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April 2017 · Africa

Upcoming feature: ETHIOPIA

Interview with H.E. Dr. Arkebe Oqubay Metiku, Special Advisor to the Prime Minister of Ethiopia

Prisma Reports (PR): What is the current, long-term vision of Prime Minister Hailemariam and what should we expect from your government today?

H.E. Dr. Arkebe Oqubay Metiku (H.E.D.A.O.M.): We look at the current development as a continuation of the Party’s programme because both, our late Prime Minister Meles and our Prime Minister Hailemariam, are leaders of the Party. Therefore, the Party has a clear vision and strategy with leaders being elected to continue the same vision. But, the focus will always be shifting as a result of the outcomes and successes, so if we look at the current focus it is mainly a shift towards industrialisation. In the 1990’s, the government focussed primarily, and until most recently, on agriculture, and the main reason was that if we need to move the economy we have to start moving the agriculture because currently around 75% of the population still relies on it. We had forecast for agriculture, which means we have been expanding extension services, providing inputs, building proper roads, expanding schools in the rural areas and expanding health centres. These are all critical because we have to forecast for poverty reduction too, so we needed to forecast for both rural areas and for agriculture.

Once agriculture starts to move, then sustaining the growth will require a very strong base of manufacturing. Therefore, we are currently trying to change the gear towards developing manufacturing. The current focus in the coming few years will be to give strong emphasis on developing the manufacturing sector, the export sector, upgrading our infrastructure and focussing on the transformation of agriculture. What I mean when I refer to our focus on development manufacturing is that we should have a very rapid growth rate of the manufacturing sector.

We have the current vision for 2025 and the target set to be sustained for the coming ten years, at 11% GDP growth rate annually. This means, sustaining what we have been achieving in the last 13 years, approximately 11% every year. However, when it comes to manufacturing, the target growth rate that we have is 25% per year. This high growth rate will help us by 2025 because the existing manufacturing sector will quadruple, it will grow by four times, so the share of manufacturing will be closer to 20%. We have also set a target to create two million direct manufacturing jobs in the coming ten years and four million indirect jobs linked to the manufacturing sector.

Since the economy is also dependant on agriculture, the major exports are agricultural products, which means we are exporting without value addition. However, by 2025 we want 50% of the exported goods to be manufactured goods by using agricultural inputs and exporting them, helping us to gain higher value addition.

To achieve this level of growth rate, the key element is that we need to attract new, major investment as it is not possible to achieve this 25% from the existing capacity. It is all about developing new capacities and for this we have put in place two important strategies. First, we need to attract FDI, with the focus primarily on the manufacturing and agriculture sectors, and less on service sectors. We want to focus on manufacturing because it is the largest job creator and has significant spill-over effect. With strong manufacturing services we can also grow in relation, for example in the logistics sector, etc.

The second aspect required will be what type of FDI to focus on. We have decided that our strategies will focus on higher quality of FDI. If we have to attract FDI, we need to focus on high quality. This includes companies with high levels of productivity, good international market access and those which are critical players in this global value chain. In order to achieve this, we are coming up with an attractive package of incentives.

There are many reasons why companies come to Ethiopia. They have to compare the situation in particular with Asia. Here, they primarily come to take advantage of a reduction in production cost. Improving efficiency is one of the driving factors. They can get labour at a lower wage here, compared to Asia where, in countries like China, they are increasing quite fast. Thus, wage is a key driver for most of this light manufacturing investment.

The second aspect is energy cost. Ethiopia provides the most competitive and lowest electricity tariff – our rate is 0.3 per kilowatt hour (kWh). This is about one third, one fourth or one fifth compared to China, Europe and other neighbouring countries. We have been investing in clean energy, mainly hydropower and wind, and we have a special policy to support manufacturing. This is the second element that can reduce production costs.

The third element is that we provide land for manufacturers freely, we do not charge them. Land is expensive in Asia, for example in Bangladesh and in India, and is not easy to get. With these elements, they can reduce their production costs.

