Ethiopia in Profile, July 2014 1 | Page 1 “Addis 2050: “A rethink of Ethiopia’s energy future”, Prof. Ludger Hovestadt , Chair for Computer Aided Architectural Design, Institute of Technology Architecture, ETH Zurich, 2013. Henricus J. Stander III Managing Partner +44 790 133 2204 [email protected]In 2009 over 72 million people (out of 85 million) lived without electricity, mostly in Rural Ethiopia. In other words, 90% of Ethiopians did not have access to the electricity grid. 1 Almost 1,500 KM² are deforested every year. That is 3 times the area of Addis Ababa, every year, to generate energy from wood resources. 90% of Ethiopian households use firewood for cooking. That is more than 14 million women exposed to indoor smoke. Less than 14% of the total road network is paved. That is more than 38,000 km of gravel roads. Closed and slow. In 2007, there were 3 motor vehicles per 1,000 Ethiopians. That is more than 330 people sharing each transport unit. Transport in rural areas depends on pack and draft animals, slow and inflexible. However as we will share, this is rapidly changing. Ethiopia’s Vision = Become Africa’s “Low-cost Operating Platform” Yesterday Today The Government’s efforts focus on two main ideas: 1. Lead with centralized power generation, followed by decentralized & distributed power. In this way, leaps in energy production drive urban efficiency, followed by a flourishing of decentralized power where it is consumed, lifting rural communities. Results = 9.6 new MWs every day. 2. Connect rural road networks and enhance global network In this way each region is connected to the rest of the country and the international network connects Ethiopia to the world. Result = 6.6 Kms every day.
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1 “Addis 2050: “A rethink of Ethiopia’s energy future”, Prof. Ludger Hovestadt , Chair for Computer Aided Architectural Design, Institute of Technology
Architecture, ETH Zurich, 2013.
Henricus J. Stander III Managing Partner +44 790 133 2204 [email protected]
In 2009 over 72 million people (out of 85 million) lived without electricity, mostly in Rural Ethiopia. In other words, 90% of Ethiopians did not have access to the electricity grid.1
Almost 1,500 KM² are deforested every year. That is 3 times the area of Addis Ababa, every year, to generate energy from wood resources.
90% of Ethiopian households use firewood for cooking. That is more than 14 million women exposed to indoor smoke.
Less than 14% of the total road network is paved. That is more than 38,000 km of gravel roads. Closed and slow.
In 2007, there were 3 motor vehicles per 1,000 Ethiopians. That is more than 330 people sharing each transport unit. Transport in rural areas depends on pack and draft animals, slow and inflexible. However as we will share, this is rapidly changing.
Ethiopia’s Vision = Become Africa’s “Low-cost Operating Platform” Yesterday Today
The Government’s efforts focus on two main ideas: 1. Lead with centralized power generation, followed by decentralized & distributed power. In this way, leaps in energy production drive urban efficiency, followed by a flourishing of decentralized power where it is consumed, lifting rural communities. Results = 9.6 new MWs every day.
2. Connect rural road networks and enhance global network In this way each region is connected to the rest of the country and the international network connects Ethiopia to the world. Result = 6.6 Kms every day.
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1. Federal Democratic Republic of Ethiopia (“FDRE”): Overview 1. 1 Economic Overview:
Ethiopia is the largest economy in East Africa
GDP in 2013 was $45 billion
Economy is growing at 7-8% CAGR and is expected to reach $75 billion by 2020
GDP Composition:
1. 2 Key Facts:
Population 94 Million Population Growth Rate 2.6%
Languages Amharic (Language of Federal
Government) and English
(Widely spoken in Business)
Topography Elevated central plateau varying in height from 2,000 to 3,000 meters above sea level. Has 25 mountains whose peaks reach over 4,000 meters
Calendar Julian calendar, which divides the year into 12 months of 30 days each
1. 3 Current Ruling Political Coalition: Ethiopian People’s Revolutionary Democratic Front (EPRDF)
EPRDF is an alliance of four groups: the Oromo Peoples' Democratic Organization (OPDO), the Amhara National
Democratic Movement (ANDM), the South Ethiopian Peoples' Democratic Front (SEPDF) and the Tigrayan Peoples'
Liberation Front (TPLF).
Prior to 1991, EPRDF was a rebel group fighting the military junta known as the Derg
After the Derg was overthrown, Meles Zenawi Asres, head of the EPRDF, served as the president of the transitional
government of Ethiopia from 1991 to 1995.
EPRDF under the leadership of Meles Zenawi formed the first government in 1995. Meles served as the Prime
Minister from 1995 until his death in Auguest 2012.
EPRDF, and in particular Meles, has been credited with the rapid economic progress made by Ethiopia.
o The EPRDF consciously modelled Ethiopia on China, South Korea, Taiwan and Singapore and the broad
philosophy is to develop the country into a democratic developmental state.
After Meles Zenawi died in 2012, a seamless transition of power within the ruling coalition took place, sustaining the
reform agenda initiated by Meles and the EPRDF 15 years earlier.
