Ethiopia’s Industrial Parks: Hard Yards, but what’s the alternative?

As Africa’s population doubles over the next generation to more than 2-billion people, might industrial parks – free trade zones by another name – offer some answer to the jobs that will be necessary? Ethiopia, where this writer has been researching the subject, offers some pointers.

Hawassa. Some 270km south of Addis Ababa, the picturesque Rift Valley city has relied on agriculture as the source of income and employment, the regional Sidama coffee one of Ethiopia’s best-known brands, and the name of the local football side.

That is until the establishment of the Hawassa Industrial Park (HIP), inaugurated by then Prime Minister Hailemariam Desalegn in June 2017. Flanked by Lake Hawassa, HIP is the largest government industrial park, built at a cost of $250-million in just nine months by the contractor, the Chinese Civil Engineering Construction Corporation (CCECC). The first phase covers 140 hectares with 52 factory sheds, housing 20 textile and apparel firms from 11 countries.

By the start of 2019 Hawassa’s factories employed 23,000 local workers and 700 expatriates. Though it was not the first, other government industrial parks are today modelled on Hawassa, which itself incorporated lessons from the first park at Bole Lemi in Addis. Five of 11 government parks are to date in operation (with six due to be inaugurated in the next six months) and two of four privately-owned examples. Together the five operational government industrial parks host 36 companies, providing 45,000 jobs that did not, 10 years before, exist. A town of 350,000, Hawassa’s GDP has alone increased fourfold in just two years.

The parks have been Ethiopia’s response to the challenge of unemployment and the need for economic diversification.

“I assigned a team led by Dr Arkebe [Oqubay],” now the chairman of the Ethiopian Industrial Parks Corporation (EIPC), recalls Hailemariam.

“We made a study of the successes and failures of industrial parks around the world, looking at Nigeria, Mauritius, Taiwan, Vietnam, Singapore, South Korea, and of course to China. Nigeria, we concluded, failed because of a lack of leadership, and that it was unsupported by the state beyond given the developers land. Mauritius, which was a success, emphasised the value of location, logistics, clear policy and organisational structure. We also wanted to avoid the situation that Vietnam found itself in, with 30% of its sheds unoccupied.”

“People,” observes the former PM, “think that an industrial park is just building sheds and providing infrastructure, but rather it’s all about the regulatory and policy environment, the provision of one-stop facilities, clarity and efficiency on customs, labour law and visas, relations with local government.

“It’s all about setting up a system,” he says, “not just a shed.”

Hawassa was selected as a site given the large local labour reservoir of some 5 to 6 million. But while it is the prototype government park, it was not the first.

But it’s labour that is the notable advantage. The average salary at Huajian is 900Bir, or $30; while workers start at just 750Bir in Hawassa. The top end is 3,000Bir.

“Our strategic advantage,” reflects Hailemariam, “is low labour cost. That requires free movement of labour and continued education to remain competitive.”

Sue Dong Linpei has been a manager of the Eastern Industrial Park for three years.

“We are here because of the size of the local market originally when we were focused on import substitution, and we stay because of comparative political stability, stable electricity and water, security, and the cost of labour. We learnt in China of the importance of industriousness and efficiency, and less positively of the need for environmental management.”

She sees the same qualities in Ethiopians. Even though changing labour’s attitude from an agrarian to become an industrial workforce is a constant challenge, “I reckon that labour efficiency is about 80% of what we have now in China’ she notes. She is disdainful of unions. ‘Unions are only here to push at problems,” she claims, “not to solve them.”

The government’s incentive packages and one-stop facilities are handled by the Ethiopian Investment Commission (EIC). Its outgoing director, Ato Fitsum, was formerly the Chief of Staff in Prime Minister Abiy’s office.

“Our role is to provide the incentive packages and one-stop facility, which integrates 28 difference services under one roof in each park.”

He judges their success in part by the conversion rate between company registration and those that ultimately became operational. It has quickly improved from 60% to nearly 100%, with just one company failing to convert in the last few years. A further metric is in the time for imports, which has reduced from four years to four months for capital equipment.

