The partnership that will shape Ethiopia’s future

Ethiopia is currently experiencing a moment of change. Its economy has seen real expansion through many years of state investment in major infrastructure projects including dams, railways, and industrial parks; but it has developed a large amount of debt, has significant inefficiencies, and relies on foreign assistance for a large part of its economy. 

The period of rapid economic growth that followed serious public investment in major infrastructure projects has ended and the country is transitioning to the new phase of the economic plan. There will be no more experimentation with public-private partnerships and they will now be an integral part of the country’s economic strategy.

It has already been decided that the government of Ethiopia will pursue public-private partnerships(PPP), but the key area on which to evaluate the success of this decision will be whether or not Ethiopia has sufficient institutional capacity; a sufficiently mature private sector; and sufficient political will to implement a successful program.

Why Ethiopia turned to Public-Private Partnerships

Ethiopia has turned to public private partnerships (PPP) due to severe financial constraints that threaten the country’s market economy; as such it is moving away from its ideological base. Fiscal constraints on Ethiopia include high levels of government debt, inflation and low levels of tax revenues. A recent audit conducted by the Office of the Federal Auditor General identified over 17 billion birr in total cost of mismanaged road construction and university construction projects, in addition to another estimated 20 billion US dollars needed for recovery and reconstruction over the next five years.

According to investment analysis “PPP is still a work in progress. We all understand the challenges. However, there are no viable alternatives that can sustain additional public sector borrowing.”

The developmental state has reached its limits from debt-financed investment. The private sector will now be required to support a greater portion of Ethiopia’s economy not because the government has abandoned its mission of developing its country, but because it has reached its maximum potential along that path.

The legal architecture — and where it falls short

Under Proclamation No. 1076/2018, Ethiopia has established a PPP Board that is headed by the Minister of Finance and a PPP Directorate-General that serves as the Board’s Secretariat. The sectors covered by the framework are energy, transport, telecoms, healthcare, education, and digital infrastructure. Ethiopian Investment Holding, with $47 – 48 billion in assets under management, will take minority interests in conjunction with private sector investors in key areas.

The structure looks good on paper. The reality on the ground lacks the critical element of capacity, credibility, and confidence. Investors require guarantees for profits repatriation, bankable tariff rates, enforceable contracts – these elements are not consistently in place. The PPP Unit within the Ministry of Finance operates without being adequately coordinated with the Ministry of Planning. Line ministries develop projects independently of each other and they do so, completely bypassing any involvement from central agencies. In most cases, when evaluating a project, investors do not fund framework processes; rather they fund projects with definitive authority, predictable cash flow and strong capable government institutional counterpart that can perform.

The projects showing PPP can work

Recurring projects tend to happen because of the success of preceding ones. For example, the Gad and Dicheto solar projects located in the Somali and Afar regional states were both procured using a public-private partnership (PPP) model. This is how PPP’s are meant to be operated — the use of private sector efficiency to deliver public goods in areas in which the government does not have the means or capability to provide timely, cost-effective services.

A great example of this style of partnership is the Addis Ababa–Adama Expressway project, whereby the public and private sectors both share the risks associated with the project, and toll revenue is used to establish a transparent, predictable revenue stream to fund the project. All future roads, railways, and transit projects built in Ethiopia should hopefully be constructed under similar circumstances.

The sectors that will define Ethiopia’s future

The focus of any government should be on energy and electrification due to their importance to all sectors (manufacturing, digital growth, health services, and education) which rely on universal electrification for their productivity and growth.

The most significant area for development and the least served by private businesses in Ethiopia is the agricultural sector. The World Bank predicts that, with enough private support, Ethiopia is likely to transition from being a net importer of food products to producing surplus food product above and beyond domestic needs (i.e., 20–25% surplus). The public/private partnerships required would include investment in cold chain infrastructure, investment in processing infrastructure, and investment in rural financial services to connect each of these smallholder produced food products to the commercial marketplace.  

The health sector is still a vastly under-developed frontier in Ethiopia and represents one of the missing links between achieving full coverage of health services throughout Ethiopia to all 130 million citizens with minimal or no increase in government health spending. Significant private investment is needed for private hospitals, diagnostic laboratories, and supply chain facilities for pharmaceuticals to allow for the widest access of services to all Ethiopians.  

By improving digital infrastructure (broadband access), farmers would have access to real-time market information, students would have access to global knowledge and businesses would be able to compete on the international market. The premise is simple; the government has ownership of spectrum and regulatory permission to operate in the market; therefore, it is the job of the private sector to bring capital, technology and operating skills to the market.

The five tests that will decide Ethiopia’s PPP future

The legal framework to support institutional capability is in place, but there is an urgent need to develop project preparation capability, such as bankable feasibility studies, credible risk management frameworks, and enforceable contracts.

Investors remain concerned by ongoing foreign exchange restrictions that impede investment, so reasonable confidence will never be achieved from IMF engagement and debt rescheduling without visible evidence of improvement.

Renegotiation of commercial contracts has been a common occurrence throughout Ethiopia’s history and signals to investors that commercial contracts are conditional. The commercial rule of law is the central pillar on which the entire public-private partnership business model relies.

The domestic private sector is not capable of supporting one billion dollar deals; therefore, strategies such as joint ventures, technology transfer, and local procurement should be utilized intentionally to build their capacity.

There is a tension between an overly controlling government and a private sector that prefers to exercise autonomy that has yet to be resolved. To be successful, the framework should be secured in a way that is deep within the institutions of the country so that it can survive times of change in its leadership.

Beyond financing: Redefining the relationship between state and market

A true PPP (Public-Private Partnership) model creates a different fundamental relationship between a state and a citizen. When the state partners with an investor or entrepreneur, they are saying collectively to both the investor and entrepreneur: We trust that you can deliver public goods in partnership with us for mutual benefit, and subject to the terms of accountability agreed upon before entering into partnership.

At a recent investment forum in Ethiopia, the head of the Ethiopian Investment Holding Company challenged private sector participation directly: The government provides capital, land, and regulatory support; however, investors have to provide at least half of the solution. This is the right approach. A PPP works when both parties provide something that neither party could provide alone. A PPP fails when either party tries to take control of the arrangement.

Ethiopia has an abundance of renewable energy resources available. With its prime geographic location, youthful population, and numerous members of its diaspora interested in investing into the country, now is the time to develop an adequate institutional framework in order to transform these resources into collaborative agreements with partners to bring electricity to rural communities, develop roads connecting rural communities to markets, provide healthcare to rural areas, and create employment opportunities for young people who can’t afford to wait for jobs.

A partnership agreement between the government and private sector is more than just a financing vehicle; it is a contract between what the country is now and what it has determined to become in the future.