Passport: Investing in Ethiopia
Bursting with potential, this ancient nation may at last soon "stretch out her hands"... to prosperity
Addis Ababa is a big, sprawling mess of a city, with seemingly no rhyme or reason to its civic planning; and it’s always been this way. In a capital surrounded by flat-topped mountains or ambas, you could walk anywhere you need to go if you have the hours, but the city is about 8,000 feet above sea level, so you’d better be in shape.
And you don’t have to look far to find the infamous contradictions of the developing world. Along a rough ribbon of sidewalk, I once saw a man carefully lays ceramic tile. Surely it would be easier and less expensive, I asked friends, to have proper cement? But no, I was told, then there would be no jobs, and the majority of infrastructure jobs for Ethiopians involve physical labour. As you ride in an SUV through the countryside (mandatory, given the geography), your vehicle will stop for every goat, chicken, ox and mule trotting along, and you’ll pass great fields of tef (a cereal crop) and maize. Bounty enough for everyone, right? Nope. Corn is considered the food of poor people, so no one likes to eat it here, or so you are told.
But appearances can deceive. In 2013 alone, Ethiopia enjoyed $1 billion U.S. in foreign direct investment flow.
“The country right now is booming with infrastructure investments, the large majority of it being financed by public investments, not private investments,” says Carl Daspect, an economic attachÃ© with the Delegation of the European Union. “So you have all the dams and the roads and the railway—I mean all those investments will eventually kick in over the medium term, say two to five years maybe, and boost the potential for energy supply, transportation, construction.”
The picture should only get better. Ethiopia’s just worked a tentative deal to resolve its bitter dispute with Egypt and Sudan over its $4.7 billion Renaissance Dam project; at stake are the vital waters of the Nile, a precious source for all three nations. And early next year, Ethiopia expects to open a new railway line linking its capital to the tiny coastal republic of Djibouti. Given Beijing’s keen interest in Africa, it should come as little surprise that the line—with a price tag exceeding $4 billion U.S.—is being built by China Railway Engineering and China Civil Engineering Construction.
Surprisingly, though, Turkey leads the way in terms of investment, with 264 projects in different phases of development. Behind China is India, according to an EU Investors survey document.
It’s not difficult to see why Ethiopia should attract foreign investors. “You’re talking about a stable country in a region which is otherwise quite unstable,” says Daspect. Availability of resources, he says, is fantastic, with an abundance of water and a 100 million head of sheep, goat and beef cattle.
“No matter what figures you take, whether it be the government or the IMF or the World Bank figure, if you make an average of all this, you come more or less around 10 percent [for economic growth] on a yearly basis,” says Daspect. “That’s quite impressive. That’s double the average of sub-Saharan Africa, which is five percent right now.”
A sandwich through a hole
It’s still a nation struggling to overcome, never mind merely exploit, its own geography. Not far from the Blue Nile Falls, you’ll still see children working as shepherds. And it’s only been a couple of years or so since trucks began to replace camel caravans to bring salt out of the Danakil Desert.
“Ethiopia is still dominated by subsistence agriculture,” says a development consultant specializing in Ethiopia, “which, as the population grows and farm plots get smaller, is becoming less and less viable as a means of household livelihood.”
He notes the problem’s compounded by the two million or so young people needing new jobs each year, when the economy is creating very few. The annual per capita income is $542, and 30 percent of the population earns less than two dollars a day.
Yet capitalism always seems to find a way. In Addis Ababa, you have the Merkato, the largest open market in Africa, where you can supposedly get everything from spices to used Kalashnikovs. One story—perhaps apocryphal but all too plausible—is that for a couple of birr, there’s a place in the market where a hand will shove a sandwich of discarded food scraps through a hole in a wall, and you can take a bite. The hand disappears, and another couple of birr gets you a second bite.
There’s another district known as “Chechnya,” a name that might have once been a rather dark joke; what used to be a rough part of town is now considered one of the hipper districts, with upscale malls, coffee shops and a large theatre that screens Hollywood films. It’s where Lily Kassahoun from Ottawa runs the Oh, Canada restaurant while her sister runs a successful spa upstairs—the kind of businesses that couldn’t thrive without a burgeoning middle class.
The future of this country, says the consultant, “hinges on how soon and how smoothly the necessary transition from subsistence agriculture to a more urbanized and diverse economy can be engineered.”
Daspect points out that since 2012, Ethiopia’s government has been working on setting up a favourable incentive scheme for investors. “So you have tax holidays, carry loss forward, import duty rollbacks—I mean you have all you want basically, as long as you are investing in the key sectors which the government wants you to invest in. Then the door is open for you…”
That door slams very firmly shut when it comes to those sectors that are off limits, such as telecoms and banking. “We’re fighting all the time with this,” says Daspect. “We’re pushing the government as much as we can to try to open up to competition, especially in the telecommunication sector, but right now this is a political decision.”
I ask Daspect what kind of feedback he gets over such a push, and he doesn’t hesitate. “It’s a no-go. For them, it’s ‘We’re not ready to open yet.’ Even for WTO accession, for example.” He doesn’t expect them to open up those sectors for another few years.
It’s the case of the government believing such changes don’t mesh with its timeline of development over the next 15 to 20 years. In the banking and telecom sectors, “one of the key arguments that they advance most of the time in the discussions is they want to make sure that the whole population benefits from it.”
