This guide has been prepared by PricewaterhouseCoopers on behalf of the United Nations Conference on Trade and Development (UNCTAD) and the International Chamber of Commerce (ICC).
It comes with a companion volume which is a more informal publication, prepared under the auspices of the Ethiopian Investment Authority, and which provides a listing of specific investment opportunities.
The purpose of this booklet is to provide a basis from which potential investors to Ethiopia may gain:
- A broad overview of the current investment opportunities and prevailing socioeconomic and political conditions of Ethiopia; and
- General guidance on the necessary legal and other issues related to undertaking investment in Ethiopia.
The guide focuses on Ethiopia's emerging role as a location for investment and on the key issues likely to be faced by potential investors. It is intended only to give an initial flavour of the Ethiopian market and to encourage potential investors to take a closer look at investment opportunities in the country.
With a population of 60 million, growing at a rate of 3 per cent per annum, Ethiopia is the second most populous country in subSaharan Africa (after Nigeria).Ethiopia is one of the oldest nations in the world and its people have an ancient culture and deeprooted values. The country has one of the lowest crime rates in Africa.
Although the gross national product (GNP) per capita of $110 per head is low, it is growing, and Ethiopia ranks as the fifthlargest United States export market in subSaharan Africa, after South Africa, Nigeria, Angola and Ghana. In 1997, the total GNP at current market prices was about $6.5 billion.
Economically, the agricultural sector, consisting mostly of small privately owned farms, accounts for about half of the country's gross domestic product (GDP), 80 per cent ofits exports, and 85 percent of total employment. Agriprocessing, manufacturing and service industries are all growing in importance.
Ethiopia also has potential as a base for exporters, with flows of goods both into the Middle East and into other parts of Africa increasing significantly in recent years.
Recent analysis by UNCTAD has shown that Africa as a whole has become a profitable region for foreign direct investment (Fill)" delivering significantly higher returns on investment than other developing regions in the world for United States corporations
The levels of return on investment by Japanese multinational corporations have also been substantial, outstripping those on investments in Europe, SouthEast Asia and North America.
Despite this track record, Ethiopiaas is the case with Africa generallyhas secured only modest levels of Fill compared to developing countries elsewhere in the world. The recent policy reforms and the introduction of a liberal investment code have opened the way for Ethiopia to attract substantially more foreign investment in the future.
There has been a major positive change over the past six or seven years in the Government's attitude towards private investment in general and foreign investment in particular. The Govemment recognizes the vital role foreign investment can play in the national economic development process, especially by bringing capital, technology and knowhow into the country and by strengthening linkages and promoting regional development.
The Ethiopian Investment Authority (EIA) has been established to provid' a onestop shop to facilitate entry of foreign investors. In order to encourage, promote and expand foreign investment, the Ethiopian Government has also undertaken a wide range of economic reform programmes with two main agendasto shift from a command to a market economy and progressively to place the Ethiopian economy under the rigorous discipline of international competition.
Over the period 1992/1993 to 1998/1999 the EIA approved 163 foreign investment projects, of which 21 have become operational and 49 are under implementation. These have included the fivestar Sheraton Addis Hotel, a major brewery investment by a French firm, British investments in shoe manufacturing and United States investments in edible oils and bottling. The largest privatisation investment ( some $172 million) to date, the Lega Dembi Gold Mine, was by a Saudi investor. The main business sectors in which Ethiopia is seeking foreign investment are:
- Manufacturing industries (including food, beverages, chemicals and pharmaceuticals, plastics, metallic and nonmetallic products, paper products, leather and leather products, textiles and garments):
- Agriculture, including agribusiness and processing for exports;
- Realestate development;
- Education and health services;
- Grade 1 construction contracting;
- Mining and quarrying of gold, marble and granite; and
- Engineering and management consultancy.
This section offers a general description of the main areas in which opportunities exist. For a listing of specific opportunities, the reader should consult the companion volume to this guide, prepared by the Ethiopian Investment Authority.
