ETHIOPIAN BUSINESSCan $79 billion build a private sector from the ground up?

Special Report July 2013

ETHIOPIANBUSINESSCan $79 Billion Build a Private Sector From the Ground Up?

July 2013Special Report

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Ethiopia is at the centre of furious activity. It has big plans and is hell bent on achieving them as quickly as possible. From the controversial Grand Ethiopian Renaissance Dam to its surprising forays into Big Data, this country is spending furiously in order to guarantee a bright 21st century future. However, despite impressive growth rates, the World Bank is concerned that only 10% of GDP comes from the private sector, while the IMF believes government spending could be “crowding out” private enterprise. All the while, many foreign investors are finding the business culture on the ground very difficult to understand. IDG Connect looks at transitioning Ethiopia, and discusses the potential within this new, blossoming country.

Ethiopia

Addis Ababa

Business in Ethiopia IDG Connect Special Report4 5

Understanding Ethiopia

Political Timeline

Monarchy, headed by Haile Selassie

Communist rule President Meles ZenawiLeadership

Aug 201219911974

Image courtesy of Mark Veraart via Flickr

Mursi woman

Addis Ababa is self-consciously on the up. State of the art modern buildings jostle between narrow walkways populated by modest dwellings and a smattering of goats or cows. The impact of intense building work judders through the streets and leaves traffic jams and chaos in its wake. Addis is situated at the heart of the country. It is the diplomatic centre of the continent and seat of the African Union. From here, five main arterial roads fan out to the exterior, taking travellers into a country of coffee plantations, spa resorts, rock-hewn churches, national parks, salt mines and desert planes.

SUDAN

KENYA

SOMALIA

ADDIS ABABA

ERITREA

UGANDA

Ethiopia is one of the oldest civilisations on the continent and with the exception of a brief five-year stint in the 1930s, it has remained un-colonised. Now it has ambitious plans for the future and is pumping money into its Growth and Transformation Plan (GTP), which began in 2010 and runs until 2015. Via an estimated investment of US$75-79 billion over five years, this blueprint for regrowth seeks to provide copious employment for its vast population, whilst hauling its ailing infrastructure kicking and screaming into the 21st century. Plans include building 10,000 miles of road, constructing 1,500 miles of railway, and by 2017, completing the Grand Ethiopian Renaissance Dam; set to provide hydro-electricity not only for Ethiopia, but neighbouring East African countries too.

Through all this vigorous, state-sponsored activity, Ethiopia is making a concerted bid to build itself afresh from the ground up. The country is wholly unique; it is unlike anywhere else on the African continent or beyond, and unusually, has little recent history of private enterprise. For centuries it stood independent, governed by a monarchy which was proud to date its heritage back to Solomon. From 1974 industry was stifled under communist rule, then from 1991, until his sudden death in August 2012, it operated under the dictatorial leadership of Meles Zenawi. This is an incredible panorama - a 40-year old Ethiopian today would have witnessed first-hand bloody civil war, disputes with neighbouring countries, along with one of the most publicised famines ever seen by the world media.

On top of this, Ethiopia is riddled with contradictions. It has the second largest population on the African continent, covering around 70 ethnic groups speaking around 80 different languages and sprawling over 420,000 square miles. Cultural differences are endemic. The Mursi people create vast distended rings on their faces by slitting open their lips and ear lobes and filling the space with wooden disks. The Afar people covet diamond-point-fang smiles by filing their front teeth into neat points. And the only subject upon which everyone is agreed is coffee. This is both one of Ethiopia’s biggest exports and provides the basis for the nationwide coffee drinking ritual; an event which takes at least an hour and involves roasting, brewing and tasting coffee in three presses.

• Government expects economy to grow 10% in 2012/13

• Industry accounts for only 10% of GDP (World Bank)

• Ethiopian credit to private sector equivalent to 14% GDP (World Bank)

• Average regional credit to private sector equivalent to 27% GDP (World Bank)

Ethiopian Economic Growth

As Ethiopia rapidly emerges on investors’ radar and the government deliberately tries to court foreign funding, all these differences start to come into play. Interest is coming thick and fast, both from large multi-nationals and from the extensive African diaspora peppered around the globe. Now is a time of intense change and possibility, offering huge potential for the people who get in at the very beginning. However, Ethiopian singularity has its own issues. The first of these is the clear challenge in building a private sector from the ground up. The second is helping foreign investors to get to grips with the unique business culture on the ground.

