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Heng Capital is an equity firm that has an office in Addis Ababa and the company is on the look out for potential investments in several areas, but especially the service sector. Capital spoke to Lian Jian, a partner at the firm, about the interests of the investment firm, and recommendations for developing industry parks.
Capital: What is your reason for being here?
Lian Jian: The Chinese economist Justin Yifu Lin who used to be the Vice President of the World Bank and who is also a top adviser to the Chinese President believed that Africa has a potential to attract huge investments.
During that time he saw the potential of East Africa so he picked two countries, Rwanda and Ethiopia and when he came back to China in 2012, he began promoting a new concept of structural economics related to development. He introduced a very famous company to Ethiopia called Huajian shoes that started manufacturing here.
I paid attention to Professor Justin Yifu Lin’s activities and we started our own company by looking into opportunities and organizing investors. I came here to discover investment opportunities in your country. It is my second visit to Ethiopia.
Capital: Which sectors are you looking at for potential investments to inject capital?
Jian: Our message of investment is a little different, especially for China. The general investment concept in your country is coming and setting up a new factory or new enterprises, but, we are an investment company.
As an investment company, we don’t need to set up a totally new company here. We try to find some existing companies that are growing and we become shareholders through injecting capital. We provide the companies advice and capital to help them grow. Of course we follow the rules of the country.
When the companies grow, our interests as shareholders, no matter the value of the share the dividend also grow. It is a very popular way of investment both in the United States and China, but it is not well frequented in your country.
Take this example; there are some restrictions in certain industries by the government. That is because they are worried that if they open those sectors and new companies come in and set up here, the local companies will not be able to compete and they will be eliminated.
But, actually, when they open up the sector, there is another possibility, which is when new companies come in, they become partners to the local enterprises and help the local enterprises grow. And in that case, both of the parties will benefit from that.
Capital: You want to provide finance to both Chinese and Ethiopian enterprises?
Jian: Yes of course.
Capital: But when you look at Ethiopia’s law, getting external finance for the private sector is difficult. How do you look at this issue?
Jian: Ethiopian authorities establish such restrictions because they fear falling into debt. What we do, internationally it is called private equity or venture capital. It is not a loan. So it does not force the local entities, whether private or public, to return the finance that has been injected.
Actually, it is a risky business. We want to invest in you because we believe you are a good investment, we give you the money and the money is not to be returned, it just stays there as equity. We are long term investors; 10 to 15 years.
Personally, I think it is quiet different from the former concept considered by the Ethiopian authorities. I understand their worries, because in previous decades, in developing countries, such investment is very thin except in India.
In other developing countries, most foreign investors worry about their potential returns. So they demand loans and debts and guaranties from the government. But now, these things are changing.
Capital: How big is your company’s capacity?
Jian: We have a very big capital, for investment purposes, it depends on the industry. For startups, we call it a soft area of service, because you don’t need a lot of money. If you give a lot of money, it is a debt for them. For manufacturers, for projects we choose, the investment is usually less than a million USD.
If we are talking about land development or real-estate, it needs much more capital. So it depends on the sector.
Capital: You said it is your second visit to Ethiopia. Did you get the chance to meet Ethiopian and foreign investors including those from China?
Jian: I have frequent contact with Chinese investors, there is a big Chinese community here already in Ethiopia, but most of them are with state owned enterprises and contractors. This year, I think, is a turning point for Chinese investors to come to Ethiopia.
When I came here for the first time, the Eastern Industry Park was not full. The government was asking Chinese investors to come. Now the industry park is full. So I have met representatives of many companies’ including Huajian shoes and other factories.
For example, the machines for a particular company have arrived but operators and teachers have not arrived yet. This creates a problem with efficiency.
There are also similar companies to mine; like a private equity company set up by the founder of Best Buy, which is one of the biggest retailers in the US. They have set up an investment company here.
Capital: What about the private sector? For example companies such as Habesha Cement and Habesha Brewery are currently working with Chinese partners to expand investment. Did you get a chance to speak to them?
Jian: I didn’t get the chance to meet them personally, but, I know the latest developments. Habesha Cement is cooperating with the largest cement group in China. It looks optimistic for them. For me personally, I have met with the Addis Ababa Chamber of Commerce and Sectoral associations. They are very active; I saw a lot of entrepreneurial spirit.
I have met a lot of Ethiopian entrepreneurs that could be potential cooperators with us, which means we will invest in them; this includes an Internet service provider, language school and a share company called Addis Africa International Convention & Exhibition Center.
Capital: How is your relationship with the Chinese government and the Chinese Embassy here?
Jian: I have many strong relationships in Beijing, but the embassy here, not really. I have a good relationship with the China-Africa Development Fund. It is one of the most important government agencies with lots of money in Africa. Its East African office is located in Addis Ababa.
Capital: You mentioned that you had a chance to visit top Ethiopian officials, tell us about your point of discussions and how they went?
Jian: I met with officials who are responsible for industry development at the Ministry of Industry. There are some financial problems with the industry park development here.
The first industrial area in Ethiopia the Eastern Industry Zone; it was set up by an investor from China. For seven years it was losing money, but now more business men from China have been coming here and it has started generating money.
The Chinese entrepreneur that set up the industry park has been using profits from his domestic business in China to keep the park running. However, for the last two years, China’s economy has been experiencing a slowdown and as a result the owner had less capital.
Now, even though there are many Chinese enterprises set up in his industry park, he has to negotiate with the CGCOC, which is one of the largest construction companies here, to finance it and make it operational.
After talking with the State Minister of Industry who also confirmed this problem, people from the Ministry agreed to visit China. They will study industry park development and will visit some famous industry parks.
We talked about the secrets behind the success of Chinese industry parks; I introduced to him a mechanism called a lend credit mechanism.
Capital: How can you obtain money from nowhere?
Jian: For example, this city is under developed, and the government wants to build industry parks to provide employment to the people, but there is weak infrastructure regarding road, water and electricity. There is a very special institution called the China Development Bank which also has a heavy existence here.
The institution provides a package loan. The Chinese entrepreneur who sets up at the industry park first takes out a loan from the Chinese Development Bank. They then builds roads that go to the industry park, but at the same time they have some projects based on civil engineering a few kilometers from the park with commercial and real-estate development. So, through the loan the entrepreneur has a lot of money, and through that the road gets constructed and the industry park set up.
Gradually the land is auctioned for commercial and residential real estate. Manufacturing enterprises start coming into the industry park, and they start to employ people. With more people coming, the auction sales are fulfilling their value and there are land developers who are willing to buy the commercial land. Then, the loan is paid back to Chinese Development Bank.
So all the mechanisms self fulfill, this means that, at the beginning it is all zero, but, with the mechanisms it all comes together. With the industry park, the infrastructure comes first, and then auction of the land will come later, gradually.
The industry park model is very slow in the return of cash flow. You have to combine it with different things to make it profitable.
Capital: So you are recommending that these kinds of methods be implemented here?
Jian: The State Minister of Industry was very interested in this and he is going to visit many industrial parks in China. As far as I know the industry park he visited was run by local offices but the mechanism was the same. Another one he visited was jointly operated by China and Singapore.