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Zemedeneh Negatu is the Managing Partner for Ernst & Young in Ethiopia and Head of Transaction Advisory Services for Eastern Africa. His clients include very prominent investors from Saudi Arabia, the U.A.E., the United States and other countries who have been advised on investments worth billions of dollars. Zemedeneh recently gave an insightful speech at the Economist Forum held at the Sheraton Addis on African High Growth Market Summit.
Zemedeneh has extensive global and African experience advising clients in financial services, manufacturing, telecoms and airlines. Zemedeneh has lived in the United States, Canada, Brazil, Argentina and Saudi Arabia. He completed Harvard Business School’s LSE program and received his degree in business administration from Howard University, Washington, D.C. and is a U.S. CPA. Zemedeneh sat down with Capital to discuss about the recent turns on liberalization of the country’s key economic sectors: Excerpts
Capital: Do you have any business that is going to come to Ethiopia in the near future?
Zemedeneh: Well I would expect yes, it is a process.. It is a gradual process. First create the awareness. Then the second step is they say; “okay, I will come and look at it”. Then you engage them, which again, is what we have done. We give them high level knowledge of Africa and some sense of what Ethiopia is doing. The next step would be to approach those who are interested in working here.. So, I know from experience the first thing is awareness and the next thing is they say; “okay Zemedeneh, we have seen this picture you have painted for us and we will come and discuss this further”. I would expect a few companies to do follow-ups. Some have already decided to invest here.. Others would say, “okay I will consider and come definitely if past experience is the case.. I would expect several companies, over the next year or two to start investing here.
Capital: Currently, a majority of the FDI comes from the Eastern World as opposed to the West. Why do you think this is?
Zemedeneh: I can tell you for a fact that it is changing. I will give you specifics. Yes, over the last five years much of the FDI was coming from BRIC countries-the newly emerging economies China, India, Turkey. But the last couple of years, you have seen the likes of Diageo, Heineken, and you have seen a big USD four-billion power sector deal. It is all American money, I can tell you. I know for a fact it is private American money. That is big. By any ones imagination, four billion USD is a lot of money anywhere in Africa. For one single project, it is massive, and that is Western money. So you are starting to see the tide changing. People who are most optimistic about Africa are Africans themselves and then investors from the emerging market because they came from the emerging market and they could see where this thing is going. But now even investors from the West-Americans and Europeans are starting to get it. Even they are starting to realize it. However, they are kind of late comers. They were all more concerned about the risks. Your perspective matters, we look at things more optimistically here in Africa than maybe they do in the West.
For instance, when you talk to Western companies, until recently, they were more focused on the risk. They would mention power shortages, slower Internet, if you wait until the broadband is as fast as it is where we live in Virginia; then it will be too late. Somebody else will be ready to invest. The Chinese are ready to invest. The other emerging markets are also ready. The Western investors started to sayok, we will develop a risk management that will allow us to come at the stage before everything is perfect. In older days, they were expecting everything to be perfect. When I say this, we as Africans have to be very honest. The number of challenges that investors are telling us are impediments for them to be investing in Africa. We need to address this issue, however, at the same time, Africa has made tremendous progress. Ethiopia has made enormous progress. There is no doubt about it. We came from nothing 10-12 years ago economically to where we are today. It is huge progress. There’s no question about it. In my view Ethiopia’s progress is not reversible. I expect the growth to be sustained in Africa and Ethiopia. So the answer to the question in a long-rounded way is even the Westerners have started to get it. However they are still picky and they choose countries that have big markets and make it easy to do business. They want countries that have clear policies and good political leadership. They want determined political leadership.
They don’t like people to be ‘wishy-washy’; today you make policy, tomorrow it changes. I think, to be fairly frank, one of the attractiveness of the Ethiopian economic strategy is there’s a determined leadership with one layer. It might take a while to get there- to formulate the policy-but once they formulate it, at least it is one. That really gives confidence to investors. In some African countries, policies change all the time. At least in Ethiopia, whether you are comfortable with the policy or not, it is consistent, it is determined, it is the State’s policy and it will continue.
So, the Westerners have already, as I said, started to get it. And I am not just talking; I see evidence. And that (USD) four billion to me is a turning point. We are going to see more and more. We have the American Private Equity Fund, which has committed USD 600 million for the energy space including Ethiopia. That is USD 600 million to explore oil and gas in five countries and one of them is Ethiopia. This is American money again. So, I would expect to see the early adoptors were investors from emerging markets. There is no question about the Chinese, the Indians, the Turkish and the Middle Eastern investors. One of the things is we will start seeing more and more of is these investors from the Middle East.