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1. 4 Political Time Line:
2. Ethiopia – Transformation
Dawn in Ethiopia: “Over the plains of Ethiopia the sun rose as I had not seen it in seven years. A big, cool, empty sky flushed a little above a rim of dark mountains. The landscape 20,000 feet below gathered itself from the dark and showed a pale gleam of grass, a sheen of water. The red deepened and pulsed, radiating streaks of fire. There hung the sun, like a luminous spider's egg, or a white pearl, just below the rim of the mountains. Suddenly it swelled, turned red, roared over the horizon and drove up the sky like a train engine”.2
That was then, this is now!: Most investors, when asked what jumps to mind when thinking of Ethiopia, mention famine, poverty, war or barefoot gold-medalists (if they are old enough to recall the 1960 Olympics in Rome). Despite these lingering perceptions, over the past 15 years, a remarkable transformation has taken place in Ethiopia. The magnitude of this change is scarcely covered in the press nor well understood among the investment community. State-led development, Asia-style, is driving rapid growth and economic diversification while laying the groundwork for enabling Ethiopia to become a low-cost, labour-intensive manufacturing platform just as Chinese labour costs breach the Yuan 4,000/month threshold3 (having more than tripled from Yuan 900/month in 2001). High productivity growth, high urbanization growth rates, continued capital scarcity and a rapid pace in the reduction of indirect company operating costs, combine to offer an exceptional investment environment for those with the patience, familiarity and capability to manage the risks associated with an economy in transition.
2 Doris Lessing, Going Home; Harper Perennial; 1st Harper Perennial Ed edition (April 1996). 3 National Bureau of Statistics, China Statistical Yearbook 2013.
1941 – 1974: Socialism’s Foundation
After World War II, Emperor Haile Selassie l, came back to power and launched a range of largely ineffectual initiatives to promote the modernization of the nation
In 1961, the 30-year Eritrean Struggle for independence began
Perceptions of this war as imperialist was one of the primary causes for the growth of the Ethiopian Marxist movement and in the early 1970s, the Ethiopian Communists started receiving the support of the Soviet Union
1800-2000 vs 2001-2013: As the chart4 to the right shows, from 1800 to 2001, Ethiopians did not meaningfully increase their inflation adjusted incomes (follow the dark blue dots, representing years, over time from 1800 to 2012). Moreover, it took two centuries to add an additional 20 years to life expectancy, (a general measure of quality of life). Then around 2001, it all began to change. From 2001 to 2013, another ten years of life expectancy was added while the purchasing power of the average Ethiopian more than doubled. Dramatic and swift improvements had taken place resulting from the largely state-directed development agenda, the effects of which are rapidly transforming SSA’s second most populous nation while largely remaining under the radar of most investors.
3. Macro-Economic Overview5 3. 1 GDP Growth:
The EPRDF’s developmental state approach has led to the economy experiencing strong broad based growth over the
past decade, making Ethiopia one of the fastest growing economies in the world
The economy grew at 8.8% CAGR from 2001-2012 compared to the East African Community (EAC) regional
average of 4.4%.
The growth is led primarily by expansion of the services and agricultural sectors, while the contribution of the
manufacturing sector has been relatively modest (though slated for rapid grow as noted below).
Demand side growth has been led by both private consumption and public investment, with the latter assuming
an increasingly important role in recent years
Outlook: IMF, AfDB, World Bank and others predict that Ethiopia is likely to be in the high single digit growth league
for the foreseeable future, maintaining its position as one of the world’s fastest growing economies. In May 2014,
Ethiopia received credit ratings for the first time; Moody’s gave the country’s credit worthiness a B1, while S&P and
Fitch gave it a B, signalling the country’s intention to tap the Eurobond market in the near future and enabling
benchmarking against regional peers Kenya and Uganda.
4 For a dynamic view see, www.gapminder.org . 5 All data from IMF Regional Economic Outlooks 2012 and 2013 and IMF Country Report No. 13/308, Oct 2013
Growth remains above the Median LIC and the World… … Driven mainly by agriculture and services
The Government’s proactive steps aimed at enforcing greater predictability of currency and lowering inflation has
shown positive results.
Inflation, which had spiked in 2008 (> 60%) and again in 2011 (> 40%) has been kept below 7% over the past few
years.
Also, the IMF has engaged with the Central Bank & Ministry of Finance to restrain the excessively accommodating
monetary policy that had characterized the high inflation period, in order to maintain positive real interest rates.
In addition, the Government has moved to a managed devaluation regime, devaluing the Birr by 6% per annum to
manage the periodic over-valuations that had widened the current account deficit over the past decade.
Outlook: Greater predictability of the economy has attracted more FDI into sectors that can either displace imports
(eg: agriculture) or generate export earnings (eg: light manufacturing).
Inflation has come down drastically … …. Although it remains high compared to emerging and developing economies
Improved competitiveness as a result of exchange rate adjustments beginning in 2009-10 has become well established by end 2012/13
Foreign exchange supply has come under pressure in the first half of 2012/13 resulting in a widening of the premium in the parallel market
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3. 3 Debt to GDP
Post implementation of debt forgiveness programs, the Debt/GDP ratio came down to a record low of 10.7% in
December 2008 from an all-time high of 93.2% in December 1994.
