Ethiopian Business Review

The Government has no Motivation or Capacity to Regulate the Private Sector.

Elias Geneti has been the president of the Addis Ababa Chamber of Commerce & Sectoral Associations (AACCSA) since 2014. Having received his masters of science in soil engineering in 1992 from the Ukrainian Agriculture University, he returned to Ethiopia in the 1990s. Elias took a job as a business development officer for ODA Share Company, ending up as deputy Chief Executive Officer, before setting up a trading company to export oil seeds and pulses in 2005.

Elias served as the president of Ethiopian Pulses, Oilseeds & Spices Processors-Exporters Associations for eight years. He sees better prospects for the private sector in the years ahead and believes the recent measures of the government to privatize key state-owned enterprises is a sign of radical change. EBR’s Samson Berhane sat down with him to discuss chambers, the benefits of privatization and challenges of the private sector.

EBR: The recent decision of the ruling party to sell some or all of the shares of certain key public enterprises seems to be a short term solution for the crises that have plagued the country for over a decade. Although the ruling party has hinted that liberalizing other sectors will follow, do you believe that it can be possible without even having a roadmap?

Elias: I don’t consider the recent measures a short term solution. Rather, they are critical measures. To understand this, it is crucial to look at the level of the national economy. Currently, the Ethiopian economy is based on neither socialist nor capitalist principles. Although it is considered a developmental state, the government’s major role makes it seem socialist. On the other hand, the involvement of private sector, however small, makes it somehow capitalist. 

In fact, according to a study conducted by the Addis Ababa Chamber of Commerce and Sectorial Associations, the share of the private sector in the economy is around 25Pct, whereas the rest is contributed by the government. The enterprises, which are the main reason for the rise in the government’s contribution to the economy, were supposed to have been privatized a long time ago, because the government is both the policy maker and one of the participants in the market. Usually, when the government becomes a major player in both the economy and politics, the sustainability of development will be compromised. That makes privatization obligatory, not optional.

For example, China has sustainable and steady growth, not because the state has the biggest role in the economy, but rather as the result of the efficiency of the private sector and its contribution to the economy of the nation. Likewise, Ethiopia cannot ensure sustainable development by maintaining the status quo towards the development of the private sector, especially at a time when the economy is in danger.

There are three reasons that can support my argument. Firstly, partially or fully privatizing public enterprises is crucial to continuing and finalizing the already started mega projects. Secondly, even though these public institutions have huge capital accumulation, they are not effective. Had the private sector been given the opportunity to run them, their revenues would have tripled or quadrupled.  Finally, privatization would play a major role in bolstering service quality and enhancing infrastructural development. Hence, the recent decision of the ruling party is a good start, if not a radical change. 

But if we look at the experience of other countries, such as Guinea and the United Kingdom, privatization brought about bad consequences because it was not implemented properly, or prepared for. 

The recent decision of the government signals the change that is about to come in the structure of the economy. I expect liberalization to be the next step. We must learn from Kenya, which has many telecom providers, making competition stiff, fast and dynamic. There is nothing to deter us from creating the same environment in Ethiopia. 

Privatization can be taken as a mechanism to allow many telecom, electricity and airlines services providers to flourish. That will lead to fast growth, competitive prices, efficient services and higher future tax. Meanwhile, the public and the state must have confidence that the private sector can run the economy.

In Ethiopia, the demand and supply must eventually determine the market. The role of the government, which has been the cause for the failure of the market system, must diminish step by step. To make that happen, Ethiopia must change the status quo. Creating awareness among the public is also essential, because there are people who think price and service delivery would be adversely affected. 

The major barriers of the private sector in Ethiopia are corruption, shortage of finance, inefficient government bureaucracy, shortage of foreign currency, as well as unavailability of land. The control of key sectors by the government had been rarely mentioned as a challenge.  

Businesses have no alternatives to escape from corruption, extended bureaucratic hurdles and service inefficiency, because the government is the only provider of utilities, which exposes the country to corruption and other related challenges. 

Do you think the government is ready to allow and facilitate competition among the private sector in key sectors?

