Reviving private business and industry

Small firms face the challenges of a restructured economy

'One major hindrance to economic development in the past was the restrictive policies imposed on the activities of the private sector. Without changes in the policy, efforts to realise economic recovery would be futile.'

So says the guide to 'Ethiopia's Economic Policy during the Transitional Period' which the government issued in 1991 six months after it came to power. A look at Addis Ababa's streets today offers colourful proof of the rapid shift that has taken place in economic policy in the past three years. Advertising hoardings which during the time of the Derg bore placards proclaiming the victory of socialism are now festooned with the praises of more mundane but tangible attractions: motorbikes, shoes, refreshing drinks. In government offices and wherever representatives. of the international aid donors and lenders meet, the words 'private enterprise' are on everyone's lips.

Official pronouncements are one thing, but what is happening on the ground? The Vice Minister for Industry, Girma Yigebru, says the Government is in favour of encouraging small and medium-sized enterprises (SMEs) because they are a good way of creating employment and encouraging technology transfer. The European Union, too, is among those who regard encouraging private-sector success as a priority for Ethiopia's economic development, with the focus very much on small businesses. In Addis Ababa there are several small firms which get, or hope to get, a helping hand from Europe as they make their contribution to Ethiopia's transformation into a free market economy. Their experiences illustrate some of the opportunities and difficulties the private sector faces.

Leather

One of the few raw materials the country produces in quantities above subsistence level requirements is hides and skins; in fact the sector is second only to coffee as a potential export earner. Apart from supporting herders in rural areas, it provides a living for urban dwellers who process the skins into garments, shoes and bags. Ethiopia's Ministry of Trade has selected three leather goods manufacturers, one public and two private, for support as part of a Foreign Trade Development Project which it is financing jointly with the European Commission. To help the companies make their breakthrough into the export market, the project has provided technical assistance in the form of a workshop for their designers, as well as helping their representatives attend the famous international fashion fair in Germany to prospect the market there and in Belgium.

One beneficiary of this scheme is Genuine Leather Craft, a private limited company operating in what used to be an apartment in the trading district of Addis Ababa known as Mercato. Its general manager, Teshome Kebede, says that with larger premises he could employ nearly twice the present workforce of 28 - and would dearly love to expand his export sales too, from the present 20% of output to 60%. As the European Union is the world's biggest buyer of leather products, he naturally has his sights set on consumers there, and aims to compete on price and quality with other developing country producers such as India, Pakistan and China. The problem is that big retailers in, for example, Germany only place huge bulk orders, which at the moment a firm as small as Genuine Leather Craft could not fulfil, so Mr Teshome is looking instead for outlets in specialist shops with a fast turnover - and lower mark-ups. Going up-market, of course, means the quality has to be improved - so a vital need is a higher standard of training for the leather workers, and here the EU has promised to help. Another requirement for expansion is more capital. But neither it nor the other two selected firms can put up the security the banks require for a large enough loan, so instead the three manufacturers are asking the EU to stand guarantor or lend them take-off money directly, possibly from Stabex funds.

Light engineering

'It was a bonanza!' That is how another businessman described the scheme to allow Stabex funds to be made available to private entrepreneurs. Iacona Engineering is a light industrial company in the suburbs of Addis Ababa which produces metal furniture for offices, hospitals, hotels, restaurants and schools. General manager Roberto Iacona says the firm employs 75 people, which makes it one of the largest SMEs in Ethiopia. He has used Stabex money to import raw materials such as steel box tubing and the EU's Centre for the Development of Industry (CDI) is using its good offices to help him make contact with European firms, as well as carrying out a study for him on the requirements for going into industrial, rather than artisanal, production and making his own components.

However, there are difficulties inherited from the pre-1991 period. Under the old regime it was impossible to raise enough capital to import new technology, so many of the processes at the factory are hand-operated. Mr Iacona now wants to expand the business so that he can export at least to the countries of the Preferential Trade Area in eastern and southern Africa, but to improve quality and increase output he needs, for example, electric-powered machines to bend metal tubing which cost $35,000 each. The legal restriction on using foreign exchange to import such machinery has gone, and dollars can be bought at auction, but, since the purchasing power of the birr was halved through devaluation in 1991, to take a bank loan in birr for this type of outlay, and at 14 to 15% interest, is beyond even a relatively successful small entrepreneur's means. The land leasehold system, in its turn, discourages borrowing to finance expansion: Iacona Engineering already occupies 6000 square metres and has plans to take over neighbouring land to put up more workshops, but Mr Iacona is unwilling to invest in fixed buildings on land which will not be his and plans instead to put up prefabricated buildings which can be dismantled and removed.

Furniture and fashion

A much smaller company which has been developed entirely with private money is the St George's Interior Decoration and Art Gallery, a luxury establishment whose owner and managing director, Saba Alene, produces furniture from local materials to designs of her own which she bases on traditional styles. Sales are largely to the diplomatic community locally, to foreign visitors and to Ethiopians living abroad, and the company provides a living for some 20 people. Mrs Saba has no problem finding outlets for her products, or for the paintings by local artists which she also exhibits, but she too says that state ownership of land and real estate makes it difficult to plan ahead. Her business premises are held on a short lease and, like other urban leaseholders, she still has no idea what it will cost to extend the lease, but cannot acquire the freehold of the building. Another constraint is the rising price of her raw material: government offices controlling the supply of wood do not have enough to meet the demand, and levy a tax on what they have, while private suppliers are prohibitively expensive. This problem will no doubt solve itself when competition among suppliers develops in the new free market climate, but surviving the transition is the immediate difficulty.

