DEVELOPMENT BANK OF ETHIOPIA

BULE HORA BRANCH

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From 07/12/2020 TO 11/12/2020
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.
AM PM AM PM AM PM AM PM AM PM

1 Aseffa Lamiso

2 Gemechis Deso

3 Tibebu Timotewos

4 Netsanet Mekonnen

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 DEVELOPMENT BANK OF ETHIOPIA
BULE HORA BRANCH
ATTENDANCE SHEET
From __________________ TO ________________
No NAME MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY
.
AM PM AM PM AM PM AM PM AM PM

1 Aseffa Lamiso

2 Gemechis Deso

3 Tibebu Timotewos

4 Netsanet Mekonnen

5 Gelma Bule

N.B When ever used, the following abbreviation shall mean as indicated.
AL- Annual Leave OD- On Duty MRL- Mourning Leave

MCL- Marriage Leave TL- Training Leave SL -Sick Leave

MTL- Maternity Leave EL- Exam Leave HD -Holiday

 On Privatization of Public Enterprises in Ethiopia
By: Mekdes Mezgebu and Mesfin Tafesse

1. Introduction
In this issue of our legal update, we share with our readers how the Ethiopian government’s recent policy drive to privatize key state-owned
enterprises, referred to in the Ethiopian legal regime as Public Enterprises (PEs), may be implemented legally and the broad regulatory
issues that may need to be considered. The decision to privatize is a reflection of the policy that is current at the time of its making. It is
inherently a political decision and demonstrates a major shift in policy at the highest executive organ of the government. Execution of this
decision may necessitate the amendment of existing laws. It may also require a gap filling exercise on the assumption that existing laws do
not cater for some of the PEs targeted for privatization. Such is the case, in our considered view, on the privatization of, for example, the
Ethiopian Airlines, Ethio-Telecom and Ethiopian Electric Power (EEP). On the other hand, the privatization of Ethiopian Shipping and
Logistics Services Enterprise (ESLSE), the Sugar Corporation and Railway Corporation, may be executed on the basis of existing laws on
privatization.  Further, legislative amendment of current investment laws including relaxation of rules restricting sectors for private and
foreign investment, and enhancing clarity on regulatory mandates will be critical.

2. Policy Background
Following the overthrow of the socialist regime in 1991, the transitional government of Ethiopia at the time announced a free market
economy. A number of legislations were enacted to privatize PEs and encourage private sector participation. Key among these legislations
was the Public Enterprise Proclamation No 25/1992 (“PE Proclamation”) that facilitated the conversion of PEs to autonomous commercial
entities. The Privatization of Public Enterprises Proclamation No. 146/1998 (“Privatization Proclamation”) was also a key legal instrument
that paved the way for privatization of PEs. While many sectors that were previously dominated by the State were eventually liberalized,
sectors in defense, aviation, supply and distribution of energy, railway, shipping and logistics services, telecommunication and postal
services were exclusively retained by the government.

From the early 2000s, there was a shift in policy outlook of the government regarding PEs. The adoption of a developmental state
economic model, in which the State assumed a commanding role in bringing about economic development, facilitated the establishment of
more PEs. The policy received a legislative endorsement with the establishment of the Public Enterprises Supervisory Authority and the
Industrial Fund by virtue of Proclamation No. 277/2002. This law redefined the role of PEs as active players in the country’s economy and
the drive towards industrialization. Furthermore, a five-year national development agenda of the government i.e., the Growth and
Transformation Plan (spanning the period 2010-2020) assigned a significant role for PEs in the economy. Of the 77 billion dollars that was
required to execute the GTP II, it was envisaged for PEs to contribute 45% of the financing. Since 2005, notable PEs that were newly
incorporated include: the Ethiopian Railway Corporation (2007), Metal and Engineering Corporation (2010), Ethiopian Sugar Corporation
(2010), Chemical Industry Corporation (2012), Industrial Development Zones Corporation (2013), Ethiopian Petroleum and Industrial Gas
Enterprise (2012) and Metal, Petroleum and Bio Fuel Corporation (2015). Key PEs also went through a restructuring process including the
 Ethiopian Electric Power Corporation (EEPCO) which split into two PEs - EEP (2013) and Ethiopian Electric Utility (EEU), Ethiopian
Telecommunication was converted to Ethio-Telecom (2010) and the Ethiopian Airlines Enterprise was merged with the Ethiopian Airports
Enterprise to become the Ethiopian Airlines Group (EAG).  (2017). To further strengthen the expanding role of PEs in the economy, the law
empowered most of these PEs to sell and pledge bonds, negotiate and sign loan agreements with local and international financiers in their
own name with the government providing sovereign guarantees.

In terms of private investment and foreign participation in the economy, government policy has remained the same since 1991. Successive
investment laws have divided areas of investment as: 

 Areas exclusively reserved for the Ethiopian government – these are transmission and distribution of energy through the national
grid, postal (except courier services) and air transport services with the seating capacity of more than 50 passengers.
 Areas permitted only for joint venture with the Ethiopian government -- e.g., telecom services.
 Areas reserved for Ethiopian nationals only – these include, inter alia, banking, insurance, micro-finance; broadcasting services;
packaging, forwarding and shipping agency services.
Current Investment Proclamation provides that the Council of Ministers or the Investment Board, as the case may be, may authorize the
opening up of investment sectors that are otherwise restricted for private and foreign parties.

