Ethiopia Pushes Privatization to Give Economy a Sugar Rush

ADDIS ABABA (Capital Markets in Africa) – For decades, Irba Jana has scraped out a modest living from sugar cane, selling his harvest to mills run by Ethiopia’s state-owned sugar monopoly. But lately, he’s been working as a security guard to supplement his income, as two of the three nearby processing facilities have closed because of a lack of upkeep and investment. “Sugar cane just isn’t profitable anymore,” says Irba, a grizzled, 50-year-old father of eight. “It may be time to start farming something else.”

Recently, though, he got the news that could augur a return to better times: The government is planning to privatize Ethiopian Sugar Corp.’s assets, including a factory complex near Irba’s home on a high plateau a two-hour drive southeast of Addis Ababa. And a local investor aims to let farmers buy shares in the mills, with promises of investment in additional projects such as candy and ethanol factories. A voice at the factory would benefit farmers, says Beyene Bikila, a fellow grower, and union member. “We know how to produce,” he says, “and we should get paid properly.”

Privatization of the sugar industry is part of a sweeping liberalization backed by Abiy Ahmed, the 43-year-old prime minister who in October won the Nobel Peace Prize for his work to end a two-decade conflict with neighboring Eritrea. Ethiopia is among Africa’s most dynamic economies, averaging annual growth of almost 10% for the past decade. Yet the country remains one of the most state-controlled on the continent, a legacy of the Marxist-Leninist Derg regime that ruled from the 1974 coup that deposed Emperor Haile Selassie until a return to democracy in 1991. “The private sector is not playing its natural role,” says Eyob Tekalign, a former diplomat and private equity executive hired by Abiy as state minister for finance. “Our growth had shortcomings in terms of quality, job creation, inclusivity, and benefiting the poor.”

The government aims to raise at least $7.5 billion from selling assets from the sugar industry, the phone system, railroads, and other infrastructure. Ethiopia needs foreign exchange: Exports have dwindled, and external debt has grown 26% since 2016, to $27 billion—more than a quarter of the country’s likely 2020 gross domestic product of roughly $100 billion. In December, the International Monetary Fund and the World Bank pledged more than $5 billion to help narrow the budget deficit and support Abiy’s reform agenda. Saudi Arabia and the United Arab Emirates have also pledged cash, and China has pushed back the repayment of loans by a decade, to 2030.

The government says it will first sell a half-dozen of the sugar monopoly’s holdings, followed by seven other processing plants and plantations, expecting the new owners to boost production and turn Ethiopia into a net exporter of sugar.  The ministry says roughly two dozen companies from at least 10 countries are considering bids, with the first sales coming by June—though the entire process will likely extend into next year.

Next up will be assets of state-owned Ethio Telecom, which struggles to provide anything more than basic voice service in most of the country. The government plans to sell as much as 49% of the company this year and issue two mobile and broadband licenses to boost competition.

France’s Orange, South Africa’s MTN Group, and Safaricom of Kenya have all expressed interest in licenses, which bidders estimate will fetch $1 billion, as well as another $1 billion-plus to build out networks. With its growing economy and a population of 100 million on track to double by 2045, Ethiopia is “the biggest prize left in Africa from a telecoms point of view,” says Michael Joseph, acting chief executive officer of Safaricom Ltd.

After that could be Ethiopian Railway Corp.: tracks, trains, stations, and especially the line that covers the 466 miles from Addis Ababa across the border to the port city of Djibouti. The route, opened in 2018 with $4 billion in funding from China, enables landlocked Ethiopia to move cargo to and from the coast. A priority is to attract funding to keep that line running—it’s struggled with electricity shortages—and complete new projects such as a route north from Addis Ababa. Also likely to be sold are assets of the electric utility, with more than a dozen hydro plants, and a series of industrial parks built with yet more loans from China intended to turn agrarian Ethiopia into an exporter of clothing and manufactured goods.

