10:55 am - Friday July 20, 2018

Don’t Privatize Ethiopian Airlines - Part III (By Worku Aberra PhD)

Don’t Privatize Ethiopian Airlines

Part III

By Worku Aberra

The EPRDF justifies its privatization decision on efficiency grounds, but in order to eliminate inefficiency, the types and causes of the inefficiency must be understood first. Economists distinguish between three types of inefficiencies: allocative, technical, and economic.

Allocative inefficiency results from a resource not being used to maximize social welfare, to meet social (consumer) needs. Technical inefficiency occurs when a firm produces below its potential level of output, and economic inefficiency occurs when a firm incurs a high cost of production for a given level of output. Each of these inefficiencies requires different solutions, not necessarily privatization.   

The smaller economically inefficient SOEs, which have become a drain on the treasury, should be privatized. I have no problem with the sugar plants being privatized 100%, but the solution to the inefficiencies of the large SOEs include reorganization, monitoring, and supervision.

Media reports suggest that Ethio Telecom exhibits allocative inefficiency, which has resulted in low services at high prices to its customers. The source of such inefficiency is primarily the market structure. All of the large firms slated for privatization are monopolies. Privatizing these firms will not change the nature of the market. They will remain monopolies. Instead of a publicly owned monopoly, privatization will create a semi-private entity.  The inherent inefficiency in a monopoly remains. The solution to allocative inefficiency of a monopoly is regulation. An unregulated semi-private monopoly will always be inefficient.

More importantly, the source of the inefficiency may be political. The reason for the limited number of internet services provided by Ethio Telecom is not technical; it is political. Much smaller telephone companies in other African countries serve more internet users than Ethio Telecom.  

An SOE may be inefficient because of bloated bureaucracy. If that is the case, the solution is trimming the bureaucracy. An SOE may be managed by an incompetent, corrupt, political appointee or staffed by unskilled political cadres.  In that case, the solution is appointing a dedicated, competent, and professional management; and employing trained, skilled, and educated employees.

While Ethio Telecom may be economically inefficient, it has and should have national objectives such as providing services on literacy, healthcare, hygiene, training, and formal education through satellite communication. Delivering these services may not be profitable, but what is the monetary value of a more literate, educated, skilled, and healthier population? It is priceless.

Some monopolies, known as natural monopolies, are efficient economically and socially because of their economies of scale. A natural monopoly is a monopoly that requires a large amount of capital in infrastructure investment to produce a product or to provide a service in a market. A textbook example of a natural monopoly is a firm producing electricity.

Economically, it does not make sense to have many companies build dams and install power lines to produce and distribute electricity. One firm is more efficient. After spending billions of dollars building the dams and installing the power lines, it makes no economic sense for the government to privatize EEPC. Socially too, different tariff rates can be applied to different socio-economic groups so as to benefit low-income households and to promote industrialization. SOEs often have more than one objective, as I have tried to show.

To be sure, Ethiopians most probably pay one of the lowest prices in the world for their use of electricity. The price, reported to be below the cost of production, may have to increase and the government should pay whatever the political price maybe for the hike. The frequent power outages that customers experience can be resolved technically. It does not require privatization. Another natural monopoly is the Railway Company, which is serving less than the projected number of riders. Here again, the solution to increasing ridership is not privatization: it is marketing.

Not all of the SOEs scheduled for partial privatization operate at a loss. The EAL has been a profitable, internationally reputable airlines, generating hundreds of millions of dollars each year for the government. As the most profitable firm among the SOEs for sale, no doubt the EAL will attract more investors, domestic and foreigners alike.

In the airlines industry, where many privately owned companies have declared bankruptcies (American Airlines, United Airlines, Delta, Nigeria Airways) while others are on the brink (Air India, South African Airways, Kenya Airways), the publicly owned EAL stands out as one of the most profitable airlines. It is an important source foreign exchange earnings for the government. It is a world-class airlines. It is the pride of all Ethiopians. It symbolizes what Ethiopians can achieve and how Ethiopians can excel on a world stage. It is the jewel in the crown of all SOEs in Ethiopia.

That’s why the decision to privatize the EAL is baffling. There are no economic reasons to justify the privatization of the EAL. Privatizing the EAL is engaging in an economic malpractice. Are there any problems with the EAL? I am sure there are some. For example, it has been reported that nepotist employment practices are widespread, but that requires a different solution from privatization.

The Prime Minister says that privatization will encourage economic growth. His assertion presumes that the SOEs are a drag on economic growth, but we haven’t seen the evidence from Ethiopia to support the claim. And studies conducted elsewhere on the relationship between SOEs and economic growth show no conclusive results to buttress the assertion that SOEs harm economic growth.

In fact, some of the fastest growing economies that Ethiopia wants to emulate, Korea, Singapore, Taiwan, and China, have had high shares of SOEs in their economies. As the economies of these countries demonstrate, SOEs are also compatible with a free market economy. Hence, the best signal to attract foreign capital is not privatization, but political reform that ensures peace, security, and stability.

The high level of corruption that the Prime Minister has been talking about ever since he came to power and the absence of a stock market in Ethiopia raise further questions. What will be the market value of these firms? What will be their share prices? Will the shares be undervalued? Who are the domestic and foreign investors? These are some of the known unknowns, to paraphrase a former US official.

The suggestion that the media will act as a watch dog to ensure that the sale of the shares are free from corruption, that the shares will be sold at fair market value, that the investment is legitimate cannot be taken seriously.  The media is neither willing nor capable of such an undertaking. This is the role reserved for a securities and exchange commission, as in the US and elsewhere. Ethiopia lacks such a commission.

No doubt, the privatization of the major SOEs will provide a golden opportunity for foreign investors and the EPRDF-minted barons to buy shares at bargain-basement prices. As the Wall Street Journal reported on June 6, the decision “…will present one of the biggest business opportunities in Africa to foreign and domestic private investors…” (Emphasis, mine).  But for the Ethiopian tax payers, the decision lacks economic merit. The decision, more Thatcherite than developmentalist, must be reversed.


Worku Aberra (PhD) is a professor of economics, in Montreal, Canada.

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