Ethiopia's land policy cools investor interest

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Summary
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The government retains ownership of all land in Ethiopia. Foreign investors must lease land from regional authorities. In Addis Ababa, leases are acquired by auction, though some prime business land is available at set prices. Detractors say the inability to buy land outright, the high cost of leasing land, the requirement to pay 50% up front, and problems and delays in executing the lease and infrastructure agreements deter investment, both foreign and domestic.

While government officials feel that freehold is "totally out of the question," participants at a recent economic association meeting raised important criticisms of land policy implementation and offered suggestions for improvement. Government officials argue that the lease mechanism is "tantamount to freehold" because land holders can sub-let, sell, and extend their leases. End summary.

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Buying and selling land forbidden
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Land cannot be bought and sold in Ethiopia. Article 40(3) of the Ethiopian constitution states clearly that "land is a common property of the nations, nationalities, and peoples of Ethiopia and shall not be subject to sale or other means of transfer." A 1993 proclamation gave regional governments the power to regulate the transfer and acquisition of land. Addis Ababa created a board to implement and oversee the land lease policy.

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Mechanisms for land acquisition
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Most foreign investors acquire land in Addis Ababa through an auction mechanism. Fifty percent of the total lease is required as a down payment. The remainder must usually be paid within five years for a business and within ten years for a manufacturing industry. The duration of the lease is typically 50 years for a business and 60 years for an industry, though investors can request leases as short as 30 years and as long as 99 years. Lessees must begin construction within one and a half years of the date the agreement is signed. If the lessee fails to begin construction by the appointed date, the agreement is cancelled and the amount paid is refunded, minus deductions for penalties and charges.

The city of Addis Ababa is concerned about the development of an adequate drainage system, the renovation of slum areas, and the construction of modern roads and infrastructure. For this reason, the land board favors projects which promote social service investment or have welfare benefits, such as those in health and education. The board reduces lease payments for projects like these as an incentive. For example, colleges and technical or professional training institutes are allowed a 100% discount. The construction of a sports stadium is also allowed a full discount. Public health projects, such as the construction of prenatal or childcare hospitals, are granted 95% reductions in land price. Schools serving grades 9-12 are given 93% reductions and schools from kindergarten up are allowed 85% reductions. Other projects that provide social services may receive between 50-80 percent discount.

Several prominent business zones in Addis Ababa have fixed lease prices based on prior auctions. Investors who wish to obtain land in these areas must submit a project profile and a preliminary plan for the project, a free-hand sketch, an investment certificate, and a completed application form. The urban development and works bureau approves the use for the site according to a master plan. The project is then evaluated and presented to the board which sets the lease price. Obtaining property for a business along Victory Road costs 1080 birr ($133) per square meter. Land behind Victory Road that is zoned for apartments or single-family homes will cost 831 birr ($102) per square meter. In a similar fashion, land prices near Bole Airport on the "European Union" road or in the "Old Airport" area are predetermined.

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Economic association seeks alternatives
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The economic association held a panel discussion entitled "Alternatives to the Current Land Policy" on July 3 at its seventh annual assembly. Government participants used the assembly to reinforce the importance of the current land policy. The primary government panelist, the chief economic advisor to the Prime Minister Newaye Gebreab, noted that the urban lease system provides a marketable system of land holding within the current framework of government-owned land tenure. Fixing the price of land is difficult so in many cases an auction system is imposed to help determine the cost. Several attendees commented that the problems with the land lease policy are in its implementation.

Assefa Tessema, president of a local business association, said the lease prices repel potential investors and keep them from taking part in the country's economic development. The spiraling rents of residential units is also aggravating the housing shortage in Addis Ababa. The system of land distribution benefits less than 1% of the population, he commented.

Other participants complained that investors have trouble securing land at a reasonable price. The majority of urban dwellers are facing unaffordable lease rates. They pointed out that the plots of land presented by the office for auction may not match the interests of the investors in terms of location and size. Others complained about the delay in the supply of land and the inadequacy of the infrastructure provided.

One attendee suggested mitigating the cost problem by basing the price of the lease on the average income of the people. He also proposed offering land at lower rates for manufacturing industries that employ many workers or promise to expand the necessary infrastructure. In response to a criticism that concentrating all powers and functions on the lease office results in inefficiency, one panelist suggested transferring land distribution powers to the Woreda (sub-regional or township) level.

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Flexibility in land lease system
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Despite the intractability on the issue of land ownership, the government often shows flexibility in the policy implementation. For example, fifteen or more individuals can apply for certain land parcels available for single family housing projects. The community members provide documentary evidence of their income and assets to the Addis Ababa council and then compete in a random lottery drawing against other applicant groups for the parcel of land. The successful group obtains the land at a highly subsidized price, often only paying the 250 birr ($40) registration fee.

As another example, a U.S. beverage company, Summit Partners, found Ethiopia's mechanism for leasing land onerous but took advantage of flexibility in the system. Summit finally obtained land for a new bottling plant after a two year wait. Once the land and price were secured, the Addis Ababa administration planned to build the roads, connect the water and sewer pipes, and put in telephone and electricity wires. Summit objected because it did not want to delay construction any further. Instead, Summit offered to build the roads and other infrastructure itself. The board agreed to deduct the infrastructure costs from the lease price.

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Land policy history
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The Ethiopian government maintains a two-tiered system of landhold -- the lease system and the rental system. The Ethiopian government is trying to move everyone onto the leasehold system. Land can still be transferred from one "owner" to another, but the new owner is automatically charged rent on the land and must make payments to the Ethiopian government. (Current owners in most cases pay only a minimal property tax). In these cases, the rental charge replaces the property tax. Landholders can sublet the land, sell or transfer the lease, and can use the lease as collateral. The lease can be renewed or extended by the current holder. Ethiopia's system, many note, is "tantamount to freehold."

In the past, Ethiopia's land was in the hands of feudal lords. Farmers were merely tenants on their own farms. When the military took over from Emperor Haile Selassie in the early 1970's, land became freely available. The Derg regime showed favoritism, however, handing out the best and biggest parcels of land to its own cadres or political friends. The land would then be sold to an intermediary who would then sell it again for a profit. One of the priorities of the new government was to get rid of all the intermediaries and return land ownership to the people. The sole relationship would be between the land provider (the government) and the land user.

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Comment
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Although many thought the recent economic association meeting would reveal cracks in the government's intractability on land tenancy issues, the public sector participants merely reinforced the sanctity of their policy that all land is owned by the state. However, we can hope that the ideas generated at this forum will compel a thorough review of how the leasing policy is implemented. At present, acquiring land is an arduous process and lease prices, particularly within Addis Ababa, are expensive. Government officials respond that the price is set by auction and investors are welcome, even encouraged, to set up their project outside the capital. This has only led investors to shop around for land just outside the Addis regional administration. Once the land is acquired, embassy is optimistic that Ethiopia will back up its claims to allow sub-leasing, renewal and extension.