An Agenda to Reform Party Affiliated Companies in Ethiopia

Editor’s note The authors argue that “…the conflict in Tigray, despite the enormous cost to human lives and resources has created an opportune moment for a “big bang” approach to reform the ethnic party-affiliated business sector, if there is the political will…” Dozens of weblinks have been included in the article for reference purposes. The editor has attached a PDF file in the end with all the links for convenience. To publish, you may send your submissions to : info@borkena.com 

Seid Hassan and Minga Negash [1]

December 19, 2020

Introduction             

On October 5, 2018, on the Ethiopian privatization, together with our coauthors, we attempted to draw the attention of policymakers to some of the grey areas of selling public assets. The grey areas mentioned were state ownership of land and “the 100 or so companies operating as “endowments” and other privately-held public interest economic entities.” The endowment companies are affiliated with ethnic political parties, by each of the constituents of the now-defunct EPRDF. We argued that it makes no sense to privatize State-Owned Enterprises (SOEs) like  Ethiopian Telecom, sugar factories, and industrial parks and leave party business untouched. We argued that ethnic-party-affiliated businesses are not the only instruments of unaccountability and corruption but also major sources of conflict and atrocity and economic crimes and spoilers of clean elections. In this commentary, we argue that the conflict in Tigray, despite the enormous cost to human lives and resources has created an opportune moment for a “big bang” approach to reform the ethnic party-affiliated business sector, if there is the political will.   

On November 17, 2020, the Ethiopian Attorney General’s Office announced the freezing of the bank accounts of TPLF-affiliated conglomerate-the Endowment Fund for the Rehabilitation of Tigray (EFORT) and its 34 subsidiaries, accusing them of being in cahoots with the now-defunct TPLF led regional government of Tigray and participating in financing ethnic-based conflict, acts of terrorism, tax evasion, corruption, illicit financial flows, thereby seeking to derail and overthrow the country’s “constitutional order.” The same source informed us that these enterprises benefitted from preferential policies, tax waivers, and loans from state-owned financial institutions with little or no collateral. If the allegations are correct, an interesting policy question arises as to whether the other ethnic party-affiliated endowment companies are doing the same, arguably on a smaller scale. The accusation came as no surprise to the authors of this commentary. In our previous works (Hassan 2013a, 2013b, 2019; Negash, 2013; 2008 ) and commentaries (Hassan 2016a, 2016b) which illuminated how conflict assets were recycled into a legitimate business and how the entities are obstacles to political liberalization, fair economic development and exacerbate corruption, nepotism, and government unaccountability.   

Corruption Networks and the Privatization Debacle

Cross-country studies have documented the link between corruption and privatization (Knyazeva, Knyazeva, and Stiglitz 2013), and in transition economies, some have been asking whether privatization can be done without corruption (Kaufmann and Siegelbaum 1997). The evidence from developing countries is that the IMF conditionalities largely do not involve strong corruption abatement strategies, and hence “large-scale privatization should be avoided especially under conditions of weak accountability” (Reinsberg et. al 2019; Adams and Mengistu 2008). The Ethiopian case has not been an exception. As illustrated by Hassan (2013b, 2019) and McCracken (2004); Hailu 2017), the ruling regime, with the tacit support of international financial institutions, using the privatization process to transfer the SOEs’ assets to powerful individuals, ethnic political party-owned/affiliated enterprises and the Mohammed International Development Research and Organization Companies (MIDROC) a conglomerate at throwaway prices[2]. To date, there are no publicly known corruption mapping strategies to identify the theft and retrieval of public assets and much of the publicized actions appear dramatic and episodic primarily targeted at those who are on the losing side of the power games.  

