Overview: Addis rising (The Africa Report n°40 – May 2012)

Ethiopia’s power is growing as the government emulates the centrally driven development policies and restrictions on freedoms favored by some of Asia’s newly industrialized countries

On every level – economically, militarily and diplomatically – Ethiopia is building its power on the continent. Prime Minister Meles Zenawi, alongside Rwanda’s President Paul Kagame, is the leading exponent in Africa of what has come to be called “developmental authoritarianism”

In practical terms, it is a dirigiste style of government married to an eager pursuit of commercial opportunities. In Ethiopia, that means building massive state-backed hydropower schemes to export electricity across the continent, but also facilitating a foreign-financed boom in agribusiness and export crops. The aim is to end Ethiopia’s chronic food shortages and to make it a net food exporter. With a population of more than 85 million (Africa’s largest after Nigeria) and growing at 2.9% a year, time is pressing. Some 70% of Ethiopians are under 30, and the demographic boom represents an opportunity and a threat.

This strategy borrows heavily from the Chinese Communist Party’s state-capitalist policies that have produced double-digit growth and lifted some 400 million people out of poverty over the past 30 years. Premier Meles’ government also uses some of Beijing’s political ideas: it cracks down on dissidents and seeks to win legitimacy through raising living standards and boosting the country’s economic and regional power.

Ethiopia’s armed forces are less well-equipped than their Nigerian and South African counterparts, but its army is bigger and more battle hardened. Coming from a tradition of guerrilla fighting before he took power in l991, Meles has used his country’s military power to make it the leading diplomatic force in north-east Africa.

Independent Minded. Ethiopia’s history of defeating colonial occupation made it an obvious choice as headquarters of the Organization of African unity, now the African union (AU). At the opening of the new Chinese-built AU headquarters in Addis Ababa in January, Meles lambasted the neo-liberal economic prescriptions pushed institutions such as the World Bank and lnternational Monetary Fund (IMF).

Addis boasts of its transformative economic successes. Its figures charts double-digit economic growth over the past eight years. It is Africa fourth largest economy rated in 2011 at $95bn by the IMF using purchasing power parity (PPP).

Yet the government’s own Growth and Transformation Plan (GTP) from 2010 to 2015 is far more bullish. It forecasts average real growth of at least 11% per year and aims to achieve the Millennium Development Goals by 2015. Zemedeneh Negatu, managing partner of Ernst &Young Ethiopia, forecasts the economy will “reach $472bn in 15years” (also using PPP).

By then, Ethiopia would be sub-Saharan Africa’s third-largest economy, with a gross domestic product (GDP) of more than $4,000 per capita. The IMF forecasts 5.5% growth this year after 7.5% growth in 2011 and investment company Access Capital projects rates of 8-11%.

Growth prospects are spread across sectors. There is a scramble to find and develop mines after decades of neglect. Manufacturing is growing: exports of textiles and leather goods doubled over five years to $165m, but the GTP target is to reach $1bn in textiles and clothing exports and $500m for leather.

Agriculture – which produces 41% of GDP but accounts for 85% of jobs – is soaring, driven by foreign and local investors taking on commercial farms of up to 100,000ha. The successful Ethiopian Commodity Exchange passed $1.1bn in trading in 2010/11. Output from the country 12 million smallholder farmers could be boosted through more irrigation and fertilizer and better seeds.

The retail food and beverage sectors are also booming. Britain’s Diageo bought the Meta Abo Brewery in January for $225m after Heineken bought Harar Brewery for $78m and Bedele for $85min 2011. Other consumer-goods investors include SABMiller, Tiger Brands, Procter and Gamble, Nestlé and Unilever. Ethiopian-Saudi Arabian billionaire Mohammed Al-Amoudi said in April he would invest $600m in growing groundnuts and making edible oil, after snapping up a government farm and four other enterprises in a recent privatization exercise. His MIDROC company is the biggest private conglomerate in the country.

On the down side of the chart is inflation, the second highest in the world. After a 2011 peak at 40.6% it was down to 36.3% in February, still driven by soaring food prices. World Bank country director Guang Zhe Chen warned in April “There is a limited scale of how much the government can really invest in all these state enterprises unless you continue to borrow from the banking sector, which is again going to be fueling inflation”.