Additional strategic consideration is that they look at the market opportunity, and here there are two aspects. The first is the growth of the domestic market. With the economy growing in double digits, and the population growing by 2.5% every year, the domestic market is growing quite fast. Companies like Unilever from the UK, for instance, have invested because they see a measurable advantage. The leading brewers in Europe have established facilities here: Diageo, Cassel, Heineken, Bavaria – all the leading brands are here. The brewery sector, for instance, is growing 20% every year, creating a huge opportunity for investors. When you have a big population coupled with rapid growth rate, it provides purchasing power and gives major advantages in terms of the market.

Another element is the market access privilege that we have to Europe and the US. As a result of AGOA, we have duty-free privilege to export to the US and to Europe also, but we do have similar privileges, preferential rates to Asian markets like Japan, India, China. So they are also looking at this second element of market access.

To conclude, the first one is reduction of production costs, the second is market access and the third strategy consideration is the stability in Ethiopia. We are a very stable country in terms of security, as you may have seen in Addis Ababa, where you can walk at night and crime rate is very low. In addition to this, Ethiopia is a major player in Africa’s stability. It provides the largest peacekeeping force globally and not just on an African level. Following this, the macro-economy, banks interest rates and inflation are all controlled. Having a stable macro-economy is a critical element for investors, as is stability because no investor will like to spend money if their investment is not safe. As well as these considerations that they have, there are additional strategy considerations.

Ethiopia is a country that is putting huge resources in long-term investments. We are investing heavily in energy. For example, three months ago we commissioned hydropower, which is close to 2000mw. Now, we are currently building a Grand Ethiopian Renaissance Dam, which is 6000mw. This will be the largest in Africa when it becomes fully operational in one year and a half. Even the ones that have already been inaugurated are amongst the top three largest hydropower projects built so far. This is significant. We are investing heavily in energy because without it you cannot think of investment in manufacturing. A reliable supply source of energy is critical. You have to compare it with African standards. We are a single project of 2000mw, 50% of Nigeria’s capacity, so we are putting a lot of investment in that. We want Ethiopia to be the leading country in Africa, not only in its supply of energy but a major player in the energy industry.

The other major investment we are making is in transportation. Our prime focus on earlier days was on rural infrastructure, roads and highways. However, our focus has shifted in the last five years. We are now focussing on building state-of-the-art railways and expanding international airports. The national railway line we are planning to build is around 6000km and we have already completed the construction of Addis Ababa – Djibouti railway. The other routes are under construction. For instance, 50% of the route from Awash to Makale has been completed, around 600km, whilst other routes will continue to be built. We are not only investing in standard railways, however. We are investing in electric powered railways, which means that we will be using energy produced by our hydropower projects. It is a huge advantage to provide a cheaper alternative of mode of transport to investors. It makes the exporters very competitive.

We have also currently built more than 20 airports, most of them international. Ethiopian Airlines are also expanding its infrastructure. For example, they have recently finished 600,000 tonnes capacity of cargo terminal. This is one of the largest capacities. Airports in Singapore, for instance, also have the same capacity. Hence, this is a heavy investment which will help us to be competitive as we can use both railway and air transport. Therefore, expansion of transport infrastructure is very critical for investors because ultimately, logistics matter quite significantly.

The other area of investment is in skills and skills formation. We have forecast to reform our education system since education is our core priority. For example, consider the current 100 million population; by 2025 Ethiopia is going to be among the top 10 most populous countries. Out of the 100 million people, 30 million are students in primary schools, so we have been expanding education. Regional states spend up to 50% on education, high schools and primary schools. We have also been expanding universities. In 1991 we only had 3000 university students and one university. Currently, we have more than 50 universities and a 600,000 university student population. Every year we have 100,000 graduates, who are not primarily social science graduates. We have had a shift in the last ten years from social science towards science-focussed courses. 70% of the courses at universities are in natural science, technology and engineering, and from this 70%, 40% are engineering related. Thus, we have invested in this. We basically use German expertise here to reform our universities and our technical vocational schools. In 1991, we only had three technical schools whilst now we have more than 1,300 which can train up to 1 million. After looking at different models of education, we therefore chose to adapt the German system since it helped us to develop a very solid industrial base. These are large investments with more than 50% of our federal budget being spent on this. Ethiopia is the country that spends the highest level on long-term investment. These are the important considerations investors look at.