The IMF’s recent Debt Sustainability Analysis (“DSA”) concluded, “Ethiopia remains at low risk of external debt
distress. The present value (PV) of PPG external debt declined from 15.3 percent of GDP as projected in the 2011 DSA
to 13.6 percent of GDP, reflecting higher-than-projected inflation and smaller than-projected currency depreciation”.6
Outlook: The level of Ethiopia’s external debt distress remains at a low risk rating.
6 IMF, Staff Report for the2013 Article IV Consultation – Debt Sustainability Analysis, Oct 2013
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3. 4 Debt-funded Infrastructure Spending:
The debt build-up required to fund the Government’s ambitious and aggressive infrastructure program is unlikely
to destabilize growth.
As the charts above illustrate, the IMF does not foresee excessive risk from Ethiopia’s current borrowing plans.
Importantly, in all scenarios, the risk threshold is never breached and in most cases the forecasts remain well
below the threshold where vulnerability to external shocks could destabilize growth.
One caveat to this is, as in many developing economies, domestic savings in Ethiopia are low. Small and medium
enterprises (“SMEs”) have very limited access to bank credit or other financial services given the temporary
“crowding out” of the private sector as a result of the sustained infrastructure investment program.
3. 5 Current Account Deficit:
High growth and aggressive infrastructure spending have led to an expanding current account deficit, though it is
substantially lower than regional peers.
The growing current account deficit is driven by:
a) The surging domestic demand since 2003 resulting from broadly distributed growth.
b) The Government’s import of intermediate capital goods for the construction of roads, rail, power and telecom
networks.
c) Low saving rate.
Ethiopia’s position has been vulnerable to external shocks, particularly in the food and fuels categories.
Stabilization of growth, a strong rebound in remittances and continuing growth in Official Development Assistance
(“ODA”) since the global financial crisis have contributed to an improvement in terms of trade between 2008 and
2013 but the general current account deficit, conversely, has expanded.
In an effort the address the issue, the Government has made it mandatory to source at least 20% of content for
construction projects locally moving to 50% local content by end of 2014.
Outlook: The growing current account deficit has created one area of macro risk that the government and multilateral
agencies will have to monitor and manage over the coming decade.
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3. 6 Summary: The broad-based inclusive growth agenda of the EPRDF is widely considered a success to date. The
economy has recorded remarkable and steady growth for over a decade and the benefits have been inclusively
distributed spreading wealth into rural Ethiopia while significantly reducing poverty. The Government has
consistently prioritized capital spending vs current expense. It has borrowed to leverage that capital investment
program, but debt levels remain low and are forecast to remain within manageable thresholds. Inflation appears to
have been tamed and an overvalued currency is now controlled within a managed float system to maintain
competitiveness. One area of risk is the current account deficit. But as discussed below, much of the Government’s
policy framework is geared toward broadening and deepening the country’s export potential in a bid to build up
Dollar reserves and narrow the current account deficit.
Ethiopia’s current account deficit has been widening over the last two years…
…With relatively low export base …
… And low reserve coverage … But strong remittances and official transfers
Particularly volatile terms of trade …And low but growing external debt could signal a future vulnerability for the country, if not contained.
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4. Policy and Social Overview 4. 1 Government Infrastructure Framework: Ethiopia is engaged in Africa’s most ambitious and strategic infrastructure
spending program (US$73 Bn over five years) with the objective of transforming the country into the lowest cost
operating environment on the Continent and in turn achieve middle income status by 2020-23. Government
expenditure on capital investment has resulted in the following infrastructure improvements:
Installed electricity capacity more than doubled over the period 2007-2011, from 800 MW to 2,000 with a target of
10,000 MW by 2016, while distribution increased from 1,600 communities to almost 6,000 over the same period.
Total road length (municipal and rural) increased from 42,429 km in 2007 to 52,042 km in 2011.
In 2010, 44% of the population had access to freshwater sources, and 20% to improved sanitation, up from 30% and
10%, respectively, in 2001.
The Government is building almost 2,395 km of railways including a high-speed rail from Addis Ababa to Djibouti to
facilitate exports.
The number of mobile subscribers and telecom density for mobile lines increased from 6.52 million in 2009 to more
than 45 million by 2014. Similarly, the coverage of wireless telephone service increased from 50% to 90% by 2012.
Spatial View of Ethiopia’s Expanding Infrastructure Networks Mapped against Population Density, 20117
7 “Ethiopia’s Infrastructure, A continental Perspective”, Policy Research Working Paper 5595, The World Bank, March 2011.
