DiogenesClub
January 30th, 2012, 01:44 PM
That the day that the EPRDF government gets out of the business of operating what are essentially service enterprises is inevitable. These kinds of entities often are, elsewhere in the world, owned and operated by for-profit corporations.
More importantly, early in its tenure, partly as a way to set itself apart from its predecessor, the EPRDF had made clear that it was committed to the implementation of a market economy, where the place of the government is to support and facilitate the work of the private sector by designing and tenaciously implementing carefully thought-out public policy.
In the following years, the government has systematically offloaded many of its holdings in a staggered series of offerings, the latest round of which saw the sale of its breweries. The Prime Minister’s oft repeated flirtation with a state-led economic development paradigm notwithstanding, nothing significant has transpired in the 20 years that could lead anyone to think that the EPRDF is intent on permanently keeping Ethiopia’s remaining public enterprises in its portfolio of economic concerns.
As such, a recent report from Access Capital was not terribly surprising, which, among other things, recommended that the government dispose its portfolio of public enterprises that it is still holding. It couched its counsel in the context of the current national imperative: the five-year economic Growth & Transformation Plan (GTP) proclaimed as the pillar of its long-term economic ambitions. As inevitable as that outcome is, it is doubtful that now is the right time for that to happen.
Of course, there are a number of hurdles which threaten to render that plan unattainable. Most ominous of all hurdles is the sky-high capital requirements of the plan and, particularly, the need to secure foreign currency of the type the country has never seen or dreamt of before.
The solution for that particular hurdle, the new report argues, is already on hand. All the EPRDF has to do is to sell its prized economic assets to international investors, and it can secure the capital it needs for the transformative plan, in foreign currency to boot.
Doing so can also remove a longstanding irritant in Ethiopia’s relations with multilateral financial institutions, such as the World Trade Organisation (WTO), and with many of its Western bilateral economic partners. The government can divest its holdings and open its service sector to foreign direct investment to make its path to WTO membership smother, it argues.
There indeed is merit to the analysis and recommendations. In fact, the recommendations might seem to have so much value that the EPRDF might be tempted to quickly act on it. Yet, there needs to be caution against the disposing of national institutions, the very repositories of the people’s accumulated wisdom and experiences in managing profitable enterprises for the public good.
There, indeed, is real and substantial economic value in keeping these institutions, which have provided needed services for over a hundred years. More importantly, they have served as platforms for training so much of the local workforce in the art of high-level management and even in a variety of technical fields, ranging from flying jets to the design and installation of high voltage power lines and repeaters for mobile communications.
This applies particularly to those institutions that have served as the economic and psychic anchors of modern Ethiopian society, including Ethiopian Airlines, the Commercial Bank of Ethiopia (CBE), the Ethiopian Electric Power Corporation (EEPCO), and even ethio telecom, with all of its imperfections.
All one needs to have to argue as such is a little common sense, a little understanding of the realities of the Ethiopian economy, and a lot of partisan love for the country and its people.
This action involves very large enterprises, the very largest in the land and among the largest in all of Africa. As such, if they are put on the auction block in today’s environment, they will definitely end up in foreign hands.
Given the nature of the Ethiopian capital market, if it can be called that, Ethiopians were not even able to come together and raise the capital necessary to buy the state beverage companies. These companies required far less capital but promised very high return on investment(ROI). When the state finally put these companies on the market, one by one, they were transferred to foreign owners.
It might help to note that they were not sold to foreign firms because the government preferred foreign capital to domestic or because Ethiopians did not appreciate the economic value of these companies. The outcome was dictated by the economic and institutional realities of the country.
Even if someone in Ethiopia had realised the great prize that Meta Brewery was and if it is assumed that there were enough people in Merkato with deep enough pockets to come up with the capital, there was no institutional mechanism for the orchestration of such a transaction. So, first the soft drink bottlers, PepsiCo and Coca-Cola went foreign. That was followed by the sale of St George Brewery and several smaller deals, and finally it was Meta.
If the capital market is not functioning well enough or is not deep enough to support the financing of the 225 million dollars required to close the Meta deal locally, how could it mobilise the billions of dollars required for the privatisation of Ethiopian Airlines or any of the other mega companies?
Placing these assets on the auction block before the legal and institutional framework necessary for a properly functioning capital market is in place will guarantee that the institutions become foreign property, with all of the implications that this entails. Some of these, including ethio telecom and the CBE, are centuries old and are built with Ethiopian blood and sweat as equity.
The very scene that every Ethiopian used to snicker at when travelling through African capitals would become part of a lost identity. Overnight, thousands of Ethiopians employed and supervised by fellow citizens would be working for foreign bosses. Institutions which, for so long, were the sources of national pride would no longer belong to any citizen of the country.