Business in Ethiopia IDG Connect Special Report6 7

Building a Private Sector from the Ground Up

Yared Berhane of Ernst & Young said at the Ethiopia Investment Summit last May: “Ethiopia’s investment in infrastructure is three times the African average.” The aim of this has been two-fold: to provide extensive employment for a huge labour force; and galvanise that energy to improve the country. This in turn ought to make it a better place for the native population to live and help render it a more attractive destination for foreign business people. Incredibly the government reports that the GTP plan is also largely on track. However, immediate success aside, this immense outpouring of cash does throw up problems of its own.

The large scale “mega” projects have been scrutinised intently and have come under rapid fire both internally and externally. There have been farms and sugar enterprises, but the most high-profile and controversial of these to date has proved to be the $4.8bn Grand Ethiopian Renaissance Dam on the Nile. This has caused a huge rumpus with Egypt, which is concerned about losing its fresh water supply and prompted former President Mohamed Mursi to pledge on live TV to “defend each drop of the Nile with our blood.”

The Grand Ethiopian Renaissance Dam is not only causing a problems with Egypt either. It is also promoting discussions around the nature of GTP initiatives, which while “aiming for tomorrow,” are actually “using yesterday’s technologies based on yesterday’s thinking and yesterday’s plans.” The flagship of 21st century dams was in fact designed in the 1960s by the same Italian company building it today. Whilst many other large scale projects are also based on, or near, the sites of previous failed enterprises. Many of which, inauspiciously enough, failed due to overseen costs.

Spending large amounts of public money is a tough balancing act. If this dam project succeeds it could do wonders for the country. The aim is to create the biggest hydro-electric power station in Africa. This should have capacity to generate 6,000 megawatts of electricity and could help power Ethiopia along with its neighbours. The Ethiopian national electricity corporation estimates future buyers could come from Kenya, Djibouti, Somalia, Uganda, both Sudans and even Egypt itself. This would provide untold benefits for the whole of East Africa, especially when you consider that around 90% of sub-Saharan Africa is currently off-grid.

Simegnew Bekele, the engineer leading the Ethiopian dam project, has likened it to the ‘Hoover Dam’, the iconic Great Depression-era engineering feat which became a symbol of American enterprise in tough times. “Hoover Dam was constructed when America was (in) depression,” Bekale told Associated Press. “It was an enormous success. I am sure our dam too will herald a bright future for this country and also for the whole region.”

Yet all this ambition comes at a price. Whilst massive public spending has done its job and created one of the fastest-growing economies in Africa, the International Monetary Fund has warned that volatile inflation, balance of payment pressures and a stifled private sector raises questions over sustainability. Jan Mikkelsen, the IMF’s country representative in Ethiopia said: “The amount of financing that those projects absorb is so large that it is crowding out activity in the private sector.”

The World Bank has also stressed that Ethiopia must give the private sector a bigger push in order to attract foreign investment. Guang Z. Chen, the World Bank’s country director, told Reuters: “For this country to continue to grow I strongly believe industry has to take a much bigger role because there is no other country that I’m aware of, aside from these resource-rich countries, that can go to middle-income status with still 50% of GDP on agriculture.”

Chen continued: “The trend that worries us is that while the public investment as a share of GDP is increasing, the private investment as a share of GDP is decreasing. Making credit available for the private sector is certainly one area the government can do more on.”

