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Investment in sectors that matter

Staff Reporter
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The European Investment Bank (EIB), Europe’s long-term lending institution, formally opened the bank’s first permanent representation in Ethiopia in 2016. The office leads engagement by the EIB, both to support long-term infrastructure and private sector investment in Ethiopia and to manage relations with the African Union Commission and other international organizations based in Addis Ababa. The Bank’s Ethiopia office Head Christophe Litt spoke to Capital about some of the projects in their pipeline.

 

Capital: Tell us about some of your current projects.

Christophe Litt: If we look at the public sector projects, we are currently appraising two strategic projects. One is called a Jobs Compact; the initial idea was to build three industrial parks which would be expected to  create about 100,000 jobs and 30 percent of those jobs would go to refugees based in the country. So, the idea is really to better  integrate refugees who have been here for many years.

This was announced by the Ethiopian Prime Minister in New York at the Obama Refugee  Summit in 2016, during that time the Prime Minister met with the Bank’s president, representatives of the World Bank, European Union and DFID, and with all those institutions we confirmed our interest in financing the so-called Jobs Compact project.

A lot has happened since then. There was a pre-appraisal or pre-feasibility study carried out by McKinsey to identify the best sectors that could be developed in each of these parks given their location but also taking into account all the existing initiatives in the country. A so-called refugees skills survey was also undertaken. We also tried to determine what kind of institutional setting would be appropriate for each of the parks; what kind of governance, what kind of partnership; public private, or exclusively public or private and so on.

When it comes to EIB, what we will do, at least initially, is to finance Dire Dawa phase two which is will focus on the electrical appliances sector, so it will not be textile, it could be automotive, it could be all kinds of electrical equipments. Now we are entering the phase of the feasibility study, and  the environmental and social impact assessments. We will also have to look at some of the associated infrastructures such as housing, transport, energy; to determine the perimeter of our intervention.

Our partners would follow a budgetary support approach which means the financing would not directly be linked with the construction of the park but to some objectives that need to be reached by the government to make the Jobs Compact concept a success. For example, to improve investment climate, jobs productivity, job creation, refugee status; all those aspects will be taken into account .

So, our approaches are fully complimentary. EIB is more of a project based organization; we really look at projects and it is more difficult for us to influence those more high-level topics which will be key for for the success of our financing of Dire Dawa Phase II; if the investment climate is better and productivity is better, you can attract more investors and can be more successful, etc.

Capital: The Dire Dawa phase two projects will focus on electrical appliances. Why was that particular sector chosen?

Litt: McKinsey did a very comprehensive study on all the existing projects currently being developed in the country or that will be developed, they looked at all potential sectors given the competitive advantages that can be offered by the country; Dire Dawa is close to Djibouti, and there is a lot of textile projects already. They had interviews with foreign companies to see what they were looking for, what kind of competitive advantages that place may offer and that was the proposal.

Capital: Do you have other projects in the public sector?christophe-litt

Litt: There is another that I really find interesting; because it is focusing on an existing industry in the country which has a lot of know how and has a big potential but needs some support. It is the Mojo Leather City project. The idea is to build an industrial park in Mojo focusing on the leather industry. There will be a state of the art water treatment facility; it is a very polluting industry, using lots of chemicals. I have been to Mojo to visit some of the tanneries and they would clearly benefit from such a project. So, the idea is to build a new park based on the so-called one stop shop concept. The cost is still to be determined but it could be around 100 million Euros and in such a case EIB would provide 50 million; half of the cost.

The EU has approved already, a 15 million Euro grant to finance some components; one is all the studies and  environmental impact and social assessments,. The second thing is to work on the value chain; improve the raw material/ leather and third to focus on social aspects.

Capital: So, the financing for this project has already been acquired?

Litt: We are talking about the pipeline, so for those two projects, we are currently appraising them , doing a full due diligence with the help of our technical team and sector specialists and when all the studies will be finalized we will prepare what is called an investment proposal that will be submitted to the management committee of the Bank and its board of directors. Then we will be in a position to sign the financing of these projects in the form of a long term loan at concessional rate. Usually it takes 9 to 12 months to get through all these processes. But it will all depend of course on when the studies are available.

Capital: When you invest in these kinds of projects, is it at the recommendation of the Ethiopian government; do they give you lists of areas to focus on?

Litt: They don’t exactly give us directions, of course this is a public project and we lend to the government; the government is the borrower, so it has to be approved by the government. It is more a formal step, but we also receive a financing request which confirms the interest of the government for an EIB financing for a specific project.  We are in regular contact and have weekly discussion with the Ministry of Finance  to discuss with them  potential projects and make sure we provide the right support given the overall economic strategy of the government.