That is the problem. The government has no motivation or capacity to regulate the private sector now. That is why a smooth transition is essential while gradually transferring ownership of key sectors to the private sectors. The legal framework, monitoring and control mechanisms should be well articulated. 

Meanwhile, the government should revise its way of appointing government officials. It is common to see a person who has no background in trade or business assigned to run institutions that supervise businesses, because the government prioritizes political affiliation over professional experience. I am afraid the ruling party is not ready to make that change now. But irrespective of the government’s attitude, professional experience is another area that needs attention, because it is a must to develop the capacity to regulate big multinational corporations, which are likely to be the buyers of public enterprises. 

Regulations also need to be fixed. For instance, foreign currency shortages arise due to poor regulation. While there are millions of dollars transacted on the black market, the country’s foreign currency reserves are depleted because of the poor regulation mechanisms. 

Both the first and the second Growth and Transformation Plans did not clearly stipulate how to raise the contribution of the private sector to the economy. Many argue chambers and sectoral associations, which are supposed to be the voice of the private sector, should have persuaded the government to do that. 

The government considers small scale farmers, who constitute 80Pct of the population, as  part of the private sector. As a result, officials ignore corporate businesses. Although empowering smallholder farmers is important, it should be noted that corporate businesses are crucial for wealth creation. They have the potential to create more job opportunities than the government and smallholder farmers. This should have been taken into consideration. 

So, why did you fail to make the government realize that?

We cannot be strong while the private sector is weak and vice versa. We have a government that has no desire to see strong institutions that represent the interest of the private sector. The reality is that there is no favorable environment. Instead businesses organized under the umbrella of chambers, the government prefers to deal with businesses separately. For instance, businesses under Hedasie [unions created by the government] were supposed to be members of the Addis Ababa Chamber and Sector Associations (AACCSA)

During my tenure as president of AACCSA, I tried to narrow the bridge between the government and the chamber. I proved that it is possible for a country to develop with cooperation between government and private sector. Unlike when we first started, the impact of the Association on economic affairs of the capital now has greatly improved. The City Administration’s doors seem more open to us than ever. For instance, the Addis Ababa City Administration bought ETB650 million worth of shares in the Addis-Africa International Convention and Exhibition Center, which is under construction. Likewise, the Administration provided land for the construction of our headquarters. Not only that, they have also finalized its preparations to expand the Addis Ababa Exhibition Centre, allotting an additional 10 hectare of land and spending more than USD346,000 to undertake studies for it. Such commitments are a sign of progress in terms of paying attention to the private sector.

Although there are some developments in some areas, many chambers and sectoral associations, with the exception of AACSA, are still fragile. Some attribute that to their establishment proclamation which they say does not correspond with the existing situation. 

The proclamation was enacted 15 years ago in a way that satisfied the government’s wishes. The law is complicated and in favor of the state. It considers small and medium enterprises (SMEs) as sectorial associations. That might be a holistic approach to transform SMEs to large manufacturers. The government, however, uses it for political gains, leaving the sectoral associations and enterprises disorganized.  

The law also has problems related to transparency, accountability and hierarchy. We are now working with the government to amend the law. In doing so, the involvement of the government in the activities of chambers and sectoral associations will be reduced. Also, the amendment will enable chambers to enforce a structure and chain of command. It will also incorporate ways to create cooperation among chamber and sectoral association. 

Will the issue of membership be addressed in the amended proclamation? There are some individuals that say that AACCSA membership should be mandatory. 

Making membership mandatory has its own pros and cons. It depends on the country’s development. If it is mandatory, it should be made that every sector comes to the chamber to get trade licenses, as is practiced in many developed countries. In fact, the responsibilities of chambers go as far as collecting taxes, which, in Ethiopia’s case, is handled by the Ethiopian Revenues and Customs Authority. When it membership became voluntary in Ethiopia many decades ago, it was reasonable because the term businessperson was not clearly defined at the time. The chamber was established to collectively voice the concerns of certain businesses. Making membership mandatory would have created a mess back then. 

