For Whoever Has, to Him Shall be Given The Challenges of Local Investors to Access Finance While Foreigners Amass

As the Ethiopian government seeks to transform the economy into one that’s rooted in manufacturing, the simplicity for local investors to access finance is becoming easier said than done. That’s because banks have made it complicated to access loans to start businesses because they rely much on technical knowhow and skills to approve requests for financing that many local business owners don’t possess. As the result, it is the foreign investors who are tapping the available financial resources in government banks. This has further crippled the weak and fragile local private sector. EBR’s Berihun Mekonnen reports that government should work in building the capacity of the local investors to access finance. It should also encourage the way foreigners invest in the country to be more in the form of joint venture with local investors. Such approaches in the early 1980s helped local investors in South East Asia to learn important business skills from international investors.

Abebe Getachew, a businessman in his late 30s, is engaged in importing used vehicles and machinery. He also rents construction machinery and earns a pretty decent income. He has dreams of establishing a manufacturing company that produces goods for local consumption and export. 

However, Abebe is frustrated because he knows several people who have tried but failed to start their own manufacturing companies, mainly because of lack of finance for their projects. 

He often gets uptight when thinking about the long and tiresome process of securing loans for his dream project. He also knows the difficulties of engaging in the manufacturing sector, which needs broad technical skills and industry knowhow but most of all a huge amount of startup capital. 

The frustration he has is these days shared by a large number of local business people in Ethiopia. Stories of local businesses that struggle to access financing from banks is a growing concern among business owners.

Private banks are not providing enough loans to businesses, even if they are in the government’s development priority areas such as manufacturing, or in the more lucrative trade and service sectors. These banks blame the government’s directive that requires surrendering 27Pct of every birr they give out as loans to buy government bond to have deteriorated the volume of their liquid money, seriously affecting their lending capacity. On the other hand, the fragile local investors continuously find it difficult to access credit services from the state-owned Development Bank of Ethiopia (DBE). 

Despite complaints filed by individual businesses, as well as the Ethiopian Chamber of Commerce, top government officials do not accept the idea that the private sector is increasingly lacking access to finance. This was evidenced recently when Prime Minister Hailemariam Desalegn, while speaking with the local business people during the Private Public Partnership Forum held two months ago, denied the problem categorically. He said lack of finance is not the major obstacle for the private sector in the country, particularly for those interested to invest in the manufacturing sector.

The Prime Minister argued that there is enough provision of loans for investors to work in the manufacturing sector. “The main reason for the local investors not to invest in the manufacturing sector isn’t lack of finance,” he asserted. “Rather, local investors prefer the more ‘lucrative’ trade and service sectors”. “There isn’t any local investor who has been rejected to access finance for a manufacturing project.” 

He noted that the state-owned DBE has provided around 20 billion Birr to the private sector in the first nine months of the 2013/14 fiscal year alone. The amount, however, is 91Pct of the allocated loan for the period. “The money allocated by the government for those to be engaged in the manufacturing sector hasn’t been fully utilized,” Hailemariam told participants.  

Although the Premier claims this, the DBE withdrew a ETB1.52 billion loan agreement made with Habesha Cement for construction of a new plant, although it decided later to avail 630 million birr last November.

The Bank’s primary reason for rejecting the disbursement of the 1.5 billion birr request was the outdated feasibility study presented by the cement company. It is for such technical reasons that financing local projects is increasingly becoming difficult in the country. 

Such approaches have led to a situation where almost all the finance provided by the bank to the private sector in the most recent fiscal year happen to have been taken almost all by foreign companies. Since most of the foreign companies that invest in the manufacturing sector come to Ethiopia moving their already established factories; the estimated value of the machineries and equipments usually covers the 30Pct equity contribution which is required to secure 70Pct of project finance. In such situation local investors will continue to be at severe disadvantages.

Though the DBE claims it has been serving its mission by providing credit for investors in the governments’ priority areas, recently there have been complaints that it is not providing loan services to the local investors. Officials themselves have said that most of the loans disbursed by the Bank are poured to the pockets of the strong foreign companies rather than the weak domestic investors. 

One of the participants in the Public Private Partnership Forum, where the Prime Minister himself presided said that DBE has virtually become “the Development Bank of Turkey” in reference to its increased services to many Turkish companies. Apparently, a large proportion of the financing was made to textile companies moving to Ethiopia from the transcontinental country.

DBE is a policy bank used as an instrument for the implementation of government programs and plans. There are several stakeholders that play important roles in its decision making and directions. The Prime Minister’s Office, MoFED, National Bank of Ethiopia and Government Finance Institutions Agency are some of its stakeholders. The Bank plays its role in project financing private projects that are in line with government priority areas; it also finances public projects.  The financing of Tendaho Sugar development is one good example of its public financing. 

However local business owners say the DBE  is not serving the local investors in financing projects as it does in public projects and huge foreign companies. The bank officials, however, don’t accept these complaints. “Local investors have a huge awareness gap; they are speculative and focus on returns in the short term than a long term investment which benefits both themselves and their country,” says Berhanu Taye, the Bank’s Business Promotion and Communication manager. 

There is no shortage of finance to provide loans to investors who prefer to engage in the government priority areas such as commercial farming, agro-processing, manufacturing and extractive industries as he explains. But local investors aren’t able to fulfill the necessary requirements to get the credit from the Bank. “Many couldn’t fulfill very simple formalities even providing such as  Proforma invoices, title deed certificates or proof of ownership of leased lands and marriage certificates let alone providing a well-done  and detailed feasibility study” he adds.