Image courtesy of ctsnow via Flickr

Tissisat Falls

The Hoover Dam

Image courtesy of rarvesen via Flickr

The amount of financing that those [public sector] projects absorb is so large that it is crowding out activity in the private sector. “ “

Jan Mikkelsen, Ethiopia representative, International Monetary Fund

The controversial $4.8bn Grand Ethiopian Renaissance Dam should generate 6,000 megawatts of electricity. “ “

Business in Ethiopia IDG Connect Special Report8 9

The Rising Swell of Foreign InterestIrrespective of how government initiatives actually pan out, factors such as location and the huge up-skilling labour force, is putting Ethiopia firmly on the global hit list for investment and rejuvenation, especially from within the Middle East. The Africa Global Business Forum held in Dubai at the start of May attracted more than 3,500 delegates, whilst a few weeks’ later, on May 13, the Dubai Chamber (which organised the event) opened its first African representative office in Ethiopia.

“Ethiopia is the fifth largest economy in Africa and poised to become the third largest in the next 10 years. The country’s economy is mainly based on agriculture. This sector accounts for about 45% of GDP and 85% of total employment. Ethiopia offers a highly accessible market for UAE businesses seeking expansion into Africa,” said H.E. Buamim, Director General of Dubai Chamber of Commerce & Industry, when he opened the office.

Asfaw Alemayehu, a businessman who moved to Ethiopia from the US four years’ ago told IDG Connect that in the past investors “did not see Ethiopia as an attractive country.” Now they are starting to differentiate it from its more developed neighbour Kenya and are finally beginning to look for “a long term strategy to target the country.” And external organisations are beginning to move in.

This February, professional services firm, Deloitte announced the opening of its first Ethiopia office. And IBM, which has had a long term focus on

East Africa - although centred on Kenya - started working on mounting its market share in the country in November. This has caused some scepticism from detractors however, as many infrastructure projects for private and public institutions are already underway. Hanli Wood of IBM’s CEWA Business Partner Organisation was undeterred and said: “I don’t think we are too late for infrastructure solutions. There are a lot of investments opportunities. With these investments, you need technology. Today, without technology, cell phones, the internet, one is a man on an island.”

Index Mundi records that 64% of the huge Ethiopian population are 24 or under, which creates a huge labour pool in the country. And following 2008 government initiatives, 70% of students study engineering or technology. This results in an estimated 500,000 technical graduates per annum. Yet to Henok Assefa of the Invest Ethiopia blog, the “least understood and appreciated [factor for development] is its location in the middle of the economic world.” Assefa stresses that 30% of the World’s containerised cargo passes through the red sea.

“Ethiopia is also roughly equidistant from all the major G7 & BRICS economies, making Addis Ababa an emerging major air transport hub for Africa and the Middle East. Easy to see these advantages materialised partly in the fast growing horticulture sector, which is earning more than $200 million a year in exports and likely to surpass a billion in a few years’ time.”

Bizarrely, fresh cut flowers are now the country’s third-largest export earner yet this was never a traditional industry. It was just started by a group of Indian companies a few years back and has taken off. As Henok Assefa writes: “The impending and transformative potential of Ethiopia lies in low cost, labour-intensive light manufacturing industries, which may allow it to tap into the world’s massive and lucrative consumer products supply chains.”

Ethiopian Coffee Nursery

• 64% of population under 24 (Index Mundi)

• 70% of students study engineering or technology (Government Initiative 2008)

• 500,000 technical graduates per annum (Estimate based on government data)

Labour Market

There are still a high volume of traditional industries at large which meet this criteria, but sit at some odds with modern developments. In a recent article for Reuters, Siegfried Modola describes how traditional salt traders trek through the desert with camels and caravans to “pursue this centuries-old trade in ‘white gold’”. Now however, many are wary of the new roads being built and worry that accessibility will mean big companies’ stealing their work.

As Abdullah Ali Noor, a chief and clan leader’s son in Hamad-Ile, on the salt desert’s edge explained, “Most of the people who live here are dependent on the salt caravans, so we are not happy with prospective salt companies that try to set up base here. Everything has to be initiated from the community. We prefer to stick with the old ways.”

Then there is coffee. Ethiopia is Africa’s biggest coffee producer and the drink has an ingrained cultural significance. Yet in the latest modern development, this May the first privately owned African laboratory opened in Addis, certified by the Specialty Coffee Association of America (SCAA). Mr. Marty Curtis, a Coffee Quality Institute Instructor explained why this is progress, “By having its laboratory certified, METAD is at the start of a huge project” that will contribute to the development of the country’s coffee industry by building buyers’ trust on the quality of Ethiopian coffee.