3. Public Enterprises and Privatization

The regulation of PEs and their privatization has gone through several legislative and institutional reforms in the last 25 years. Between
1992 - 2004, PEs and their privatization was regulated by two separate regulatory regimes.  The PE Proclamation and the Public
Enterprises Supervising Authority Establishment Proclamation No. 277/2002 (“PESA Proclamation”) governed the establishment and
operation of PEs whereas the Privatization Agency Establishment Proclamation No. 87/1994 (as amended) and the Privatization
Proclamation governed privatization of PEs.

Later on, the government adopted a unified approach by merging these two regulatory systems into the Privatization and Public Enterprises
Supervisory Authority (PPESA) through Proclamation No. 412/2004 (“PPESA Proclamation”). In 2015, PPESA was elevated to the Ministry
of Public Enterprises (MoPE) sustaining PPESA’s dual mandate of supervising PEs accountable to it and overseeing the government
privatization program.  

4. Regulation of Public Enterprises

i. Definition of PEs
PEs are defined in different legislations differently depending on the nature of regulation in place. The core legislation, i.e. PE Proclamation,
defines PEs as “wholly owned state enterprises established to carry out, for gain, manufacturing, distribution, service rendering, or other
economic or related activities”.  Whereas some legislations such as the the Auditor- General and Anti-Corruption legislations have taken a
broader definition of PEs. Thus, per current Ethiopian law, a PE may be one or all of the following:

a. A wholly state-owned entity established in accordance with the PE Proclamation

 b. A share company that is 100% owned by the government.
c. An entity designated by the government as a PE.
d. An entity that is partially owned by the government.
PEs may take any corporate form. There are no mandatory rules that prescribe a certain type of corporate structure for PEs. They could be
either in the form of corporations/enterprises or share companies. PEs that are established as corporations/enterprises are regulated by the
PE Proclamation whereas those that are established as share companies are subject to the rules of the Commercial Code (with certain
exemptions provided under the PE and Privatization Proclamation). For the purpose of this legal update, the entities that are under
consideration are all corporations or enterprises and not share companies.  

i. Supervision of PEs
Council of Ministers
The Council of Ministers has a wide-ranging power with respect to the supervision of PEs. These powers include:

a. Establish a PE
b. Allocate the capital of the PE
c. Assign a supervising authority for the PE
d. Dissolve a PE
e. Determine the amalgamation or division of a PE
f. Determine the establishment of a PE as a business organization under the Commercial Code.
g. Determine the sale of an enterprise, or the transfer of an enterprise or its management in any manner
h. Decide on the sale of shares held by the government
MOPE and Sectoral Supervising Ministries (SSM)
The primary regulatory organ with the obligation to oversee PEs is a supervisory authority selected by the government. The PE
Proclamation defines a supervisory authority as an entity to be designated by the Council of Ministers with a view to protecting the
ownership interest of the State. The supervisory authority is required to be assigned in the regulation establishing the particular PE. The
supervising authority could either be, the MOPE by virtue of Proclamation to determine the Powers and Duties of the Executive Organs No.
916/2016 (“Executive Proclamation”) or a Sectoral Supervising Ministry (SSM).

For instance, the Ethiopian Airlines Group (EAG) establishment regulation assigns the Ministry of Transport as the SSM. Similarly the
Ministry of Water, Irrigation and Electricity (MoWIE) is the designated SSM for EEP and EEU. The Sugar Corporation, Railway Corporation,
the Chemical Corporation and the Ethiopian Shipping and Logistics Services Enterprise (ESLSE) are supervised by MoPE pursuant to the
Executive Proclamation. Contrary to the law, Ethio-Telecom’s supervisory entity is not named under Regulation No. 197/2010 nor is made
accountable to MOPE under the Executive Proclamation.  In practice, however, the Ministry of Communication and Information Technology
(MoCIT) acts as Ethio-Telecom supervising ministry.   

As supervisory authorities, MOPE and SSMs are empowered to, inter alia, carryout the following tasks with respect to PEs that are
accountable to them:  
  Cause the allocation of an initial capital
 Appoint and remove Board members
 Appoint Board chairman
 Approve external auditors and financial reports of these auditors
 Approve corporate and investment plans
 Follow up and evaluate the performance of PEs
 Determine the amount of dividends to be paid to the government
 Propose to the Council of Ministers the amalgamation, division or sale of the PE where necessary.
MOPE assumes an additional authority with respect to those PEs that are accountable to SSMs. This relates to overseeing and assisting
their corporate management and financial performance.  

5. Privatization of PEs
i. Objectives
The Privatization Proclamation provides that the objectives of a privatization program are to:   

 generate revenue required for financing development activities;

 change the role and participation of the government in the economy to enable it exert more effort on activities requiring its attention;
and
 promote the country's economic development through encouraging the expansion of the private sector.
While these are the legally prescribed objectives, the recent policy speech by the Prime Minister (PM) to parliament indicates additional
justifications for privatization. The PM has stated that the partial or full privatization of PEs is expected to solve current operational
inefficiencies of PEs inject a much-needed foreign capital into the economy. 

i. Privatization Mandate
As noted above, in early 2000s, PEs were restructured to become key players of the government’s development agenda. Prior to the 2002,
all PEs and their supervising authorities were subject to the rules of the PE Proclamation. With the enactment of the PESA Proclamation, a
clear distinction was made between those PEs that are accountable to the Authority and those that were not. This law authorized the
Authority at the time to only have mandate over those PEs that are accountable to it and provided wider powers of supervision to SSMs.