I have primarily been talking about attracting major investments, FDI. We are mobilizing local investment as well. The second strategy we are adapting is building and expanding industrial parks. They are a key component in our industrialisation scheme. In fact, one of the major shifts we have made in recent years is having focussed over the last two or three years on this new strategy. If companies come here wanting to establish a factory they need reliable power supply, water supply, infrastructure. They also need good waste treatment facilities and to be able to get labour supply easily. In addition to this, the business climate which we are focussing on should be improved, so that investors can come, invest inside the parks and start production within three to six months. It allows us to shorten the time because we are adapting ‘plug and play’ systems of industrial parks.

The additional element is we have given sustainability a critical focus. Sustainability is important. Environmental protection is important. We are going to build thousands of factories. Factories, and the manufacturing sector in general, pollute the environment in many countries, starting with the UK and other industrial countries. Therefore, we should be able to take lessons from other countries. How can we accelerate industrialisation without damaging the environment? Mitigating the environment is expensive. In this respect, we have decided that at the level of strategy we have adapted the green economy strategy, which has aimed that by 2030 the greenhouse emission level will be reduced by 64% compared to the business as usual. We know that we do not contribute much to greenhouse emission. Even Africa’s share is below 4%. Yet, whether we are a wealthy or a poor nation, we are all living on the same continent, therefore we need to control the environment.

This is why we are building green industrial parks. We will have a mechanism that uses recycled water, resulting in 90% of the water being recycled. Saving energy will help to reduce production cost, as will using zero nuclear discharge technologies to prevent discharge from affecting the environment. We are adapting the highest level of environmental protection because consumers are now putting pressure on retailers and brands to respect the environment. Thus, we want to be in the lead. If we produce renewable energy, of which we currently use 100%; if we use green transport, electric-powered railways; and if we have green or eco-industrial parks we will proudly be able to say that Ethiopia’s products have the lowest global CO2 footprint, a sustained source of advantage.

The industrial parks are specialised parks to avoid bringing in all types of industries. We will put garments and textiles in one park, for example, so that leading companies can come here with their suppliers. It helps them because they can have good links with universities and it can promote linkages. Our Hawassa Park is the largest specialised park on the continent and we are also working on a partnership basis with the leading companies. We are engaging many US companies currently. For instance, we are closely working with PVH and Vanity Fair, whilst other companies and major brands such as Under Armour are still to come. We work closely with them and the manufacturers, and we try to look at common areas of interest to try and create an environment. Looking at the Hawassa park as a model, we discussed with PVH their strategy at the beginning. They wanted to diversify their supply chain from Asia, where labour costs are increasing. In some countries, where they source, there are many difficulties related to compliance issues. Therefore, they had a strategy to diversify. We also have a strategy, a vision for 2025 to make Ethiopia the largest manufacturing hub in Africa.

We also have a common strategy on building a fully vertical integrated industry, which means that we do not just expand garment industries but we also build textile factories, fabric mills, yarn production, local capacity and backward linkages, so that 80/90% of the materials will be produced locally, reducing logistics and improving the speed to market. This is the number one priority, and the key competitive factor for all farmers. Thus, this model is quite attractive. At Hawassa, you can find many garment factories, a fabric mill and accessory producers, helping them to be very competitive.

