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Summary
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The Ethiopian privatization agency (EPA) is moving ahead with the sell-off of nearly all state-owned enterprises. Through june 1999, the EPA has sold 175 firms, mostly small retail shops, for a total of about $360 million. With technical assistance from Germany, the EPA is preparing an additional 123 firms for sale in three "tranches." The EPA will sell shares for companies in the first group of 41 soon; a second tranche is already under preparation and consultants are sought to assist with the third tranche. New approaches toward enterprise sales and greater transparency at the EPA are good portents for a rejuvenated privatization program. All that is needed now is international interest and foreign capital. End summary.
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A Good Start on Privatizations
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Up through May of 1999, Ethiopia has privatized 175 public firms. These consisted mainly of the 72 units within the Ethiopian retail trade corporation, composed of small shops that deal in groceries, food, shoe and leather goods, construction materials, automotive service, textiles, and stationary. In addition, the government sold 14 small hotels and restaurants, 34 printing offices, and 15 furniture stores.
The manufacturing industries privatized include three flour mills, three edible oil mills, four furniture and woodworking plants, the bottling plants for Coca-Cola and Pepsi Cola, several tanneries, and various chemical, metal working, and construction factories. The most prominent privatizations were the sales of the Lega Dembi gold mine, the Saint George brewery, the National Tobacco factory, and a number of meat, dairy and livestock farms. The total sum obtained from these privatizations was 2.86 billion birr (about $360 million).
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German technical assistance
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Now Ethiopia's privatization agency (EPA) faces the daunting task of privatizing an additional 123 state-owned enterprises, many of them large firms, before the end of 2002. The sale of 86 of these companies will be conducted by foreign consultants. The remainder will be handled by the EPA. The government continues to seek funding and other aid from the World Bank, the African Development Bank, and the European Union to support its ambitious program. At present, however, EPA is relying almost solely on bilateral assistance from the German development agency (GTZ).
GTZ subcontracted the project to a private German consulting firm -- GFA -- which hired one full-time project manager and will be hiring another long-term technical advisor. The primary role of the project manager and technical advisor is to assist in-house EPA experts in selecting international consultants to conduct audits and asset valuations, and recommend ways to restructure Ethiopia's state-owned enterprises. Among the consultants hired to date for short term project work are the U.S. firms KPMG and Price Waterhouse coopers, in addition to Deloitte and Touche and SOFRECO.
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The next tranche
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Ethiopia's continued privatization will take place in stages. The EPA announced that the first "tranche" of 41 state-owned enterprises will be offered to the public soon. These enterprises include:
-- nine firms in the food industry (flour mills and edible oil factories);
-- four firms in the garment industry;
-- four textile factories (including recently equipped plants in Awassa and Arba Minch);
-- six firms in the leather industry;
-- four construction materials companies;
-- the three remaining public breweries of Meta, Harar, and Bedele;
-- the Awash Winery;
-- the Ethiopian Plastic Factory, and;
-- several tea and coffee plantations
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Wanted: foreign consultants
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While the EPA is working with consultants to prepare firms in tranche two, it has invited international firms to submit technical and financial proposals for the transformation, valuation, and divestiture of public enterprises slated for privatization in tranche three. These enterprises are divided into seven lots, grouped by sectors: public transport, freight transport, construction, building design, agricultural services, horticulture, and pharmaceutical.
The terms of reference, tender instructions, and draft contracts can be obtained from the EPA (e-mail: epa@telecom.net.et or telephone: 011-251-1-150370 or fax: 011-251-1-513955) for a non-refundable fee of 500 birr ($62.50). The proposals must be submitted by September 6.
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Sparks of initiative at EPA
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Econ/commercial officer met with EPA general manager Beshah Azmite on August 12 to discuss the approach EPA is taking with its upcoming privatizations. Beshah said Ethiopia depends on the consultants for help in financially restructuring the balance sheet and advising the EPA in how to remove obstacles to potential bidders. For example, the consultants may recommend removing undesirable items from the balance sheet. In other cases, they may suggest transferring unpaid loans from debt-ridden companies to another government enterprise or having the government pay down the debt. In other cases the company is saddled with an obsolete inventory. The consultants, Beshah said, suggest ways to remove or counterbalance these hindrances to make the firm more attractive to investors.
Beshah said the EPA plans to convert these enterprises into share companies before selling them. Investors, either individually or in groups, can buy all the shares or blocks of shares ranging from 10-25 percent of the enterprise value. The government may wish to retain minority shareholder status in several firms.
Another innovation offered by the EPA is the deferred payment plan. Up until now, the EPA has required 30 percent upon closing the sale and the remaining 70 percent upon handing over the enterprise. Under this new scheme, an investor need only put 10 percent down on the agreed price. The EPA will defer payment for up to two-thirds of the total price for a maximum of six years (at a reasonable interest rate). The balance of the purchase price must be covered through a bank loan.
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Bank privatization underway
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The most prominent privatization underway at present is the sell-off of the Construction and Business Bank (CBB). The August 15 edition of The Capital, a weekly business newspaper, reported that Price Waterhouse Cooper is conducting an asset evaluation and assessing the modalities proposed for the CBB's privatization. The CBB has 60 million birr ($7.5 million) in capital and outstanding loans of 8.7 million birr (just over $1 million). Beshah noted that this privatization is significant because it will be the first financial institution in Ethiopia to be sold, though because of restrictions on foreign participation in banking only domestic investors are eligible to participate. He said the PWC study will be presented to the board next week.
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Calub gas and tantalum mine
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Ethiopian entities that have enticed interest from abroad include the Calub Gas Share Company and the Kenticha tantalum mine (see ref a). Beshah said Ethiopia is going ahead with its plans to develop the Calub gas field itself. A Chinese firm completed its contract work on the actual well. The next step is to build an extraction facility. Even so, Beshah did not rule out the eventual participation of foreign companies. The privatization board is "ready to accept an investor at any stage of development," he said. Likewise, Ethiopia is continuing to mine tantalum for export from the Kenticha site. Beshah confided that the deposits in the "withered crust" are likely to give out in 8-10 years. The Ethiopian government would like an investor to begin conducting deep extraction before that time.
Comment: with the assistance of GTZ, Ethiopia's privatization program has undergone a minor rejuvenation. Besides the new approaches mentioned above, the EPA has taken greater initiative to inform the public about the status of its privatization drive in recent weeks. The EPA will be stretching its technical capacity to the limit in preparing 37 or more of the state-owned firms for sale. In addition, the private German consulting firm is an unknown quantity. Most importantly, however, international investor interest and foreign capital are needed to bring this process to fruition. Embassy encourages U.S. private sector participation in Ethiopia's privatization program.