In Part One, our review of the legal framework for the privatization of Public Enterprises (PEs) in Ethiopia has shown a legal vacuum on who holds the authority to privatize PEs such as Ethiopian Airlines, Ethio-Telecom and Ethiopian Electric Power (EEP). Nevertheless, other PEs targeted for privatization falling under the jurisdiction of the Ministry of Public Enterprises (MOPE) will likely be subject to the Ministry’s existing regulations.
In the second part our legal update, we discuss these rules and procedures as they may be applicable to PEs such as the Ethiopian Shipping and Logistics Services Enterprises (ESLSE), the Sugar Corporation and Railway Corporation. We also highlight some of the post-privatization regulatory requirements that are likely to emerge.
MOPE’s mandate to implement the privatization program of the government stems from the PE Proclamation, the Privatization Proclamation and the Executive Proclamation. In addition, MOPE has developed a number of directives to regulate privatization procedures. These are:
- Public Enterprises and Share Companies Valuation Directive, 2013 (“Valuation Directive”)
- Transfer and Sale of Public Enterprises Directive, 2016 (“Sales Directive”)
- Sale and Transfer of Public Enterprises through Negotiation Directive, 2016 (“Negotiation Directive”) and
- Partnership Implementation Directive (2017) (‘Partnership Directive”).
These rules govern privatization processes from pre-privatization stage to bidding and transfer of the PEs.
Methods of Privatization
The Privatization Proclamation provides that a PE may be privatized in one or more of the following modalities:
- Sale of a PE or its unit or asset;
- Sale of government’s shareholding in a share company;
- Contributing a PE as government’s share in a share company to be formed with a private entity;
- Transferring the management of the PE by way of a long term contracts such as management contracts, lease contracts or concession contracts. This also includes long term partnership arrangements in which ownership will eventually be transferred back to the government. Such partnership modality contains contractual agreement where the private sector will: Build, Operate and Transfer (BOT), Build, Own, Operate and Transfer (BOOT), Rehabilitate, Operate and Transfer (ROT) and Design, Build and Operate (DBO).
The privatization process of a PE requires a series of steps to be completed.
The Decision to Privatize
The PE Proclamation provides that the Council of Ministers (COM) must determine the sale or transfer of an enterprise. Thus, as a matter of priority, any privatization programs will require a decision of the COM. In addition, as noted in part one of the legal update, for the purpose of the PEs under consideration, the COM’s decision to privatize must be accompanied by a decision to open the investment sectors that are otherwise restricted for the private sector.
i. Conversion to Share Company
PEs typically exist as an enterprise (corporation) or as share companies with full or partial ownership of the State. The capital of a PE is determined by the government. The Privatization Proclamation provides that in the process of privatization, MoPE may cause the conversion of an enterprise to a share company. At the time of formation of the share company, the capital of the PE will be divided into shares with government owning 100% of the shares. The key PEs that are under consideration for privatization are currently all 100% state owned and exist in the form of corporations or enterprises. Given that the government intends to partially transfer shares of these PEs, their conversion to share companies will be mandatory.
Valuation of a PE or its units or assets is a prerequisite to privatization. MOPE’s Valuation Directive provides two valuation methodologies.
- Those PEs that have recorded profits once in the previous three years, the business value of the PE based on future benefits (this may mean discounted cash flow) and Asset valuation will be made. Whichever is of a higher value, will be selected as the value of the PE.
- Those PEs that have recorded losses for previous three consecutive years, only asset valuation will be carried out.
The floor and indicative price as determined by the valuation process will be approved by MOPE. Valuation of an enterprise will only be valid for a period of three consecutive years.
Bid Document Preparation
Bid documents and bid notices are prepared by MOPE’s Investment Directorate. The bid document will contain, among others, the following key information:
- The PE financial standing, audit and performance report;
- The PE’s profitability for the 3 years preceding the bid;
- Full information on the PE employees and staff;
- Fixed and movable properties of the PE;
- Sample sales contract;
- Bid evaluation criteria, bid and performance bond requirements; and
- Invitation to bidders and
- Bid Form
Furthermore, MOPE will prepare a Bid Notice having, among others,
- Fees for the purchase of bid documents;
- The date, place and time of bid opening; and
- The amount of bid guarantee.
The above requirements are not subject to changes or negotiable unless MOPE considers there are compelling reasons.
The Privatization Proclamation requires MOPE to adhere to principles of transparency in implementing any privatization programs. The principal method of privatization is through a competitive public tender. Except where there is a pre-existing contractual rights giving priority to existing shareholders of a PE, direct negotiations are permissible on specific grounds provided by law.
i. Open Bidding
MoPE Sales Directives provides that all privatization programs should be carried through open bidding. The sale of the PE is required to be publicized in all media platforms to attract the best offer from the market. Once all the bidding proposals are received, the bid opening procedure would be made publicly in front of the relevant staff of MOPE, bidders and observers. All bidding documents will be verified for the signature of the formal representative of the bidder, the official seal of the bidder and the fulfilment of the requirements of bid bond.
ii. Direct Negotiations
Direct negotiation with private parties will only be pursued and instructed by the Minister of MOPE if:
- An open bidding process fails for a consecutive three times; and
- The PE is unable to function in its existing form and transfer through direct negotiation is considered as the best option for privatization.