Ethiopia is even on course to build Africa’s most comprehensive disaster and risk management database, taking a leadership role in this area. The aim is to gather enough information to help reduce future suffering caused by the slew of natural disasters that have plagued the region since time immemorial. To date, they’ve carried out 100,000 household interviews and are set to have completed a detailed risk profile for all its 750 districts by 2015. As Mathewos Hunde, the Director of the Early Warning & Response Directorate under the Disaster Risk Management & Food Security Sector of the Ministry of Agriculture in Ethiopia, told the World Food Programme: “We can say that Ethiopia is two steps ahead compared to other countries.”

Ethiopia is also roughly equidistant from all the major G7 & BRICS economies, making Addis Ababa an emerging major air transport hub for Africa and the Middle East. Henok Assefa, Invest Ethiopia

““

Business in Ethiopia IDG Connect Special Report10 11

Getting to Grips with Ethiopia on the Ground The real challenge for any foreign nationals coming into Ethiopia is in understanding the unique business culture on the ground. The lack of private sector has left individuals with a very different attitude to those raised in commercially driven societies. In the past the majority of businesses were owned and run by a traditional elite, making business uncompetitive and unattainable for ordinary people. On top of this, mobile connectivity and bandwidth are limited, everything is half finished and licenses take an age to come through. It is not the type of environment people from more developed parts of the world expect to work in.

Evidence suggests the consumer class is gradually emerging, which should bring opportunities for companies with services to offer. BiNu, an organisation that enables easy web surfing via 2G mobile devices records Ethiopia as its third largest market (in May), with Ethiopians using the app to access news, Facebook, YouTube and Google search. Whilst a lifestyle survey released by Consumer Insight at the start of July showed that Shopping Malls were the second favourite public place visited (after church) by Ethiopian women.

Massive ongoing building projects mean that everywhere is in a state of flux. Yet most people we’ve spoken to have described a real sense of excitement from all the activity. Rashed Ahmed set up EastAfricanBusiness.com to provide information about business across the entire region, he told us: “There is a new government, a new approach, a new optimism and a new openness. Overall Ethiopia is opening up - in addition to the multi-nationals there are a lot of Ethiopians from the US and UK starting up technology and other types of businesses.”

One minute you see a shiny sky scraper and multi-national offices the next you will see extreme poverty... but despite this there is a real buzz on the ground! Rashed Ahmed, EastAfricanBusiness.com

“ “

Ahmed has encountered a lot of interest from the extensive African diaspora who are desperate to return home to their native countries. “This is a recent development, but a lot of people are young professionals, educated in the West, who have a lot of experience and are looking for opportunities within Africa. You see this entrepreneurial spirit; I’m regularly coming into contact with people opening data centres, mobile internet companies, app developers, all looking for that new market...”

“I’ve seen the most excitement and hunger for information from the diaspora,” Ahmed told us “They are pushing for development, better technology and better infrastructure in their home countries.” Ahmed is very passionate about telling a different African story, “I used to see a lot of negative stories and connotations on [Ethiopia]. There are images of people starving and Band Aid. But really it is such a dynamic and thriving place. I’m not going to lie, there is poverty and inequality. One minute you see a shiny sky scraper and multi-national offices the next you will see extreme poverty... but despite this there is a real buzz on the ground!”

Addis Shopping MallImage courtesy of Frank Janssens via Flickr

IDG Connect Special Report 13

Perspective: A Businessman in Addis Ababa

[Until 1991] there was no private sector. Now our private sector is opening up and thriving, but it is a learning curve. Asfaw Alemayehu, Corporate Council on Africa and MD of Gazebo International

“ “

Asfaw Alemayehu moved to Ethiopia from the US four years’ ago and has already seen significant changes. “[Back then] I only had electricity every other day, now I have no problem with electricity,” he told us on the phone from Addis Ababa.

Alemayehu is of Ethiopian descent, had lived and worked abroad for 16 years and decided to return “because there are lots of opportunities for me as a businessman. The country is growing and the middle class is emerging. I’m happy with my move and have no regrets. It’s not an easy place, but there is a lot happening.”

