By Tewodros Meheret Attorney-at-Law, GeTS Law Office
01 October 2018
Privatization can be an outcome of economic policy adopted by a government based on its ideological inclination or as a way out of economic challenges it has faced. It may entirely hinge on domestic considerations or could be prompted by external pressure as witnessed in connection with economic restructuring programs prescribed by the International Monetary Fund and the World Bank for economies in transition. The rationales backing up privatization could be explained by real or declared justifications. The debate on privatization is pendent and it can be observed that countries oscillate between public ownership of enterprises and their privatization. Privatization is employed as a tool often when countries favor the private sector or when it is believed that the market is better in providing goods and services. Though a list of rationales can be made, the policy debate on privatization is often reduced to the argument that privatization helps to raise revenues for the government. Yet, a decision to privatize is surrounded by policy challenges which include, among others, sequencing, speed and methods which inevitably bear on the execution of the decision to privatize.
Sequencing pertains to the existence and quality of economic and political institutions on which privatization depends. It is a prerequisite that a country should first build market institutions that would reinforce the benefits of privatization. Researches stress that the reforms assuring property rights protection, competition and openness, hard budget constraints, good corporate governance, low corruption, and optimal regulation are all complementary to privatization. Another important policy choice is the speed of privatization which calls for a decision on whether to privatize en mass to raise the revenue that a country needs or through case-by-case privatization. The third policy choice involves the modality of privatization which offers a range of methods with their own merits and demerits.
In Ethiopia, privatization has been a tool for realizing the economic reform which was embarked on as a transition from command to market economy. The change was needed because of the economic order that prevailed following the collapse of the Soviet Union and end of the Cold War. Particularly, with the demise of the Dergue which professed socialist ideology, economic reform was needed with a view to increasing the role of the private sector in the economy. In addition to the need for restructuring because of change of policy and the prevailing reality on the ground, the specific measures implemented were also prompted by external pressure. Privatization became a component of the reform package under structural adjustment program prescribed by Bretton Woods Institutions in 1990s to economies in transition.
Ethiopia was not an exception and the reform programme it launched encompassed a cocktail of macroeconomic and structural measures which were implemented in three phases and the last phase comprised, among others, a marked shift in the boundary between public and private sector involvement in the economy. Even though implementation of the reform program was set in motion in 1992, privatization commenced in 1994 with the establishment of Ethiopian Privatization Agency. It has been in execution since then with a view to reducing involvement of the state in the economy in line with the reform policy.
The Planned Privatizations: Motives and Methods
The recent resolution of the Executive Committee of the ruling party in Ethiopia to transfer some enterprises to the private sector heralded a wave of privatization which is momentous not only in the number of enterprises to be privatized but also their size, sector and prominence. It is reported that the decision includes partially or fully transferring the shares of companies such as railway, industrial parks, hotels, sugar and manufacturing industries and also to sell lesser portions of stakes of companies including the Ethiopian Airlines, Ethio-Telecom, as well as Ethiopian Shipping & Logistics Services Enterprise. It has provoked debate and attracted the attention of every citizen for emotional as well as practical reasons since in one way or the other the lives of citizens would be affected having in mind the dependence of the nation on the services rendered by some of the enterprises. The enterprises up for privatization comprise very high yielding and strategic, though they are not all utilities per se.
Inconsistent explanations have been given by officials regarding the recent announcement to privatize enterprises which have been beyond the reach of the private sector. At any rate, the most recent details by the Prime Minister in the question and answer session in parliament on June 18, 2018, further clarified matters. It transpired from that the government badly needs hard currency to finance imports and service foreign debt. It was also implied that the enterprises will not be competitive so long as they remain under state control. The injection of additional capital, deploying new technologies and management system are required to make them efficient.
What has been made clear is that there will be partial privatization of the named enterprises. The information provided in the announcement was so scant that we do not know the policy direction in sequencing, speed and method of the privatization program unless we rely on the existing law. However, it appears that the government does not intend to limit itself to the institutions in place as can be inferred from the establishment of an advisory council. It is not certain whether that will lead to revision of the existing law. It has been emphasized that privatization succeeds, only if the relevant institutional environment is in place. This calls for a clear policy direction which could only be known from subsequent actions of the government. The method of privatization seems to have been chosen as the announcement made it clear that the government is going to sell shares. But, given the variety of enterprises and the sectors they are engaged in, other methods are not ruled out.
