Ethiopia: The case for partial privatization of Ethio Telecom
Ethio telecom is not a ‘cash cow’ as has often been claimed. It is an indebted malfunctioning liability holding back Ethiopia’s economy.
This article is republished as part of our partnership with Ethiopia Insight
Last December, Prime Minister Abiy Ahmed launched a “homegrown” economic reform blueprint to further the ambitious initiative of making Ethiopia a middle-income country by 2025 and an “African Icon of Prosperity” by 2030.
The initiative, under the guidance of his hybrid Medemer philosophy, aims to overcome the structural and institutional hurdles facing Ethiopia through macroeconomic, structural, and sectoral reforms. The “homegrown” design of the program is a shrewd move by the administration to disentangle itself from ideological attachments.
As with recent previous government economic blueprints, the Homegrown Economic Reform program was developed to accommodate both the opportunities of the free market and the role of the state to address the country’s economic challenges—although with a tilt towards the non-state sector.
It envisages boosting the private sector’s contribution to the overall economy by opening up major public enterprises (Ethiopian Airlines, Ethio telecom, Ethiopian Electric Power Corporation, and Ethiopian Shipping & Logistics Services Enterprises) to private and foreign investment.
Ethio telecom is the first major enterprise to be put on the table and the process is now in its final stages.
The Communication Service Proclamation No. 1148/2019 has been passed into law, and the Ethiopian Communication Agency (ECA) established with the aim of achieving “the government policy of restructuring the telecommunications market and introducing competition.”
The law, which introduces an entirely new regulatory framework allowing the ECA to lead the partial privatization process, starting with an initial Stakeholder Consultation, is a milestone in terms of the institutional arrangements needed to manage the privatization process and ensure transparency and consistency.
The COVID-19 pandemic has underlined the importance of telecommunication services as a backbone for the global economy as well as a lifeline for many in healthcare delivery. More than ever, Ethiopia needs high-functioning and high-quality telecommunication services to fuel its rapid economic growth and support its broader political, social, and economic reform agendas.
There is no doubt a competitive telecommunication industry can offer comprehensive benefits, and a recent Ministry of Finance press release summarized reasons for the partial privatization of Ethio telecom:
“Partial privatization of Ethio telecom [will] contribute to attracting foreign investment, support the country’s effort to improve ease of doing business and its wider economic reform agenda. Furthermore, it will generate revenues through license fees, taxes, and dividends that will contribute to overall economic restructuring.”
Concerns have, however, been raised, some more grounded than others.
Telecommunication services are not a one-sector issue; they are central to the whole economy and society and must be a national priority. Ethiopia is one of the last countries to have a monopoly national telecommunications operator. Most other nations, including neighboring African countries such as Kenya, Egypt, Sudan, have privatized the sector long ago, and enjoy excellent services that make substantial contributions to their GDPs.
Meanwhile, Ethiopia is falling behind. According to the UN International Telecommunication Union’s 2017 ICT Development Index (IDI), Ethiopia’s service is ranked 170 in the world out of 176 countries.
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With over 45 million mobile subscribers Ethiopia’s telecommunication services penetration (mobile (65 percent), internet (15 percent), and fixed broadband (0.6 percent) compares badly with countries with relative population sizes like Egypt (106 percent, 48 percent, and 5.2 percent) and Nigeria (84 percent, 51 percent, 0.01 percent) respectively.
Ethio telecom recently cut prices but they are still above an affordable threshold (Broadband Commission for Sustainable Development). The Alliance for Affordable Internet (A4AI) 2019 Africa report placed Ethiopia at 60 out of 61 countries. Ethiopia may have upgraded the telecom sector over the last two decades, but it remains ineffective and substandard.
Cash cow, sacred cow
There is a myth—and it is a myth—that Ethio telecom is a cash cow providing positive annual revenue.
In fact, earnings should be set against servicing of the $3.1 billion strategic credit loan from the Export-Import (EXIM) Bank of China and China Development Bank to upgrade Ethio Telecom’s operations, even though services have remained terrible.
The loan was provided in two phases (1.5 billion in 2006 and the remainder in 2013). While the full terms of the loan have not been disclosed, research shows that the first $1.5 billion come with interest rate of LIBOR-plus 150 basis points and the repayment period is 13 years. That implies repayment costs of more than $4 billion.
Furthermore, the loan creates total dependence on Chinese equipment suppliers, expertise, and resources, with no transfer of technology and knowledge. Details of repayments have never been disclosed, but in addition to annual interest and principal commitments, there are also fees, depreciation for outdated equipment, amortization for software, and international license costs.
Overall, Ethio telecom’s annual Free Cash Flow (FCF), the relevant accounting figure for profit, is probably low and is likely to be a source of national indebtedness with no significant contribution to the national economy. That is the opposite of a ‘cash cow’.
Another supposed issue is the national sovereignty risk, but this is a false alarm and indeed the reverse of reality.
