In this issue of our legal update, we share with our readers how the Ethiopian government’s recent policy drive to privatize key state-owned enterprises, referred to in the Ethiopian legal regime as Public Enterprises (PEs), may be implemented legally and the broad regulatory issues that may need to be considered. The decision to privatize is a reflection of the policy that is current at the time of its making. It is inherently a political decision and demonstrates a major shift in policy at the highest executive organ of the government. Execution of this decision may necessitate the amendment of existing laws. It may also require a gap filling exercise on the assumption that existing laws do not cater for some of the PEs targeted for privatization. Such is the case, in our considered view, on the privatization of, for example, the Ethiopian Airlines, Ethio-Telecom and Ethiopian Electric Power (EEP). On the other hand, the privatization of Ethiopian Shipping and Logistics Services Enterprise (ESLSE), the Sugar Corporation and Railway Corporation, may be executed on the basis of existing laws on privatization. Further, legislative amendment of current investment laws including relaxation of rules restricting sectors for private and foreign investment, and enhancing clarity on regulatory mandates will be critical.
2. Policy Background
Following the overthrow of the socialist regime in 1991, the transitional government of Ethiopia at the time announced a free market economy. A number of legislations were enacted to privatize PEs and encourage private sector participation. Key among these legislations was the Public Enterprise Proclamation No 25/1992 (“PE Proclamation”) that facilitated the conversion of PEs to autonomous commercial entities. The Privatization of Public Enterprises Proclamation No. 146/1998 (“Privatization Proclamation”) was also a key legal instrument that paved the way for privatization of PEs. While many sectors that were previously dominated by the State were eventually liberalized, sectors in defense, aviation, supply and distribution of energy, railway, shipping and logistics services, telecommunication and postal services were exclusively retained by the government.
From the early 2000s, there was a shift in policy outlook of the government regarding PEs. The adoption of a developmental state economic model, in which the State assumed a commanding role in bringing about economic development, facilitated the establishment of more PEs. The policy received a legislative endorsement with the establishment of the Public Enterprises Supervisory Authority and the Industrial Fund by virtue of Proclamation No. 277/2002. This law redefined the role of PEs as active players in the country’s economy and the drive towards industrialization. Furthermore, a five-year national development agenda of the government i.e., the Growth and Transformation Plan (spanning the period 2010-2020) assigned a significant role for PEs in the economy. Of the 77 billion dollars that was required to execute the GTP II, it was envisaged for PEs to contribute 45% of the financing. Since 2005, notable PEs that were newly incorporated include: the Ethiopian Railway Corporation (2007), Metal and Engineering Corporation (2010), Ethiopian Sugar Corporation (2010), Chemical Industry Corporation (2012), Industrial Development Zones Corporation (2013), Ethiopian Petroleum and Industrial Gas Enterprise (2012) and Metal, Petroleum and Bio Fuel Corporation (2015). Key PEs also went through a restructuring process including the Ethiopian Electric Power Corporation (EEPCO) which split into two PEs - EEP (2013) and Ethiopian Electric Utility (EEU), Ethiopian Telecommunication was converted to Ethio-Telecom (2010) and the Ethiopian Airlines Enterprise was merged with the Ethiopian Airports Enterprise to become the Ethiopian Airlines Group (EAG). (2017). To further strengthen the expanding role of PEs in the economy, the law empowered most of these PEs to sell and pledge bonds, negotiate and sign loan agreements with local and international financiers in their own name with the government providing sovereign guarantees.
In terms of private investment and foreign participation in the economy, government policy has remained the same since 1991. Successive investment laws have divided areas of investment as:
- Areas exclusively reserved for the Ethiopian government – these are transmission and distribution of energy through the national grid, postal (except courier services) and air transport services with the seating capacity of more than 50 passengers.
- Areas permitted only for joint venture with the Ethiopian government -- e.g., telecom services.
- Areas reserved for Ethiopian nationals only – these include, inter alia, banking, insurance, micro-finance; broadcasting services; packaging, forwarding and shipping agency services.
Current Investment Proclamation provides that the Council of Ministers or the Investment Board, as the case may be, may authorize the opening up of investment sectors that are otherwise restricted for private and foreign parties.
- Public Enterprises and Privatization
The regulation of PEs and their privatization has gone through several legislative and institutional reforms in the last 25 years. Between 1992 - 2004, PEs and their privatization was regulated by two separate regulatory regimes. The PE Proclamation and the Public Enterprises Supervising Authority Establishment Proclamation No. 277/2002 (“PESA Proclamation”) governed the establishment and operation of PEs whereas the Privatization Agency Establishment Proclamation No. 87/1994 (as amended) and the Privatization Proclamation governed privatization of PEs.
Later on, the government adopted a unified approach by merging these two regulatory systems into the Privatization and Public Enterprises Supervisory Authority (PPESA) through Proclamation No. 412/2004 (“PPESA Proclamation”). In 2015, PPESA was elevated to the Ministry of Public Enterprises (MoPE) sustaining PPESA’s dual mandate of supervising PEs accountable to it and overseeing the government privatization program.
