Ethiopia opens up budding logistics sector

In January, it emerged that Ethiopian exports had once again disappointed, undershooting the government’s six-month target of $1.96bn by nearly 40%. It was a sobering reminder that, for all Ethiopia’s rapid, state-led growth over the past decade, exports have consistently shown few signs of improvement.

“Logistics is the number-one bugbear for anyone in exports and manufacturing,” says Graham Parrott, head of strategy at Ethiopia Investments Limited, which invests in local businesses. His words are echoed by many exporters, who say this challenge is rivalled only by the shortage of foreign exchange.

The figures are telling. To trans­port a 20ft container of garments from Ethiopia to Germany costs 247% more than from Vietnam and 72% more than from Bangladesh. In 2016, Ethiopia scored 2.37 in the World Bank’s Logistics Performance Index – significantly lower than neighbouring Uganda, which is also landlocked. The country ranked 159th out of 190 in the World Bank’s Doing Business index in 2018; Uganda came 127th.

In key export sectors, such as textiles, speed is essential to competitiveness. Slow and expensive imports, meanwhile, are bad for all businesses. According to Daniel Zemichael, chief executive of Freighters International, a local logistics company, goods take an average of 20-30 days to reach an Ethiopian customer from the port in neighbouring Djibouti. A 20ft container costs an average of $2,660 to import from its source to Ethiopia. “This is probably one of the most expensive corridors in the world,” says Serge Tiran of Massida Group, another logistics firm.

Mojo rising

The government has made improving logistics a priority. A $2.5bn, 750km railway connecting Addis Ababa with the port in Djibouti launched last year and should cut a three-day journey down to 12 hours. In an ambitious road-building programme flagship projects include a 200km expressway connecting Hawassa, home to the country’s largest industrial park, with the capital.

A $2.5bn, 750km railway connecting Addis Ababa with the port in Djibouti should cut a three-day journey down to 12 hours

Two years ago, the government signed a $150m World Bank project to transform Mojo, a poorly equipped and heavily congested dry port near Addis Ababa that processes more than 70% of imported containers, into a state-of-the-art logistics facility. Meanwhile, Addis is helping a Dutch consortium, Flying Swans, to set up a cold chain along the railway to the coast.

With the appointment of Prime Minister Abiy Ahmed last April, logistics reform shifted up a gear. The new administration’s roadmap, ‘Ethiopia: a New Horizon of Hope’, states that it aims to cut import and export transit times in half by 2020 and reduce the average length of time imported goods spend in dry ports to only two days. It also plans to increase to 90% the coverage of general cargo carried by ‘multi-modal’ transport – the theoretically more efficient system currently monopolised by the state-owned Ethiopian Shipping & Logistics Services Enterprise (ESLSE).

Abiy has also accelerated the sector’s liberalisation. In September last year, his administration announced logistics would be opened up to foreign investors for the first time, in the form of joint ventures with local firms. A bill authorising this is expected soon. Abiy’s government wants to attract at least $120m of foreign direct investment into the sector by 2021. Meanwhile, ESLSE is to be part-­privatised, and the state railway company, the Ethiopian Railway Corporation, restructured then fully privatised. “They’re really hearing us – this is a first,” says Teodros Abraham, chief executive of CLS Logistics Services and ­vice-­president of the Ethiopian Freight Forwarders & Shipping Agents Association.

ESLSE’s monopoly

Reform will need to address several bottlenecks. One is ESLSE itself, which was formed in 2012 as a merger between three state-owned entities with poor track records. The goal was to rationalise and streamline the sector, but despite posting substantial profits – $111m in 2016-2017 – ESLSE has been plagued with inefficiencies.

According to a study of horticulture firms by Arkebe Oqubay, special adviser to Abiy, two-thirds of companies said ESLSE services were poor. Firms complain in particular about its monopoly of imports by sea. Manufacturers and exporters regularly experience delayed deliveries, as ESLSE has only a limited number of vessels capable of calling at all ports of origin. Some studies have indicated that ESLSE’s monopoly may increase shipping costs by 30-50%. Many Ethiopian companies simply establish sister companies in Djibouti in order to avoid using it.

Yared Sertse, general manager of Shayashone, a local consultancy and manufacturer, says that in Jakarta, from where he imports water filters, ESLSE only has an agent. The agent sends the cargo onwards to Singapore, where it is collected by ESLSE and transported to Djibouti. He is prevented from using an international shipping line like Maersk, which can ship direct from Jakarta. “It’s like one week versus four weeks,” he says.