Transportation Power
Irrigation
Road Traffic (Average Annual Daily Traffic)
Unknown < 100 100 –300
300 –1000
> 1000
Hydro Thermal Other Capacity(MW)
<10
10 - 100
>100
ICT International Gateways
Fixed Transmission Network
ICT GSM Coverage
Current Irrigation (% Area)
<1% >5%1% - 5%Communications
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4. 2 Social Measures of Improvement:
Various government initiatives have delivered substantial quality of life improvements to Ethiopians since the
beginning of 2000’s, as summarized below:
Poverty Reduction: Broad based economic growth pursued by Ethiopia resulted in reducing poverty in both urban
and rural areas.
o While 38.7% of Ethiopians lived in extreme poverty
in 2004-2005, five years later this had fallen to
29.6%. The target is to reduce this further to 22.2%
by 2014-2015.
Improved Healthcare Provision: Impressive
expansion has been achieved in health services, as
evidenced by the steady decline in infant mortality
and progress in reducing the incidence of HIV/AIDS.
o The Government has made noteworthy efforts to
roll back malaria through dissemination of
information and the provision and use of insecticide-
treated nets. In 2005, only 2% of households had
these nets, but by 2010, all malaria-prone areas had
nets.
Investment in Education: The Government’s efforts
have resulted in the rate of primary school
enrolment (grade 1 to 8) leaping from 68% in 2004/05 to 85% by 2010/11, with greater progress since.
Increased Food Security: The Productive Safety Net program is one of the largest social safety-net protection
programs in Africa, and targets almost 8 million chronically food-insecure people in rural areas.
4. 3 Addis Ababa, A City On The Move:
In AT Kearny’s 2014 Global Cities Index
and Emerging Cities Outlook, Addis
Ababa is the third most likely city to
rapidly advance its global positioning
to become a world class city.
While its absolute numbers in the area
of innovation are quite low, it
improved its performance on the
leading innovation indicators by a very
large percentage between 2008 and
2013.
At current rates of improvement, the
Ethiopian capital is also among the
cities closing in fastest on the world
leaders—despite current distances—in
income equality, healthcare, and
business transparency.
Surya believes that one of its initiatives
in the municipal waste to electricity
space will further contribute to the
City’s standing upon completion.
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5. Investment Context, Protections and Incentives: 5. 1 Context: The various business sectors in Ethiopia can be categorized into the following four buckets based on
investment restrictions:
Reserved for Government: The sectors reserved for government are electricity generation & transmission
through the national grid, postal services, and air transport services using aircraft with a capacity of more than
50 seats.
Reserved for Joint Investment with Government: Investments in telecommunication services and production of
weapons and ammunition can only be done jointly with the government.
Reserved for Domestic Investors: A number of sectors, including financial services, have so far been closed for
foreign investment and permit only domestic investors. In April 2014, the Government announcement it first
step in liberalizing the financial sector by allowing foreign investment into the leasing sector.
Open to Foreign Investment: Sectors which do not fall into the above three categories are open to foreign
investors.
5. 2 Investor Protection: Ethiopia provides an attractive policy regime for foreign investment regarding investment
protection & profit repatriation:
Both the Constitution and the Investment Proclamation of 2002, amended in 2003, protect private property and
assure the right to repatriation of capital and profit.
Investments also benefit from Multilateral Investment Guarantee Agency (MIGA) guarantees and from measures
in Ethiopia’s Bilateral Investment Promotion & Protection Treaties (BIPPTs)8.
5. 3 Investor Requirements: No restrictions are made on the modality of participation, although foreign investment
is subject to minimum capital requirements, as a general rule US$200,000 per project, as well as progress
reporting requirements to the Government.
5. 4 Investment Incentives: To induce investment and support from the private sector the Government has
promulgated a number of laws and regulations in support of foreign direct investment including:
Creation of the Ethiopian Investment Agency, which is a one stop shop for all applications, licenses, approvals and documents.
Customs duty exemption on imported capital goods, construction materials and spare parts worth up to 15% of the value of imported goods.
Company income tax exemption from 2 to 9 years. Otherwise a graded scale based on level of income up to 30% as defined in the Income Tax Proclamation No. 286/2002.
Personal Income tax rates for residents are progressive as well capping out at 35% as defined in the Income Tax Proclamation No. 286/2002.
Loss carry forward is allowed for half the income tax exemption period.
No discrimination between foreign & domestic investors, (though FDI is encouraged in certain sectors. For example, manufacturing investments with a backward linkage to agriculture are top priorities e.g., textiles, garments, leather, leather products, food processing).
Depreciation allowances rates are categorised into: Buildings and structures, 5%. Intangible assets, 10%. Computers, information systems, software and data related hardware, 25%. All other business assets including machinery or vehicles, 20%.
Investors involved in agriculture, agro-processing or other targeted sectors are eligible for loans from the Development Bank of Ethiopia at concessional rate for up to 70% of the total investment costs.
Membership in a variety of market access treaties allowing exemption of duties or quotas include COMESA, USA through AGOA, and EU by treaty. Full repatriation rights to capital, dividends, loans and interest.
8 Including: Egypt, Germany, France, Libya, Iran, Italy, Luxembourg, Denmark, Spain, Netherlands, Sweden, Algeria, China, Austria, Djibouti, Equatorial Guinea, Finland, India, South Africa, Sudan, Turkey, Yemen, Russia, Kuwait, Israel, Switzerland, Tunisia, USA and UK.