Ethiopia's comparative advantage lies primarily in its abundant, low-cost, disciplined and trainable labour force, the size of its domestic market, and the numerous river basins affording great potential for irrigation and hydropower generation.
Key opportunities for potential investors exist in the following areas:
- State privatisation programmes;
- Agribusinesses and processing;
- Mining and resource development;
- Infrastructure development;
- Manufacturing; and
The Government is keen to develop and broaden this foreign investment base and the rest of this guide provides an overview of investment opportunities, current economic conditions and the steps required to make an investment in Ethiopia.
The Government initiated a privatisation programme in 1995/ 1996. So far over 170 enterprises and units have been privatised. Most of the smaller enterprises and units were sold to domestic investors, whilst a number of the larger enterprises have been acquired by foreign investors.
These include a gold mine, CocaCola and Pepsi Cola bottling companies, a brewery, meat processing and canning plants, and a tannery. Over the coming three years the Government plans to privatize a further 120 enterprises. Most of these enterprises are large and the Government is keen to encourage further participation by foreign investors in the privatisation programme.
Geological studies have identified a favourable geological environment hosting a wide variety of mineral resources. Initial explorations have confirmed the existence of deposits of gold, platinum, tantalite, soda ash and phosphate rock. Petroleum and other metallic, industrial and chemical minerals have also been identified.
Despite these discoveries, mineral development remains limited, contributing only one per cent to the national economy. Steps have been taken to improve the situation, including the creation of an environment conducive to private, local and foreign investment.
While there is no restriction on private investors in developing any type of mineral resource, the greatest potential is in gold and rare metals, petroleum, precious and base metals, industrial minerals and dimension stones (marble and granite).
Prospecting, exploration and mining licences have been issued to foreign mining companies from Canada, Italy, Saudi Arabia and the United States. A Saudi company has acquired, through the privatisation programme, the only primary gold mine in the country.
Health and Education
Health and education offer good potential for foreign investment. Foreign investors from the Middle East and the United States are setting up a university, following American curricula, with Ethiopian investors.
A Saudi investor is providing a modem hospital and clinic in Addis Ababa. The Government has committed itself to addressing the prevailing health problems in the country by formulating a 20year health development strategy, which will be implemented through a series of five-year programmes.
The potential of Ethiopia's renewable and non-renewable energy resources is vast. Currently, less than 4 per cent of the population is supplied with electricity. From this low base, domestic demand for electricity is growing on average at 10 per cent per year.
With a view to expanding energy supply, the Government has recently revised the legal and regulatory framework for power generation, transmission and distribution, and foreign investors are now particularly sought to set up hydroelectric power plants. Arrangements may be made with the Ethiopian Electric Power Corporation (EEPCO) for bulk sales of electric power for transmission and distribution.
EEPCO currently operates two largescale (100 ¥Wand over) and a number of small-scale hydroelectric power plants and supplies power mainly through an interconnected system of transmission lines (230 kV, 132 kV, and 66 kV) and distribution networks (15 kV, 380 V and 220 V).
The telephone density in Ethiopia per head of population is among the lowest in the world, with less than one per cent of the population having access to a telephone.
Recognizing that the development of an extensive network of telecommunication services is imperative, the Government has now liberalized the sector, allowing foreign investors to participate in telecommunication activities jointly with the Government. The Ethiopian Telecommunications Agency is entrusted with the task of regulating the sector.
Opportunities exist in expanding and upgrading central exchanges (mostly digital) and transmission networks (currently relying on microwave and satellite links) as well as in providing wired and wireless access to the highly scattered Ethiopian towns and communities. A mobile system has recently been introduced in Addis Ababa.
The manufacturing sector currently constitutes 'only a small portion of the economy, contributing about 6.5 per 'cent of GDP (Source: Ministry of Economic Development and Planning). Light manufacturing and agroprocessing dominate, with the food, beverage and tobacco processing industries being the most prominent groups in terms of gross value of production.