The problem for foreigners coming in is that Ethiopia is, “totally different in terms of background, perspective and way of doing business on the ground.” It was a communist country until 1991 and “there was no private sector. Now our private sector is opening up and thriving, but it is a learning curve. To some extent the government is more open than it was a couple of years ago, although to this day there are still some areas which are closed for foreign investors. This makes it different from our neighbours in Kenya where the private sector is very strong. In Ethiopia the private sector is at its infancy stage which is both attractive to many companies, but makes understanding Ethiopia very complex.”

Overall, Alemayehu is positive about foreign investment and believes “the Middle East is a natural partner. We have our own relationship with the Saudis and Arabs as well as Egypt.” This is both because of proximity and a shared religion: 35-40% of Ethiopians are Muslim. However, he does stress that cultural differences do come into play when companies approach the market: “Asian companies are more flexible in the way they approach Ethiopia [than European and US organisations] due to their background and experience. I see more Asian companies coming, looking and investing.”

Sheraton Hotel, Addis AbabaImage courtesy of A.Davey via Flickr

Asfaw Alemayehu is East Africa Rep. for the Corporate Council on Africa and MD of Gazebo International, an organisation which provides consulting services for those who want to do business in Ethiopia.

It is Alemayehu’s belief that the future of the country is in agro-processing and the emerging middle class. “In the supermarkets at present you mostly see imports, but the government is providing a lot of incentives for food processing and agribusiness in general. This is also causing interest from the private sector. [And as] a middle class - by Ethiopian standards - is emerging, anything that has to do with consumer goods would make a very profitable business.”

He is keen to stress how different Ethiopia is from neighbouring Kenya. “In the past, the bigger companies have looked at Ethiopia as an extension of the Kenyan market.” Now companies are starting to see Ethiopia as a place in its own right. “I see this every day - that is no exaggeration - I meet a lot of investors. A couple of years ago multi-nationals did not see it as an attractive country. Now they think that the middle class is growing and people are buying more consumer goods.”

Ethiopia is a very different market from elsewhere. In a lot of ways everything is starting from scratch. “This means both opportunities and challenges... and companies need to have their own strategic entry into the country in order to be successful.” It will certainly be interesting to see what changes the next four years’ bring to such a quickly progressing country.

Business in Ethiopia IDG Connect Special Report14 15

Perspective: A Typical Working Day in Addis Ababa

Most employees work from 8am till 5pm and like any capital, the roads are crowded with commuters. “I usually take a mini-bus to work,” Teklemariam says explaining a typical business day, “it takes around 15 - 30 minutes to travel 5 - 8km.” And the situation is worsened by “major construction of many of the major roads of the city.”

“The internet connectivity is still sub-standard. This can be a serious problem in terms of getting in touch with clients and financiers. If you worked in Addis you wouldn’t expect smooth conditions for exchanging large amounts of data between your head office in London or New York. The broadband coverage especially is sluggish. The government needs to do a lot to improve broadband coverage, although mobile connectivity is better.”

By Western standards the mobile connection is not very good. The line is less than perfect and after six minutes, without warning, a persistent Chinese voice pops up with the repeated message: “Sorry the network is busy now please try later.” “Does this happen often?” we ask, “Yes it is in major problem,” Teklemariam replies.

“The second daily issue,” says Teklemariam “is the working culture. Things are not as efficient or effective as you might expect them to be. There is a very traditional working culture and people are not governed by efficiency. The amount of time spent on a task is determined by the amount of money they will make from it.”

Getachew Teklemariam is an independent business development consultant providing advice for those looking to invest in Ethiopia. These are predominantly international companies and most are investing in the resources sector where they can see “concrete and immediate benefits.” However, companies are also interested in the consumer service and some are getting involved in government projects, as these deliver high ROI.