Two years later, PPPESA Proclamation reaffirmed this position by limiting the scope of supervision to only those PEs that are accountable
to PPESA. In addition, this law went one step further and empowered SSMs to carry out privatization of PEs responsible to them.  For the
first time, what has been a traditionally centralized approach to the privatization of PEs, was split between PPESA and SSMs.   

Consequently, the PPESA Proclamation empowered the Authority and SSMs with to:

 Lead, manage and execute the government’s privatization program

 Submit list of entities to be privatized to the government
 Prepare the PEs for privatization
 Determine bid evaluation criteria
 Prepare necessary privatization documents
 Publicize the privatization process
 Post- privatization, monitor the progress of the PEs and investors compliance with obligations.
Though SSMs mandate was expanded, in reality it did not result in the privatization of key PEs. With the exception of Ethio-Telecom which
experimented a management contract with a foreign telecom services provider (Orange), the privatization powers of SSMs had not been
tested in practice.  In fact, the legislative mandate that granted SSMs the powers of privatization was repealed by the Executive
Proclamation of 2016.  As a result, SSMs are currently mandated to only “propose, where necessary, to the Council of Ministers, the
dissolution, amalgamation, or division of an enterprise under its control, or the transfer of the enterprise or its management in any other
manner.” 

Neither is MOPE empowered to lead and manage the privatization of PEs that are accountable to SSMs. Under the Executive
Proclamation, the power and duties of MOPE is limited to those PEs that are accountable to it. Other PEs that are accountable to SSMs are
excluded from MOPEs jurisdiction. Therefore, one can conclude that PEs such as EAG, Ethio-Telecom, EEP and EEU which are all
accountable to SSMs, are not subject to any privatization regulatory regime.

Furthermore, the respective mandate of MOPE with regards to privatization was similarly reduced by the Executive Proclamation. Under
the PPESA Proclamation, privatization procedures were assigned to two organs, namely the Authority and the Privatizations Board. While
the Authority oversaw and led the entire privatization process from bidding to completion, the Board conducted a high level regulatory
review of the Authority.

In repealing and replacing the PPESA proclamation, the Executive Proclamation transferred the powers and duties of the Privatization
Board to MOPE. The mandate of the authority was neither assigned to MOPE nor transferred to a third organ leaving a grey area in the
law.  

Therefore, at present, the powers and duties of MOPE with regards to privatization are restricted to the below:

 Oversee and implement the privatization program

 Ensure the orderly execution, legality, transparency and efficiency of the privatization process
 Submit recommendations on policy issues to the government
 Examine complaints submitted to it with regards to the privatization program and give administrative decisions
 Take all necessary measures to expedite the privatization process
 Issue directives necessary for the privatization process
 These powers and duties are high level in nature and do not translate into a mandate to lead and manage the privatization process. In fact,
the reading of the above powers suggests that the privatization process would be carried out by a third party entity with MOPE playing a
supervisory role.  This will bring into question whether MoPE is granted the power by law to lead and manage the privatization of those PEs
that are accountable to it, namely, ESLSE, Sugar and Railway Corporation. In practice, though, MOPE continues to play the role of an
implementing agency for the government’s privatization program by undertaking privatizations of a number of PEs. Recently, MoPE
facilitated the privatization of Assela Malt Factory. It is also currently undertaking the privatization of National Alcohol and Liquor Factory.
This practice is further substantiated by the various directives that MOPE has enacted in the last couple of years regarding procurement,
sale and transfer PEs.  

Compounding the jurisdictional issues as to whether MOPE or SSMs are legally empowered to privatize PEs or not, the Investment
Proclamation No. 769/2012 permits a joint venture between PEs and the private sector. Article 9 of the Investment Proclamation provides
that PPESA (now MoPE) must receive investment proposals submitted by any private sector intending to invest jointly with the government
and submit same to the Ministry of Industry, for approval. Upon approval, MoPE is empowered to designate a PE to invest as partner in a
joint investment. The Investment Proclamation grants Ministry of Industry the mandate to approve joint venture proposals (by way of
privatization) between the government and the private sector. This provides further complexity into the privatization mandate and who is
assigned the legal mandate.

6. Concluding Remarks
A successful implementation of privatization program requires clarity and coherence between policy/law and implementation. Ethiopia’s
current legal regime regulating PEs and privatization is not clearly articulated to accommodate the massive task of privatizing organizations
such as Ethiopian Airlines and Ethio-Telecom. Privatization of these PEs is a grey and unregulated area. This calls for the review of the
existing legal regime in terms of achieving coherence and resulting in a fair and beneficial outcome to the country.

As a first order of business, relaxation of current legislations restricting certain sectors of the economy in which most of the PEs operate as
ineligible for the participation of the private sector in general and foreign investors in particular must be made. The other key consideration
is for the government to look into the rules of the privatization process that are presently in place. As noted above, existing rules do not
present a clear legal and institutional mandate as to who will own and implement the privatization of key PEs.  The question is whether or
not MOPE’s powers are extended to cover all of the PEs earmarked for privatization or SSMs will be empowered to lead the process
regarding selected PEs, or whether this process receives a high level inter-institutional ad-hoc structure tasked with the responsibility to
undertake the privatization process.