Instead, every leading enterprise in the land would be handed over to some European venture capitalist or a US hedge fund, which, more likely than not, would break it apart, keep the juicy morsels for dessert and trash the rest of it. In the long-term, there is even the ominous possibility that foreign entities might leverage their control of these large enterprises and seek to dominate the national economy or interfere in Ethiopia’s sovereign right to advance national interests both at home and abroad.
Things are coming to a critical economic crossroads. The economy is growing faster than it has over the last 40 years.
While large swaths of the population still live in abject poverty, wealth creation is a realistic goal of many citizens. While the economic takeoff is easier to recognise after the fact rather than while one is living through it, every indication is that Ethiopians are living through a time that sounds and smells like a transformational takeoff.
The transfer of the biggest and most successful economic institutions to foreign ownership is tantamount to the transfer of the vehicles of wealth creation to foreign hands. If that is done, the growth of the Ethiopian economy without benefiting very many Ethiopians will be witnessed.
Some might be quick to label this warning as nothing more than xenophobic protectionism. But, only a fool would be so committed to the cause of unfettered globalisation so as to ignore the disparate effect of absolute liberalisation, especially when it is certain that it will lead to a wholesale transfer of Ethiopia’s premier economic institutions to foreign hands.
The ballyhooed efficiencies of free capital markets will not come close to making up for the damage of becoming a nation of spectators rather than a nation of owners.
It is not economic heresy to argue that, under certain circumstances, there is a legitimate place for public enterprises in a nation’s economy. There is a wrong time and a wrong way to privatise long-established and otherwise successful public enterprises. That is the case in Ethiopia, today.
Remembering that it was only in the 1980s that most of Western Europe, Canada, and Japan decided to begin the process of offloading their public enterprises to the private sector, a process which lasted well into the 1990s, might help.
When the governments of these countries decided to sell their holdings, they were assured that their people were sufficiently wealthy and their financial markets sufficiently deep and sophisticated to absorb the tens of billions of dollars in equity associated with the privatisation of each of their enterprises.
Lest privatisation turns out to be a ceremony celebrating the transfer of national assets to foreign ownership, it would be wise for Ethiopia not to go down this road before its economy and its capital markets are ready. As it appears, there is neither adequate private wealth nor a well functioning capital market to allow the transfer of the largest public enterprises to Ethiopian investors.
This guy is going places. Astute and shrewd, which is more than I can say for the rest of the rif raff in the Ethiopian diaspora,.
More importantly, early in its tenure, partly as a way to set itself apart from its predecessor, the EPRDF had made clear that it was committed to the implementation of a market economy, where the place of the government is to support and facilitate the work of the private sector by designing and tenaciously implementing carefully thought-out public policy.
In the following years, the government has systematically offloaded many of its holdings in a staggered series of offerings, the latest round of which saw the sale of its breweries. The Prime Minister’s oft repeated flirtation with a state-led economic development paradigm notwithstanding, nothing significant has transpired in the 20 years that could lead anyone to think that the EPRDF is intent on permanently keeping Ethiopia’s remaining public enterprises in its portfolio of economic concerns.
As such, a recent report from Access Capital was not terribly surprising, which, among other things, recommended that the government dispose its portfolio of public enterprises that it is still holding. It couched its counsel in the context of the current national imperative: the five-year economic Growth & Transformation Plan (GTP) proclaimed as the pillar of its long-term economic ambitions. As inevitable as that outcome is, it is doubtful that now is the right time for that to happen.
Of course, there are a number of hurdles which threaten to render that plan unattainable. Most ominous of all hurdles is the sky-high capital requirements of the plan and, particularly, the need to secure foreign currency of the type the country has never seen or dreamt of before.
The solution for that particular hurdle, the new report argues, is already on hand. All the EPRDF has to do is to sell its prized economic assets to international investors, and it can secure the capital it needs for the transformative plan, in foreign currency to boot.
Doing so can also remove a longstanding irritant in Ethiopia’s relations with multilateral financial institutions, such as the World Trade Organisation (WTO), and with many of its Western bilateral economic partners. The government can divest its holdings and open its service sector to foreign direct investment to make its path to WTO membership smother, it argues.
There indeed is merit to the analysis and recommendations. In fact, the recommendations might seem to have so much value that the EPRDF might be tempted to quickly act on it. Yet, there needs to be caution against the disposing of national institutions, the very repositories of the people’s accumulated wisdom and experiences in managing profitable enterprises for the public good.
There, indeed, is real and substantial economic value in keeping these institutions, which have provided needed services for over a hundred years. More importantly, they have served as platforms for training so much of the local workforce in the art of high-level management and even in a variety of technical fields, ranging from flying jets to the design and installation of high voltage power lines and repeaters for mobile communications.