- Regulation of Public Enterprises
- Definition of PEs
PEs are defined in different legislations differently depending on the nature of regulation in place. The core legislation, i.e. PE Proclamation, defines PEs as “wholly owned state enterprises established to carry out, for gain, manufacturing, distribution, service rendering, or other economic or related activities”. Whereas some legislations such as the the Auditor- General and Anti-Corruption legislations have taken a broader definition of PEs. Thus, per current Ethiopian law, a PE may be one or all of the following:
- A wholly state-owned entity established in accordance with the PE Proclamation
- A share company that is 100% owned by the government.
- An entity designated by the government as a PE.
- An entity that is partially owned by the government.
PEs may take any corporate form. There are no mandatory rules that prescribe a certain type of corporate structure for PEs. They could be either in the form of corporations/enterprises or share companies. PEs that are established as corporations/enterprises are regulated by the PE Proclamation whereas those that are established as share companies are subject to the rules of the Commercial Code (with certain exemptions provided under the PE and Privatization Proclamation). For the purpose of this legal update, the entities that are under consideration are all corporations or enterprises and not share companies.
- Supervision of PEs
Council of Ministers
The Council of Ministers has a wide-ranging power with respect to the supervision of PEs. These powers include:
- Establish a PE
- Allocate the capital of the PE
- Assign a supervising authority for the PE
- Dissolve a PE
- Determine the amalgamation or division of a PE
- Determine the establishment of a PE as a business organization under the Commercial Code.
- Determine the sale of an enterprise, or the transfer of an enterprise or its management in any manner
- Decide on the sale of shares held by the government
MOPE and Sectoral Supervising Ministries (SSM)
The primary regulatory organ with the obligation to oversee PEs is a supervisory authority selected by the government. The PE Proclamation defines a supervisory authority as an entity to be designated by the Council of Ministers with a view to protecting the ownership interest of the State. The supervisory authority is required to be assigned in the regulation establishing the particular PE. The supervising authority could either be, the MOPE by virtue of Proclamation to determine the Powers and Duties of the Executive Organs No. 916/2016 (“Executive Proclamation”) or a Sectoral Supervising Ministry (SSM).
For instance, the Ethiopian Airlines Group (EAG) establishment regulation assigns the Ministry of Transport as the SSM. Similarly the Ministry of Water, Irrigation and Electricity (MoWIE) is the designated SSM for EEP and EEU. The Sugar Corporation, Railway Corporation, the Chemical Corporation and the Ethiopian Shipping and Logistics Services Enterprise (ESLSE) are supervised by MoPE pursuant to the Executive Proclamation. Contrary to the law, Ethio-Telecom’s supervisory entity is not named under Regulation No. 197/2010 nor is made accountable to MOPE under the Executive Proclamation. In practice, however, the Ministry of Communication and Information Technology (MoCIT) acts as Ethio-Telecom supervising ministry.
As supervisory authorities, MOPE and SSMs are empowered to, inter alia, carryout the following tasks with respect to PEs that are accountable to them:
- Cause the allocation of an initial capital
- Appoint and remove Board members
- Appoint Board chairman
- Approve external auditors and financial reports of these auditors
- Approve corporate and investment plans
- Follow up and evaluate the performance of PEs
- Determine the amount of dividends to be paid to the government
- Propose to the Council of Ministers the amalgamation, division or sale of the PE where necessary.
MOPE assumes an additional authority with respect to those PEs that are accountable to SSMs. This relates to overseeing and assisting their corporate management and financial performance.
- Privatization of PEs
The Privatization Proclamation provides that the objectives of a privatization program are to:
- generate revenue required for financing development activities;
- change the role and participation of the government in the economy to enable it exert more effort on activities requiring its attention; and
- promote the country's economic development through encouraging the expansion of the private sector.
While these are the legally prescribed objectives, the recent policy speech by the Prime Minister (PM) to parliament indicates additional justifications for privatization. The PM has stated that the partial or full privatization of PEs is expected to solve current operational inefficiencies of PEs inject a much-needed foreign capital into the economy.
- Privatization Mandate
As noted above, in early 2000s, PEs were restructured to become key players of the government’s development agenda. Prior to the 2002, all PEs and their supervising authorities were subject to the rules of the PE Proclamation. With the enactment of the PESA Proclamation, a clear distinction was made between those PEs that are accountable to the Authority and those that were not. This law authorized the Authority at the time to only have mandate over those PEs that are accountable to it and provided wider powers of supervision to SSMs.
Two years later, PPPESA Proclamation reaffirmed this position by limiting the scope of supervision to only those PEs that are accountable to PPESA. In addition, this law went one step further and empowered SSMs to carry out privatization of PEs responsible to them. For the first time, what has been a traditionally centralized approach to the privatization of PEs, was split between PPESA and SSMs.