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6. Key Investment and Business Trends As a result of the policies and incentives implemented by Ethiopia, FDI into the country has grown significantly in the
past decade:
FDI has grown from roughly $1 billion in 2001 to $5 billion in 2012.
Sectors that have attracted most investment include agriculture, agro-processing, consumer goods and light
manufacturing.
Given the dearth of local capital, we anticipate a gradual opening of the retail and financial services sectors.
Liberalization in those two sectors would meaningfully accelerate growth, given the stimulating effects and
efficiency gains possible. Nevertheless, this remains on the horizon. In the interim, see the following opportunity
sets:
Agriculture
Current Scenario 48.8% of GDP
60% of exports
85% of Employment
Biggest exporter of floricultural products in Africa (1st African deal for KKR, $200mn investment)
4th largest sesame exporter, 3rd largest coffee
Top 10 producer of oil seeds like linseed and a variety of pulses
Opportunity
Drivers
Agricultural Transformation Agency (“ATA”) created as policy and investment Czar agency
Low agricultural productivity, at 1.2% per annum, roughly the same as medieval Europe
Varied agro-climate and altitude differences allows farming of a wide variety of crops
The livestock sector has the largest heard in Africa but is grossly unexploited
Government
Support Measures
Formation of the Ethiopian Commodity Exchange, first in Africa, has created efficiency in price discovery and delivery9
Well protected land tenure rights enshrined in the constitution
Leaseholds extension from 66 to 80 years for farming ventures
Key to Success Location (proximity to markets, infrastructure and water)
Outlook High value horticulture sector is likely to overtake floriculture as an export earner
Future growth in the agribusiness sector will be driven by improved production by small-scale farmers and further foreign investment in commercial farming and agro-processing
Consumer Goods
Current Scenario A plethora of activity led by foreign investments in beer industry
Opportunity
Drivers
94 million population, rapidly expanding economy, high urbanization rates and young population (73% under 30 Years)
Government-focus on development of light manufacturing sector
Industrial parks under construction
Significant
Developments
Diageo acquired a minority stake in state-owned brewery, Meta Abo, in 2011 for $225m
Heineken bought two smaller breweries for $85m and $78m respectively in 2011
Duet Group acquired 41% stake in Dashen Brewery for $90 million in 2012.
Announcement of greenfield investment projects such as Raya Brewery and Habesha Brewery
South Africa’s Tiger Brands acquired majority stake in East African Holdings’ FMCG operations, the largest manufacturer of household goods in the country
Unilever announced $100mn manufacturing investment
Outlook Interesting opportunities exist for expansion of market outlets such as supermarkets, distribution systems, and wholesale/retail operations
The next drive in the growth of FMCG sector may see expansion into the regional markets of Somalia and South Sudan
Current Scenario Contributed 0.6 percentage points to the country’s annual GDP growth over the last decade
Key Opportunities Sectors such as cement, metal-working, engineering, logistics, and services from mobile apps to outsourced towers all offer captive demand opportunities due to increasing focus on local content
Key to Success Strong government relationships
Acute insight into the way business is conducted on the ground
The key to identifying the opportunities lies in understanding the inputs the government requires to implement these various development projects particularly given the increasing focus on local content
Outlook Raising the country’s infrastructure endowment to that of the region’s middle-income countries could add an additional 3 percentage points to infrastructure’s contribution to growth
The $73Bn in spending to quintuple power generation, triple the capacity of the road network, triple the railway network, quadruple the mobile network and expand Ethiopian Airlines into the largest airline in Africa imply massive supplier input opportunities
Logistics and Distribution
Current Scenario Growing trade, despite current inadequate infrastructure, is driving the sector
Opportunity
Drivers
Increased trade with neighbouring countries
Planned transportation corridors in the region especially the Nairobi- Addis Ababa highway that will link Ethiopia’s 94 million population with 130 million consumers in EAC
High speed rail between Addis Ababa and Djibouti under advanced construction
Established road linkages between Ethiopia and Djibouti, Sudan, Kenya and parts of Somalia; New projects that will link the country to South Sudan
Development of Lamu port by Kenya with an aim of supplying South Sudan and Ethiopia
Planned railway project connecting Kenya, Ethiopia and South Sudan
Government
Support Measures
Bilateral and multilateral trade agreements to improve trade including tariff free trade with Sudan and Djibouti and free people movement between Kenya and Ethiopia
Outlook Ethiopia is well positioned as the launch-pad for market access to over 400 million potential consumers between the EAC, Sudan, South Sudan, Somalia and Djibouti, providing a great opportunity for the development of logistics and distribution sector
Tourism
Current Scenario Sector vastly underdeveloped relative to its potential
Tourist arrivals increased from 184,078 in 2004 to 560,000 in 2010
Domestic tourists accounted for 35% ($844 million) of the total travel and tourism spending ($2.38 billion) in 2011
Occupancy rate at high-end hotels such as Sheraton, Hilton and Radisson is currently over 90%
Opportunity
Drivers
Similar Czar agency like ATA being created to drive sector transformation
Highest number of world heritage sites in Africa
Diverse flora and fauna for safaris and an amazing river system and spectacular mountains
Insufficient tourist infrastructure (ex: Addis Ababa has only 110 hotels and less than 5,500 rooms)
Key Metrics Average length of stay is 7 days
Average spending per day is $158
One travel agency for every 1,516 tourists
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Mining
Current Scenario Despite being the country’s fastest growing sector, the Country is the least explored in Africa
Mining is the second largest export sector after agriculture
Investment in mineral resources is now 10x greater than at the beginning of the 2000s
Accounted for 1.6% of GDP in 2011
Expanded by over 200% in 2011
Opportunity
Drivers
Ethiopia’s landmass is composed largely of pre-cambrial, mesozoic, and cenozoic layers, which hold a range of minerals including precious metals such as gold and platinum and industrial minerals such as potash, coal, and marble. The country’s mesozoics hold significant potential for oil and gas
Despite potential the sector has only recently started seeing activity
Half of the country’s landmass is yet to be surveyed and evaluated for mineral deposits
Significant
Developments
The Ethiopian Mining Development Share Company, already the fifth largest producer of gold, has earlier this year reported 2.5m kg of tantalum in Kenticha
Canada’s Allana Potash is currently developing its 1.3 billion tons of high-grade potash deposits in the Danakil depression.