This applies particularly to those institutions that have served as the economic and psychic anchors of modern Ethiopian society, including Ethiopian Airlines, the Commercial Bank of Ethiopia (CBE), the Ethiopian Electric Power Corporation (EEPCO), and even ethio telecom, with all of its imperfections.
All one needs to have to argue as such is a little common sense, a little understanding of the realities of the Ethiopian economy, and a lot of partisan love for the country and its people.
This action involves very large enterprises, the very largest in the land and among the largest in all of Africa. As such, if they are put on the auction block in today’s environment, they will definitely end up in foreign hands.
Given the nature of the Ethiopian capital market, if it can be called that, Ethiopians were not even able to come together and raise the capital necessary to buy the state beverage companies. These companies required far less capital but promised very high return on investment(ROI). When the state finally put these companies on the market, one by one, they were transferred to foreign owners.
It might help to note that they were not sold to foreign firms because the government preferred foreign capital to domestic or because Ethiopians did not appreciate the economic value of these companies. The outcome was dictated by the economic and institutional realities of the country.
Even if someone in Ethiopia had realised the great prize that Meta Brewery was and if it is assumed that there were enough people in Merkato with deep enough pockets to come up with the capital, there was no institutional mechanism for the orchestration of such a transaction. So, first the soft drink bottlers, PepsiCo and Coca-Cola went foreign. That was followed by the sale of St George Brewery and several smaller deals, and finally it was Meta.
If the capital market is not functioning well enough or is not deep enough to support the financing of the 225 million dollars required to close the Meta deal locally, how could it mobilise the billions of dollars required for the privatisation of Ethiopian Airlines or any of the other mega companies?
Placing these assets on the auction block before the legal and institutional framework necessary for a properly functioning capital market is in place will guarantee that the institutions become foreign property, with all of the implications that this entails. Some of these, including ethio telecom and the CBE, are centuries old and are built with Ethiopian blood and sweat as equity.
The very scene that every Ethiopian used to snicker at when travelling through African capitals would become part of a lost identity. Overnight, thousands of Ethiopians employed and supervised by fellow citizens would be working for foreign bosses. Institutions which, for so long, were the sources of national pride would no longer belong to any citizen of the country.
Instead, every leading enterprise in the land would be handed over to some European venture capitalist or a US hedge fund, which, more likely than not, would break it apart, keep the juicy morsels for dessert and trash the rest of it. In the long-term, there is even the ominous possibility that foreign entities might leverage their control of these large enterprises and seek to dominate the national economy or interfere in Ethiopia’s sovereign right to advance national interests both at home and abroad.
Things are coming to a critical economic crossroads. The economy is growing faster than it has over the last 40 years.
While large swaths of the population still live in abject poverty, wealth creation is a realistic goal of many citizens. While the economic takeoff is easier to recognise after the fact rather than while one is living through it, every indication is that Ethiopians are living through a time that sounds and smells like a transformational takeoff.
The transfer of the biggest and most successful economic institutions to foreign ownership is tantamount to the transfer of the vehicles of wealth creation to foreign hands. If that is done, the growth of the Ethiopian economy without benefiting very many Ethiopians will be witnessed.
Some might be quick to label this warning as nothing more than xenophobic protectionism. But, only a fool would be so committed to the cause of unfettered globalisation so as to ignore the disparate effect of absolute liberalisation, especially when it is certain that it will lead to a wholesale transfer of Ethiopia’s premier economic institutions to foreign hands.
The ballyhooed efficiencies of free capital markets will not come close to making up for the damage of becoming a nation of spectators rather than a nation of owners.
It is not economic heresy to argue that, under certain circumstances, there is a legitimate place for public enterprises in a nation’s economy. There is a wrong time and a wrong way to privatise long-established and otherwise successful public enterprises. That is the case in Ethiopia, today.
Remembering that it was only in the 1980s that most of Western Europe, Canada, and Japan decided to begin the process of offloading their public enterprises to the private sector, a process which lasted well into the 1990s, might help.
When the governments of these countries decided to sell their holdings, they were assured that their people were sufficiently wealthy and their financial markets sufficiently deep and sophisticated to absorb the tens of billions of dollars in equity associated with the privatisation of each of their enterprises.
Lest privatisation turns out to be a ceremony celebrating the transfer of national assets to foreign ownership, it would be wise for Ethiopia not to go down this road before its economy and its capital markets are ready. As it appears, there is neither adequate private wealth nor a well functioning capital market to allow the transfer of the largest public enterprises to Ethiopian investors.
This guy is going places. Astute and shrewd, which is more than I can say for the rest of the rif raff in the Ethiopian diaspora,.