIH are planned to be holding shares, debentures, bonds, and securities that are in its ownership; investing in any business and investment opportunities as it sees profitable; taking part in the capital market, money market, and other similar sectors through purchase, sale, or other investment undertakings. It also includes the takeover and managing of state-owned assets that may be assigned to it by the board of directors, among others.

Beyond having the power to transform property of state-owned enterprises and other assets transferred to it into optimal income-generating ventures through structure and system change, EIH has full authority to undertake all preparatory works and decide on the dissolution, amalgamation, division, sale, privatization, a spin-off of subsidiaries it calls into its pool.

According to Mamo Mihretu and Bilen Mamo, CEO and Deputy CEO of EIH, on their interview on Global Sovereign Wealth Fund on June 22, public enterprises across different sectors, including transport and logistics like Ethiopian Airlines, energy, mining, manufacturing and financial services like CBE, construction, agriculture, telecom and media like Ethio Telecom, gaming, hotels and tourism are expected to be transferred to the EIH. Also, significant landholdings across the country are part of its assets and are ready for investment.

In a research piece published in 2000, Michael Kerf looked into the role of state holding companies in fostering private engagement in the economy. He explores whether, and under what conditions, state-holding corporations would be the ideal entities for carrying out such responsibilities, based on the experience of four African nations which he examined. He comes to the conclusion that forming a state-holding corporation is not always the best option and holds the rare cases when the opposite should hold.

When, and only when, investment responsibilities cannot be transferred to the private sector; when tariffs are insufficient, at least temporarily, to cover investment needs, and it is critical that a public entity has access to other sources of finance; when the holding company’s financial strength and accountability promote the gradual adoption of new technologies; and when a state holding company may be better suited than other entities for planning and financing investments, should such an investment arm be instated by the government of a sovereign nation.

It seems that Kerf would not agree to the idea that a sovereign wealth fund would not enable bettered private sector involvement in the economy. Successful participation of private investment in the economy requires clarity and coherence between policy/ law and implementation. Privatizing some of the state-owned enterprises has also been another approach attempted by the Ethiopian government to improve private participation in investment. Even this approach has been full of controversy and dilemma.

“First, privatization processes in Ethiopia seem to suffer from a lack of transparency and is a very slow and corruption-riddled process,” an expert demanding anonymity told EBR. “It is difficult to tell whether political decisions or economic factors are dictating which firms should be privatized, how, and to whom. Also under question is by whom their market values are evaluated and what factors govern the bidding processes.”

For Addis Alemayehu, Founder of Kazana Group, a private holding company, whether private or state owned, holding companies can actually boost the efficiency of the companies they hold. A holding company is an efficient structure to use resources wisely, whether it be financial or human resources. For Addis, holding companies could also raise private participation in investment.

“Someone who has ETB100,000 in a bank may decide to invest in these companies rather than keeping his money at a 5Pct interest rate,” Addis told EBR in a recent interview. “Holding companies make it possible for the public to also invest in these companies and not just use their services.”

Ethiopia is regarded as a late-starter with regards to privatization, even by African standards. The principal reason for privatization in Africa has been to placate international financial institutions. Despite the World Bank’s conditions, different countries, however, were engaged in privatization moves for varying reasons. The Ethiopian government has identified the following three objectives for privatization: generating revenue required for financing development activities undertaken by the government; changing the role and participation of the government in the economy to enable it to exert more effort on activities requiring its attention; and promoting the country’s economic development through encouraging the expansion of the private sector. Some studies argue that the main motive for Ethiopia’s privatization seems to be generating revenue from the sale of the state enterprises, making the first objective the most important of the three.

“The first and foremost reason that expedited the privatization program in Ethiopia is the poor performance of state-owned enterprises, particularly production and utilization of plant capacity,” Bilen told EBR. “Moreover, most firms could not cover their working capital requirements and were making a loss.” EBR

10th Year •June 2022 • No. 108