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Haste Makes Waste! Privatization of Ethio Telecom

Haste Makes Waste! Privatization of Ethio Telecom

Hagos Berhe 10-27-20

In December 2019, the then Prime Minister Abiy Ahmed launched a “homegrown” economic reform roadmap to further the ambitious initiative of making Ethiopia a middle-income country by 2025 and an “African Icon of Prosperity” by 2030. The “homegrown” design of the program is a shrewd move by the administration to disentangle itself from ideological attachments. At the center of this reform agenda had been privatization of state-owned enterprises. The four sectors identified as top priorities for privatization were the telecom, aviation, energy, and logistics.  The state monopoly Ethio Telecom with customer base of 65 million people & Ethiopian Airlines known to be symbolic for the nation were center stage of the long-standing intellectual debate. 

On October 26, 2020, Abiy Ahmed Ali has announced in his official face book page that two foreign telecom operators will be licensed soon to operate in Ethiopia & Ethio Telecom will also be partially privatized. The statement further states that the privatization will be actualized in a manner that benefits the country with no mention given on why & how they are to be earned. It is to be recalled that the planned privatization of the Ethiopian Airlines was suspended by the fact that the airline is doing well and “appears robust;” according to the Ahmed Shide(former Finance Minister) in a press conference held on October 12th 2020.  “Maintaining the current capacity of Ethiopian Airlines is more beneficial to the economy than privatizing it” he said. Was the reason for suspending privatization of the Ethiopian correct? Profitability of the Airliner in the past was not controversial. Rather, the controversy was in the government’s premature position on the privatization of State-Owned Enterprise (SoE) under the guise of “Homegrown Economic Policy’.

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If the reason for suspending the Ethiopian Airlines was profitability performance of the SoE that logic should have equally applied to Ethio Telecom state owned monopoly. In a press conference held with local journalists in the capital Addis at the end of July, 2020, the Ethio Telecom’s CEO Firehiwot Tamiru stated that over 47.7 billion birr was raised in revenue in the fiscal year ended; which she said is up by 2.3 billion from the targeted plan of 45.4 billion. Moreover, the SoE was exemplary in generating employment & foreign currency. That is really a spectacular performance in this Covid-19 pandemic period. Hence, the reason given to the suspension of the privatization of the Ethiopian Airlines is not analogous to that of the Ethio Telecom. Had it been that there wouldn’t be an urgent need for replacing the Ethio Telecom by other foreign operators and privatization of the same.

Implicitly, Abiy’s statement declares a “success story” relating to boosting foreign direct investment (FDI) by means of privatizing SoE namely Ethio Telecom. According to the neoliberal or free market ideology, there should be no restriction on foreign investment. The proponents of this ideology consider restricting of foreign investors from investing in certain ‘strategic’ industries or demanding them to transfer technologies as simply pushing them out to go somewhere else and losing the jobs and the wealth that they would have created. This was the assumption behind Abiyi government’s privatization agenda. Simply speaking, that was a neoliberal agenda.

To understand the pros & cons of the foreign acquisition of Ethio Telecom, understanding the types of contemporary FDI practices briefly may be of paramount importance.  Nowadays, FDI can be made either by what is known as ‘brownfield investment,’ that is, acquisition of existing firms by a foreign firm, or ‘greenfield investment’, which involves a foreign firm setting up new production or infrastructural facilities. The acquisition of Ethio Telecom by foreign operators & its privatization to foreign companies qualifies the definition for a brownfield investment. Statistically, brownfield investment has accounted for over half of total world foreign direct investment (FDI) since the 1990s. Even this figure had reached 80 per cent in 2001, at the peak of the international mergers and acquisitions (M&A) boom. It is simple to understand that most of the FDI revolves around taking control of existing firms, rather than the generating of new output and jobs.

Of course, the new telecom operators may inject better managerial and technological capabilities and revive an ailing company but very often such an acquisition is made with a view to utilizing capabilities that already exist in the acquired company rather than creating new ones. Given that, Ethio Telecom is not an ailing company rather it is a “cash cow”. And the acquirer will simply harvest the profits instead of investing in managerial and technological capabilities. In fact, it will leverage its profits by employee layoffs & cutting other expenditures with vital contributions to the overall national progress by way of CSR.  More importantly, once Ethio Telecom is acquired by a foreign firm, the acquiring company is likely to have the home-bias which in the long run could impose a limit on the benefits to accrue in the host country; Ethiopia.

Even in the case of considering  a Greenfield investment by the acquirer by way of  expansion or fresh investment in the telecom industry which can create new productive capabilities relative to an alternative of having no foreign investment must be considered with due diligence. Even in dealing with such a greenfield investment opportunity, the Ethiopian government should consider the FDI’s impact on the future progress of the Ethiopian economy before accepting the deal. Different FDIs have different potentials for technological innovation and productivity growth. Otherwise, the government will end with irreversible costly decision (sunk cost) that may be fatal to the country’s future economic growth. Put another way, “what you are doing today influences what you will be doing in the future and what you will get out of it”.

For a developing country such as ours, the local firms of which are underdeveloped, it may be by far better to restrict FDI at least in some industries and try to raise national firms so that they become trustworthy alternative investors to foreign companies. Such an alternative may result in a loss of some investment in the short run. However, it may be a better alternative that can ensure a healthy macro-economic climate in the long run.

 Another area which Ethio Telecom may be subject to risk associated with such a haste privatization agenda is related to private equity funds which used to play an increasingly significant role in corporate acquisitions. Theoretically, some companies which do not possess an in-house expertise in the telecom industries, may acquire the Ethio Telecom for the long term and hire industry experts as managers and request them to upgrade its capabilities. Practically, however, private equity funds usually have not the appetite to upgrade the acquired company for the long run. Most of the time, they acquire firms to sell them on in three to five years period after making them more profitable. Given the time horizon, the restructuring usually involves cost cutting measures such as lying off workers and reversing & protecting from long-term investments, at the expense of raising capabilities. Restructuring of this type is likely to destruct the long-term prospects of Ethio Telecom by paralyzing its capability to generate productivity growth.

Worse than that, an acquisition of Ethio Telecom based on private equity funds may be completed with an explicit motive on part of the acquirer to engage in asset-stripping, selling the valuable assets of a company without regard to its long-term future. It is advisable to remind the government once again that neither structuring the company nor engaging in asset-stripping will favor the country. Putting aside the legitimacy & legal status of Abiy’s government to complete the sale of Ethio Telecom to the lawyers & politicians in the meantime, the deal is not economically feasible. Beyond the inconsistency in reasoning out the rationale for selling out between the Ethiopian Airline & the Ethio Telecom, the benefits that the country is to earn from privatization will never outweigh the associated cost of it. Hence, privatization of Ethio Telecom is as the saying goes Haste Makes Waste!

 

 

 


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