Consequently, the PPESA Proclamation empowered the Authority and SSMs with to:
- Lead, manage and execute the government’s privatization program
- Submit list of entities to be privatized to the government
- Prepare the PEs for privatization
- Determine bid evaluation criteria
- Prepare necessary privatization documents
- Publicize the privatization process
- Post- privatization, monitor the progress of the PEs and investors compliance with obligations.
Though SSMs mandate was expanded, in reality it did not result in the privatization of key PEs. With the exception of Ethio-Telecom which experimented a management contract with a foreign telecom services provider (Orange), the privatization powers of SSMs had not been tested in practice. In fact, the legislative mandate that granted SSMs the powers of privatization was repealed by the Executive Proclamation of 2016. As a result, SSMs are currently mandated to only “propose, where necessary, to the Council of Ministers, the dissolution, amalgamation, or division of an enterprise under its control, or the transfer of the enterprise or its management in any other manner.”
Neither is MOPE empowered to lead and manage the privatization of PEs that are accountable to SSMs. Under the Executive Proclamation, the power and duties of MOPE is limited to those PEs that are accountable to it. Other PEs that are accountable to SSMs are excluded from MOPEs jurisdiction. Therefore, one can conclude that PEs such as EAG, Ethio-Telecom, EEP and EEU which are all accountable to SSMs, are not subject to any privatization regulatory regime.
Furthermore, the respective mandate of MOPE with regards to privatization was similarly reduced by the Executive Proclamation. Under the PPESA Proclamation, privatization procedures were assigned to two organs, namely the Authority and the Privatizations Board. While the Authority oversaw and led the entire privatization process from bidding to completion, the Board conducted a high level regulatory review of the Authority.
In repealing and replacing the PPESA proclamation, the Executive Proclamation transferred the powers and duties of the Privatization Board to MOPE. The mandate of the authority was neither assigned to MOPE nor transferred to a third organ leaving a grey area in the law.
Therefore, at present, the powers and duties of MOPE with regards to privatization are restricted to the below:
- Oversee and implement the privatization program
- Ensure the orderly execution, legality, transparency and efficiency of the privatization process
- Submit recommendations on policy issues to the government
- Examine complaints submitted to it with regards to the privatization program and give administrative decisions
- Take all necessary measures to expedite the privatization process
- Issue directives necessary for the privatization process
These powers and duties are high level in nature and do not translate into a mandate to lead and manage the privatization process. In fact, the reading of the above powers suggests that the privatization process would be carried out by a third party entity with MOPE playing a supervisory role. This will bring into question whether MoPE is granted the power by law to lead and manage the privatization of those PEs that are accountable to it, namely, ESLSE, Sugar and Railway Corporation. In practice, though, MOPE continues to play the role of an implementing agency for the government’s privatization program by undertaking privatizations of a number of PEs. Recently, MoPE facilitated the privatization of Assela Malt Factory. It is also currently undertaking the privatization of National Alcohol and Liquor Factory. This practice is further substantiated by the various directives that MOPE has enacted in the last couple of years regarding procurement, sale and transfer PEs.
Compounding the jurisdictional issues as to whether MOPE or SSMs are legally empowered to privatize PEs or not, the Investment Proclamation No. 769/2012 permits a joint venture between PEs and the private sector. Article 9 of the Investment Proclamation provides that PPESA (now MoPE) must receive investment proposals submitted by any private sector intending to invest jointly with the government and submit same to the Ministry of Industry, for approval. Upon approval, MoPE is empowered to designate a PE to invest as partner in a joint investment. The Investment Proclamation grants Ministry of Industry the mandate to approve joint venture proposals (by way of privatization) between the government and the private sector. This provides further complexity into the privatization mandate and who is assigned the legal mandate.
- Concluding Remarks
A successful implementation of privatization program requires clarity and coherence between policy/law and implementation. Ethiopia’s current legal regime regulating PEs and privatization is not clearly articulated to accommodate the massive task of privatizing organizations such as Ethiopian Airlines and Ethio-Telecom. Privatization of these PEs is a grey and unregulated area. This calls for the review of the existing legal regime in terms of achieving coherence and resulting in a fair and beneficial outcome to the country.
As a first order of business, relaxation of current legislations restricting certain sectors of the economy in which most of the PEs operate as ineligible for the participation of the private sector in general and foreign investors in particular must be made. The other key consideration is for the government to look into the rules of the privatization process that are presently in place. As noted above, existing rules do not present a clear legal and institutional mandate as to who will own and implement the privatization of key PEs. The question is whether or not MOPE’s powers are extended to cover all of the PEs earmarked for privatization or SSMs will be empowered to lead the process regarding selected PEs, or whether this process receives a high level inter-institutional ad-hoc structure tasked with the responsibility to undertake the privatization process.
Coming up -- Part II: Legal Update – On the privatization rules and procedures of MOPE