MOPE Negotiation Directive states that call for Direct Negotiations should be made publicly. A Negotiation document and Negotiation Notice that is similar to the Bid document and notice for open tenders must be prepared by MOPE. MOPE has the discretion to negotiate with more than one bidder and select the final winner.
In open bids, evaluation of the bids will be made on the basis of the Financial Proposal and Technical Proposal. The bidder who has passed the technical proposals and offered the highest price will be selected as a winner. Bidders offering to pay 100% of the purchase price on the date of the execution of the sales agreement, rather than through a deferred payment modality, may be given additional points of evaluation. Where there are more than two bidders with similar score, these bidders will be given the opportunity to provide a final offer. On the basis of the evaluation criteria, MOPE will determine the winner and notify of the award to all bidders. The winning bidder is expected to sign the sales agreement within 10 days of award. Where the winning bidder fails to do so, the second ranked bidder will be given the opportunity.
Parties to a privatization program may choose ordinary courts or arbitration tribunals as a forum for the settlement of disputes. If arbitration is the preferred mode of dispute settlement, the rules of arbitration specified under the Ethiopian Civil Procedure Code and the Civil Code will be applicable. From past privatization programs, MOPE has selected Ethiopian courts as the preferred forum for dispute resolution under the PE’s sales agreement.
Post- Privatization Considerations
i. Executing Sales Agreement - following the announcement of a successful winner, the winning bidder will be invited to sign a Sales Agreement with MoPE. The Sales Directive provides that the Sales Agreement must provide particulars on payment modalities, hand-over of the PE, and material contracts to be transferred to the private party. It is also provided that the buyers undertaking to implement the business proposal and expansion plans (if any) and the role of MoPE in post-privatization supervision must be included in the Sales Agreement. The winning bidder must settle all payments in accordance with the Sales Agreement and guarantees (if any).
ii. Merger Approval – The Trade Competition and Consumer Protection Proclamation No. No.813/2013 provides that merger notification and approval must be obtained from the Trade Competition and Consumer Protection Authority (TCCPA) for deals that are considered as merger. The scope of application of the TCCP Proclamation extends to any commericial activity or transaction in goods or services conducted or having effect in Ethiopia. Thus, for the purpose of TCCPA approval, a merger is deemed to have occurred,
- when two or more business organizations previously having independent existence amalgamate or when such business organizations pool the whole or part of their resources for the purpose of carrying on a certain commercial activity.
- By directly or indirectly acquiring shares, securities or assets of a business organization or taking control of the management of the business of another person by a person or group of persons through purchase or any other means.
Any privatization of a PE fulfills the elements contained in (b) above. This makes merger notification and approval inevitable. TCCPA normally approves the merger if it is of the opinion that the merger is not likely to have any significant adverse effect on trade competition.
iii. Transfer of Rights and Liabilities: with the exceptions of debts, the Privatization Proclamation provides that all rights and obligations of the PE will be transferred to the Buyer upon privatization. The transfer of debts will require the consent of the creditors. With respect to receivables and payables, any outstanding obligations of the PE will be transferred to the Board of Trustees for Public Enterprises. Proclamation No. 208/2000 empowers the Board of Trustees to collect any receivables and takeover debts that are not transferred to the private party upon privatization. This law obliges the private party to preserve the documents and files to be transferred to the Board in their original place and condition until the Board takes over or removes them. In addition, the private party is expected to cooperate in the collection of debts and receivables.
iv. Post – Privatization Supervision: MOPE is given the responsibility to monitor progress of the privatization program. The investor who has bought into the PE is required to implement the investment plan (typically lasting 5 years) that was submitted as part of the Bid document and agreed upon under the Sales Agreement. The private entity is also required to submit periodic reports and allow MOPE’s personnel to undertake inspection, where necessary.
Ethiopia’s regulation of PEs and privatization programs leaves a lot to be desired. There are legal and institutional loopholes that must be addressed to accommodate the massive privatization plans of the government. Clarity in relation to the articulation of the privatization mandate as it applies to the Ethiopian Airlines, Ethio-Telecom and EEP will ground the process on a strong legal basis.
While MOPE is relatively better positioned to guide the privatization process, its existing rules and procedures are inadequate to manage the size and complexity of some of the PE targeted for privatization. MOPE would require strong external support (financial, management and legal) to achieve the desired results of the privatization. Active participation of the PEs and their sectoral supervisory ministries as well as close monitoring of the COM is needed.