The tactics employed in transferring publicly owned enterprises to political party affiliated companies and other vested interests included exploiting institutional voids and bureaucratic corruption such as selling the SOEs without competitive bidding or using the worst form of valuation, depleting the value of SOE assets- designed to depress their sale prices, bid-rigging that included revealing bids to (ethnic) cronies, canceling bids without cause, cutting procurement procedures, subcontracting main contracts to the losing bidders, official self-dealing, and expropriations. The consequences of the faulty privatization have been serious. First, and at the basic level, it is not clear what percentage of the proceeds from the sale of public assets have been remitted to the government’s coffers. It is also not clear how the buyers financed the acquisitions and whether the debts from state banks were paid off. Second, it has led to the commanding heights of the economy being in the hands of a few ruling party-owned conglomerates known as EFFORT, MIDROC, and foreign private equity funds who are known for hunting privatizations in developing countries. The beneficiaries have been the clientelist kleptocratic-politicized ethnic elite cartel which is competing to capture the economics as well as politics.    

Corporate and public sector reform before privatization

The Government of Prime Minister Abiy is under immense pressure. With the United States (September 2, 2020) and European Union (December 2, 2020) freezing aid disbursements, the indications are that the IMF and World Bank-supported economic recovery program is already in jeopardy. Geopolitical dynamics, lack of cohesion within the ruling party, COVID 19, the desert locust, armed conflict, and large internally displaced people (close to 3 million) have exacerbated the uncertainty and the economic misery indices (inflation, the collapse of the currency, debt, deficit, bank illiquidity, unemployment,  and refugees)-the cumulative effects of which may oblige the cash trapped government to dispose of state assets at throwaway prices. The evidence however shows that governments do not fall simply because of sanctions and economic misery (witness: Eritrea, Iran, Venezuela, North Korea, Syria, Zimbabwe, etc.). Dictators and illiberal regimes thrive under these settings. Furthermore, the evidence presented so far is that economic liberalization requires much more careful study, prudence, and pragmatism than being driven by external pressures and ideological predilections (e.g. neo Marxian-neo liberal- prosperity gospels) especially in old nations like Ethiopia whose history is replete with resistance to colonialism. 

In our ongoing research, a version of which was presented at Vision Ethiopia’s 2018 7th Conference that was held in Addis Ababa, we documented, among other things, the opaque business-political relationships that Ethiopia was, and still is, engulfed with the highest form of corruption known as state capture. Gradual reform under conditions of state capture has proved to be impossible. We argued that the Ethiopian state capture is more serious and dangerous than what the World Bank investigators and other authors discovered in transition countries. In Ethiopia, the evidence is that ethnicity has become not just a governance problem but also a threat to peace and national security. Political leaders wear multiple hats: as business owners, board members of SOEs, corporate and ethnic parties associated companies, policymakers, as the military’s top brass, national security officers, diplomats, etc., by which the state-business boundary is completely fused; the. bureaucracy and media are opportunistic; good. norms, ethics, and cognitive-cultural values of public service are hard to find. The  2018 presentation and the economics panel that attracted several news outlets that included the attention of the State-owned Ethiopian News Agency called for a clear separation of powers and decoupling of the state, the party, and the economy. We take that statement further and argue that Proclamation No. 46/1993; Article 27 (2), which states that a political party “may not directly or indirectly engage in commercial and industrial activity” is unenforceable given the de facto problems of accountability in government, the ruling and opposition parties, and the ownership structure in the economy.[3]   

The TPLF is not the only ethnic party that has affiliated business enterprises in the country, as there are also Tiret in Amhara; Tumsa in Oromia; and Wendo in the Southern Nations, Nationalities, and Peoples’ Regional State (SNNPRS). We do not fully know the link between the parties that rule the other regions and their business structures/affiliations. They appear to operate along similar organizational lines as EFFORT and are intertwined, in one way or another. For example, “like EFFORT (and Tumsa and Wendo) Tiret has shares in Wegagen Bank, and Walta Information Centre, and its regional credit and savings the organization” (Vaughn & Gebremichael, 2011). It is, therefore, important to recognize that the rapacious ethnic-politico-business empire would still be alive and well as long as the authorities target only EFFORT and its subsidiaries. That is, since these party-affiliated/owned companies have been doing more or less the same, the authorities who claim to be change agents should not fail to see how deep their roots go right under their noses[4]. The political costs of not including the Amhara, Oromo, SNNPRS , and other ethnic party-controlled enterprises in the reform process would be inviting ill will, a sense of being expropriated by one ethnic group from the other, exacerbate/sustain the conflicts, and vendetta – seeking vengeance against TPLF’s wrongs. Not including the other party owned entities in the reform would be like, in the parlance of the corruption/anticorruption lexicon: “Under the TPLF, its tribesmen ate. Now it’s our turn to eat.” 