56% of customers were dissatified with ESLSE’s overall delivery performance in a 2015 study on the multimodal system in Ethiopia

A related problem is the multi-modal transport system introduced in 2012. The system – which enables both sea and land legs of a journey to be carried out under a single contract – has been effective in many countries. However in Ethiopia, where only ESLSE is licensed to do it, there have been significant teething problems. Containers have sometimes proved impossible to trace and shipments often took longer than under the previous system.

Red tape

Bureaucracy also needs to be streamlined. A World Bank report in 2016 said that customs clearance required up to 103 procedures and about 21 documents. Shayashone’s Yared says he had a container of water filters stuck in Mojo dry port for three months last year, costing him $2,500 in fees. “I bought all the documents, and they still couldn’t decide,” he recalls.

The government’s goal over the next couple of years is to launch a customs single window service and to computerise the whole system. “The reforms seem promising, but not yet tangible,” says Yared. “There is a sound vision at the top, but the civil servant mentality is still a controlling mentality.”

There are also doubts around the liberalisation agenda. The joint-venture model – which caps foreign ownership at 49% – may not be attractive to large multinationals. There are many private logistics firms in Ethiopia, but most are small, with only one or two clients.

Privatisation of the railway, which has been beset with problems, might also prove problematic. Only a small number of big companies are currently using it for exports, in part because the line does not yet reach the dock in Djibouti and there are no trunk lines to industrial zones, dry ports and depots. Moreover, rail rates are not yet competitive with trucks. Towards the end of 2018, China extended the debt repayment period for the railway from 10 to 30 years – possibly because Ethiopia had failed to start paying back the loans. Completion of another line connecting to the northern city of Mekele has stalled because China’s Exim Bank is wary of financing it.

Perhaps the biggest bottleneck of all is the port of Djibouti [see box]. It is small and congested, especially when the Ethiopian government procures bulk imports like wheat, sugar and fertiliser. Freighters International’s Daniel says it is around 70% more expensive than other ports in the region. Gizeshwork Tessema of Gize PLC, another local firm, puts it bluntly: “It’s the most difficult part of the supply chain.”

Ports of possibility

High-tempo port diplomacy characterised the early days of Abiy Ahmed’s premiership last year. All Ethiopia’s seaboard neighbours received entreaties, starting with Djibouti in May. An agreement struck between Abiy and his Djiboutian counterpart, Ismaïl Omar Guelleh, promised joint development of the latter’s maritime facilities: Ethiopia will take a stake in the port of Djibouti while Djibouti will have the option of taking stakes in state-owned Ethiopian firms. The following month Ethiopia announced plans with Somalia to invest jointly in four sea ports. Trips to Sudan and Kenya were followed by similar announcements, while a deal with the Emirati state-owned port operator DP World and the government of Somaliland made Ethiopia a minority shareholder in Berbera port.

A bigger game-changer was the rapprochement with Eritrea in July. The deal struck between Abiy and President Isaias Afwerki included restoring Ethiopian access to the ports of Massawa and Assab. In September, an Ethiopian vessel docked at Massawa for the first time in 20 years, though it is Assab – only 887km from Addis Ababa and close to large potash deposits in northern Ethiopia – that will be most important to the Ethiopian economy. “Our natural gateway has always been Assab,” says Teodros Abraham of Ethiopia’s CLS Logistics Services.

Yet neither is currently fit for purpose. Saudi Arabia and the United Arab Emirates, which both played a role in the diplomatic thaw, are said to have promised funding to refurbish them, and the World Bank will likely chip in. But it will take at least two years to get Assab ready for Ethiopian shipments, including installing a yard capable of receiving containerised cargo. As it stands, Assab is suitable only for the Emirati military vessels that have been using it as a base since 2015. “Yes, Assab is an option – but not now,” says Serge Tiran of logistics firm Massida Group. “Nothing is ready.”

In the long-term, diversification will be good for Ethiopia. Competition should bring down prices in Djibouti. The prospect of rivals already seems to have jolted the country into action: after years of Ethiopian badgering, port working hours now include a full day on Thursday. More importantly, new ports mean Ethiopia will have other options if Djibouti runs into trouble. “An economy like Ethiopia cannot be dependent on one corridor,” says Teodros.