The government has taken big steps in the pre-privatization process in order to make the grand privatization
of major public enterprises become a reality. The process is taking into consideration the macroeconomic
imbalance of the country.
The energy sector is the major debated public enterprise. It has been studied more than others under
consideration.
On Monday April 22 pre privatization work was addressed at a briefing to the privatization advisory council,
which was assigned by Prime Minister Abiy Ahmed at the Office of the Prime Minister.

Telecom
In his presentation Eyob Tekalign, State Minister of Finance, stated that some of the public enterprises’
valuations would be finished in the near future.
He said that with regards to the telecom sector, a detailed study has been conducted. The results will
determine the next course of action. Either the state run telecom will continue managing infrastructure and
communication services or those two tasks will be separated and overseen by two separate entities. The study
also analyzed if additional businesses could be brought into the telecom sector.
He said that the details of the study will be submitted to the committee in the near future. The valuation work
has been commenced but it may take up to six months.
A telecom regulatory law has been also drafted for the telecom sector, and the public hearing was held a week
ago. He said that based on the proclamation, a strong regulatory body will be established. Currently the
proposal in this regard is in the final stages and it will be finished in a couple of weeks.
Energy
The energy sector has involved many public enterprises. It is expected to be privatized partly and this is in the
process of taking place.
Eyob said that the Ethiopian Electric Power and Ethiopian Electric Utility are undertaking a huge debt burden.
He said that initially there needs to be a detailed study to solve the debt issue and the sector needs structural
reform. They are hoping the study will provide them with solutions as they seek a way out of debt. According
to Eyob, the debt structuring shall be evaluated by relevant government bodies including financial institutions.
The study may indicate that some of the debt shall be annulled in consideration of its profitability when it
includes the private actors. “We will present this to the advisory committee in the recent future,” he said.
He told Capital that the investment in the energy sector is over 300 billion birr, and the loan on the energy
sector is more than other enterprises. Experts said that some of the loans might be annulled or the payment

period may be extended.

Logistics
The logistics sector has been also studied and the focus is on how to improve the operation as opposed to
focusing on the privatization of the shipping enterprise. The study, which was finalized on April 10, focused on
improving the sector that shall also accelerate the economy in general. Eyob said that the committee will see
the study in detail by the coming week.
Sugar
The sugar sector has already taken one step and a Request for Information (RFI) has been published two
weeks ago to understand the prospective buyers.
He said that the government is undertaking the sugar policy to indicate the future operation on the sector.
“The RFI, which have 15 questions including the experience and capital capacity of interested buyers, will give
us input for drafting sugar policy,” the State Minister added.
The factory assessment and valuation on five factories is being undertaken on the selected five sugar factories.
The valuation work is expected to be finalized in the coming 2 months.
Railway
According to the presentation, the railway sector is the challenging area since the capital city light railway is
still subsidized and difficult to return to profitability. “However, the Ethio-Djibouti line shall be returned into the
normal track with little improvement at the corporation,” he explained. The sector is the other public enterprise
with huge debt that is included in commercial loans. “For the railway sector we have developed the general
reform document that defines the railway sector’s contribution for the economy and evaluates the future
investments,” he added.
Public enterprises proclamation
One of the reforms regarding the pre-privatization process is the amendment of 27 year old public enterprises
proclamation. The proclamation requires several changes since the public enterprises will be experiencing
international competition, is going through a draft amendment process and stakeholders at the government
apparatus including the public enterprises are talking about it. Public Enterprises Law Proclamation no.

25/1992 was issued in 1992 during the transitional government period.

The privatization proclamation is also the other law that will be reformed as per the upcoming privatization
process.
The study targeted to enhance the country’s economy in general terms, according to the State Minister.
“The current study and evaluation is part of the economic reform and correlated with the macroeconomic
imbalance of the country. It is not only just the privatization process,” Eyob concluded during his presentation.
Abiy, who chaired the discussion, reminded the council that they have a crucial role in the pre and privatization
process more than just accompanying the process. “We shall do the process by just putting policy but we need
such kind of council coming from various opinions and expertise would provide significant input on the
process,” he says, “you shall influence the policy even though you might not be directly voting.”
In the discussion one of the committee members stated that the role of the advisory council was not behind
the public relations work.
Other participants in the opening of the discussion expressed concerns that putting public enterprises up for
sale at this period, when there is instability in some places, might affect the value of the enterprises. “The
timing might not be good for selling the enterprises since major potential buyers would not have confidence in
the situation in the country,” the council member explained.
Abiy argued that even though the timing is crucial, international investors are still highly interested. “Investors
do not think like local politicians. Investors undertake several and detail evaluations before coming but making
the country stable is our major homework as mentioned,” he responded.
He recommended the telecom privatization process follow the sugar approach and issue RFI to know the real
interested investors and to transfer to the next step.
Regarding the privatization of the telecom sector the PM claimed that has more meaning besides generating
hard currency from the sales.
“For instance involving the private sector will help us improve of the doing business index, which considers
automation that is not only an application problem but it is further that shall improve in several areas in the
economy,” he explained.
“If we lag on involving the private sector it might be dying. On the current technology that pushes the artificial
intelligence on the front our sector might not go far. The convergence of the technology is now growing and at
the same time the bypass tech is growing we have to include others since it is important technically and
financially,” the PM, who is a well-trained IT specialist, gave details regarding the necessity of the role of the
private sector to save the country monopoly, which is one of the most profitable public enterprise but accused
by its clients on its poor performance.
The PM has expressed his concern about the telecom company that shall be significantly affected regarding
revenue and capable on technology if the privatization delays more.
Eyob supports Abiy’s argument. “The recent study of the International Finance Corporation (IFC), a private
wing of the World Bank, indicated that the telecom sector at least needs further USD 2.2 billion to be on
similar position to countries like Kenya,” he told journalists after the meeting.
“Currently our telecom industry is not widely expanding the sector’s technology, while world is using the 5th
generation. This sector needs more investment since it is crucial to build digital economy,” he added.
He informed that the detail of the study will be presented for council on the coming week.
In relation to the concerns of the current economic slowdown the PM stated that there is a perception that the
economic growth is slowing. “In real terms the economy is not slowing down in this budget year except the
export sector, which is mainly the agriculture sector,” he argued.
He showed that the financial sector has registered a 20 percent growth on different banking operation aspects,
while the tourism sector has registered a 36 percent growth so far in the budget year.
He said that the economy in the past focused on a big push model on aggregate demand approach. The
country has undertaken several projects by local resources and international loan and grants.
“There is limitation on the supply side. Now we are in a policy change and focusing on aggregate supply by
expanding governed actors (the private sector) on the aggregate supply side,” the PM explained how the
current privatization process shall expand the aggregate supply.
The privatization process is not only focused on generating hard currency, but filling the gap on market failure,