Another businesswoman in Addis Ababa is Genet Kebede, a ladies' dress designer who markets her creations through a small company she has set up called Paradise Fashions. A show of Mrs Genet's glamorous collection was seen by the department for trade promotion of the European Commission's Directorate-General for Development, which is considering funding a showing of the dresses at the Paris prorter fashion fair this year. The styles incorporate Ethiopian cultural motifs and are pitched at the expatriate Ethiopian market, particularly in North America. Mrs Genet employs ten people, and on her small turnover a huge problem is the cost of travelling abroad to show her product: air tickets have to be paid for in foreign exchange and have become so dear since the devaluation of the birr that four out of five business people, she claims, have given up travelling altogether. Premises are a problem, too: last year she was engaged in buying land when the urban land leasehold proclamation was issued, and now she has no idea if she will get title to it - or a refund of the 85% of the price she had already paid when the law came out. A further catch is that the Commercial Bank refuses loans to business people who cannot produce a receipt for a paid-up lease (in any case, the proclamation does not state what leases are to cost, so none can be issued). And on the regulations governing imports, without which she cannot make her dresses, Mrs Genet says it is a case of 'today one thing, tomorrow another'. At present customs duty is a quarter of declared value, which for some entrepreneurs on slender margins is so high that they have been unable to redeem goods ordered from abroad when they arrive at the airport (to make matters worse the airport, not unreasonably, then bills them for storing the goods). At least Paradise Fashions can afford to import the materials it needs, but only because Mrs Genet's husband is an expatriate paid in foreign exchange.

A free market?

Ashenafi Shifferaw, the head of the Ethiopian branch of the CDI, says the number of socialist regulations which have not yet been revoked is a real obstacle to liberalising the economy: for example, public enterprises still get priority in buying supplies of raw materials and securing credit from banks. Some SMEs are so demoralised that they wonder whether the Government is setting up a freemarket economy at all. On the subject of their financial difficulties, the President's Economic Adviser, Neway Ghebreab, says that there is a great deal of liquidity available for investment from the state owned Commercial Bank. But, as Mr Ashenafi points out, the fact that even after the Derg the Bank will only accept fixed buildings or plant as collateral for a loan has discouraged anyone trying to start up in business with no fixed assets - one businesswoman who wanted to produce plastic buttons industrially was kept waiting for five years. And a manufacturer of plastic bottles imported up-to-date equipment three years ago but has still not been able to obtain foreign exchange to bring in technicians to train his workers to use it. Birr to buy the currency at auction can be borrowed privately, Mr Neway says. But high interest rates still put loans on the free market beyond the reach of many.

The lack of clarity about land and property ownership is another disincentive. In such a poor country the government has to set priorities, and is more concerned with improving conditions for the 85% of the population who live from subsistence farming than for manufacturers of in essentials living in urban areas, but entrepreneurs say it is the goods and services they supply which will get the economy moving for everybody and bring in hard currency. If the present uncertainties persist, to quote Mrs Genet: 'the middle classes will just give up.'

Coffee

Paradoxically, it was in the very export sector where stakes were highest that a more positive note was at last sounded. Coffee has traditionally accounted for more than half of Ethiopia's export earnings, and exports in the 1992/93 financial year (from July to July) were 92% up on the figure for the preceding year. One entrepreneur in the capital whose turnover has gone up fourfold since 1991 is Geoffrey Wetherill. This expatriate Englishman with 30 years' experience of life in Ethiopia has a coffee processing business, Ambessa Enterprises, where Arabica beans from the country, bought at auction, are graded, roasted and packed. The company operates two eight hour shifts a day and expects to process at least 3000 tonnes by the end of this year for the domestic and export markets. There was a high point in the 1980s, though, when the factory worked round-the-clock and handled twice that amount. Now there is a glut on the world coffee market and, like other exporters, Mr Wetherill is having to go for improved quality to attract foreign customers, primarily in the United States, Europe (particularly Germany), Japan and Saudi Arabia. But he sees great potential for expanding sales in Ethiopia itself.

'In a world of coffee overproduction,' he says, 'we are in a country where coffee is short, despite the fact that we're producing it.' In the last 20 years the population of Ethiopia has doubled, but the amount of coffee being produced is still the same. Every household in the country drinks it; at 10kg, say, per head, there could be a domestic market of half a million tonnes a year, far outstripping last year's exports of just under 70000 tonnes. Mr Wetherill is not bothered about who owns the farmland where the beans are grown or the urban land on which his factory stands, provided the present holders have a guaranteed right to continue using the land; of more concern to him is improving the whole operation from its starting point. So he is looking forward to investment in the form of joint ventures with foreign companies interested in providing services to farmers setting up in business (in fact he reckons there is room for ten to fifteen thousand small agribased industries in the country). The European Union could play a vital part, he believes, by giving more expert technical advice to farmers on pruning, picking, hulling and storing their crop, and by helping them acquire simple equipment.

Thinking along the same lines, Mr Iacona speaks for all his fellow entrepreneurs when he says he is grateful for EU aid, despite one criticism which his counterparts in many ACP countries (and some of their governments) might share: 'The procedures take too long. Businessmen want things immediately. We don't want to be assisted for the rest of our lives, but this is the moment when we can catch up and we need assistance to make us competitive, and not just in the local market. We need to be supported aggressively and with less bureaucracy to get the maximum effect.' Deregulation all round seems to be the key. R.R.