IT’S ETHIOPIA’S TIME

www.simplesharebuttons.com Share this post...

Zemedeneh Negatu is the Managing Partner of Ernst & Young in Ethiopia and Head of Transaction Advisory Services.

He has a wide variety of clientèle including prominent investors from Africa and the Middle East. Here in Ethiopia, he was instrumental behind the acquisition of Meta Brewery by Diageo and Ethiopian Airlines’ development roadmap Vision 2010. He has extensive global experience advising clients in financial services, manufacturing, telecoms and airlines. Asrat Seyoum and Bruh Yihunbelay of The Reporter sat down with Zemedeneh for an interview at his office on Mega Building located off Bole Road and discussed about Foreign Direct Investment (FDI) to Ethiopia, inter-African trade, commercial farming and other pertinent issues. Excerpts:

The Reporter: What is your assessment of the FDI coming to Ethiopia in the past four years?
Zemedeneh Negatu: In general the trend in the past two or three years has been encouraging. For example last year Ethiopia attracted one billion dollar in FDI which is the highest ever in the history of the country. On the one hand, you can say this is a very good achievement but another way of looking at is to note that Ethiopia has the fourth largest GDP in sub-Saharan Africa and therefore it has to increase the volume of FDI. The second observation I have is the fact that FDI has started to go into diversified sectors including manufacturing. Our analysis indicates that investors are starting to invest in those sectors where Ethiopia has competitive and comparative advantages. One other important trend to note is that the sources countries for FDI are becoming diversified. Until recently Ethiopia was highly dependent on FDI from the newly emerging economies such as China, Turkey and India. However, we are now seeing more investments and expression of interest from Western developed economies. For example in 2012 the two largest FDI were from the UK and the Netherlands represented by Diageo and Heineken. In my opinion these investments represented the tipping points in terms of really grabbing global investors’ attention. For instance, since 2012, almost every day we see potential new investors in our offices inquiring about the opportunities in Ethiopia. But Ethiopia needs to stay focused and make sure that it stays attractive to global investors because competition for FDI is fierce around the world. Every country from China to the US is working hard to lure international investors to their countries.

As you have mentioned earlier, the completion for FDI is fierce. How do you see this competition in Africa? Particularly, Ethiopia in comparison to other African countries?

I actually believe that Ethiopia has or soon will have many of the attributes to be highly competitive in attracting FDI not only compared to other African countries but also from developing Asia and beyond. For example Ethiopia’s strategy is to become one of the major manufacturing hubs of Africa but several other African countries also aspire to do that, from our neighbors in East Africa to all across the continent. Therefore, one way to win the FDI competition is by making the business operating environment smooth and efficient. For example make it easy to set up a business and once the business is open the regulatory authorities should collaborate with the investor as much as possible so that it’s successful. A successful investor is the best good will ambassador for Ethiopia and can therefore help attract more FDI. Besides the operating environment, another key attribute for winning the FDI competition is investment in infrastructure. In this regard, Ethiopia has been making significant progress and is in fact in many respects way ahead of other competitor countries on the Continent. I will give you just one example, power. For Ethiopia to be a manufacturing hub like China or South Korea, one of the needed ingredients is electricity, which must be readily available and affordable. As it happens, Ethiopia today has one of the lowest electric tariffs in the world, which is around 4 US cents per kilowatt hour. Therefore, a manufacturer in textile or garment sector for instance will seriously consider Ethiopia since cheap electricity is one of the elements that will make them competitive. Furthermore, one of the major competitive advantages that Ethiopia has is abundant and cheap labor. Ethiopia’s average monthly labor manufacturing costs is around 60 to 80 dollars per month whereas in China it is as high as 600 dollars. That is why Chinese companies are setting up their factories in Ethiopia. I just want to make one overall comment about the comparative FDI figures of Ethiopia compared to some other African countries. If you look at the big headline grabbing FDI figures coming to Africa the past few years, Ethiopia does not usually figure in the top fifteen countries because the big FDI figures are mostly comprised of investments in natural resources like oil and gas and minerals which are capital intensive and therefore they tend to account for very high volume of the FDI flow. Therefore certain countries in Africa which are very rich in natural resources tend to attract large FDI. That’s why the billion dollar FDI in Ethiopia has to be put in perspective and why I said is a respectable figure because Ethiopia has not yet started to receive large FDI in the natural resources sector.