Capital: For the Jobs Compact project, you said 30 percent of the jobs created will go to refugees. Where did that idea come from?

Litt: The project was initiated by DfID, there is a similar project in Jordan. I think that there is a strong desire from the Ethiopian government to better integrate refugees in general. But there are of course several  factors to be taken into account, such as the skill and profile of refugees compared to the needs of investors. It is something that we will see in time. But the idea is that at least 30 thousand refugees should benefit from this project to get the possibility to have a job at the end of the process.

Capital: What about the private sector, what is the Bank’s engagement in that sector?

Litt: For the private sector, we also have quite a few leads. We have two types of instruments; the first is what we call corporate loan, whereby we provide senior debt  of maximum 50 percent of the cost of a project to a corporate that invests in the country.

We are following various projects such as  investment to build malt houses in the country and aluminum cans. We also had contacts with breweries who are looking at extending their operations.

Then we also have project finance instrument which is a loan that we make to an SPV (Special purpose Vehicle), a company that is being set up for a specific purpose, and all the cash flows from the project will be used to pay back the loan. For that instrument, we are also looking at various projects such as the Corbetti geothermal project. For Corbetti the idea is to provide 50 percent of the senior debt necessary for the first 60 or 70 megawatts. The project has been a bit delayed, but we already had a team going on site and starting appraisal, a few years ago. Now the promoter has  signed the power purchase agreement (PPA) and we expect that the project will move forward.

We are also looking at the so-called “scaling solar” projects that are being launched by the World Bank. All this is of course private lending; so we lend to a private company although there is a public private partnership, as the electricity is purchased by the State for the term of the project and based on pre-agreed tariff..

We are also in discussions with OCP, the fertilizer company which is building a plant in Dire Dawa. It is a USD 2.5 billion project for phase one..

We also have  two other interesting projects that we are also appraising at the moment. The first one is called Women Entrepreneurship Development Program (WEDP), which was set up a few years ago by the World Bank and the idea for EIB would be to provide  a concessional loan to the Ethiopian Development Bank which then will on-lend to selected micro finance institutions who will then provide financing to women who have existing businesses and are looking to expand it. Appraisal for that project has already started. The objective will also be for EIB to provide Technical Assistance where needed for example in the form of capacity building or training of some of the stakeholders. So basically this will take the form of a grant alongside our the loan to make the project more robust.

The other project that is a bit similar but  is at a very early stage is in the honey sector. We had preliminary discussions with the Agricultural Transformation Agency who is working on the honey value chain. Ethiopia is the 10th producer but is definitely not the 10th exporter, so there is a big potential there and we are trying to see how we can cooperate for example through the financing of small farmers or beekeepers using a facility that EIB has developed specifically for such beneficiaries, also through microfinance institutions .

Capital: How do you assess the capacities of micro finance institutions in this country?

Litt: The first thing is that our loan for the above projects would be to the Development Bank so the risk that we take in the end is on the Ethiopian government. But of course we want to make sure that our financing go to the micro finance institutions that are sustainable. So, a full due diligence of these institutions will be carried out by our sector specialists.

Capital: What about the startup sector in the country that is growing, do you have interests in financing?

Litt: It is difficult for us to directly invest in startups; it takes a lot of human resources and the potential amount to invest is a bit too small for us, given that we invest about EUR 3bn a year in Africa. We have done it with M-Birr, it is an exception because we found the potential impact of this investment quite unique.

One way for EIB to reach start-ups is to invest in venture capital funds; these funds will then  invest in innovative companies, particularly startups. These are also usually funds that are a bit small in size and have a lot of risks.

This why we have set up a program called Boost Africa with the African Development Bank and the EU. The idea is to de-risk our investment in venture capital funds by using  a so-called First Loss Tranche. Let’s say that we have identified a good venture capital fund in Ethiopia but it is a bit too risky, so the EU would co-invest in the fund, but its investment will be a First Loss Tranche, which means that if the fund does not perform as expected the losses will first be absorbed by this tranche. And then EIB and the other private investors would be senior to this tranche. The idea is really to reduce the level of risk of such projects so that it reaches a level that is acceptable to EIB and to private investors.