There are other, more systemic, risks to the country. The pushing out of international non-governmental organizations (NGOs) in 2009 has weakened local opposition. But land disputes could spiral into regional territorial and secessionist clashes. In May 2011, the Oakland Institute published a tough report on land grabs in Ethiopia that argued investors are paying well below market rates for the land.

Oakland’s policy director Frederic Mousseau believes that anyone who speaks out on the issue in Ethiopia is in danger: “The problem in Ethiopia today is that you have no real political freedom. Any NGO or journalist or opposition member who speaks out is at risk.”

In late March, Kenya’s deputy parliamentary speaker Farah Maalim sparred with Ethiopia’s ambassador to Kenya Shemsudin Roble. Maalim openly criticized Ethiopia’s human rights record in the Nairobi press: « It is open knowledge that those opposed to the regime in Addis often find themselves in jail, exile or in the grave.”

Your land is my land. Maalim suggested that Addis must be prepared to give a chance for dialogue to the Afar Liberation Front, Oromo Liberation Front, Ogaden National Liberation Front and Benishangul/Gambela movements. These movements are active in areas where land holdings have been sold to foreign investors in the Afar, Oromia and Gambella regions. For Mousseau, “what’s happening in Ethiopia is an internal colonization of indigenous land by people from the highlands – this is what we have seen in Afar. The idea is that this is going to bring jobs, but in the plantations I have seen in Afar they are working with highlands people, not local Afar.”

This is confirmed by Sai Ramakrishna Karuturi, managing director and founder of Karuturi Global, a floriculture company from Bangalore that is now one of the largest landholders in Ethiopia, leasing some 100,000ha. “It is true that we employ a majority of highlanders but then they make up a majority of the population. And because of the large roadwork programs in recent years, they are the people with the skill sets that we need”

Karuturi denies reports from organizations like Human Rights Watch that claim that villagers were forced from their lands at gunpoint. « We are working with communities – we moved back from an area where we had not realized they had a cemetery, and we have moved back from a zone where villagers were growing crops next to the River Baro.”

As in South Africa, the lack of skills in the economy could also cause problems. Take, for example, the proposed creation of large parastatals such as the Metal Engineering Corporation (MetEC). The Ethiopian government is protecting it like an infant industry while giving it important contracts. For Henock Assefa, managing partner at Precise Consult in Addis, this new parastatal will not turn into an expensive white elephant like Ajaokuta Steel Mill in Nigeria because “it has a major anchor client, creating parts for the Millennium Dam”.

But others are less sanguine. A member of the development finance industry, on condition of anonymity, raises concerns about MetEC, which is run by a former Brigadier General, Kinfu Dagnew: “The early stages of developmental states – putting in roads, infrastructure and so on – is relatively easy. But the next stage, running complex state-owned enterprises is much harder”. The financier points to Singapore as a model for structuring incentives and performance targets for parastatals, but suggests that Ethiopia lacks the managerial expertise to make them work.

A narrow business elite that is dependent on the ruling party for contracts remains a big risk. For Precise Consult’s Assefa “this is exactly why the government said that it wanted to privatize slowly, to avoid an oligarch problem like Russia had.” Others will point to the eight companies that were recently privatized, of which five were sold to MIDROC – owned by the ever-present Al-Amoudi.

Nicholas Norbrook

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Ethiopia in numbers

Government’s spending set to exceed 100bn birr ($71.7bn) in 2011/12

Much is infrastructure, rising to 59% of total government spending in 2011, over twice the level in most African countries.

–          According to the GTP, government and public enterprise spending will reach 1.26trn birr ($71.7bn) over the plan period, with half the $33bn financing requirement in foreign currency.

–          Local and foreign contractors will do much of the work and maintenance, sharing billions of birr in profits and creating hundreds of thousands of jobs.

Infrastructure targets:

–          An eight-lane expressway on the export route from Addis Ababa to Adama;

–          71,000km of new roads costing $7.2bn;

–          2,400km of railways including replacing the Djibouti line to the sea and a mass transit for Addis Ababa ($6bn);

–          a fivefold increase in electricity to 10,000MW, including the $4.8bn Grand Millennium Dam and electricity exports;

–          huge increases in irrigation.