Outlook The government’s target is to increase the contribution to 10% of GDP
Light Manufacturing
Current Scenario The Government’s long term strategy is to position Ethiopia as a low-cost, labour-intensive light manufacturing platform
Opportunity
Drivers
Strategic Location: About 30% of the world’s containerized cargo passes through the Red Sea, offering potentially large advantages in transportation efficiency Ethiopia is roughly equidistant from all the major G7 & BRICS economies
Resource Availability: Ethiopia is the second most populous country in Africa and offers very competitive labour rates; In addition the country has a rich resource base including lowest cost of electricity on the continent at 4 Cents/kwh
Support Infrastructure: Construction of high-speed rail access, that will connect resources to population centres and onwards to the Red Sea port of Djibouti
Reduction in China’s Competitiveness and Focus: China is moving out of low cost manufacturing and up the value-added ladder. Driven by: Dwindling labour pool and rapid rise in average age of its workers. The resulting
tightening has led to significantly higher wage costs for manufacturers Intense pressure on RMB to appreciate has affected Chinese export competitiveness The Ethiopian Government’s current strategy of developing its platform attractiveness
has drawn significant Chinese light manufacturing investment Distance from Ethiopia to Potential Export Destinations
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Government
Support
Developing the light manufacturing sector is core to the government’s long term vision and it has taken various policy measures to strengthen the sector: Government incentives include providing easy access to land and low cost and long-
term bank loans The Ministry of Industry is collaborating with investors from China, India, and Turkey to
build industrial parks with the capacity of hosting hundreds of light manufacturing firms The Revenue and Customs Authority is currently working on a new program of
Authorized Economic Operators (AEO), aimed at removing delays and uncertainty in importing and exporting for investors
Significant
Developments
One park, the Chinese “Eastern Industrial Park” is already operational on the outskirts of Addis Ababa, and two more are under construction
More than 1,000 Chinese firms, many in light manufacturing, have reportedly applied for business licenses in Ethiopia
The Turkish garment industry has also started to make inroads with several $100m plus investments, while Indian investment has already passed the $4bn mark
Ikea and Unilever have recently announced plans to invest in manufacturing in such industrial zones
Outlook The development of the manufacturing sector has the greatest potential to transform the country through the creation of millions of direct and indirect jobs and generate billions in foreign exchange
Summary: The EPRDP governs Ethiopia through a state-directed development model which has been remarkably effective, thus far, in distributing wealth, encouraging growth and improving basic human development indicators like life expectancy, health, education and access to water. The gradual opening up of the economy will create sequential waves of investment opportunity as some sectors currently remain closed to foreign investors but will be liberalized as is happening with leasing in the financial services sector. Among the sectors that hold high promise currently are Agriculture, Mining, Logistics, FMCG, Tourism, and Light Manufacturing. Challenges to doing business in Ethiopia are those common in most frontier markets. But the Government is committed to addressing those challenges and improving its standing in the indices such as the World Bank’s “Doing Business” index. Ethiopia has been one of the top 2 performers in SSA since 2000 according to the IMF.10
10 Sources: IMF, SSA Regional Economic Outlook April, 2014; and United Nations Development Programme, Human Development Report. Note: Percent rank
in sub-Saharan Africa. A higher number indicates higher per capita income and better degree of human development. PPP = purchasing power parity.
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7. Surya’s Experience in Ethiopia
In general we are seeking to build businesses that are core to the functioning of the domestic economy. This would include sectors such as energy, financial services, health care, education, retail distribution and transport & logistics. When we entered Ethiopia in 2012, a number of sectors were limited to the public sector and as agriculture forms the backbone of the economy, we have focused thus far on two:
a. Electricity production through the BOT model via our portfolio companies Cambridge Energy International Inc. and DP CLeantech/Cambridge Africa
b. Agriculture food production through our portfolio company, Gursha Farms, which is in formation at this writing.