Are the Required Laws and Institutions in Place for the Privatization?
Obviously, with the legal framework in force, policy vacuum is not a concern but in view of the size and import of the enterprises to be offered for sale and the social, economic and political implications, thoughtful consideration of the above policy issues is desirable. It is to be noted that privatization has been around and the legal framework has been in use for decades. Nevertheless, the question to be raised is whether the privatization of those enterprises calls for amendment of laws or can it be accommodated within the existing legal framework. First, the law recognizes that privatization mainly involves the sale of a public enterprise, part or assets of an enterprise or shares held by the government in such enterprises. With the account given, the proposed mode of privatization is sale of shares to private entities both foreign and domestic. This method is plainly incorporated in the definition of privatization under Ethiopian law and it has been tested in earlier privatization efforts. That being said, the sale of shares will require revisiting the existing law so as to allow private investment in some sectors and also to streamline privatization. For instance, the investment law divides investment areas into three categories, namely those reserved for the public sector, those reserved for domestic investors and areas which are open for foreign investors including in joint venture with the state.
One becomes curious to know whether those areas in which private participation is to be introduced are open, as per the law in force, to the private sector in general and foreign investors in particular. Pursuant to article 6(1)(c) of Investment Proclamation No.769/2012, air transport services using aircraft with a seating capacity of more than fifty passengers is one of the areas of investment exclusively reserved for the government. On the other hand, the law permits involvement of the private sector in the telecom sector through joint investment with the government. The existing law has room for the change to be introduced as what has been disclosed so far is that there will be transfer of minority shareholding of the government in those enterprises to private investors.
It is interesting to note that the Investment Board has the discretion to open to foreign investors areas of investment exclusively reserved for domestic investors. It takes merely a resolution of the board to open those areas to the private sector. The latest decision of Investment Board to lift the restriction under article 3(b) of Investment Regulation No. 270/2012 and allow up to 49% participation of foreign investors in packaging, forwarding and shipping agency services, is a case in point. A similar measure can circumvent the impediment to privatization of enterprises engaged in sectors closed to foreign investor under the investment laws. However, the areas of investment reserved for the government can be open to foreign investors if the law is amended as the power of the Investment Board does not go beyond the areas reserved for domestic investors.
By and large, the policy direction has been given to privatize selected public enterprises which are under full state control. But, the law in force provides that the list of enterprises to be privatized shall be determined by the Government upon the recommendation of the Supervising Authority. Pursuant to Article 31(9) of Definition of Powers and Duties of the Executive Organs of the Federal Democratic Republic of Ethiopia Proclamation No. 916/2015, the Ministry of Public Enterprises has the power to submit proposals to the Government on the dissolution, amalgamation, or division or sale of public enterprises it supervises. This leads to another question regarding the power of the Ministry on those public enterprises it does not supervise. It is given restricted power with respect to those enterprises so that it can but “oversee and assist their corporate management and financial performance.” The logical conclusion is that the Ministry cannot propose privatization, for instance, of Ethiopian Air Lines which is supervised by Ministry of Transport. A supervising authority has, however, the power to propose to the Council of Ministers with regard to enterprises under its control that it or its management be transferred. Thus, the supervising authority has the power to initiate the privatization of a public enterprise it supervises, which, of course, does not rule out decision being made directly by the Government. Similarly, Proclamation No. 25/1992 empowers the Council of Ministers to decide on the sale of shares held by the Government in business organizations it establishes under the Commercial Code. This presupposes formation of a company under the Commercial Code or conversion of an enterprise to a share company.
It is not clear whether the process is following this path since what has been announced hitherto is that the decision was made by the Executive Committee of the ruling party. It is expected that a formal decision on the status of each public enterprise initiated by the Supervising Authority will be formally endorsed by the Government. It follows that an institution will be responsible to undertake the successive steps to be taken in transferring the enterprises which are divided into two as pre-privatization activities and the privatization process. The former in particular involves activities for making the enterprise ready for privatization such as, carrying out due diligence, valuation and auditing, transforming the public enterprises into share companies, preparing information memoranda and setting in motion the bidding process. In view of the size of the enterprises to be privatized, preparing them for privatization is a daunting task which, as announced by the government, might involve breaking down some of the enterprises before they are converted to share companies.