Addis International Film Festival now accepting short and feature documentary film submissions

admin
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Initiative Africa announced that the preparation of organizing the 12th Edition of Addis International Film Festival (AIFF) is underway. The 2018 edition of AIFF will take place from May 1 – 6, 2018 at the Italian Cultural Institute and Hager Fiker Theater in Addis Ababa, and the university campuses of Adama, Hawassa, Bahir Dar and Mekele.
Organized by Initiative Africa, this year, the theme of the Festival is ‘Migration, Displacement and Climate Change’ and will be joined by several international film professional guests. Although the scope remains Migration and Displacement, the 2018 Edition will also screen films outside the core theme.
The documentaries, which will be screened this year around the above thematic area, aim to contribute to humanitarian efforts that enhance the protection of migrants, refugees, and internally displaced persons. Through the screening of relevant documentaries on the issues and the convening of discussions among experts and practitioners, the Addis International Film Festival (AIFF) is focused on addressing the key drivers of vulnerability among migrants and displaced persons, and foster a space for citizens to engage in exchange about challenges and dilemmas relating to sustainable humanitarian responses to migration and displacement.
This year AIFF expects to screen over 60 documentary films from around the world to over 7,000 attendees. Festival participants are mostly young professionals, university students, and members of the international community.
This year, AIFF invites young and women filmmakers to vie for two very exciting awards: ‘Young Filmmaker of the Year Award’ and ‘Woman Filmmaker of the Year Award’.
As in the past the 12th Edition of AIFF is accepting short (up to 30 minutes long) and feature (over 50 minutes long) documentary film submissions until March 15, 2018.
Since its inception in 2007, Addis International Film Festival has grown in scope and size from drawing less than 500 people, 9 films and one venue in its first year to over 7,000 attendants, 60 films and three venues last year. Overall, the Festival has screened over 630 films and attracted over 39k participants over the past 11 years.
The Festival expects to draw up to 10,000 attendants to its three venues and screen 70 short and feature local and international documentary films.

Ethiopia: The relentless protests that forced the Prime Minister to resign

Staff Reporter
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The stepping down of Hailemariam Desalegn will not satisfy Ethiopia’s protesters. But it is a start.