The biggest problem that Teklemariam sees relates to attitudes to risk. “Most of these companies are just entering Africa. They don’t really understand the risks involved in doing business here and tend to have a negative attitude. I repeatedly see that as a major problem for international companies. Of course, at the end of the day the whole issue boils down to the business environment. It is not as flexible as international companies want it to be. The legal system remains more inflexible than international companies would expect or would look for. And the bureaucracy needs restructuring.” It still takes a long time to get licences, and at least 7– 10 days to complete the whole process of starting a business, which is far longer than other sub-Saharan Africa countries. On top of which, “the infrastructure provision is still very low.”

The problematic business culture largely boils down to the fact that a “high portion of the businesses are owned by a traditional elite.” These are typically involved in import and export and “control a large part of the economy. There is a huge barrier to entering the import and export business. [But] the traditional elite have [also] saturated the whole business culture. This makes it hard for businessmen starting out to join. The country is also defined by passivity. Most people would rather live under the protection of the state than compete on a level playing field with international companies. This is a very traditional expectation from business people in this company,” and is hard for international organisations to understand.

Teklemariam believes the two biggest potential areas for investors lie in the tech sector and the consumer sector. “Ethiopia is the political capital of Africa. When Africa moves, Ethiopia moves even faster. This is a country of over 80 million people… there is an emerging middle class which international companies can cater for.”

“If you are involved in innovations and research for governments as well as private companies this is a good place for investment because the skilled manpower is very cheap in this country as compared to any other African country,” Teklemariam continues. “Establishing R&D centres is very cheap compared to other countries due to government initiatives for companies involved in that sector. There is also real potential for development of the telecoms infrastructure sector [as the mobile phone situation reveals]. And there are clear advantages to be taken from the proximity to the Middle East.”

The daily issue is the working culture. Things are not as efficient or effective as you might expect. Getachew Teklemariam, Independent business development consultant

“ “

Getachew Teklemariam is an independent business development consultant providing advice for those looking to invest in Ethiopia.

Addis Ababa trafficImage courtesy of sameffron via Flickr

The constant flux in the city means despite the internet and business problems, the capital is an attractive place too. There are a lot of services springing up to cater for tourists and locals’ free time including restaurants, hotels, gyms, movie theatres… and it has even been labelled the spa capital of Africa. “The service sector is really growing. You can be certain to find your favourite dish in the city. Whether it is Canadian, Chinese or Japanese… you can easily access it in Addis.”

“There is a lot of momentum in the country,” Teklemariam concludes: “It is an opportune time for investors. Of course, those people who come here need to have a very good understanding of the local environment. [But] if investors have the local knowledge and put in place local strategies to make use of local opportunities, this could benefit them lot. This is a great time for the whole of Africa… I believe this is the last frontier in terms of opportunities.”

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Conclusion

Through its US$75-79 billion plan, which is half way to completion, the Ethiopian government is determined to drive progress. This coupled with a rapidly up-skilling young labour force and enviable location between the Middle East and Europe, is generating escalating interest from foreign investors. These are coming in the shape of large multi-nationals, like IBM and Deloitte, along with the extensive diaspora who would like to bring their skills back home.

In addition to aggressive spending, Ethiopia is taking a leadership role in areas like Big Data, with its comprehensive disaster and risk management database due for completion in 2015. And projects like the Grand Ethiopian Renaissance Dam, may be dogged with controversy, but also have the potential to supply constant, sustainable energy to a region that desperately needs power.

The ambition in these plans is incredible. Addis Ababa and the entire country infrastructure is being completely overhauled, bringing massive changes to people on the ground. The only problem with all this concerted upheaval is whether it is happening too quickly and in fact stands at odds with the mind-set of people who have already had a very difficult time. Recent Ethiopian history has proved a turbulent rollercoaster of change. Many individuals have seen the end of monarchy, the rise and fall of communism, numerous wars and now here comes the unfamiliar march of commercialism.

The World Bank and International Monetary Fund have warned that the private sector may not be well enough catered for. Whilst the people we have talked to on the ground have spoken of a unique business environment, which is hard for foreign nationals to understand. Maybe the diaspora will be needed to translate the differences, but it is hard to argue with the buzz, enthusiasm and drive for change which is so evident through all these initiatives. It does look like Ethiopia’s future could be very bright indeed… as long as it is truly ready to make the transition.

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