Addis Ababa is suspicious whether major telecoms would bother to develop their networks in remote areas. And their point has merit; one visit to Ethiopia, and you’ll take in the vastness of the country, its diversity of terrain and scattered population. Daspect says the government has its own plan to increase network accessibility.
And it’s working in other ways to spread the wealth beyond the capital, still the main spot for major business and infrastructure development.
“Very large amounts of government and donor funds have in recent years been going to the regions, so there are enormous improvements in the regional capitals and in education, health and food security in the rural areas,” says the development consultant. “And there have been dramatic improvements in the biophysical environment—particularly in the highlands, thanks to the government’s policy of communitybased watershed development.”
The administration could score better, however, on the way it treats foreign companies wanting to do business in Ethiopia. The tax system can induce a migraine. “It’s not so much the rate itself,” says Daspect. “If you compare internationally, 30 percent company tax is not that high, actually.”
It’s more the way that tax audits and assessments are made, with a cumbersome appeal system. “If you fall under a tax audit, and you’re suspected of fraudulent activity,” says Daspect, “what the tax authority will do is they will assess your real tax bill, plus penalty, plus interest, and in some cases, this results in huge amounts of money, which sometimes even exceed the capital of a company. And the tax appeal system itself is done in a way that if you want to access the appeal system, you have to pay 50 percent of the penalty, interest, everything included, up front.”
But there’s apparently a new income tax law is due out within a year or so. “It takes time,” says Daspect. “Over the next couple of years, I suspect that many things will change for the improvement of the business climate in the country.”
But your executives will still need to make some cultural adjustments.
“Some people love Addis Ababa, others hate it,” says the development consultant. “People who become agitated and tense when things don’t go as expected or expect to be surrounded by a system that always works smoothly would get stomach ulcers. Some NorthAmerican diaspora Ethiopians come to Ethiopia full of positive thinking and wonderful plans for projects, but leave disillusioned when they find their bucketloads of American confidence and their aspirations for the future don’t get the enthusiastic responses they are expecting. The more laid-back types adapt.”
I gave this expert a good laugh once in a hotel bar, recounting my exasperation at being hassled by young men, each one looking to gain a few birr by playing tour guide. It wears you down, hearing the constant “Mister, Mister!” The consultant concedes that “for some—especially women—it can be very tiring, though often harmless. In many cases, foreigners find they have to abandon Western-style activities, such as jogging in public.”
Carl Daspect knows how difficult it is to adapt. Originally from France and having worked in CÃ´te d’Ivoire, he considers Ethiopia “a peculiar country, unlike anything you’ve seen before… You have to get accustomed to it.”
And there are rewards for your effort, especially beyond the capital. On an island in Lake Tana, a monastery in a tukul, a thatch hut, has medieval frescoes of Christian saints. In beautiful Harar, you’ll find 110 mosques… plus a nightly show of a guy feeding hyenas.
“Sometimes it’s not easy, but overall, yeah, it’s okay,” says Daspect. “And I suppose for people who were here three or five years ago, things have changed tremendously in the city for the better, I suppose.”
Only a couple of years ago in Addis Ababa, I noticed dropped calls and that the Internet would go offline at least a couple of times a week. Daspect points out you can now get fairly decent cell and web service. “The traffic is also improving in the city—it’s chaos right now—but it’s improving on a daily basis… Yeah, difficult to adapt, but it’s possible. I mean if you talk to all the businesses coming into the country, they will all tell you the same: it’s difficult but it’s worth it, let’s say.”
SAINTS AND SINNERS
Almost 100 years ago, Ethiopia had the chance to avoid the cliches of today’s Africa (despotism, corruption, poverty). Emperor Haile Selassie, still the country’s most well known leader, sent many young men—known as the “Young Ethiopians”—to Europe to be educated in the 1920s and 1930s. The idea was that these technocrats might one day help him modernize the country.
But in 1935, Mussolini invaded Ethiopia, his armies bombing Red Cross hospitals and dropping poison gas on warriors armed mostly with spears and antique rifles. Fascist soldiers massacred thousands and sent thousands more to concentration camps. Ethiopians fought a guerrilla war, finally taking the country back with British help in 1941.
With a generation of educated progressives wiped out, Haile Selassie became increasingly autocratic and detached from the daily life of his people. A famine in the province of Wello sparked a student revolution in 1974, and then a ruthless cadre of Marxist military officers took over. Known as the Derg, they were led by their psychopathic chairman, Mengistu Haile Mariam.
The Derg were to Ethiopia what Pol Pot’s regime was to Cambodia. In the Red Terror Museum of Addis Ababa, there are boxes of skulls and bones of the Derg’s purge victims, many still unidentified. The Derg were eventually ousted in 1991 in a civil war, replaced by the Ethiopian People’s Revolutionary Democratic Front. Mengistu fled—only to be given safe haven by Robert Mugabe in Zimbabwe (Mengistu still lives there today).
During the 1990s, Ethiopia was run by the EPRDF and its controversial leader, Meles Zenawi. Depending on who you talk to, Meles was either a reformer or a despot; he died from illness in 2012. Since then Ethiopia has been on political autopilot, with an acting prime minister, Hailemariam Desalegn, finishing up Meles’ term. Elections are scheduled to take place later this month.
Copyright 2015 Rogers Publishing Ltd. This article first appeared in the May 2015 edition of Corporate Risk Canada magazine