Social Targets:

–          increasing primary school enrolment to 100%;

–          more than doubling university students to 500,000 with 40% in science or engineering;

–          increasing technical and vocational schools to over 1 million students;

–          100% primary health coverage and big cuts in infant and maternal mortality.

Export (2010/11):

–          Coffee – $842m

–          Gold – $485m

–          Oilseeds – $323m

–          Quat – $238m

–          Gross foreign exchange earnings at Ethiopian Airlines are estimated at $1.1bn a year

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Manufacturing: an industrial web, stitch by stitch

Ethiopia is taking advantage of rising wages in Asia, and its own natural advantages in agriculture and cattle-raising, to build a light-industry base that is being kickstarted by foreign investment.

Saygin Dima Textile Share Company, a joint venture between Turkish company Saygin and Ethiopia’s Privatization and Public Enterprises Supervising Agency, began operations at its new fiber and fabric plant in Oromia in March. It serves as confirmation that the Ethiopian government sees the textile industry as a major part of the structural transformation from an agrarian to an industrial society.

The bottom rung of low-skilled work has long been the preserve of razor-margined Chinese manufacturers, but rapid wage inflation in Asia has raised the possibility of Africa finding a foot on the manufacturing ladder. Ethiopia’s leaders are among the continent’s most fleet-footed at attracting investment to the sector, and they are banking on foreign know-how and capital. Premier Meles Zenavi travelled to Istanbul in 2005 to promote Ethiopia as a land of opportunity to Turkish textile companies, which is bearing fruit today.

The model for the textile industry had already proved successful with the flower sector. By providing cheap land and credit from the Ethiopian Development Bank (EDB) to Golden Rose in 2000, the Ethiopian government helped to kickstart the country’s floriculture sector. The demonstration effect has tempted others in, to create a sector worth more than $200m in 2010.

Likewise, Turkey’s Ayka Textile has enjoyed special treatment as a role model to attract others in an effort coordinated by the Ethiopian Investment Agency, EDB and Oromia regional government. Ayka has invested $9Sm in the country’s largest factory which was built on 15,000m3 some 18km west of the capital and began full-scale production in 2010.

Resounding success. Ayka Addis finance manager Amare Teklehimanot explains that the five-year tax break and help finding land and credit helped to attract the Turkish company. Results have been encouraging, with regular exports of woven products and garments to Germany, Italy, Greece and Cameroon. The three processing departments – spinning, knitting and weaving – have a combined capacity to process 43,000tn of cotton per year. Turnover in the first year was $3.6m, 70% of the target. By the 2010/2011 season, it had risen to $36m, outstripping predictions by 135%.

The government hopes to build on this success, and it has targeted an additional 46 textile projects worth $2.5bn through the Growth and Transformation Plan, of which the Saygin Dima plant is one. They include cotton ginneries, and spinning, knitting, weaving and finished garment factories.

Linkages in the textile industry are critical to keep costs down. One constraint has been the lack of cotton. Indian textile giant Spintex has invested $70m in its factory at Kombolcha and 2,500ha of cotton growing areas. It has used fast-maturing hybrid varieties and hopes to export two containers of cotton each day. It will also supply 1,200tn of lint to local companies – including Ayka Addis, with which it has signed a memorandum of understanding.

The hand of developmental state is never far away from the industry. When high cotton prices threatened to leave local mills without raw materials in 2011, the government placed a cap on exports. This situation is a problem faced by many African countries that plan to add value when commodity prices are high. In Nigeria, for instance, the Petroleum Investment Bill is needed to guarantee a gas supply for local users like power stations and fertilizer factories when gas producers can sell more profitably abroad.

But market interventions are not always a success. Berhane Gedey, owner of Bazel Agricultural Plc, a local cotton producer, told reporters “The relationship between growers and textile manufacturers has gone sour since the export ban was imposed.” The cap has since been lifted as international prices fell in late 2011.