Ethio telecom’s critical infrastructures are currently the preserve of Chinese companies, ZTE and Huawei, but the protection of Ethio telecom as a strategic asset cannot be provided solely by maintaining a state monopoly on telecom services. Instead needs a national strategy for the physical protection of critical infrastructures and critical software components along with guiding principles to underpin efforts to secure the elements vital to Ethiopia’s public health and safety, national security, governance, economy, and public confidence.
In fact, the ECA proclamation has set some rules (e.g. Art. 21 subs (3)) to govern the actions of foreign and public investors under its jurisdiction. Partial privatization of the telecom services, allowing private investors and the public to participate in a competitive market, will now help safeguard national security.
As it happens, the single greatest threat to Ethiopian national security, in fact, is debt.
As of May 2020 Ethiopia’s external debt stock total was around $28 billion. The extent of the government’s dependence on foreign debt allows creditors, including international institutions, to influence and exercise control over not only policy but also economic performance. For instance, to get an International Monetary Fund loan, countries must submit a “Letter of Intent” in which they are required, arguably contrary to national sovereignty, to mention their national economic priorities, reserves, and public expenditure, including defense budgets.
Surprisingly enough, the Abiy administration does not seem particularly bothered about it. In a piece of recent news published on Politico, the Prime Minister is quoted saying: “There are some that say we are adding more debt to the country’s already high debt. But borrowing from the IMF and the World Bank is like borrowing from one’s mother.”
This tendency towards loan dependency is misguided. It is naïve to think that international creditors are generous or altruistic.
The global order works on the principle of quid pro quo; nobody provides loans out of benevolence. Ethiopia has become increasingly dependent on Chinese investment, extending from the telecommunication sector to manufacturing, owing more than $12 billion, including the $3.1 billion supplier-loan to Ethio telecom. The size of this raises concerns over the dangers of what some scholars refer to as ‘debt-trap diplomacy.’
In 2018, for example, when Sri Lanka was unable to repay a loan for a Chinese-built port, the Chinese shipping company took a 99-year lease on the facility. In Myanmar, China has proposed to turn the disbursed investment on the suspended Myitsone dam, which the Burmese government cannot afford to repay, into equities on the dam.
Given Ethiopia’s indebtedness to China, there may well be a risk to long-term national sovereignty.
Matters of real concern
The establishment of ECA and promulgation of the proclamation may be necessary preconditions for privatization—but they are not sufficient.
There is a genuine concern among Ethiopians about the transparency and accountability of the privatization process. It is essential to engage the public (academics, political parties, development partners and other concerned stakeholders) concerning valuations, bidding processes, and selection and procurement criteria.
Selection of transaction advisors and asset valuators, and indeed the whole process has, hitherto, remains opaque. The World Bank is the primary financier of the privatization process, and at the same time, the International Finance Corporation, the private lending organ of the World Bank, is a transaction advisor. This raises a question of imbalance.
The recent ECA call for submission for stakeholder consultation on directives and regulations related to the transaction is a step in the right direction, but public trust and understanding are essential to the success of the process and its future prospects.
Timing is another concern.
Some commentators have raised fears that the valuation of Ethio telecom may be affected by the course of the COVID-19 pandemic and its economic impact. This is a genuine danger, but, as the telecommunication sector is the lifeblood of the COVID-19 world, it is likely that investors will see it as an area with minimal risk and continued potential. From the government’s point of view, it is crucial to get funding through privatization, which offers lower risks than loans.
The ECA call for Expression of Interest, which lasted for a month closed on 22 June.
According to a press release, ECA received 12 submissions, of which 9 telecom operators ([consortium of Vodafone, Vodacom, and Safaricom], Etisalat, Axian, MTN, Orange, Saudi Telecom Company, Telkom SA, Liquid Telecom, Snail Mobile); 2 non-telecom operators ( Kandu Global Telecommunications and Electromecha International Projects); and one incomplete submission.
The expressions of interest of prospective bidders at short notice shows the unwavering interest, and at least minimizes timing concerns.
Partial privatization of Ethio telecom will bring substantial opportunities for Ethiopia if supported by appropriate processes and public trust. As documented in 177 countries, a competitive telecoms market has multidimensional benefits: it brings local entrepreneurs into the economy, allows technology and knowledge to be transferred quickly, improves efficiency, slows, and even halts government dependence on foreign loans, promotes access to capital, and expands the government tax base.
The government decision to proceed with the partial privatization of Ethio telecom is therefore correct and timely.
A competitive telecommunications industry will serve as a significant catalyst in reducing the state’s role in the economy by bringing in public and private owners to support ongoing economic reforms; raising investment capital for telecom services; increasing the efficiency of Ethio telecom by exposing it to greater competition and market discipline; raising revenue for the government; reducing government subsidies; and attracting foreign investment.
It should also help protect national security interests by reducing debt exposure and reliance on Chinese infrastructure.
It is, indeed, the sole justifiable way forward.