Rather than triggering the system put in place in the existing laws, the Government, however, seems to have opted another course to implement the decision to privatize the enterprises gauging from what has come to light so far. A 21-member Advisory Council has been established to ensure transparency and accountability in the process. Obviously, the council is not accommodated in the existing legal framework and the mandate it may have does not seem to go beyond making recommendations with respect to the manner in which privatization is to be conducted. It cannot replace the organ which is responsible for carrying out the pre-privatization activities and the actual privatization. We have seen above that the initiation can be undertaken by the supervising authority and once the Council of Minister approves the list of enterprises up for privatization, the implementation should be assumed by an organ. None other than the Ministry of Public Enterprises can claim to have the institutional capacity, infrastructure and expertise to implement privatization program. Under Proclamation No. 916/2015, with respect to public enterprises and shares to be privatized, the powers and duties given to the Privatization Board by Proclamation No. 412/2004 are given to the Ministry of Public Enterprises. Accordingly, it has the power to oversee and supervise the implementation of the Privatization Programme, ensure the orderly execution, the legality, transparency and efficiency of the privatization process, approve modality of privatization and take all other measures to necessary to expedite the privatization process. Essentially, it is this organ that is executing privatization which is an ongoing activity and it is mandated to execute the process.
The massive privatization to be undertaken involves ensuring the existence of a legal framework for participation of the private enterprises in the specific sector and preparing the enterprises for privatization. Even though the Ministry of Public Enterprises has tested capacity, the size and significance of the enterprises and the interest shown by foreign investors call for building its capacity up to the challenge. Clarity should be ensured in adopting and executing the appropriate privatization modality which is dictated by the objective to be achieved by the Government. The objectives should be clearly spelt out and it should not only best price but also capital investment program, management control, employment guarantee and technology transfer be given due attention. The institutional framework available should be exploited without prejudice to the effort to ensure transparency and accountability in the process. The activities of the Advisory Council should also be synchronized with the implementing agency which will continue to protect ownership interest of the state in partially privatized enterprises. Bearing in mind that this round of privatization involves large public enterprise, the mode of privatization must be carefully selected having the relevant factors in mind such as public interest, objective of the endeavor and absence of capital markets.
 Sergei Guriev and William Megginso, Privatization: What Have We Learned?, available at https://siteresources.worldbank.org/INTDECABC2006/Resources/gurievmeggison.PDF, p. 5
 Africa Development Bank Group, Ethiopia, Structural Adjustment Programme, Project Performance Evaluation Report (PPER) Operation Evaluation Department, 26 May, 2000, p. 2
 See Privatization Agency Establishment Proclamation No. 87/1994
 Cited above at 1, p. 17
 See Art. 2(1) of Proc. No. 146/1998
 Proclamation No. -769/2012
 Investment (Amendment) Proc. No. 849/2014, Art. 29(7)
 http://www.investethiopia.gov.et/images/pdf/EIB-decision-on-Logistics.pdf; The decision lifts the restrictions imposed under Article 3.1(b) of the Investment Regulation No. 270/2012, including the provision of bonded warehouse, consolidation and deconsolidation services and allow joint venture participation of international logistics service providers holding up to 49% or less stakes.
 Art. 2(8) of Privatization of Public Enterprises Proclamation No. 146/1998, Article 4(1) defines the term as the Central Government, now the Federal Government, which power is to be exercised by the Council of Ministers. Thus, there must be a resolution of the Council to set the process in motion.
 Privatization of Public Enterprises Proclamation No. 146/1998, Article 4(1)
 See article 31(1) of Proc. No. 916/2015.
 Ethiopian Airlines Group Establishment Council of Ministers Regulation No. 406/2017, Article 4.
 Public Enterprises Proclamation No. 25/1992, Article 11(11)
 There seems no limit to the form of business organization, but considering the fact that we are talking about transfer of shares the ideal form is a share company.
 Proclamation no. 25/1992, Article 47/3/
 Privatization of Public Enterprises Proclamation No. 146/1998, Article 5.
 See Article 31(2)