When we look at the figure that you have mentioned, a billion dollars, it is the just the registered investment capital. But, how do you evaluate country’s performance in terms of how much of that money goes to actual investment on the ground? And also how much of these companies become successful?

As I have mentioned earlier one of the things Ethiopia has to focus on to ensure the success of the investors is to stream line the business operating process from initial registration to the time they start actual operations. For instance one of the things we sometimes hear from investors is that the various bureaucracies need to be streamlined and be more proactive. But in this regard, for instance, I was pleased to learn recently the Ethiopian Investment Agency has reorganized and has established a one-stop process to make it easier for investors to not only register but also monitor and provide assistance once they started operations. This is an important step since unlike five years ago when Ethiopia was eagerly seeking the attention of global investors, now it’s got it. Therefore, it has to make sure that the attention is converted to actual investments and these investments are successful.

You have mentioned that currently the bulk of the FDI coming to Ethiopia is from China, India and Turkey or the Middle East. Although the trend is changing, with a number of FDI coming from the West these days, how can you explain the difference apart from their fundamentally divergent foreign policies towards Africa?

You are correct to note that until recently much of the FDI into Ethiopia was dominated by investors from the emerging economies. And I believe the reason was because these investors were able to spot the opportunities in Ethiopia earlier than those from the developed world because they had seen similar opportunities in their own countries only 20 to 30 years ago. For instance less than 30 years ago China was very poor but now it’s the second largest economy in the world. Therefore Chinese investors have actually seen in their life time what it took to move from being a poor country to a middle income country and to the second largest economy and therefore have an advantage in spotting opportunities early. That’s why when they come to countries like Ethiopia it reminds them of early development days in China and are willing to invest earlier than, for example, Americans, who have not gone through a similar experience in decades and therefore are (were) slower in seizing the opportunities. However, even the Americans have now started to realize that Africa is the place to be. And to their credit, once they realized it, which was mostly in the last three or four years, they have started making investments, although on a more selective basis of the countries and sectors.

You do say that the westerns are now threatened by BRICs?

I don’t want to use the word threatened but the fact the BRICS, especially China’s huge investment in Africa, did grab the West’s attention. China came to Africa in a very big way. For instance China-Africa trade went from 20 billion dollars to 210 billion dollars in a span of 14 years. Therefore, I think it was unavoidable to get the West’s attention to what was taking place in Africa and for the West to develop a new engagement approach with Africa.

In terms of ease of doing business, comparing these two groups of countries, do you think when the westerners come to Africa the competition is going to be fair?

It’s a fact that investors coming from the emerging economies have some advantages since their risk perception about investing in Africa is somewhat different from those coming from the advanced Western economies. But regardless of the difference in risk perception and the competitive landscape for the two sets of investors, I think Africa overall needs a better job in improving the ease of doing business. For instance, if we look at the World Bank’s annual “Ease of Doing Business” report which ranks about 189 countries, essentially measuring how easy or difficult it is to do business in countries around the world, despite a lot of progress Africa has made, still it’s African countries which occupy the bottom part of the ranking. In fact Ethiopia, ranked at 125 is one of the best ranked African countries and is outranked by only 8 other Sub Saharan African countries mostly very small nations such as Mauritius, Seychelles and Cape Verde. Therefore in my view all African countries can and should do better in improving the ease of doing business.

We are always talking about attracting businesses from Brazil, China or some of BRIC countries, what about inter-African trade situation?

This is one of the topics I have talked about repeatedly in the speeches I give and the media interviews I have done around the world. At the moment inter-African trade is only about 13 percent of total African trade. It is the same percentage as it was in 2002. The overall trade volume has increased but the percentage didn’t. That means there is something wrong and needs to be fixed by accelerating Africa’s regional integration. The reason I say this is that virtually no single African economy is big enough as a stand-alone. So, the solution is to look at it as a region. The fact Africans don’t trade among themselves has to change because the Continent has enormous potential. I think in my view the Africa Union (AU) can do a lot more to make this happen. There is a lot of discussion at the AU, heads of state summits, the regional workshops, but still today it’s difficult to trade between African countries. Therefore regional integration should be Africa’s agenda item number one at the AU and for every African head of state.