I think the agricultural space in Ethiopia would be extremely attractive. You just have to make sure you attract the right type of foreign investor and secondly make sure that our policies are smart. Those are the two things that I think, because the overall framework of the government is good. Ethiopia has made a decision that foreign direct investment in agriculture is good and beneficial to the country. That is the major step we took as a country three-four years ago. Now we derail down, in other words, are we attracting the right types of investors in the agriculture sector? And then are our policies proactive? Are they attractive enough? If we do that I am sure Ethiopia will be an agricultural powerhouse. It might take time but we will get there: not only will we feed ourselves but we will be an agricultural powerhouse. I don’t just mean the basic agriculture-agro industry. We produce raw material, like oranges, tomatoes and whatever. But we import package juice from the Middle East, from somewhere else. That has to change and that is going to change. More and more value added products and a value chain that would attract Middle Eastern investment. They are very keen on investment in agriculture. They just want to make sure that they are comfortable with the policies, procedures, and can protect their investments and I think Ethiopia has done quite a bit to encourage it. Agriculture will definitely attract investment from the Middle East and Asia. At a very good meeting with a major commodity company that had previously set up 1500 hectares; they now want to expand to 6,000 hectares in the Southern Nations. This company is called Olam. They are a major global commodities and agriculture company. Those are the kinds of industries Ethiopia should attract. The very serious, the large, global company, they are listed in the Singapore Stock Exchange. Those companies can contribute to Ethiopia’s agricultural transformation. So, I expect more and more from diversified sources.
Capital: Recently the Ethiopian government has indicated that it may liberalize the power sector.
Zemedeneh: I know it is a capital intensive business. At some point, what EEPco has done and the government has done … we can finance so much. On our own, we can do so much. That means we need now the private sector to come in and contribute to that. And that 25 year power-purchase agreement, the four billion dollar deal, I think that was a starting point. Now you see the floods gates opening where more and more investors, because the parliament passed a proclamation, we first needed the framework. Now we are going to see more and more private investment both domestic and international. The domestic I think because the knowledge and knowhow doesn’t exist will be in joint ventures. I cannot imagine a local Ethiopian company doing this by itself. First, the amount of money required is a lot but secondly I would expect more and more joint ventures from Ethiopian companies going into the power sector. But the idea was fantastic. To be honest, we should use that as a model for other sectors that are capital intensive-large scale infrastructure and more kinds, I think we should allow those kinds of initiatives to take place. The power sector did an excellent example where Ethiopia could be the leader. As an Ethiopian I am proud that we managed to build the Nile Dam on our own, with our own money. We didn’t have to beg anybody. We made a commitment as a country; this is a priority for us and look what we are doing. When we are determined, we can do it.
But there’s a limit to that, right? I don’t think EEPCo can go do another USD five billion or 10 billion dam on its own and the question is even if you could, is that a smart way of doing it? Why don’t you differ or share the risk and the cost with the private sector? I think the short answer is it was a good and timely decision by the government to allow the private sector in. Unless I read it wrong, they even allowed them to export the power if they can which is very smart.
This brings me to the other point about regional integration. Regional integration is important. One of the reasons sometimes it gets dark is because there isn’t substance behind someone’s talk about regional integration. But if you show what regional integration means, for example, power produced by the Nile Dam will power Kenya, all of a sudden even in Kenya, the private sector and the government will now translate the benefits of regional integration. All of a sudden both sides will understand the substance, there’s money in it, there’s benefits to the economy. Then that moves regional integration to a meaningful stage When we reduce it to the basic element, Ethiopia is going to produce electricity and sell it to Kenya, to Sudan and then regional integration becomes real. I think the power initiative is timely and fantastic. I think it will contribute not just to Ethiopia but also to the whole region in terms of substance.
Capital: What’s your view about the liberalization of the financial sector and the telecom industry?
Zemedeneh: I think the Ethiopian government has made it abundantly clear in every opportunity that they get, that they are not ready to liberalize.
Now, I will give you my view on the two sections. Financial services, I agree. I don’t think it is time for Ethiopia to open up this sector for two reasons: government officials made it clear that we don’t even have the capacity to regulate this. For me that is the biggest thing which I completely agree with. We have fifteen private banks owned by Ethiopians. This has helped create wealth in our own country. Had we opened it up 10 years ago, I assure you none of these banks would exist today. The private banks in Ethiopia, as small as they are and they are not sophisticated as the multinationals, managed to create wealth for the public and they also managed to contribute to the Ethiopian economy. For example, last week my father managed to get a 37 percent dividend from one of the banks operating here. Where on earth would you get such a high return. I own shares in American banks, they give me a maximum of a three or four percent dividend. Here they pay this year in year out.
The dividend paid here will be invested here in Ethiopia and the multiply effect of these investments remains in Ethiopia. So at the moment despite the small size of the banks, I still think that we have done okay by not allowing foreign banks in. But down the line Ethiopia will eventually open up the sector. The impression I get is beyond 2020.
The other is the telecom sector. We should really consider some kind of liberalization of the telecom sector and I compare ethio telecom with Ethiopian Airlines. Ethiopian Airlines became a world class airline because it faces competition every single day. It performs on global standards and the CEO of Ethiopian Airlines when he wakes up he knows there is Lufthansa, Emirates and other major airlines. Can we say this to ethio telecom? NO! I honestly believe that competition will do wonders for ethio telecom. What type of competition and when,we can discuss.
We should also calculate the impact of the inefficiency of ethio telecom on the Ethiopian economy. It is probably huge.
Banking is okay but the telecom should have competition. I think some kind of liberalization should be considered as of tomorrow.
If I was the government I would consider allowing Ethiopians to set up a second or third operator before even allowing foreign telecom companies the same as the banking sector. Down the road the government can allow foreign companies to enter the sector.