One company not for sale is Ethiopian Airlines, Africa’s biggest carrier. When news of the privatizations became public, investors worldwide began eyeing the airline, but the government says a sale is unnecessary. The company has turned Addis Ababa into the busiest hub for traffic from the region to the Middle East and Asia, putting it in competition with rivals worldwide and forcing it to be more efficient than monopolies such as Ethio Telecom. Privatization “is not a priority,” says Tewolde Gebre Mariam, the carrier’s CEO. He has, though, suggested that some assets, including a cargo facility and the 373-room Skylight hotel at the Addis Ababa airport, could be sold.

The sales will reduce the outsize role of Metals & Engineering Corp., a military-run conglomerate commonly known as Metec that until recently was at the center of Ethiopia’s state-driven economic model. Founded in 2010 to foster economic growth, the company was given control of projects ranging from fertilizer and sugar plants to the Grand Ethiopian Renaissance Dam—Africa’s largest hydropower project, which is five years behind schedule.

Soon after becoming prime minister, Abiy reshuffled the Metec board and split the company into civilian and defense arms, saying its infrastructure projects have run wildly over budget. Ethiopian police have arrested dozens of people at the conglomerate, 14 former employees have been charged with graft, and auditors are looking at potential misappropriation of funds intended for sugar plants and the Nile dam. “Metec took on many projects, but it didn’t have experienced employees,” says Ahmed Hamza, a former intelligence official appointed by Abiy to run the company. “This pushed Metec to failure.”

While Abiy has strong backing from investors and the World Bank, his economic record is mixed. Black-market exchange rates for foreign currency stand more than 30% above the official bank price as businesses and individuals fight over scarce resources to pay for imported goods and international travel. The United Nations World Food Program is predicting food crises in some areas of the country this year, and the price of injera, the staple flatbread, has jumped as inflation stands at almost 20%. “Ethiopia has suffered from long-term, chronic foreign exchange liquidity issues,” says Razia Khan, chief economist for Africa and the Middle East at Standard Chartered Plc in London. International loans could ease the cash crunch and “deal with an important impediment to any privatization.”

The political situation is equally iffy, with Abiy facing widespread criticism for an authoritarian style and surrounding himself with loyalists. More than 200 people have been killed in demonstrations and ethnic clashes since July, and even the Ethiopia-Eritrea peace process appears to have stalled, with the land border once again closed. That’s giving some potential investors pause. Miltiadis Gkouzouris, CEO of Dutch agricultural development firm HVA International, says he’s “absolutely interested” in returning to Ethiopia’s sugar industry almost a half-century after his company’s licenses were taken away by the Derg regime, “but we are waiting to see how the political situation develops.”

For years, mismanagement at Ethiopian Sugar slowed development, and its debt has ballooned to almost $2.3 billion—loans the government must pay if the company fails. “The sugar industry was one of the most productive in the world,” but it suffered from overambitious expansion and the appointment by the government of unqualified managers, says Berhanu Jijo, a sugar industry veteran who now heads consulting firm AgriPol International. “Productivity has gone down tremendously.”

The entrepreneur pushing the community ownership plan near Irba’s farm is Bitew Alemu, a stocky, 37-year-old owner of a small computer accessory and printing business. When news of the sugar privatization came through in 2018, he set up a company called Ethio Sugar to bid on three plants. He’s competing against far larger companies from China, South Africa, Qatar, and Kenya, so his local ties and the support of farmers and factory hands are essential for his pitch. “We are working with them because we are part of them,” Bitew says after addressing a group of maintenance workers outside one of the facilities he’s bidding on, a 65-year-old factory that’s been out of commission since 2012 and is used for parking and fixing trucks and trailers.

While his plan would require investment from farmers, he says he’s lined up bank financing for those who need it, and he insists a united effort will let everybody prosper. “If they work hard and the company becomes profitable, they’ll get a dividend,” Bitew says. “Then we can deploy more factories and boost production—invest and expand the business.”

Source: Bloomberg Business News