Regarding the business environment, we know that we cannot change the bureaucracy. No country would succeed in changing the bureaucracy in a short time. However, we want to create the best business environment for the companies. The solution we have come up with is creating an environment for them inside the parks. So, at Hawassa park all the service work providers are stationed in the one-stop service platform, where they are given all the required support. Logistics companies, banks, trade license, etc.; are all located inside the park. As are visa provisions and work permits. Everything will be available, so that they only have to think about productivity. Companies will only have to think of factors that are critical for this competition. This is the new approach we have adapted in terms of industrialisation, which will help us to sustain double digits’ growth, since manufacturing will be strong and agriculture will continue to be.

In agriculture, in particular, we are working on two areas of focus. The first is focussing on improving the productivity of the small holder farmer. Our farmers, therefore, need to improve their productivity in terms of coffee production, sesame production, cash crops, etc. We also focus on transforming the agriculture sector to make agriculture sustainable. Rainfall is unpredictable because of climate change. Due to global warming, rain comes at the wrong time, therefore we have to shift towards irrigation to not rely on rainfall.

The second aspect is that we continue to attract major investors in agriculture as well. For instance, we have succeeded in attracting many European companies, especially from Holland in the floriculture sector. Now we are expanding the floriculture sector. One week ago I was in the Netherlands to attract major investors, and there is huge interest to continue investing in Ethiopia. Not only flowers, the leading biotechnology companies are also aiming in Ethiopia to expand production of vegetable seeds and high productivity seeds. Therefore, we will continuously engage investors in agriculture. Cotton production, for instance, is a major area of focus, as is the production of vegetable oil and livestock development (since we are quite strong in livestock). Therefore, we will be expanding investment in agriculture which will help us to accelerate investment.

Whilst we give the service sector priority, it is our second priority in terms of manufacturing and agriculture. Within services, the area we focus on is mainly tourism, as well as aviation. We want Ethiopia to be a major hub in aviation. We have been investing in Ethiopian airlines, the largest airlines currently, whose capacity we will continue expanding. Logistics, however, is still an area we will be focussing on. We want to build a solid logistics industry, same for ICT which is relevant for manufacturing.

(PR): You said in the Bloomberg interview that only very recently the productive sector investment started pouring from the US, what did you mean by that?

H.E.D.A.O.M.: It is basically the front for European and US companies which, for the past three decades, have been investing to build their supply chain in Asia. If you look at many of these global companies, they have their global headquarters in Hong Kong. They produce their goods in China, Bangladesh, India, Indonesia. That is the major manufacturing hub globally. The Japanese have been primarily investing in this area, which makes sense because they can secure the highest productivity there. Like China, it is the manufacturing power house. Consequently, they have focussed on that but recently there have been some major shifts in their thinking. They want to diversify from Asia and the reason is simple: labour cost is increasingly becoming quite high. Compared to when they started, labour cost has increased between five and ten times. They are looking for an alternative source of competitive wage. In addition to this, they also want to diversify their risks. In some countries, issues of compliance are becoming an increasing major concern. This is one strategy.

Also, many African countries were not all so ready to welcome such investments, including Ethiopia. Only in recent years we have started to focus on manufacturing development, whereby you have to create the right environment for these leading companies to invest in countries like Ethiopia. Many of these companies are primarily exploring east Africa, mainly Kenya, Ethiopia, Tanzania, etc. Most will visit these countries, however they ultimately decide to invest in our country because the conditions are here. Investment in infrastructure, skills formation, government focus… We target the companies and, as government officials, we spend a lot of time engaging with them. We have streamlined our processes that they do not need to pay bribes. If they are going to get land freely inside the park, if all conditions are being put there, then why do they need to pay bribes? They have found the government to be quite responsive, which is why we are succeeding with these companies: Vanity Fair, PVH, as well as others from other sectors.