Hailemariam Desalegn has announced his resignation as Ethiopia’s Prime Minister and chair of the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF).
According to some analysts, the prime minister since 2012 was expected to step down at the EPRDF congress scheduled for later this year, but today’s move came as a surprise.
Desalegn said he would formally step down once a successor is chosen and claimed his departure was part of the government’s attempts to change how it operates. “I see my resignation as vital in the bid to carry out reforms that would lead to sustainable peace and democracy,” he said in a televised address.
The government has faced a crisis of legitimacy in recent years amidst huge protests across much of the country, particularly by members of the populous Oromo and Amhara ethnic groups. Hundreds of people have been killed in resulting clashes with security forces.
Desalegn’s resignation can be seen as a response to the fact these protests have continued despite brutal crackdowns and gestures of reform. As analyst Mohammed Ademo says: “Make no mistake. This momentous transformation isn’t a favor from a benevolent vanguard party. It’s the cumulative outcome of years of relentless struggle by democracy activists and opposition. Many died fighting to see this day.”
Oromo and Amhara protests
Ademo says Desalegn’s replacement is widely expected to come from the Oromo party in the ruling coalition. Protests in the Oromiya have been particularly sustained and this week saw a concerted three-day strike across the region. Enormous numbers blockaded roads and marches on the streets of towns and cities. An Oromo prime minister would not necessarily mean the regime would change it how it governs, but it would be a symbolic victory for the protests in that region.
However, as speculation grows about what happens next, protests in Ethiopia’s northern Amhara region – although generally lesser covered – should not be forgotten. Just last month, demonstrations flared up in Amhara too, resulting in bloody clashes and several deaths.
These weeklong events were triggered in the town of Woldiya when people taking part in a popular religious festival chanted anti-government slogans. Security forces responded violently, leading to the deaths of at least six civilians and one security agent. Angry at this bloodshed, protests then spread to the nearby cities of Kobo and Mersa where government offices and private property were attacked, leading to millions of dollars of damage. At least eight more people were killed in the resulting crackdown.
Grievances and triggers
These recent anti-government demonstrations are the continuation of those that emerged in late-2015. At that time, members of the Oromo and then Amhara – Ethiopia’s two largest ethnic groups, who together make up about two-thirds of the population – began protesting in huge numbers.
The grievances that triggered those protests were not resolved, but temporarily suppressed through force and the imposition of a state of emergency from October 2016 to August 2017.
The Oromo protests have deep roots and encompass widespread disaffection with the government regarding human rights abuses and lack of freedoms, but they were initially triggered by an urban development plan in the capital. Addis Ababa is located within the Oromiya region and activists complained that the proposed expansion would have seen it swallow up Oromia land and towns.
The Amhara’s reasons for protesting have been similarly manifold. They have demanded greater respect for human rights and democracy. They have called for more economic investment in the Amhara region to create employment and spur development. And they have expressed anger at an unfair political economy that disproportionately benefits supporters of the regime.
However, one of key triggers of the Amhara’s protests has been the disputed territory of Wolqaite. Activists claim that this large agricultural district was annexed by neighbouring Tigray regional state despite the fact its residents largely identify as Amhara, and a committee was established to campaign for its return. The government’s decision in 2016 to detain this group’s leaders using Ethiopia’s notorious anti-terrorism law was one of the main triggers of the widespread protests that followed.
It remains to be seen how many of these protesters demands will, and can, be met by a new EPRDF prime minister.
Infighting in government
As well as on the streets, growing discontent with the ruling class has also manifested in the corridors of power. In office since 1991, the ruling coalition known as the Ethiopian People’s Revolutionary Democratic Front (EPRDF) is composed of four ethno-nationalist parties. This includes the Amhara National Democratic Movement (ANDM), the Oromo Peoples’ Democratic Organisation (OPDO), and the Southern Ethiopian People’s Democratic Movement (SEPDM).
However, by far the most senior and strongest party within the coalition is the Tigrayan People’s Liberation Front (TPLF). Representing an estimated 6% of the population, the TPLF oversaw the formation of the other three parties in government and handpicked their leaders.
Over the years, the TPLF has taken advantage of its dominance to favour its political base. Today, Tigreans dominate key political and economic positions, including in the army, security establishment, key federal ministries, and state-owned corporations such as Ethiopian Airlines and Ethio Telecom.
The government’s junior parties have typically been acquiescent. But with growing pressure from their constituencies, the OPDO, and to a lesser extent ANDM, have become more assertive. They have demandedless interference from the TPLF in their regional affairs and expanded political and economic roles at the federal level. At times, decisions and policy directions provided by federal authorities have been over turned by regional authorities, and vice versa.
Some are now suggesting the new prime minister will be from the OPDO. While this would be symbolically meaningful, it is too early to say how significant it would be in terms of governance. TPLF loyalists would still hold key positions and it is notable that outgoing Desalegn is not from the TPFL either, but the SEPDM. He was chosen by the former PM Meles Zenawi to be his successor and was viewed by many as a puppet of the TPLF.
Ethiopia after Desalegn
Years of unaccountability, the collapse of rule of law, and the ethnicisation of the country’s politics have pushed Ethiopia to tipping point. Injustice, repression and lack of democracy have instilled a sense of despondency, particularly among Ethiopia’s youth. This has driven many to view protests as the only viable means of bringing about meaningful political change.
As these sustained mobilisations have continued, the government has been forced to offer ever greater signs that it is willing to reform, most notably through Desalegn’s resignation as well as the recent release hundreds of political prisoners. But unless this leads to real steps to institute rule of law, redefine the political economy, and promote a fairer distribution of resources, discontent will only be staved off momentarily.
Protesters in Oromiya, Amhara and beyond may see the PM’s resignation as a victory, but they will crucially be watching closely for what happens next.

Gonje de Wadla is an assistant professor of public administration based in Ethiopia.