according to him.
He shows the performance of the sugar project that consumes huge public money but failed to be real.
“If we can finish the sugar project we shall also face the marketing, but if we join on JV or fully privatize we
get better deals,” he added.
Eyob told journalist that the pre privatization process is undertaken by several well experienced professionals
gathered from different local and international sources. “The council is helping us strongly, this is the fourth
time we have met,” he told Capital.
The council is the upper body for the process and the macroeconomic committee chaired by the PM and is the
direct body for the operation and the steering committee which includes several ministers is following the
process at the ground work to evaluate the technical committee work and transferring it to the macroeconomic
committee.
“The technical committees are different groups of committees that are made up of professionals in the field.
Every sector has from six to eight local or international experts,” Eyob said.
The airline pre privatization process has not started yet. Sugar and telecom sectors are likely to be the first to
be privatized.

Privatisation of Ethiopia’s State Enterprises to Maximum Benefits

The EPRDF government has announced partial privatisation of state enterprises. Transferring enterprises in strategic parts of the
economy will have positive effects on the competitiveness of the economy and the privatised firms.  This can only be achieved if the
privatisation process is transparent and inclusive, writes Addisu A. Lashitew (PhD) ([email protected]), a researcher at Simon Fraser
University in Vancouver, Canada.

The unprecedented move by the government to privatise nearly all major public enterprises has caught many by surprise. Even those who have
been advocating for the cause were left bewildered by the far-reaching nature of the proposed privatisation measures.
With the exception of financial institutions, the plan involves partially privatising nearly all major public enterprises including the national airliner,
the telecommunications corporation, the national electric power corporation, the railway and shipping lines corporations and a range of industrial
plants that are under establishment.
While the government will continue to hold the majority shares in the major state corporations, the industrial establishments are open to full private
ownership by foreign or domestic investors.
The process of privatising corporations that were under the auspices of the formerly socialist state has been going on for the past three decades in
Ethiopia. But the process has been so slow that as many as one-third of the enterprises that were meant to be transferred to domestic and private
actors are still under government ownership.
This studied approach of privatisation has drawn praises from the likes of the World Bank for its prudence. In countries such as Russia, rushed
privatisation processes had led to significant wastage of public resources as corrupt officials colluded with emerging entrepreneurs to grab entire
industries at a significantly undervalued price. Non-transparent and corrupt privatisation procedures have led to the loss of substantial public
wealth in countries such as Madagascar.
Radical, ideologically-driven privatisation schemes have also led to counterproductive outcomes that involved the transfer of public service
providers such as water utilities into private hands.
Public ownership is motivated by the need to address the limitations of private ownership and create positive externalities that are beneficial to
societal welfare. For instance, a state might take ownership of a strategic enterprise with the aim of protecting and nurturing infant industries that
would otherwise face difficulty to compete on their own. An example of this is Ethiopian Airlines, which thrived under strong government support in
the form of protection from competitors, and loan guarantees.
Alternatively, privatisation can be motivated by the need to extend public services that are less likely to be provided affordably by profit-driven
private actors. State ownership in Ethiopia’s telecom, electric power generation, shipping, and the rail sector is motivated by the need to provide
accessible and affordable telecom, electric power and transportation services to citizens.
In spite of these advantages, however, state ownership can also derail economic and social progress. Public enterprises will become more
bureaucratic and less efficient since they are not disciplined by competitive market forces. In contrast, they can become spoiled by the
government, which often buys their products, provides their finance and even assigns their management and board members. Having the same
agent as an owner, financier, buyer and manager leaves public enterprises devoid of independent oversight, exposing them to agency problems
that foster lethargy, inefficiency, and corruption.
The absence of external pressure for excellence also means that bureaucrats will settle for average outcomes. A great example of this is Ethio
telecom, which has been decently successful in expanding mobile access but remains notorious for its poor customer service, much less
pioneering transformative social innovations such as mobile banking. Likewise, the electric corporation has been generally successful in extending
access to electricity but has failed to reduce its poor and erratic power distribution.
Given these considerations, the government’s move to partially privatise most public enterprises is understandable. Through partial ownership, the
government can steer these enterprises towards advancing public welfare, such as universal electrification and mobile access. The presence of
private ownership will introduce market pressure that will create an impetus for innovation and growth.
Partial ownership by global technology leaders can also improve innovativeness and market responsiveness. Imagine what it would be like to have
a telecom firm that creates business-friendly internet bundles, cares about its customers and makes significant efforts to build its reputation.
Likewise, partial private ownership of the electric power corporation could eliminate power interruptions that have a debilitating effect on all
business but especially those engaged in power intensive sectors. These moves will go a long way towards removing the annoying bottlenecks
that citizens and businesses encounter, while at the same time increasing the country’s openness and competitiveness in the global market for
resources such as capital.
To fully exploit the benefits of privatisation, however, the process will have to be transparent and carefully managed. For instance, a clear case for
privatisation needs to be made for each enterprise rather than making a political decision to privatise every public-owned business entity.
Ethiopian Airlines appears to be doing very well, and it is not clear why it should be privatised. The company has a very ambitious expansion plan
which has made it the largest African airliner while also being one of the most profitable. Privatising such a successful enterprise rather than
strengthening its management and governance structures sounds like fixing something that is not broken, and in fact, works fabulously.
The authorities also need to ensure that the process does not end up enriching the wealthy without bringing in new management or technological
expertise. It is worthwhile to recall Russia’s transitioning experience, which led to the creation of billionaire oligarchs overnight, with adverse
politico-economic consequences that last to this day.
In addition to exacerbating inequalities, this kind of mistake will erode public confidence and undermine political support for the process. The
government should strengthen the relevant regulatory agencies to ensure oversight and create an open and competitive environment, especially in
sectors that were previously occupied by state monopolies.
The transfer of ownership should likewise focus not only on attracting capital and technology but also creating a sense of collective ownership.
This is especially the case for Ethio telecom, whose monopoly position gives it an advantage of network externalities, thus enabling it to stay