Turning a crisis into an opportunity 

Looking for a silver lining of a crisis and seeking for opportunities to seize on as WWII winds down, it is said that it was Winston Churchill reportedly said, “never let a good crisis go to waste.” His approach is known to have contributed to the creation of the United Nations which was done in collaboration with Stalin and Roosevelt and other nations. It was Rahm Emanuel; President Obama’s chief of staff popularized the expression and Churchill’s insight during the great recession of 2008. Along similar lines, many companies are now leveraging the Covid-19 pandemic, turning the crisis to their advantage, as for example, looking into the many advantages of working from home. The ability to transform a crisis into an opportunity and embarking the country on a different path is the hallmark of all successful leaders. Big crises and great opportunities rarely come together, and we believe that the current situation in Ethiopia should be considered as such. 

Above, we showed the problems at hand and alluded to what is to be done. In our ongoing work which deals with the accountability of party-owned businesses, we explore alternative issues ranging from “do nothing”, i.e., keep status quo ante and let the endowment companies continue ravaging the Ethiopian economy, to “do something”, i.e., choose a reform- under which several alternatives reveal themselves that we refrain from enumerating here to save space. We also explore whether to go piecemeal or reform with a “bang”, each of which has its variants. 

Given the continuity of TPLF’s grip on the Ethiopian polity and the economy, we thought, earlier, that a phased or piecemeal approach to tackling corruption was the “second-best” action for tackling the Ethiopian corruption conundrum, especially because the new Prime Minister’s approach was one of a slow motion-gradual reform. We did so although corruption in Ethiopia is highly systemic and the establishment of an anti-corruption agency did not deliver what it was supposed to do (Hassan 2019). Furthermore  “big bang” fight against corruption networks runs the risk of turning into conflict as the stakes are high. Despite the recognition that it requires collective actions to tackle it, and that gradual reform had the potential to fail but thought doing something was better than the alternative especially when ethnicity is the cornerstone of governance and politics.  Now that TPLF’s political calculus has gone wrong, the “big-bang” method of reform has availed itself. Therefore, if Ethiopia is going to have a decent post-conflict economic recovery, this mixing of business with politics, the ethnically centered enterprise empire-building, and few family-controlled conglomerates need to be reformed. The opportunity should not be missed. 

 [1] The authors are respectively, Professor of Economics at Murray State University and Professor of Accounting at the Metropolitan State University of Denver and the University of the Witwatersrand. The views expressed here are personal and do not reflect the views of the institutions the authors are associated with.

[2] The owners of MIDROC has been under arrest in Saudi Arabia for nearly two years on account of alleged corruption and the new CEO was seen making a substantial donation to the ruling party in the presence of the Prime Minister and getting acclamation.

[3] In July 2020 the Reporter reported that the Auditor General has been threatening to release its report to the media if the House of Peoples Representatives (Parliament) continues to ignore its duties of monitoring the executive branch of government. Similarly, urban land speculation and the audit of it have put the de facto appointee mayors (of Addis Ababa) into public scrutiny and respected audit profession to be at loggerhead with the capturers of the institutions of government.  

[4] The Amhara the regional government had announced that it will sell all its shares in 10 companies while the Tigrayan regional the government announced it would privatize, in special share offerings, and EFFORT would report to the regional legislative body (instead of to the regional party). There is no evidence indicating that any of the declared measures materialized. Now that some of the EFFORT companies are declared as a crime suspects, the assets of these companies and their employees are in greater danger, thus requiring carefully thought urgent decisions.