Officers in the Bank blame local investors, stating that they don’t have the habit of consulting and involving educated and skilled people when preparing their project proposals. “It is funny that they sometimes even propose to complete the requirements after they receive the financing.” says a senior loan officer at the Bank who spoke to EBR on the condition of anonymity. 

If an applicant submits a complete project proposal fulfilling the requirements and the necessary documents, the process for the approval of the loan only takes 32 days, according to Bank officials. But most local investors don’t submit a complete document and so the process can take much longer.  

Although the bank is understaffed, it offers technical support for investors on how to handle the financial flow and accounting procedures upon receiving the finance. It also tries to assist on human resources recruitment and management. But as it stands, officials of the Bank understand that there are staff capacity limitations in reviewing proposals. “This is because several of the reviewers are young professionals who need capacity building to give efficient services,” says Berhanu. 

The above problem at the Bank, coupled with the bottlenecks at virtually all levels of government structure -- from acquiring land, utility services, importing of raw materials and machinery -- force local investors to rather eye other business opportunities in the ‘easy-to-make-money’ sectors such as the service and importing businesses. 

Many in the private sector say the procedure of acquiring money is not suitable for the up- and-coming private sector. Development banks in many countries usually finance mega projects. “This keeps the sector at a disadvantage because Ethiopia’s private sector is young and fragile compared with those foreign investors” says Zafu Eyesuswork Zafu, former president of Ethiopian Chamber of Commerce. “There aren’t [enough] private investors that can participate in huge investment projects.”  

Although government accepts most of the challenges that hinder the private sector from investing in the manufacturing sector, lack of “determination, risk taking and experience” among local businesses, while an entrenched “rent seeking behavior” to focus on areas of high margin sectors, such as real estate are the major challenges according to government officials. On the government’s side there is a problem of convincing local investors that the government gives support is one challenge.

In alleviating the challenges investors in Ethiopia face, the government has passed legislation to establish a one-window service at the Ethiopian Investment Agency, soon to become Ethiopian Investment Commission with increased mandate and capacity. The Agency undertakes activities that are aimed at attracting investors by promoting the investment potential of the country and provide facilitation services after potential investors come to Ethiopia. 

The critical activity the Agency is carrying out is to coordinate stakeholders and smooth facilitation of the services provided. To this effect, more than 10 government institutions -- including DBE, Commercial Bank of Ethiopia, Revenue and Customs Authority, Department for Immigration, Ethiopian Electric Utility, Ethio Telecom, Land administration -- are expected to have a desk at the Agency. Though some of them have been opened their offices in the Agency’s premises many still don’t have started any activity. 

If an investor comes to invest in government priority areas such as in the manufacturing sector, then 70Pct of the finance the project needs shall be given if the company provides the remaining 30Pct. This is especially designed to benefit local investors, according to Getahun Negash, the Agency’s public relations director. “For foreign investors the government requires if they could cover all the cost for the capital goods.” 

Although there is such a marked difference in provision of finance and other supports, the agency criticizes local investors for not being interested in investing in the manufacturing sector. As to the assessment of the Agency, the investors lack of interest stems from the fact that manufacturing requires inclusive skill and management while an international competition also makes it tough to compete and penetrate the world market.

This has inspired the government to change its approach of persuading local investors to invest in the priority areas such as manufacturing and giving different support by approaching investors in person. Developing industry zones and giving priority to local investors, give support in machinery selection and establishments through different institutions established for this purposes. Many of the investors prefer the services sector, which is not as complicated as the manufacturing sector; one could rent a house and start the business. While to invest in the manufacturing sector an investor is expected to have enhanced technical capacity and huge capital, the managerial knowhow of raw material sourcing, distributing plan, directing, or coordinating the work activities and resources necessary for manufacturing in accordance with cost, quality, and quantity specifications is very complicated for many local investors to build their knowledge base. This is because the present private sector is just 20 years old. 

One solution for this quagmire is to develop the private sector through government affirmative actions says Zafu. As much as the country tries to protect the financial sector to build its capacity before opening up to foreign competition, the same can be done to the manufacturing sector. 

The country can also revise the way foreign investors invest in the country. It can require them to joint venture with local investors. As the local investors draw valuable lessons and build their financial, technical and managerial capacities, government can change the modalities of how foreign investors invest in the country. 

Countries such as India have used such approaches. For instance, the Japanese automotive giant Suzuki entered Asia’s second populous market, India, in 1982, only when the company signed a license and Joint Venture Agreement (JVA) with Maruti Udyog Ltd, a local company. The Indian government authorized Suzuki to use at least 33Pct of the components of the car to be used be indigenous parts from India. Through the years, the partnership with the two companies grew to a higher level allowing Maruti to learn from Suzuki the nuts and bolts of automotive industry. In 1987 the Joint Venture exported 500 cars to Hungary for the first time. 

To date, the company produces 1.5 million cars annually for local and export. The three decades of experience gained through the joint venture has helped Maruti to build its technical capacity to the level of proficiency the Japanese has in automotive industries. Ethiopia can emulate the same strategy.

2nd Year . September 2014 . No.18

Berihun Mekonnen

EBR Staff Writter

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