Nothing much is different now. Except for issuing certificates of origin, AACCSA doesn’t provide any services, while similar institutions in other countries handle more than half of the available services to businesses. If the chambers were allowed to provide similar services, there would be no need to make membership mandatory. But chambers need to have the financial resources and knowledge to do that. For the AACCSA, for instance, it is impossible to handle 200,000 businesses because there is a finance and skill gap.  

Over the past two years, the country has been plagued by unrest and violence, which has adversely affected businesses and resulted in a drop in investor confidence. Have you noticed any changes after the appointment of the new Prime Minister?

Although the damage has been minimal, the protests were a big challenge for businesses. The economy was also greatly affected by the protests. For instance, in four exhibitions organized by AACCSA, there was a decline in the number of foreign participants. But with the coming of the new leadership, there seem to be good things on the horizon. Investor confidence has improved since then. Furthermore, the fact that the government has compensated businesses that lost millions because of the unrest has contributed a lot to the rise in confidence. 

The lack of insurance against risks related to political unrest contributed a lot to the insolvency of some businesses during the protests. Since business always involves uncertainties, the insurance industry should be able to respond to that. However, insurance companies rush to cut prices, instead of introducing new products. 

Before I reflect on that issue, it is first important to address the existing capacity of insurance companies. The insurance industry in Ethiopia is really backward. The regulation also doesn’t follow global trends. In fact, motor insurance policies contribute the lion’s share of the premiums written by insurance companies. This makes the loss ratio higher because most of the insured cars in Ethiopia are old and imported. They can’t introduce a new policy without creating a network with multinational reinsurance and insurance companies. 

For instance, I own a company that exports oilseeds. Our buyers in Texas usually demand that we present bring Cost, Insurance and Freight certificates. But we are unable to do that because there are no insurance companies that can insure my product until it reaches the destination. So I take the risk and export the products without insurance. 

Although the insurance companies want to work with international reinsurers to cover the gap, they don’t have the capacity to do that. There is also a knowledge gap in the industry. For instance, I was the board chairperson of an insurance firm, yet I have not bought a life insurance policy or insured my house. The same goes for majority of the population.

One of the major challenges of the private sector is the traditional tax system. Even in the midst of all the issues people are facing, the government plans to increase the contribution of tax to GDP to 17Pct. Is this justifiable?

That is not reasonable. The regulatory body is very weak and corrupt. We see some people selling products in Merkato without being taxed, while others are forced to leave the business after dealing with heavy tax bills. This could have been solved if the country had a trade policy, which is important to ensure accountability and transparency. Tax authorities tend to leave big traders untaxed and get tougher on small businesses. We live in a country where businesses that fulfil their duties are tactically penalized. 

Related to that, recently businesspersons and officials charged with and convicted of corruption were released. That has created some confusion among the public. 

I believe justice should come first. If anyone steals what belongs to others, they should be penalized. However, the recent cases might not be only about corruption. I think there are many issues that are hidden to the public. There might be political motives behind the arrest of the released people. At a time when ethnic based fights are common, releasing prisoners to bring about national reconciliation is a wise move. 

While there are attempts to reduce the involvement of state in the economy, there are still conglomerates such Tiret [an endowment company affiliated with the Amhara National Democratic Movement] and Effort [an endowment affiliated with the Tigray People Liberation Front], that are affiliated with the coalitions of the ruling party with huge capital. Constitutionally speaking, the party is not allowed to be involve in investments to avoid conflict of interests. 

This was caused by a lack of a clear definition of the private sector. Ethiopia is trying to copy Korea where the involvement of the state has been huge. The establishment of the Metals and Engineering Corporation is a showcase. The same is true with EFFORT, Tiret and other conglomerates. It is a way of controlling the political economy of the country. But I believe the institutions that are affiliated to political parties will not be a threat to the private sector unless they are given a preferential treatment.


6th Year . June 16 - July 15 2018 . No.63


 

 

Samson Berhane

Editor-in-Chief

samson.b@ethiopianbusinessreview.net

Leave a comment

Make sure you enter the (*) required information where indicated.Basic HTML code is allowed.