We anticipate further liberalization and are advancing our strategy to identify equally exceptional platforms in the financial services, health care, education and manufacturing sectors. Our experience to date has produced the following observations:
1. Challenging Execution: The major investment risks revolve around execution. The Government is forthcoming, positive and supportive of foreign investment. But as the Government remains heavily integrated into the economy, making things happen takes more time than is common in other emerging markets and requires significant interaction with a range of different public institutions. Good relations with the Government are key to making things happen.
2. White Spaces Being Claimed: The pace of change on the ground is remarkably fast. Addis Ababa’s skyline is reminiscent of Dubai’s in the early stages of its real estate boom with construction cranes everywhere. A palpable sense of urgency exists within the top leadership, who express impatience and determination in achieving the transformation they plan for the country. Despite this not trickling down to the lower levels in Government Agencies, entrepreneurial flourishing is staking claims across a range of sectors.
3. China on the Move: China has jumped the gun on Ethiopia’s historic allies and other emerging markets. Chinese firms are noticeable everywhere, particularly in the manufacturing zones and on construction projects.
4. Multiple Followers: A growing presence from India is also observable, though anecdotally and in our own experience, Indian firms don’t move with anywhere near the decisiveness and purpose as Chinese firms. On the other hand, one meets folks from New Zealand, South Africa, Canada, America, the Middle East and Europe regularly in the packed hotels, all with similar stories of potential and impatience.
5. Visible Wealth Creation: Wealth production and accumulation are now increasingly visible. The Government has an implicit policy not to allow Oligarchs to grow to control and shape the economy as happened in Russia, South Africa, India or other SSA countries. As a consequence, Ethiopia is creating more dollar millionaires at a faster pace than any other nation in Africa.11 In conversations with these local entrepreneurs, it is clear that deep local knowledge and relationships help them work the system resulting in less frustrations than the foreigners going it alone.
6. Not all Uniform: The pace of change in new MWs of electricity, kilometres of railroads or roads and new water connections is not matched by improvements in the telecommunications system which remains frustrating in comparison to other SSA countries who have deregulated, notably neighbouring Kenya.
7. Overall Impression: In general, the lumpy bursts of progress are visible everywhere and reminiscent of China in the late-1980s, India in the mid-1990s and Vietnam in the early-2000s, reflecting the Government’s administrative capacity scrambling to catch up with the unleashed market forces at work.
Upcoming Surya Event: Surya plans on hosting an Investor Summit in Q1, 2015 in Addis Ababa in which presentations and open discussions within an exclusive venue will take place with the top leadership of the country, CEOs of notable Multinationals operating in Ethiopia, and several of our portfolio company leaders to discuss not only Ethiopia but 2 or 3 sectors with deep dives into the opportunity set. Further information on the agenda, timetable, venue and speakers will be forthcoming. For those interested in reserving slots early, as attendance will be limited, please feel free to contact Aliki
Currimjee at +44 203 141 7054 or [email protected]. We look forward to seeing some of you then.
11 The number of dollar millionaires in Ethiopia rose from 1,300 in 2007 to 2,700 by September 2013, according to New World Wealth, a consultancy based in
Appendix 1: FACES OF CHANGE 1. IMPATIENT “INTRAPRENEUR”
Bekalu Zeleke: Government-owned businesses are often dismissed as being bureaucratic, slow and unentrepreneurial. The Commercial Bank of Ethiopia and its president Bekalu Zeleke, left, explode that image. The institution, which is the largest commercial bank in Ethiopia and in the entire East African region, has opened more than 100 new branches in the past year, bringing the total to 372. But the bank’s plans for the future are what truly make it stand out. The bank, with two million account holders now, plans on increasing the number of accounts by 25% per year, establish 200 new ATMS per year and open 500 new branches over the next five years. Its mission: to become a world-class commercial bank by the year 2025.