There are also plans to take advantage of Ethiopia’s cattle herd, one of Africa’s largest at some 49.2m animals. Chinese investors have been active in the leather sector for several years now, but fears that local manufacturers would be forced out of business have proved unfounded according to Deborah Brautigam, author of The Dragon’s Gift. Instead they have improved and modernized their processes and equipment.

In a clear example of how Ethiopia is plugged into the global economic tilt towards Asia, China’s Huajian International Shoe opened a shoe factory in January with financing from the China-Africa Development Fund. Employing 600 people in a light manufacturing zone, it became Ethiopia’s largest manufacturer of women’s shoes in one stroke.

Local tanner and leather wholesaler Dire Industries is also producing shoes at its Peacock factory in Dire Dawa. Speaking at the All-African Leather Fair in March, Dire Industries’s general manager Biniam Bedada outlined the challenges to the sector: the lack of raw materials, power outages and delays to imports.

Textile manufacturers face similar issues even as the cotton sector looks to be heading for a sharp expansion. Before the sector can take off, there will need to be “the ecosystem of suppliers, those who make the buttons or the zips”, as well as the integrated supply chain from field to fiber to fashion, according to Ernst & Young Ethiopia head Zemedeneh Negatu. “The other challenge is that even if the factory cost is competitive, once it leaves the gate the transaction costs are high,” Negatu explains. The Ethiopian government’s focus on infrastructure bodes well for the medium term, but this means investors have to have longer horizons.

As Hinh T. Dinh, lead author of a World Bank report on Africa and light manufacturing released in March, says, “Africans do not have to wait for perfect investment climates to create millions of productive jobs in light manufacturing.”

Yohannes Shebeshi in Addis Ababa and Nicholas Norbrook

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Powering ahead with a regional strategy

Ethiopia aims to become the France of Africa, exporting energy across the region, and hopes to become an oil producer also.

If energy exports between Sudan and Ethiopia get past some initial teething problems, the interconnection between the two counties – financed to the tune of $41m by the World Bank – will mark the second phase of what Ethiopia plans to be a major electricity export industry. It already supplies 35MW to Djibouti, for which it receives $1.5m a month, and hopes to extend this to Egypt, Kenya, Uganda, and South Sudan. Work is under way to electrify villages across the border in Somaliland, while an agreement to supply Kenya with power has been agreed in principle.

However, initial plans to export 100MW of electricity to Sudan have been scuppered by UN sanctions on the Iranian company responsible for installing three substations. Sudan is now scrambling to find alternative equipment, and Ethiopia’s state electricity utility, Ethiopian Electrical Power Corporation (EEPCo) is looking for other suppliers, with Areva and Erickson in the picture.

Sudanese president Omar al-Bashir is reported to have told Ethiopia’s ambassador in Khartoum that Sudan now supports Ethiopia’s controversial 6, 000MW Millennium Dam project. Although the African Development Bank and World Bank have backed away from financing the dam because of its environmental and social impacts, the Ethiopian government is pressing ahead, with around 15% already completed. Relations with post-Mubarak Egypt have improved but further spats are to be expected. Egypt receives 95% of its water from the Nile and is hypersensitive about the use of the river’s water.

Wind Farms. Not content with this massive hydropower investment, Ethiopia is also pursuing a wind strategy. This feeds into a modern decentralized distribution system, which avoids transmitting power over long distances to stranded populations and instead builds smaller generation capacity closer to those who need it. Wind power, uniquely scalable, fits the bill.

Two projects are underway, one operated by the Chinese and the other by a Spanish company. The Adama wind farm of 34 turbines, producing around 50MW, is funded at 8S% through the Chinese Exim Bank, with the rest through the Ethiopian government; Hydro China and the China Grains and Oil Group Corporaton operate in tandem. The wind farm should be ready in the middle of 2012. The larger Ashegoda project, in Tigray state, is being put together by Vigo, and will deliver 120MW by the end of 2013.

With Tullow striking oil across the border with Turkana, Ethiopia’s energy prospects have become brighter still. It is thought that the South Omo blocks north of the Kenyan border share the same petroleum system, giving a boost to explorers such as Africa Oil and Agriterra, as well as domestic investors, including magnate Mohammed Al-Amoudi.

Honoré Banda

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