dominant and generate abnormal financial returns.
It is important to ensure that the public rather than individual investors alone benefits from the wealth generated by this large corporation. While
the Prime Minister’s proposal to sell about five percent of the shares to individuals of Ethiopian origins is encouraging, this number might not be
revised upwards in order to succeed in creating a genuine sense of ownership.
The privatisation of Safaricom, Kenya’s largest telecom firm, provides an excellent example of a successful and balanced approach to
privatisation. At its formation, the government of Kenya owned 60pc of Safaricom, and the remaining 40pc was owned by Vodafone, a major
British telecom operator. Benefiting from the policy support of the government and the technological expertise of Vodafone, Safaricom thrived as a
highly customer-oriented and innovative company.
A decade ago, the government sold off a quarter of its stake in Safaricom through a transparent and competitive public offering at the Nairobi
Stock Exchange. This privatisation scheme enabled well over half a million individual Kenyans to own stakes in their country’s largest corporation.
Today, Safaricom is the largest stock-listed company in East Africa and runs a purpose-driven business model that successfully blends
commercial profit with the social purpose of empowering Kenyans. This example shows that privatisation can be carefully designed in a manner
that balances between strategic public ownership, mass ownership, and access to advanced foreign technology. Ethiopian officials should seek to
learn from and replicate this successful case of privatisation.
The pros and cons of privatization
7 September 2019
By Contributor
Privatization has long been considered as a strategy for continuous economic growth and improvement. At different
points of history, countries turned to privatization to raise funds and encourage citizens and foreign investors to support
local and national enterprises. Today’s economic philosophy is more about the effectiveness of private ownership than
about keeping large companies and strategic enterprises in the hands of governments. After all, private owners and
investors have their interest in maintaining the effectiveness and profitability of their enterprises. Ethiopia is presently
going through a new wave of privatization: several state corporations will be sold (partially or fully) to private owners.
Privatization will definitely increase the intensity of market competition, creating a more favorable economic climate;
however, it will also create barriers to regulating and monitoring private monopolies, whereas employees may face new
conditions of employment as owners struggle to increase their profits and revenues.
Privatization is often used in the context of economic policymaking and change. Hargrave (2019) defines the concept as
“the process by which a piece of property or business goes from being government owned to being privately owned.”
Putting it simply, privatization is when governments sell state corporations and enterprises to private players. It is a
complex process that involves numerous variables. It can also take different forms and pursue different patterns.
Nevertheless, in almost every case, privatization is for a state enterprise to become a private, for-profit company that will
be effectively managed and sustained to benefit the owners. When governments are no longer in a position to keep state
enterprises running, they can opt for privatization to save companies and jobs. For some countries, privatization is a
measure of last resort as they seek to restore their economic and market positions and achieve sustainable growth in the
long run.
Ethiopia is a perfect target for privatization discussions, as this has been one of the key instruments used by the
government to stabilize markets and foster economic growth. Since the beginning of the 2000s, Ethiopia has made critical
steps to revitalize and redesign its economy according to global standards. Privatization was claimed as one of the
primary dimensions of macroeconomic change in Ethiopia. Calls for privatization became much louder under the new
Prime Minister, Dr. Abiy Ahmed. Since his first days in office, Dr. Ahmed and other officials have worked with global
agencies to outline a comprehensive plan for effective privatization (Lee, 2019). At the beginning of 2019, it was
announced that domestic and foreign investors would be able to purchase the shares of four major state corporations –
Ethiopian Airlines, Ethio Telecom, Maritime Transport and Logistics Corporation, and Ethiopian Power (Anyanzwa, 2019).
However, the government would retain its ownership of these companies, but it will also allow others to participate.
These are the initial steps taken by government to liberalize Ethiopian economy. However, public officials should be
aware of the pros and cons of the privatization strategy and anticipate its positive and negative implications for the
country’s economy.
A good thing about privatization is that it increases the inflow of currency to the economy. This is particularly relevant for
Ethiopia, which experiences a shortage of foreign currency and, for this reason, may fail to fulfill its corporate and
political obligations. Also, by selling state corporations and putting them into the hands of private investors, governments
create better conditions for achieving sustainable efficiency and profits. Apparently, private owners want their companies
to bring profits and increased revenues. Therefore, they are interested in improving the quality and efficiency of
management decisions and systems. Private owners who purchase state corporations may have a better strategic
perspective, compared with governments. The downside is that the commercial interests of investors may coincide with
the priorities and expectations held by governments. Tensions can become more obvious if governments retain part of
their ownership in privatized companies. Organizational restructuring, business model redesign, employee layoffs, and
relocation are just some of the potential actions that can be taken by new owners to boost profitability and efficiency.
Therefore, government should not expect privatization to go smoothly, as new owners may choose a different way of
doing business.
Privatization does not always mean a single owner; quite often, state corporations become private through initial public
offering. If that is the case, the company will have many shareholders, major and minor, who will pressure managers and
executives to keep it efficient, productive, and profitable (Pettinger, 2017). However, in this situation, the company may
deviate from its initial purpose or intent. Many government-owned enterprises fulfill a social or public purpose, such as
providing health care, and public transport. Once these enterprises become privately owned, shareholders may no longer
be interested in serving the public good. Consequently, Ethiopian authorities should outline the conditions or criteria for
privatization or achieve a consensus with future owners regarding the role and purpose strategically important
enterprises will play in the country’s economy after they are privatized.
All in all, privatization has its pros and cons. On the one hand, it attracts private investors, boosts corporate efficiency,
and improves the economic climate. On the other hand, it does not allow state authorities to control and regulate
corporate decisions. Strategies used by new owners to keep companies running may deviate from governments’ priorities
and expectations. Therefore, it is in the best interests of the government to articulate its privatization criteria to future
investors, so that strategically important enterprises keep serving the public good after they are privatized.
 Privatization the Problem, Rarely the SolutionJomo Kwame Sundaram
 October 21, 2016
Privatization has been one of the pillars of the counter-revolution against development economics and government activism from the 1980s. Many developing
countries were forced to accept privatization as a condition for support from the World Bank while many other countries have embraced privatization, often on
the pretext of fiscal and debt constraints.