Zeleke and the bank demonstrate that state-owned organizations can be drivers of economic expansion in Ethiopia and all across Africa. ”The bank is on a mission to transform its operations,” says Dan Kazungu, IBM’s country representative in Ethiopia. IBM hopes to help the bank accomplish its mission. The company recently signed a deal to provide it with $3 million in computer hardware, software and services, which, in addition to making the aggressive expansion possible, will also enable mobile and Internet banking services. Zekele has been a progressive force at the bank for some time. In 2011, he announced plans for a new 42-story headquarters building in the Ethiopian capital of Addis Ababa, which would be the tallest building in the country and the first to be accorded green building certification under international standards. 2. SERIAL ENTREPTRENEUR
Samuel Alemayehu: After returning to Ethiopia 5 years ago, Sam has been a whirlwind of entrepreneurial activity, founding Cambridge Industries as a platform for creating companies in the telecommunications, vehicle assembly, renewable energy, agriculture and retail segments. Sam’s formula mirrors Surya’s which is why we have partnered with him across multiple companies, identifying white spaces and then combining intellectual, human and financial capital to build competitive advantage and market share fast before competitors can get a foothold. After immigrating to the US as a teen and teaching himself English in High School, Sam received his BA and MS at Stanford University where he incubated in his dorm room America’s largest SMS
messaging platform. He subsequently worked for Venrock, the Rockefeller Family VC in Silicon Valley absorbing the art of the start-up. Recently, Sam and Surya successfully commenced construction on the $120mn 30MW “Reppie” municipal waste to electricity project in Addis Ababa. Sam has received many awards including: Ron Brown Scholar, Coca Cola Scholar, Toyota Scholar, Class Valedictorian, AP Scholar with Distinction, NSBE Humanitarian of the Year. 3. Agent of Change
Khalid Bomba: CEO, Ethiopian Agricultural Transformation Agency. Khalid was most recently a Senior Program Office within the Agricultural Development Group at the Bill and Melinda Gates Foundation. Prior to joining the Gates Foundation, Khalid served as regional Director for Africa at the Global e-Schools and Communities Initiative, an NGO founded by the UN ICT Task Force to advise government on developing effective strategies in utilizing ICT to improve national education systems. Khalid has also served as President and CEO of FAN5Kids, an NGO dedicated to improving the quality of fitness and nutrition curriculum in urban schools; and CFO of Invisible Hands Networks, a technology company. Khalid began his career at JP Morgan, spending nearly a decade working as a Vice President on corporate finance in Latin America, Middle East and Africa. Khalid is
a graduate of Swarthmore College and the London School of Economics.
4. LIGHT MANUFACTURING Bethlehem Tilahun Alemu: When she started in 2004 with the name soleRebels, Bethlehem Tilahun Alemu exactly knew where her enterprise of making hand-crafted shoes would take, not only her, but also her local community in Addis Ababa. According to her, the fine and skilled artisans employed from her local community (in Ethiopia) form the backbone of the company and the essentials of the company’s ethics. With the joy of spreading a bit of their cultural heritage with every shoe crafted, Alemu has emerged as a commendable entrepreneur consolidating her business in less than a decade with her gumption. Owing to Alemu’s grit and dedication towards soleRebels today, the company is the only achiever of WFTO Fair Trade Certified Footwear Company title worldwide. Following the success of her business, Alemu was invited by Bill Clinton
to address as a speaker The Clinton Global Initiative's panel. She was elected a World Economic Forum Young Global Leader in 2011 and honored by World Bank Managing Director Ngozi Okonjo-Iweala (now Nigerian Minister of Finance), as the first African woman entrepreneur to get an invitation to speak at the World Bank/IMF annual meeting in 2011 on African growth. She has received global recognition for entrepreneurship by multiple institutions and soleRebels was among the top 5 finalists of the 2011 Legatum Africa Awards For Entrepreneurship. 5. NEW MEDIA EDUCATION PIONEER
Brukty Tigabu: “Tsehai Loves Learning/Whiz Kids Workshop” was founded by Brukty and her husband and is an award-winning Ethiopian children's multimedia company that produces educational television and radio shows and children's books. Her television show Tsehai Loves Learning is a national hit, with each episode reaching over five million children through television broadcasts and video screenings in schools, health clinics and refugee camps. The company will soon launch its most ambitious venture to date: Tsehai’s Amharic Classroom Library Project, which seeks to do nothing short of creating a new culture of reading for Ethiopian children. Bruky and her work with Whiz Kids Workshop have earned much recognition for making a major contribution to first language learning in Ethiopia, including: the UNESCO Japan Prize 2009, Pre-School Category of Japan Prize 2008, Next Generation Prix Jeunesse International 2008, Educating Africa prize 2008,
The Tech Awards 2011, Microsoft Education Award 2011, Rolex Young Laureate 2010 and Fast Company’s Most Creative People in Business 2014. 6. DISRUPTIVE VISIONARY
Dr. Eleni Gabre-Madhin: In 2008, Gabre-Madhin founded the Ethiopian Commodity Exchange which has transformed the agribusiness sector and impacted literally millions of lives. In 2013, she left the ECX to form eleni LLC, to incubate and scale other commodity exchanges across Sub-Saharan Africa with funding from Morgan Stanley and the IFC. She has had many years of experience working on agricultural markets - particularly in Sub-Saharan Africa – and has held senior positions in the World Bank, the International Food Policy Research Institute (Washington), and United Nations (Geneva). She has a PhD in Applied Economics from Stanford University, and Bachelors and Masters degrees in Economics from Cornell University and Michigan State University, respectively. Dr. Gabre-Madhin was selected as "Ethiopian Person of the Year" in the 2002 in addition to many other awards, including being invited by TED to give a talk just prior to forming
the ECX. Please see: http://www.ted.com/talks/elene_gabre_madhin_on_ethiopian_economics
![[City Profile] Ethiopia](https://static.documents.pub/doc/80x56/54b7d8b84a7959543e8b4647/city-profile-ethiopia.jpg)
