Privatisation in Ethiopia

This briefing has been published by Deborah Haddis of Mesfin Tafesse & Associates, Ethiopia, who has agreed to Simmons & Simmons making it available to elexica subscribers.

This article covers the early initiatives that the current government had taken after it came to power in May, 1991 privatisation of state owned enterprises. Over the course of almost two decades, the government has managed to transfer several state owned enterprises from the public domain to private entrepreneurs including foreign investors. The privatisation process is still on-going and there are expressions of interest from various corners to acquire some of the enterprises that have not been transferred. In several occasions, we had advised a number of clients on the process and issues arising from the transfer. This update sets forth the landscape in terms of norms and institutions that make the fabric of the privatisation process. To conclude, we will highlight the accomplishments of the privatisation process.

Privatisation is a way of transfer, through sale, of an enterprise or its units or assets or government share holdings in a share company to private ownership. In line with the free market economic policy proclaimed by the then Transitional Government, the privatisation process in Ethiopia was initiated in 1994 through the establishment of the Ethiopian Privatisation Authority (EPA) by Proclamation N0. 87/1994. In 1998, further amendment was made through Proclamation N0.146/1998 (as amended) that allowed the EPA to have more mandate and responsibility, among other things, to exercise post privatisation monitoring activities. It then became necessary to merge the EPA and the Public Enterprises Supervising Authority with a view to coordinating the implementation of the privatisation program with the activities of public enterprises. Therefore, Privatisation and Public Enterprises Supervising Authority (the PPESA/Authority) has been established by Proclamation No.412/2004 (as amended). However, Proclamation No. 146/1998 has only been partially amended and its provisions with regards to privatisation remain intact. PPESA, among other duties, had been responsible for leading the privatisation process of public enterprises until the coming into force of the Definition of Powers and Duties of the Executive Organs of the Federal Democratic Republic of Ethiopia Proclamation No. 916/2015. Hence, as per the provisions of Proclamation No. 916/2015 the powers and duties given to a Supervising Authority of Public Enterprises by Proclamation No. 25/1992, with respect to public enterprises and shares to be privatised and the powers and duties given to the Privatisation Board by Proclamation No.412/2004 are transferred to the newly established Ministry of Public Enterprises (the Ministry). Furthermore, Proclamation No.412/2004 has been repealed with the exception of its provisions on Industry Development Fund. Therefore, the discussion in the following section will be mainly focused on the functions of the PPESA due to the fact that the Ministry has just recently been established and most of the work in regards to privatisation has been done by the PPESA.

The PPESA might adopt various appropriate modalities of privatisation. However any modality selected has to be approved by the Privatisation Board. The main privatisation modality used by the PPESA is asset sale method through competitive bidding. Accordingly, the majority of small retail trade outlets, small hotels, restaurants, manufacturing and mining enterprises are privatised via auction through competitive tender method. Although asset sale through competitive tender is the principal method, employee and Management Buy Outs and restitutions to former owners represent a significant proportion of transactions.

The Ministry

Objectives

The stated objective of the Ministry is generating revenue to finance the development activities of the country as well as promoting the country’s economic development through encouraging the expansion of the private sector. It strives to implement the privatisation program in a transparent and efficient manner in accordance with the privatisation of public enterprises legislation. The Ministry also has the mission to change the role and participation of government in the economy to enable it to exert more effort on activities requiring its attention. It supports public enterprises in attaining higher level of capacity utilisation and the employment of better management systems and technology, and thereby improves their performance and maximises their achievements. Furthermore, it has the objective of assisting in the establishment of new enterprises in sectors where private investors could not participate for various reasons and which will be bottlenecks for the overall economic development. The Ministry supervises the management of public enterprises and it protects the ownership rights of the state in public enterprises and share companies.

Tasks

Among the various tasks of the Ministry is the implementation of the privatisation programme in accordance with the provisions of the relevant proclamation. This includes determining the privatisation sequence or defining a plan for all enterprises included in the privatisation programme. The execution of its plan starts with undertaking the necessary preparatory work for the privatisation of enterprises which includes determining the bid evaluation criteria for the selection of investors participating in privatisation, and preparation of the necessary documents to be used in the privatisation process.

Furthermore, the Ministry is empowered to design ways and means of encouraging domestic investors to participate in the privatisation of enterprises. Finally, the Ministry will take the necessary measures to publicise the privatisation programme and its implementation. Interested bidders are expected to submit applications for the enterprise they wish to bid for.

