Privatizing vs. publicly listing (stock exchange) Ethiopia’s public enterprises?

Privatizing vs. publicly listing (stock exchange) Ethiopia’s public enterprises?

Ethiopia is at the very beginning of a dramatic transition from being the sole owner of gems of its large enterprises to creating a market for foreign investors that want to make these enterprises more efficient and profitable. Since the moment Abiy Ahmed (PhD) became the country’s Prime Minister, Ethiopia has been making headlines. The most rapidly growing Sub-Saharan economy, Ethiopia has yet to become the most attractive target for foreign direct investments from members of the diaspora and foreign investors. The question is whether the privatization campaign is a better alternative to making state-owned companies public.

Ethiopia is launching a broad privatization campaign that will mark a retreat from the outdated philosophies of state governance and economic decision making toward openness, transparency, and equity. The country wants to embrace new economic principles while preserving its control over its strategic enterprises. Privatization is a policy move that signifies Ethiopia’s decisiveness to open the most important economic sectors to foreign investors. The purpose of this move is obviously two-fold: to boost the efficiency and economies of scale in the strategic sectors of the Ethiopian economy and to relieve the burden of financial and policy responsibility that the government has historically assumed in relation to state-based enterprises.

Privatization will affect some of the most prominent Ethiopian enterprises that are currently owned by the state. These include but are not limited to Ethiopian Airlines and Ethio Telecom. According to Bukola Adebayo, privatization can add to the increasingly competitive position of Ethiopian Airlines, a company that is undergoing chance to expand its operations to new destinations. However, this is just the beginning, as the Ethiopian government has announced Napoleonic plans to let foreign investors and Ethiopian diaspora get a share of state-owned manufacturing companies, railways, and even parks, Adebayo states. It is a great chance for Ethiopia that is equally promising, relevant, and extremely complicated.

It should be noted that privatization was a regular step for many developing nations in their transition from a state-based to the market economy. Ethiopia is hardly an exception; to a large extent, it follows a common rule. At the beginning of the 1990s, dozens of post-Soviet countries also went through privatization as they were restructuring their economies. Countries of Eastern Europe, including Poland and the Czech Republic, relied on privatization to step away from command toward market-based principles in their economies. As such, privatization as a change strategy is not new.

Reasons, why Ethiopia has chosen privatization over listing state-owned enterprises, are also clear. Basically, it is a simple and straightforward way to raise new funds without giving up entirely the state’s control over large and strategic enterprises. It is also an opportunity for Ethiopia to improve its economic and political image locally and internationally, presenting itself as a country that welcomes foreign investors and is willing to create an environment that fosters foreign investments and political input from the outside. The way the Ethiopian Government wants to Privatize is by selling a portion of its share of a company to an investor(s) that will take partial control over the enterprise. Ethiopian government will be able to use the funds raised through privatization to address its most pressing financial needs. It will have a chance to close the current budget gaps and re-invest privatization revenues in other promising projects.

Theoretically, Ethiopia could choose the initial public offering as an alternative strategy for restructuring its economy. It means that companies that are currently owned by the state would go public and be listed in one of the major stock exchanges in the world as we do not have a national stock exchange. However, IPOs have a number of disadvantages against privatization. For example, the funds received through an IPO go directly to the company rather than to the state coffers. Therefore, Ethiopia cannot use them for purposes other than supporting and restructuring the publicly listed organization. An IPO requires a great deal of preparation, and a publicly-traded company faces numerous legal requirements and organizational restrictions due to its status. These factors certainly justify the government’s decision to pursue privatization as the primary strategy for restructuring and optimizing the country’s public enterprises.

Will Ethiopia manage to accomplish its goals? At present, there is no reason to believe that privatization will fail. The country and the rest of the world are quite optimistic about the steps taken by Ethiopia to turn its economy into a flourishing one. However, Privatization requires a great deal of accuracy, responsibility, and transparency. As Ethiopia is trying to reduce the burden of state responsibility for managing its companies and infrastructure, the government must be increasingly thorough selecting responsible investors that will work in the best interests of the country and its residents. It is a turning point in the history of Ethiopia, and it holds the promise to improve the economic and social conditions in the country if the government and the Prime Minister are eager to achieve the goals of privatization in a legal and ethical manner.

Ed.’s Note: Samuel Alemu, Esq is a partner at the ILBSG, LLP. He is a graduate of Harvard Law School, University of Wisconsin-Madison Law School, and Addis Ababa University. Samuel has been admitted to the bar associations of New York State, United States Tax Court, and the United States Court of International Trade

Contributed by Samuel Alemu

Note: released first on Reporter English