There is also investment in the energy sector on Geothermal, for instance. One US company is already developing Geothermal projects and, for sure, large companies have been major suppliers for the Ethiopian market. Boeing and GE are major suppliers to Ethiopian airlines. We have been buying Boeing for many decades. Consequently, the interest is increasing in sectors like textile, footwear, laser products, food and beverage, energy… We are only making a proactive move with clear, targeted investment promotion and putting the conditions on the ground in the last few years. Now we are expanding the areas of focus, for example, expanding into pharmaceuticals. We have already started the construction of the first specialised pharmaceutical industrial park in Addis Ababa, which will be completed by end of 2017. Many pharma companies are already looking at this opportunity. We are aiming not only for the local market; currently we are importing 85% of the pharmaceutical products required for the local market. It is not only about being able to manufacture them locally, we are looking at the African pharma market as well. Currently we have targeted a $5 billion export market from Africa and $27 billion pharma markets as well, so we are expanding.

Chemical and petrochemical is also a priority area, along with equipment manufacturing. We have identified top key sectors, where we will be focussing. The opportunities provided are broad because of the push factor in Asia and the readiness on our side is what makes things happen. It is this combination. If US companies were to come ten years ago, the conditions would not have been present in many African countries. This is the reason why more US companies are now focussing on Ethiopia. Our advantages are so big, even our incentive package is quite generous. Investors do not decide based on incentives. They look at the basics, the long-term plans, however usually incentives will help companies to reduce their risks until they adjust to the local environment. For many of these industries, for instance, we keep their income tax benefit for up to ten years, which means that for ten years they do not pay any tax. As far as the exported goods are concerned, they do not pay any duties at all. They can import all their machinery duty free. There is no restriction on ownership; 100% ownership is allowed in almost all sectors. This is a very good incentive.

We must also remember that there is a huge misperception. Many people in places like the US, Europe and Asia consider Africa to be just one country. When they hear in the news about Ebola disease, they assume the whole continent is affected. We saw this in the reduced passenger travel from Asia two years ago. Countries such as the UK still look at Ethiopia as the country of food aid and remember the famine that happened 30/40 years ago. This perception needs to change.

Nevertheless, things are happening quite fast. The Chinese are aware about the opportunity in Ethiopia. Out of the 54 countries, Ethiopia is the best destination for many of the Chinese manufacturers. India’s firms are primarily moving to Ethiopia, as are Turkish manufacturers. The largest investment from Turkey is in Ethiopia, not in Egypt. Europeans are now investing here too. In Hawassa, you will see one interesting company, Belgian company, which is a diaper manufacturer. The company has a €4 billion turnover, has established their production facility and set up a production line. By 2020, they are going to generate €400 million from their factory at Hawassa, of which 60% are exports. They are commissioning their factory in June, so even the first line will have the capacity to produce 250 million diaper units. These are just some of the unique things. We are observing a lot of investment and interest from many European and US companies. Ethiopia is a country that is making rapid economic growth. It is creating the condition to build the manufacturing sector, which the government is keen to support and this is reaching everyone’s ears. Things are going to accelerate in the coming few years.

We try not to give companies a concrete proposal. Unilever, for example, which has a £55 billion turnover, established a factory here approximately 18 months ago. The first year they produced and the second year they doubled, so we had a discussion with the top management of Unilever. We told them that we wanted them to produce up to £10 billion by 2025. We asked them what they wanted our government to do, as we are ready to give them any support, incentive or protection they need. We have come up with very concrete, solid proposals and we are also revising our aim. For instance, in apparel and textile, our aim by 2025 is to build an industry that will export $30 billion. We want to reach this level, a similar level to what Vietnam is at currently.

Big mills are also coming and investing in this sector. This is the approach that companies would like to see because they want to look at the future and operate on a long term basis. What Ethiopia is trying to do differently from other African countries is that we are not just trying to do what is needed to be done. First, we try to look at companies that have done it rightly. With industrial parks, for instance, we studied seven countries: South Korea, Singapore, China, Taiwan, Mauritius… We learned from them how to build parks, as well as the negative elements of it. For example, concerning the environment, most countries I mentioned did it the wrong way. Therefore, we learn from the others, then try to do it in a way that suits our local conditions. It is a learning process for us. We learn from the leading companies by listening to and understanding their requirements.