When Brook Taye became chief executive of Ethiopian Investment Holdings (EIH) in August, he was taking on one of the biggest jobs in Ethiopia: reforming the country’s state-owned enterprises (SOEs).
The institution was established in 2021 as the strategic investment arm of the Ethiopian state and now boasts a portfolio of 40 companies, collectively worth tens of billions of dollars. They include the national airline, the state-run telecoms company and the country’s dominant bank, as well as state firms involved in electricity, manufacturing, construction, trading, chemicals, hospitality and insurance.
“We think of ourselves as an entrepreneurial state,” says Brook, who also sits on the committee that steers Ethiopia’s economic policy. “We really think that we can achieve a huge amount of development growth through our state-owned enterprises.”
The creation of EIH is a sign of the ambition of Abiy Ahmed, the prime minister, who chairs its board. His first six years in power were characterised by political turmoil, including a devastating war in the north and ongoing rebellions in large swathes of the country.
Now the government is trying to inject new energy into its economic agenda, after entering an IMF programme in July. It has floated the birr and opened up sectors such as banking to foreign competition. But, says Brook, that does not mean a rush to privatisation.
“Liberalising the market does not mean selling off state assets,” he explains. “The government does not have a privatisation strategy: what we have is a state-owned enterprise reform strategy.”
Commanding heights
The state has dominated the Ethiopian economy for decades. Ethiopian Airlines was established under the rule of Emperor Haile Selassie. After his overthrow in 1974 the country was run by soldiers who aligned themselves with the Soviet Union and nationalised land and businesses.
Then, from 1991, the country was governed by the Ethiopian People’s Revolutionary Democratic Front (EPRDF), which took inspiration from Marx but came to see its mission as building capitalism under a “developmental state”. More than 300 state-owned enterprises were privatised in the first two decades of its rule. At the same time, the state remained the most important actor in the economy, with its remaining firms shielded from competition and given preferential access to finance.
“The government thought of them only as a policy instrument, [without] a bigger emphasis on commercial viability,” says Brook, who has previously worked as a regulatory analyst, a private equity fund manager and a ministerial adviser. “We paid dearly for that mistake with the debt burden that we had to fix as a result.”
The idea behind EIH, he explains, is that it “needs to act, think and speak as an owner” of the assets it controls, rather than as a mere regulator. He says his focus is on the commercial viability of firms, such as their return on assets. The fund will also co-invest in new ventures with private partners, such as a recent partnership with a Japanese firm to manufacture passports.
EIH would not divulge profit figures for its portfolio, but says that its companies generated revenues of $18.5bn in the 2022/23 financial year. It paid a dividend of 5.8bn birr ($46m) to the government in the first quarter of this year, which ran from July to September.
Although some of its companies, like Ethiopian Airlines, are hugely profitable, others are struggling. The IMF has said that the amount of debt owed by state-owned enterprises is an “acute” fiscal risk. It singles out loss-making companies in the railway, electricity and sugar sectors, all of which sit in EIH’s portfolio.
In 2021 a chunk of debt equivalent to 9% of GDP was transferred from state companies to a newly-created corporation and is now treated as government debt – but that “was not accompanied by improvements in operational viability”, the IMF wrote this year.
“We have a very few companies that are struggling,” says Brook. “They’re struggling because either they have legacy issues, like the sugar companies, or some sort of cyclical business cycle related turbulence. The rest are doing really well.”
With the government in default to foreign bondholders, and the IMF urging a speedier pace of reform, there is pressure to sell-off state assets and make a quick buck. But Brook says that Ethiopia has learned from the experience of other countries in Africa, as well as in eastern Europe, where rushed privatisations sometimes went disastrously wrong.
“They divested when companies were weak,” he says. “No owner would do that. You don’t sell your house when it’s a depressed market. You paint the house, change the door, so that you can attract more payment.”
Telco troubles
When EIH does try to part-privatise companies, it cannot always find buyers. It has tried and failed to sell a 45% stake in Ethio Telecom, the dominant telecoms provider. Brook blames a “plethora” of issues, including the world economy, the covid-19 pandemic, and the war in northern Ethiopia.
“The 45% offer is still on the table,” he says. The government might start looking for investment from companies in the financial sector after failing to find a telecoms operator to invest.
In the meantime, the government is selling a 10% stake in Ethio Telecom to domestic investors, which Brook says is going “really well”. That sale does not affect the 45% offer, he says, because the government “has no intention to maintain a majority [stake]” in the long-term.
The sale of Ethio Telecom shares is part of preparations for the launch of the Ethiopian Securities Exchange (ESX) in January. Ethiopia is the largest country in the world without a stock exchange, and Brook – who spent the last two years as director-general of the Capital Markets Authority – thinks it is high time for that to change.
“The market has the capacity to mobilise a huge amount of financial resources to support development,” he says. “It would not only allow us to establish a proper yield curve on treasury bonds and treasury note instruments, but also elicit finance from the local market, and help institutional investors from abroad.”
Brook says that EIH is also planning to list companies involved in shipping, printing, insurance and duty-free shops.
Taking wing
Ethiopia’s economic ambitions will be hard to achieve when the nation remains mired in a political, social and security crisis. Investors are unlikely to put their money in a country where they cannot drive outside the capital because of kidnapping on the roads.
But Brook remains optimistic about the long-term potential of Africa’s second most populous country. When asked which models he follows, he says the answer lies “in Ethiopia – it’s called Ethiopian Airlines”. The national carrier has survived for 79 years through several turbulent changes of regime. “Why did it survive? There is one common underlying factor. They were left alone. They were managed commercially.”
For some critics, the Ethiopian state has been far too slow to relinquish its grip on the economy. For others, it is in danger of flogging the crown jewels, such as Ethio Telecom, too early in its journey to economic development.
Brook seems to envisage a middle course, where the state keeps control of major enterprises but exposes them to more vigorous competition, including from foreign entrants – just as Ethiopian Airlines has been tested against competition from other carriers around the continent.
“We need to liberalise because Ethiopia doesn’t receive a gold medal for 10,000 metres [in Addis Ababa],” he says. “We go and run in Paris and receive a gold medal because of competition.”