January 24, 2019

Ethiopian Business Climate Reform – Off to a Good Start!

BusinessCurrent Affairs

Contemplation points

Avatar: Saron Lakew
By Saron Lakew

Ethiopian Business Climate Reform – Off to a Good Start!

Contemplation points

In the World Bank Group’s (WBG) Ease of Doing Business Report 16th edition (2019), Ethiopia has ranked 159th out of 190 economies worldwide and 29th from Sub Saharan Africa (SSA). The country has improved by two ranks from the previous year and increased by a 0.9 score on the absolute measure of regulatory practice.  

For the past four years, the government, with the support of other stakeholders, has engaged in reforming the business climate with the aim of improving the country’s ranking on the report. The effort has brought some reforms into light, out of which the following were recognized by the WBG Report:

  • Starting a Business was made easier by the enactment of the Commercial Registration and Business Licensing proclamation. Proceeding laws simplified pre-registration and registration formalities and abolished the minimum capital requirement. It was further simplified by the removal of the need to obtain a certificate of competence for certain types of businesses (2016 - 2018).
  • Trading across Borders was made easier through a series of initiatives including the implementation of a risk based inspection system, pre-arrival clearance, cargo-scanning and a 50pc reduction on paperwork related to import and export (2017 and 2018).
  • Enforcing Contracts was made easier by establishing specialized benches to resolve commercial cases (2018).
  • Construction Permit processing got faster by reducing the time to obtain planning consent from 30+ days to under 3 days (2018).

However, the breadth and depth of the reform effort was neither adequate enough to revolutionize the business climate of the country nor bring a significant ranking improvement on WBG’s Report. Taking a look at the top reforming countries provides valuable insight regarding the missing ingredients – consistent follow-up by the highest executive body and a strong monitoring & evaluation framework.

There has been a renewed interest by the government to reform the business climate and improve Ethiopia’s ranking on the report which seems to come with a broader scope and a stronger commitment by the highest executive body. The national initiative was launched by H.E PM Abiy Ahmed with the presence of the implementing agencies leadership (please see DB_Launch). This national initiative has identified 80 distinct actions to be executed by the 10 government agencies. A closer look into the reform document by the Office of the Prime Minister (OPM) further indicates the vision of placing Ethiopia among the Top 100 DB ranking countries by 2020 (please see DB_Preview).  

Vision – too ambitious?

As mentioned, the reform effort aims at placing Ethiopia among the top 100 ranking countries by 2020. The 2020 report is the upcoming 17thedition and recognizes reforms which are implemented until May 2019, which leaves less than five months for the implementation and recognition of impact by the private sector (respondents of the Doing Business Survey).

In order to land among the top 100 countries, in the five-months window, Ethiopia needs to implement reforms that can help surpass at least 59 countries – this is too ambitious to say the least. It took five-years for Kenya to jump 68 ranks(from 129 in 2014 to 61 in 2019) and the type of reforms implemented by Kenya during those years are in no comparison to what is being planned for implementation in the five-months window here. Hence, it is vital to reevaluate and produce a realistic vision to align implementation and manage expectations accordingly.

Institutionalization and Scope of Reforms

The greatest achievement of the reform effort this year is having the Prime Minister at the forefront leading the reform effort and monitoring the implementation by the Policy and Performance Unit (PPU) at OPM. If the commitment sustains and the monitoring is carried out well, it will bring the required attention, urgency and accountability into the reform process.

In my view, this reform effort is like no other in-terms of its breadth – it brings together 10 government agencies to improve the business climate from entry to exit points (10 indicators in total). I see no better way or approach broader than this. However, for actual and meaningful impact, the reform effort should go beyond the scope of the Doing Business methodology. The Doing Business methodology has a standardized case scenario across the 10 indicators which are applicable for all the 190 economies. Its measurement is only based on those case scenarios, for example, for the Trading Across Borders indicator, it looks only at the time and cost ‘to export coffee to Germany’ and ‘import spare-parts from Japan; or for Construction Permits, it looks mainly at ‘the time it takes to obtain a construction and occupancy permits for a warehouse’. A reform which is limited only to the aforementioned constricted scope will not be meaningful by any measure for the private sector in the country. The breadth and depth of reforms implemented by the top reforming countries, such as Rwanda and Kenya is a good epitome in this case.

Rwanda is the front-runner in the region with a big jump in reforms, especially from 2008 onwards. In the past ten-years, the country implemented 51 reforms across DB indicators. Among the reforms, the major ones include: end-to-end online business registration, fully integrated electronic land registry and construction permit platform, a public-private partnership (PPP) providing single access point to government services (IREMBO), online and mobile tax registration and payment systems, quarterly declaration and payment of VAT, the establishment of integrated border management,  and the introduction of 24- hour border operations.

As we can see from Rwanda’s experience, for actual impact on the business climate, it is important to sustain deep-rooted reform efforts instead of one-off quick wins. Such deep rooted reforms cannot be achieved with an ad-hoc committee-like working groups. If we are set to overhaul the business climate, it is important to integrate the required reforms into the formal plans of the implementing agencies with a sense of urgency in the delivery timeline .

Mobilization of Interest Group

In the end, what matters is the experience of the private sector. An actual evaluation of impact is the change experienced by the private sector – the very approach of Doing Businessas well. For this reason, it is wise to adopt a bottom-up and an inclusive approach that brings the private sector and professional associations at the center. The role of these stakeholders has a vital importance for the accurate identification and understanding of constraints and the development and prioritization of required reforms.

From the private sector and association side, I do not see a better platform for these interest groups to extend their support and also exercise their collective pressure for change. Business and professional associations especially need to leverage these opportunities to channel the required reforms for their respective sectors/practices. They should become official allies of the reform process by ensuring their inclusion in the permanent institutional structure and engaging in the implementation process. This ensures the relevancy of the initiatives to the private sector, creates transparency on the implementation, and provides the opportunity to exert the necessary pressure for delivery of the required services. These interest groups have a strong bargaining power as they are representatives of the private sector, which later on reports back to the Doing Business team to determine the country’s ranking.

Hence, the platform presents a win-win for both parties – government will get an accurate list of action points with a higher impact value and also bridge the existing communication gap with the private sector; and the interest groups channel the reforms they need to see as well as exercise their influence to get them implemented. In conclusion, it does seem that we are headed towards the right direction. For all parties involved however, it is important to remember that reform is not a one-off exercise. Overhauling the current business climate requires time. Through a sustained commitment from the Prime Minister, rigorous monitoring and evaluation of implementation by the PPU, and active participation of interest groups, we can find Ethiopia among the top 100 in the coming 3-5 years.