“Our role,” he summarises, “is to regulate, facilitate, trouble-shoot, and hand-hold.”

Addis’ tortuous traffic hints at one of the major problems faced by the parks – logistics. The export route from Hawassa to the port of Djibouti can take five days. The building of new roads will help, as will integration with the Chinese-constructed Standard Gauge Railway (SGR). Also, additional port options through Berbera in Somaliland (which is being refurbished by Dubai) and, with the recent improvement in relations with Eritrea, Massawa on the Red Sea, should also help to bring down costs.

Early challenges include the difficulty, says Lelise Neme Sori, the CEO of the IPDC, of integrating government services such as water and electricity “when we were moving at a much greater pace. There were some 55 government stakeholders alone to be aligned.”

Today’s challenges centre on the provision of local accommodation for the sudden influx of workers, the deleterious effects of regional (ethnic) job reservation and its effects on competitiveness, local policing inefficiency and occasional strikes over what business sees as ‘minor issues.”

There are other challenges, unrelated to operational conditions, but rather the fiscal burden on the government of establishing the parks. Hawassa and others were financed through a $780-million Sheba bond; the two most recent parks (the Bole Lemi expansion and that at Kilinto) by $250-million in World Bank concessional funding. The 756km, $3.4-billion SGR was funded 70:30 by a Chinese Exim Bank loan and the Ethiopian government respectively, which is hoping to extend the term of repayment from 15 to 25 years and to soften the commercial terms.

As Ato Fitsum remarks:

“We have come to terms with the fact that government cannot create jobs, and that the private sector must. The government can only create the enabling environment.”

Hailemariam says that it was always the intention that government offered a catalyst for others to follow, and that the Eastern Industrial Zone is the model to follow in the future now that the export manufacturing sector is established.

“Government had to be the pioneer,” he observes, “as the private sector wanted to de-risk their investment. We could not afford failures or ghost parks.”

Such costs have complicated Ethiopia’s fiscal challenges, which are underscored by a low tax to GDP ratio of just 12%, about half of where it should be, and have led to a periodic shortage of forex, not least hampering the inputs for some export businesses. Floating the exchange rate will help, as will offloading some State-Owned Corporations, including the industrial parks themselves.

My 17-year-old daughter was horrified at the low cost of labour when I explained the route that Ethiopia has embarked on to meet the annual inflow of 500,000 new job seekers including 100,000 university graduates into the market. “How can they live on that?”

“We don’t really have an option,” says Hailemariam. “There is no one silver bullet. Tourism offers some possibilities.”

There is plenty of upside in this sector: Ethiopia only receives one million visitors annually.

“But one bullet”, like Kenya has learned, “and they are gone”, he warns. “Together with agriculture, and agro-industry, manufacturing will provide the bedrock of what we are trying to build.”

Or as Ato Fitsum has noted:

“We are criticised for taking the route of apparel and textiles, given the threat of modernisation. But we still believe that labour-intensive industries are a special route and option for Ethiopia given that our labour rates are much lower, unlike those African countries where, for instance, commodities drive up wages. We also need to leverage our demography, while there are huge outsourcing possibilities created too as a result, such as in IT.”

Overall, the strategy is delivering growth even though the breakneck pace of infrastructure investment is causing debt, a balance of payments and exchange rate issues. With growth and rising incomes, the political challenge of inequality will also perhaps inevitably arise. Combined with the country’s ethnic and political mix, this could be an explosive combination, fears about which have contributed to Prime Minister Abiy Ahmed’s far-reaching reforms since he came into power in April 2018. The short-term imperative, however, apart from dealing with the fiscal and monetary aspects, is to ensure competitiveness and growth not just through low labour costs, but to lower logistical costs and quickly move up the value chain into export sectors other than apparel.

The impressive bit about Ethiopia is the extent to which, whatever the concerns of privilege, the economic policy options have been thought through and acted on. Political stability cannot, the government acknowledges, be sustained without economic delivery. Such is the virtuous cycle of investment, democracy, people, jobs and growth.

© The Brenthurst Foundation 2019.