Privatization preconditions, strategy and benefits for Ethiopia

By Germain Kramo

The Ethiopian government has made the decision to sell minority stakes to foreign and domestic investors in state monopolies such as Ethio Telecom, Ethiopian Airlines, and Ethiopian Shipping & Logistics Services Enterprise.

This decision is to be welcomed because it will help to alleviate the public deficit and will especially modernize these companies and allow the private sector to boost strong and sustainable growth with more job creation. Nevertheless, how can we avoid the lackluster balance sheet of privatization in Africa since the 1990s?

For a successful privatization, several conditions must be met. First, the decision to privatize must not be based solely on the will of the Prime Minister. It must involve all other institutions, both legislatively and judicially, so that all their actions contribute to the success of privatization.

Better yet, the process of privatization must be inclusive and well-debated to prevent public perception of it as a sell-off of the national heritage to foreigners.

It seems that in Ethiopia the government has not bothered to deploy this educational effort necessary to mobilize public opinion around this reform, which carries the risk of resistance or even sabotage.

The improvement of the rule of law is another fundamental condition for the success of privatization. The consolidation of the rule of law (independent and efficient justice) is essential for the legal security of transactions. It promotes the improvement of the business environment and helps to attract investors. In this regard, efforts are needed in Ethiopia as the World Justice Project’s Rule of Law Index (2017-2018) shows that it is among the worst performers. With a score of 0.38 on a scale from 0 to 1, Ethiopia is ranked 107th out of 113 countries ranked in respect for the rule of law. It should not be forgotten that improving the protection of minority shareholders is also essential for successful privatization. Weak legal protection may discourage potential buyers. Statistics from the Doing Business 2018 report on the level of minority shareholder protection in case of conflict of interest indicate that Ethiopia has a score of 28.33 out of 100 and ranks 176 out of 190 countries ranked. The country must make efforts to better protect future buyers of minority holdings in public companies.

It is important to guarantee the independence and efficiency of regulatory institutions.

Transparency in public tenders is a requirement for the success of privatization. The lack of transparency is the doorway to any form of abuse including corruption. According to Transparency International’s Corruption Perception Index, Ethiopia ranks 107 out of 180 countries ranked.

The establishment of good governance and transparency is a prerequisite to avoid privatization being an opportunity to distribute privileges and favors to friends and allies. Without good governance and transparency, privatization will serve to replace public monopolies with private monopolies.

Ethiopia is not ranked well (36th out of 53 countries), and worse, it is among the 22 countries that have slowed their pace of governance reforms. Thus, it declined in the second half of the decade.

Successful privatization requires free competition. A 2015 study found that in the water and sanitation sector, the lack of fair competition between private companies and public enterprises was mentioned as one of the bottlenecks for private companies.

Lack of price flexibility has created uncertainty over usufruct rights over goods and services produced by private companies. Privatization operations of major utilities (water, electricity) in sub-Saharan Africa, for example, have often been put in place while keeping some price control, which leads to a lack of incentive to invest. Therefore, it is illusory to hope for the development of a private sector because potential entrants would not have been sufficiently incentivized. In the absence of free competition, price liberalization policies could have the opposite effect to that expected. This could lead to a multiplication of social crises caused by steep price increases (mainly commodities) and to the exclusion of a large part of the population, often the most vulnerable.

In this perspective, the success of privatizations in Ethiopia depends on creating a framework for open and healthy competition that forces companies (on pain of disappearing) to improve the quality of their products and pushes them to lower prices. It is, therefore, necessary to prevent and punish the creation of cartels or monopolies, as well as other restrictive business practices.

All in all, the Ethiopian government has shown its willingness to divest minority stakes in some state-owned enterprises. The decision, which is to be welcomed, must nevertheless be accompanied by the fulfillment of certain preconditions for its success.

Reforms that improve the rule of law, governance and a better business environment are essential to attract the best performers and not the bottom performers. In short, for privatizations to transform poorly managed and budgeted state-owned companies into efficient and competitive private enterprises, they must be part of a comprehensive institutional reform.