Privatization generally refers to changing the status of a business, service or industry from state, government or public ownership to private control. It sometimes
also refers to the use of private contractors to provide services previously delivered by the public sector.

Privatization can be strictly defined to include only cases of the sale of 100%, or at least a majority share of a public or state-owned enterprise (SOE), or its
assets, to private shareholders. The definition of privatization in some contexts is so broad that it includes cases where private enterprises are awarded licences to
participate in activities previously the exclusive preserve of the public sector.

Why the turn to privatization?

The balance of payments problems arising from oil shocks in the 1970s and the US Fed’s increase of the interest rate to well over 20% precipitated sovereign
debt crises in Latin America and elsewhere from the early 1980s, forcing many developing countries to seek credit support from the International Monetary Fund
(IMF) and the World Bank.
The World Bank and IMF’s ‘neo-liberal’ policy prescriptions involved liberalization, deregulation and privatization. Collectively, they later came to be known as
the Washington Consensus to refer to the common position of three Washington DC based institutions – the US Treasury, the IMF and the World Bank.

Main arguments for privatization

Privatization was advocated as an easy means to:
1. reduce the ‘financial and administrative burden of the government’, particularly in undertaking and maintaining services and infrastructure;
2. ‘promote competition, improve efficiency and increase productivity’ in the delivery of public services
3. ‘stimulate private entrepreneurship and investment’, and thus accelerate economic growth;
4. help reduce ‘the presence and size of the public sector, with its monopolistic tendencies and bureaucratic support’.
Public or consumer welfare
Since a significant portion of state-run activities are public monopolies, privatization will hand over such monopoly powers to private interests likely to use them
to maximize profits. The privatization of public services tends to burden the public, especially if charges are raised for privatized services which may not
improve with privatization.
Private interests are only interested in profitable or potentially profitable activities and enterprises. Thus, the government will be saddled with unprofitable and
less profitable activities, reinforcing the impression of SOE inefficiencies. Consequently, privatization may worsen overall enterprise performance. ‘Value for
money’ may go down, despite improvements used to justify higher user charges.

Privatization in many developing and transition economies has primarily enriched a few with strong political connections who ‘captured’ lucrative opportunities
associated with privatization, while the public interest has been increasingly sacrificed to such powerful private business interests. This has, in turn, exacerbated
problems of corruption, patronage and other related problems.