Between 1992 and 1998, a total of 66 new (foreign) industrial projects were approved and supported by the EIA. At least 10 of these projects, including a tannery, a soap manufacturing factory, a brewery, a bottling factory, a plastic packaging plant and an incandescent lamp factory, have already started production.
High labour content activities such as electronic assembly and low-cost, low value consumer goods (toys, basic appliances, garments, footwear, etc.) have long been the staple of low wage developing countries. The macroeconomic environment, including the exchange rate regime, adds to Ethiopia's competitiveness in these products.
Organizing a Private Business Investment
Foreign participation in investments may be carried out either through the establishment of branches or through locally incorporated enterprises. All foreign investors intending to invest in Ethiopia are required to obtain investment permits. Foreign investments are governed by a number of codes, proclamations and regulations.
The Ethiopian investment regime identifies three types of investors:
- Domestic investors;
- Foreign investors (wholly owned); and
- Investors in joint ventures.
The legal regime makes a distinction among the different classes with regard to areas of investment and capital requirements during licensing. In all other respects, the law treats all classes of investors in the same manner during and after licensing.
The EIA is the focal point for promoting, coordinating and facilitating foreign investments in the country. Organized as a "one stop shop", the EIA:
- Provides all the necessary information required by foreign investors;
- Approves foreign investment applications and issues investment permits;
- Provides registration services to newly incorporated business organizations;
- Approves expatriate posts in approved investments and issues work permits to foreign employees;
- Issues trade and operating licences for foreign investments;
- Approves and registers technology transfer agreements between local companies and foreign technology suppliers and;
- Facilitates the acquisition of land by foreign investors in accordance with the relevant federal and regional Government laws and regulations.
In all cases of proposed foreign investments, the following documents will have to be submitted in order to secure an investment permit and other certificates and licences:
- A completed application form;
- A project profile;
- A draft memorandum and articles of association, if the investment participation is through a locally incorporated enterprise; ,
- A list of machinery and equipment intended to be exempted from duty;
- In the case of planned employment of expatriates, a schedule for their replacement by Ethiopians and details of the training programme leading to the replacement; and
- Technologies transfer agreements, if any.
If the applicant is a company, the following documents are also required:
- Certificate of incorporation of the parent company;
- Statute or memorandum of association of the company;
- Annual report and financial statement of the company;
- A resolution passed by the owners or the board of the company authorizing the establishment of a branch office in Ethiopia and indicating the capital of the branch, its activities and the name of the manager; and
- A power of attorney for the person authorized to sign on behalf of the company.
All these documents need to be authenticated by the Ethiopian embassy of the investor's home nation, where such an embassy exists.
Once the documents listed above are submitted, the EIA will process applications for investment permits and investment incentives, as well as for registration of branches or locally incorporated enterprises.
The necessary documents are then sent to the Legal Documents Registration and Depository Office to be officially signed by the applicants. A public notice appears in an official gazette announcing the formation of the branch/enterprise. Subsequently, an investment permit, certificate of incorporation and other licences are issued to the applicants by the EIA.
The aim is to issue investment licences within 10 working days of submission of the complete set of documents. In practice, how ever, more than 10 days might be required. A recent review by the EIA of a sample of 15 applications indicated a mean processing time of 16.7 working days.
Fees and expenses
The EIA charges a fee of $30100 for processing applications, depending on the amount of investment capital. A further expense of $300400 may be incurred for stamp duties and the publication of an official notice.
Building and construction permits
Permits are required for all construction. Local municipalities normally issue such permits after examining architectural, structural and sanitary designs. The power supply authority will also have to be satisfied with electrical drawings before approving a connection to the national grid.
Areas Reserved for Domestic Investors
Certain business activities are reserved for domestic investors (see annex 2). These are mostly small scale manufacturing and trading activities, such as the retail trade, wholesale trade (except trade in petroleum products), the import trade and the export of traditional commodities.