It’s actually common to hear characterization nature of investments that comes to Africa. For instance, it is claimed that Chinese companies are more focused on the extractive industries while companies coming from the west are interested in joining sector with job creating potential. As an investment banker and business advisor, what can you say about the characteristics of the nature of businesses of the two groups?

In my view the nature of much of the Chinese investment in Ethiopia is different from how you framed your question. In Ethiopia the Chinese are not engaged in any material way in the extractive industries such as oil or mining, if they are it’s still relatively small. The fact of the matter is that the Chinese are engaged in Ethiopia in manufacturing and infrastructure. For instance they have built a huge industrial park in Dukem about 35km from Addis, the world’s largest women’s shoe manufacturer Huajian has setup a manufacturing plant which exports to the U.S, several Chinese car manufacturer such as Lifan are assembling cars in Ethiopia and there is a big Chinese owned residential and commercial real estate development currently under construction. Therefore, the fact on the ground in Ethiopia is actually different to your argument. In Ethiopia, it seems like they have put a marker and are saying that this is the place they want to be in multiple sectors. In other parts of Africa, especially the initial entry point years of China into Africa, resource was probably the priority and focus, which is understandable because they need oil and other natural resources from Africa. But, I think China’s engagement in some African countries over the next decade or so will change. They will always be looking for resources in some Africa countries probably because there is nothing else but in some of these countries. In my view China will have two tracks in Africa. In certain countries they will be engaged in natural resources, while in others they will be in broader sectors like such as manufacturing, telecom, services and so on. Nigeria, besides Ethiopia, is a good example in this regard.

Commercial farming is one of your areas of expertise and I want you to comment on your experience with Saudi Star and the current status of the project. So how successful is Saudi Star?

I have stated in the past and I will repeat it here again – FDI in Ethiopian agriculture if managed smartly has the potential to be a big plus for Ethiopia’s economy. I know this is not always acceptable in certain quarters outside of Ethiopia who are not sure if this is the right way to go. But my view is that large scale FDI and local Ethiopian owned farming, including small holder farming, are not mutually exclusive since they could actually be complementary. We have seen this in the flower business when the foreign investors first came in 2003 in Ethiopia. Back then people were asking why Ethiopia is investing in what looks like a luxury good at the expense of other farming. But look at where it is today. Ethiopia is the second largest exporter of cut rose in Africa next to Kenya earning about $225 million last year and employing tens of thousands of people. I think the same thing could be done with FDI in Ethiopian agriculture. Still, it needs to be managed carefully and the policy framework has to be smart. And if Ethiopia does that, it actually has the potential to become an agricultural powerhouse. It helps to remind everyone that Ethiopian is still a potentially large agriculture country and has 74 million hectares of arable land. But I saw some statistics recently that out of about 4 million hectares prepared for foreign agriculture investors only around four hundred thousand has been utilized. Therefore, much is yet to be done to encourage foreign investment into Ethiopian agriculture and for it to be a win- win situation. For instance, Ethiopia can marry two things – very rich people in the Middle East who are living in the desert with tens of billions of petro dollars at their disposal but can’t grow anything there, and Ethiopia which has fertile land and can produce and feed not only its people but the Middle East. I think this has the potential for a perfect match. Therefore, if we have the right policies, have the right monitoring system in place and are very careful about selecting the right investors I believe that FDI in Ethiopian agriculture could be transformational.

You have been a proponent of commercial farming but we don’t see it progressing the way it is supposed to and there is the issue of land grab. What is your current stance on the issue?

I think having the land grab debate, starting about five years ago, was healthy because Ethiopia (and Africa) was new to addressing the issues related to FDI in agriculture and the potential implications. However, to a certain extent the headlines about land grab were grabbing a lot more of people’s attention and may have taken away time from the constructive and valuable debates. However, in my view, Ethiopia as a country has evolved and five years down the road I think a lot of good lessons have been learned as to how to handle foreign investment in agriculture and I am assuming revised policies and procedures are being implemented.