Adverse consequences
Some other adverse consequences of privatization include:
  The social and political implications of two types of services, i.e. one for those who can afford more costly, private – including privatized – services,
and the other for those who cannot, and hence have to continue to rely on subsidized public services, e.g. medical services and education.
 The effects of minimal long-term investments by private owners narrowly focused on maximizing short-term profits.
 Increased living costs as well as poorer services and utilities – especially in remote and rural areas – due to ‘economic costing’ of services, e.g.
telecommunications, water supply and electricity.
 Reduced jobs, overtime work and real wages for employees of privatized concerns.
Flawed arguments
Arguments for privatization can be refuted on the following grounds:
 The public sector can be more efficiently run, as demonstrated in Singapore, Taiwan and South Korea.
 Greater public accountability and a more transparent public sector can ensure greater efficiency in achieving the public and national interest while
limiting public-sector waste and borrowing.
 Privatization may postpone a fiscal crisis by temporarily reducing fiscal deficits, but the public sector would lose income from profitable public sector
activities, and be stuck with financing and subsidizing unprofitable ones. As experience shows, the fiscal crisis may even deepen if the new owners of
profitable SOEs avoid paying taxes with creative accounting or due to the typically generous terms of privatization.
 Privatization gives priority to profit maximization, typically at the expense of social welfare, equity and the public interest. It tends to adversely affect
the interests of public-sector employees and the public, especially poorer consumers.
 Public pressure to ensure the equitable distribution of share ownership (e.g., ‘voucher privatization’) may inadvertently undermine pressures to improve
corporate performance since each shareholder would then only have small equity stakes, and would therefore be unlikely to incur the high costs of
monitoring management and corporate performance.
 By diverting private capital from productive new investments to buying over public sector assets, economic growth would be retarded rather than
enhanced.
II. Advantages of Privatization
January 1, 1993 |        FONT SIZE: 75% 125%

By William D. Eggers
Many reasons explain the movement by cities and states toward privatization to restructure and
"rightsize" government. Much of the impetus is the desire to inject competition into the delivery
of state services in order to provide services to citizens in a more-efficient and cost-effective
manner. If structured appropriately and sufficiently monitored, privatization can:
1. SAVE TAXPAYERS' MONEY
2. INCREASE FLEXIBILITY
3. IMPROVE SERVICE QUALITY
4. INCREASE EFFICIENCY AND INNOVATION
5. ALLOW POLICYMAKERS TO STEER, RATHER THAN ROW
6. STREAMLINE AND DOWNSIZE GOVERNMENT
7. IMPROVE MAINTENANCE
SAVE TAXPAYERS' MONEY
By applying a variety of privatization techniques to state services, infrastructure, facilities,
enterprises, and land, comprehensive state privatization programs can reduce program costs.
Over 100 studies have documented cost savings from contracting out services to the private
sector.[17] Cost savings vary but average between 20 and 40 percent, depending on the service.
For some services, such as prison construction and operation, savings are generally less, while for
others, such as asphalt resurfacing, savings are often greater. Competitive bidding whenever
possible and careful government oversight are crucial to sustained cost savings.
States can also realize large one-time windfalls from the sale or lease of state infrastructure and
facilities. Moreover, privatization can put an end to subsidies to previously government-run
operations.
Privatization also creates a steady stream of new tax revenues from private contractors and
corporations who pay taxes and license fees, while state units do not.
INCREASE FLEXIBILITY
Privatization gives state officials greater flexibility to meet program needs. Officials can replace
the private firm if it isn't meeting contract standards, cut back on service, add to service during
peak periods, or downsize as needed.
IMPROVE SERVICE QUALITY
A number of surveys have indicated that public officials believed service quality was better after
privatization. In a survey of 89 municipalities conducted in 1980, for example, 63 percent of
public officials responding reported better services as a result of contracting out.[18]
If competitive bidding is instituted for a service, service quality can improve even if the service is
retained in-house. The reason is simple: competition induces in-house and private service
providers to provide quality services in order to keep complaints down and keep the contract.
Service quality is not assured, however, by privatization. Contracts must be well-designed with
performance standards that create incentives for high quality service. Furthermore, diligent
monitoring of the contractor's performance through customer surveys and on-site inspections
must also be performed by government in its oversight role.
INCREASE EFFICIENCY AND INNOVATION
Private management can significantly lower operating costs through the use of more flexible
personnel practices, job categories, streamlined operating procedures, and simplified
procurement.[19]
Private ownership can stimulate innovation. Competition forces private firms to develop
innovative, efficient methods for providing goods and services in order to keep costs down and
keep contracts. These incentives, for the most part, do not exist in the public sector.
ALLOW POLICYMAKERS TO STEER, RATHER THAN ROW
Privatization allows state officials to spend less time managing personnel and maintaining
equipment, thus allowing more time to see that essential services are efficiently delivered.
STREAMLINE AND DOWNSIZE GOVERNMENT
Privatization is one tool to make bureaucracies smaller and more manageable. Large private
corporations often sell off assets that are underperforming or proving too difficult to manage
efficiently. Under new owners and leaner management, such divisions often receive a new lease
on life. Entrepreneurial governments can replicate this experience.
IMPROVED MAINTENANCE
Private owners are strongly motivated to keep up maintenance in order to preserve the asset value
of the investment in the facility. Public owners often defer maintenance due to political
considerations, increasing overall long-term costs.