Putinomics-101

Alazar Kebede
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In late 2014, a headline “Putin Watches Russian Economy Collapse Along with His Stature,” blared in Time magazine. Yet three years have passed since the price of oil crashed in 2014, halving the value of the commodity that once funded half of Russia’s government budget. That same year, the Western countries imposed harsh economic sanctions on Russia’s banks, energy firms, and defense sector, cutting off Russia’s largest firms from international capital markets and high-tech oil drilling gear. Many analysts, both in Russia as well as abroad, thought that economic crisis might threaten President Vladimir Putin’s hold on power.
Today, IMF and World Bank report revealed that Russia’s economy has stabilised, inflation is at historic lows, the budget is nearly balanced, and President Putin is coasting toward reelection on 18 March 2018, positioning him for a fourth term as president of Russia. Russian media highlighted that fact that President Putin has recently overtaken Soviet leader Leonid Brezhnev as the longest-serving Russian leader since Joseph Stalin. They also reported that economic stability has underwritten an approval rating of President Putin that hovers around 80 percent. Chris Miller, noted Russian expert, stated that “Putinomics” made it possible for Russia’s president to survive repeated financial and political shocks. Here, the most important question is, how did he do it?
Chris Miller noted that Russia survived the twin challenges of the oil price crash and Western sanctions thanks to a three-pronged economic strategy. First, it focused on macroeconomic stability, keeping debt levels and inflation low above all else. Second, it prevented popular discontent by guaranteeing low unemployment and steady pensions, even at the expense of higher wages or economic growth. Third, it let the private sector improve efficiency, but only where it did not conflict with political goals. This strategy will not make Russia rich, but it has kept the country stable and kept the ruling elite in power.
That said, the other question worth mentioning is that, does President Putin really have an economic strategy? According to Chris Miller, a common explanation of President Putin’s longevity is that he survives because Russia’s oil revenues keeps the country afloat. A number of economic analysts adamantly argued that Russia’s economy is known more for corruption than for capable economic management. But the Russian government could have adopted different economic policies and some of the alternatives would have made it harder for President Putin to sustain his hold on power. They might also have left Russians worse off. Consider what Russia looked like in 1999 when Vladimir Putin first became President: a middle-income country in which oil rents constituted a sizeable share of GDP. A country led by a young lieutenant colonel KGB officer committed to using the security services to bolster his power. A president who claimed the mantle of democratic legitimacy in part based on his ability to force big business and oligarchs to follow his rules, whether by fair or foul means.
A Russian economist, Anatoly Gregor explained that this could well describe Chavista Venezuela, still governed by an autocratic regime, still dependent on declining oil revenues, and still failing to build an economy based on rules rather than political whim. The difference is that Venezuela’s Chavistas spent recklessly during the oil boom while presiding over a mismanagement-induced collapse in oil production and, now, painful shortages of consumer goods created by poorly conceived price controls. According to World Bank estimates, Venezuela was wealthier on a per person basis than Russia in 1999. No longer now.
Willie Buster of Leeds University stated that the Russian government’s skill in mustering and distributing resources explains why the Russian elite has maintained power for nearly two decades and how it has deployed power abroad with some success. According to Willie Buster, many oil-fueled dictatorships squander their oil revenues on luxury goods like Ferraris and Fendi handbags. Russia’s ostentatious oligarchs have certainly accumulated their share of British football teams and hundred-million-dollar yachts armed with missile defense systems. But unlike its own spendthrift 1990s, Russia during the 2000s saved hundreds of billions of dollars during the good years, stowing resources in reserve funds for use when oil prices fell.
President Putin’s aim in economic policy has not been to maximize GDP or household incomes. Such a goal would have required a very different set of policies. But for President Putin’s objectives of retaining power at home and retaining the flexibility to deploy it abroad, the three-pronged strategy of Putinomics, macroeconomic stability, labor market stability, and limiting state control to strategically important sectors, has worked.
To understand Putinomics much better, let’s start with macroeconomic stability. Alexander Potonin of Warsaw University stated that Russia is a relatively rare kleptocracy that gets high marks from the IMF for its economic management. Why? Since the beginning of Vladimir Putin’s time in office, he and the Russian elite more generally have prioritized paying down debt, keeping deficits low, and limiting inflation. According to Alexander Potonin, having lived through devastating economic crashes in 1991 and 1998, Russia’s leaders know that budget crises and debt defaults can destroy a president’s popularity and even topple a regime, as Boris Yeltsin and Mikhail Gorbachev both discovered.
Willie Buster explained that when Vladimir Putin first took power, he devoted much of Russia’s oil earnings to paying back the country’s foreign debt ahead of schedule. In the current crisis, Russia has slashed spending on social services to ensure that the budget remains close to balance. In 2014, oil and gas earnings constituted around half of Russia’s government budget. Today, it is widely reported that oil trades at half the 2014 level, but thanks to harsh budget cuts, Russia’s deficit is around one percent of GDP which is far lower than in most Western countries. To ensure macroeconomic stability, President Putin has implemented a harsh austerity program since 2014, but there have been few complaints.
The second prong of President Putin’s economic strategy has been to guarantee jobs and pensions, even at the expense of wages and efficiency. During the economic shock of the 1990s, Russian wages and government pensions often went unpaid, causing protests and a collapse in President Boris Yeltsin’s popularity. When the recent crisis hit, therefore, the Kremlin opted for a strategy of wage cuts rather than allowing unemployment to rise.
The third prong of Putinomics is to let private firms operate freely only where they do not compromise the President Putin’s political strategy. The large role that oligarch-dominated state-owned firms play in certain key sectors is justified in part by their willingness to support President Putin in managing the populace by keeping unemployment low, media outlets docile, and political opposition marginalized. Alexander Potonin noted that the energy industry, for example, is crucial to the government’s finances, so private firms have either been expropriated or wholly subordinated to the state.

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