All other areas are open to foreign investors except defence industries and telecommunication services, where they may invest only jointly with the Government. Foreign investors may acquire existing firms in sectors open for foreign investment.
There is no local content requirement, although investors are encouraged to use domestic resources in their manufacturing processes as much as possible. A technology transfer agreement may be entered into between the parent company and a local company or subsidiary. Such agreements have to be submitted for approval to the EIA together with the initial application.
Ethiopia does not as yet have a comprehensive set of environmental legislation and regulations. Investors are expected to adopt environment friendly practices, and may be requested to sign an undertaking to that effect. The Ethiopian Environmental Protection Agency may scrutinize projects that are judged to have a significant environmental impact.
Once a business is up and running, it may have to deal with various ministries, authorities and agencies. The most important are the Ministry of Trade and Industry, the Inland Revenue Authority, the Customs Authority, the National Bank of Ethiopia and the Environmental Protection Agency.
Competition and price policies are not rigorously developed.
There are no antitrust laws or laws against unfair competition. All price controls have been dismantled except those on petroleum products.
Foreign investors may exit their investments through disposal of their shares, assets or entire businesses. Asset disposal by liquidating enterprises requires the prior consent of the Inland Revenue Authority. In accordance with Proclamation No. 37/1996, proceeds from the sale or liquidation of an enterprise are exempt from capital gains tax and may be remitted abroad in hard currency. As Ethiopia does not have a stock exchange, investors wishing to exit their investments will have to find and negotiate with a private buyer.
Foreign investors may own any businesses other than those falling in sectors specifically reserved to Ethiopian nationals, the Government and domestic investors.
In the case of joint investment, the Investment Proclamation requires that the domestic partners acquire a minimum of27 per cent equity ownership interest. Foreign investors may acquire property required for their investment activities. Land is public property and may be acquired only on a leasehold basis.
Ethiopia does not have comprehensive legislation providing for the protection of intellectual property. There are, however, legal provisions governing some aspects of intellectual property. A section in the Civil Code of Ethiopia deals with "Literary and Artistic Ownership" regulating mainly issues of copyright.
There is also another piece of legislation, Proclamation No. 123/1995, which governs inventions, minor inventions and industrial designs, focusing mainly on patents. Regulation No. 121/1993 governs the provisions of the Commercial Code and Proclamation No. 67/1997 technology licensing. Ethiopia is a contracting party to the Convention establishing the World Intellectual Property Organization (WIPO), which has been ratified by the State.
The constitution protects private property. Investment Proclamation No. 15/1992 and the revised Investment Proclamation No. 37/ 1996 also provide investment guarantees against measures of expropriation and nationalization, except when required by the public interest. Where such measures are taken, the Government guarantees to provide adequate and prompt compensation based on the current market value.
Investment permits may be suspended or revoked for good reasons specified in the Investment Proclamation. The competent court in Ethiopia or through international arbitration may settle disputes arising between a foreign investor and the Government amicably or, failing that. Since 1992, there has been no instance of expropriation, nationalization, revocation or suspension of any investment
Exchanging and Remitting Funds
The exchange rate is determined at weekly foreign exchange auctions, where banks and large investors (participation requires over $500,000) participate. Foreign exchange may be acquired from banks at the prevailing exchange rate. Trade related payments are normally transferred through letters of credit.
Foreign investors are entitled to make the following remittances:
- Profits and dividends;
- Principal and interest payments on external loans;
- Payments related to a technology agreement;
- Proceeds from the sale or liquidation of an enterprise; and
- Proceeds from partial sales of shares to domestic investors.
- Expatriate employees may remit salaries and other payments accruing from their employment in hard currency.
Overall, the Ethiopian Government is working progressively to improve the business climate and regulatory framework for foreign investment and the EIA offers a streamlined service to encourage and facilitate investment in the country. The Ethiopian Government is committed to the development of a free market economy and foreign investment has an important role to play in the continuing liberalization and development of the economy.