After a certain asset has been privatised, the tasks of the Ministry still extend to post-privatisation monitoring, ensuring compliance of investor’s obligations, and undertaking impact assessment of the privatisation process in general. In addition to these tasks the Ministry is responsible to carry out other activities necessary for the fulfilment of its objectives.

The privatisation process

The privatisation process consists of undertaking the preparation of state owned enterprises for privatisation (pre privatisation process), privatising enterprises (implementation) and monitoring (post privatisation). This includes assessing the impact of privatisation on the economy (post privatisation). In the courses of carrying out these tasks, the privatisation process involves the following activities:

• due diligence
• valuation and auditing
• transforming the public enterprises in to share company
• preparing information memoranda
• the bidding process, and 
• transfer of enterprise

Due diligence - the first step of the process pertains to report production that diligently identify and address problems and constraints related to the privatisation of an enterprise. This is the stage where problems should be identified and recommendations should be made to rectify the problem.

Valuation and auditing - the second step involves valuation and auditing. This involves asset valuation, financial audit, financial restructuring and business valuation. The asset valuation is related to the fixed assets like buildings, process plants, and machinery, vehicles, office furniture and equipment. The valuation is based on market-based values. The financial audit, on the other hand, is done to get a true and fair view of the state of the financial position of the enterprise at a given point in time. The process is done according to international accounting standards. Ideally the market should set the price of the public enterprises. However, for many practical reasons, this is not feasible, and actual asset evaluation is necessary, often used as auction base price. Fixed asset valuation of buildings, processing plant and machinery vehicles and equipment, etc. is done to reflect market-based prices. In connection with this, a financial audit is also done to clearly indicate the financial positions of the enterprise - very vital information for potential buyers. This step also includes financial restructuring and business evaluation processes. Debt rescheduling, different forms of write-off and measures that ensure the viability of the proposed share company are activities in the restructuring process. Business valuation on the other hand takes into account the performance of the enterprise over time, financial strength, market conditions etc., in addition to asset and liabilities of the enterprise.

Transformation to share company - the third step pertains to actual transfer of the enterprise into a new share company. One of the benefits of transferring the enterprise into Share Company is to allow domestic investors to have access to involve in the privatisation process by pooling their resources together, which otherwise is difficult to finance big purchases individually.

Preparation of information memoranda - this step involves preparation of an information memorandum document. This document includes the historical profile of the company eg performances, principal activities, markets, customers, competitors, sales outlets, suppliers, production processed, fixed assets, human resources, etc. The document also provides investors with the necessary information regarding the enterprise and basic information about the whole economy of the nation. These documents are expected to provide ample information to prospective buyers with regards to company performance, product and outputs market, customers, sales outlets, suppliers, human resource, competitors etc., and the country’s economic profile in general.

The bidding process - this step includes preparation of bid documents, advertising and selling bids, bid evaluation, negotiation and signing of contract agreements.

Transfer of the enterprise - the final step of the privatisation process is the legal transfer of the enterprise from government to the private sector. This may involve the handing over process of the enterprise to the buyer, share transfer etc, depending on the mode of transfer. The transfer includes physical handover of assets to the new owner. Share transfers are also done as per the contract signed.

The rights and obligation of an enterprise shall upon privatisation be transferred to the buyer. However, the transfer of debts shall require the consent of creditors. Furthermore, the rights and obligations pertaining to receivables and payable shall be transferred to the Board of Trustees if the sales contract states as such.

Accomplishments of the privatisation process

During the past two decades 371 enterprises have been privatised and have generated a revenue of 24bn ETB. Though the privatised enterprises are from different economic sectors the majority are from agriculture, agro processing and manufacturing. Currently, the Ministry has a plan to privatise ten enterprises in the current fiscal year. From these enterprises, Ethiopian Crown Cork and Can Manufacturing Share Company, National Tobacco Enterprise (Ethiopia) Share Company, Bahir Dar Textile Share Company and Kombolcha Textile Share Company are the four enterprises that have already been put for public tender. The Ministry plans to sell 25% of its shares in Ethiopian Crown Cork and Can Manufacturing Share Company, 60% of its shares in National Tobacco Enterprise (Ethiopia) Share Company and 1% of its shares in both Bahir Dar Textile Share Company and Kombolcha Textile Share Company. However, of the four enterprises put for tender the two textile companies have failed to attract bidders after being put out for tender twice. Thus, the Ministry has now decided to privatise these enterprises through negotiation. The remaining six enterprises are yet to be revealed.