Ethiopian Investment Law Reform

Key policy reform and departure

points

October 2019
Investment law reform: rational
Over the past few years, substantive issues which call for the revision of the The revision of the investment law has been
Ethiopian investment legal regime have been identified dictated by the need to:-

✓ Modernize the investment regulatory and

POLICY-LEVEL RATIONALE
administrative framework
– Catching-up with changes: global and local changing context
– Changing perceptions: reverse the long held perception that Ethiopia is ✓ Align the investment legal regime with
closed for business and portray the message that the country welcomes recent changes in economic policy priorities
productive investments in all sectors of the economy
– The need to remain competitive: make required reforms to match
✓ Revisit investment areas open to the private
competitors
sector

TECHNICAL AND PRACTICAL REASONS

✓ Consolidate protracted rules on investment
– Over the years a number of gaps and ambiguities have been identified
that hindered the application of the law
✓ Adopt best practices for efficient
▫ Attempts made to address these gaps and ambiguities through investment administration/service provision,
piecemeal amendment of the laws as well as decisions of the including One-Stop-Services and
Ethiopian Investment Board (EIB)
▫ This approach has brought about uncertainty and unpredictability in ✓ Devise a faster and more transparent
the investment legal regime; need for a comprehensive look at and investor grievance handling mechanism
revision to the legal regime has thus become evident.
Investment law reform: approach
▪ Structure- A technical working group covering ▪ Legal analysis - review of the current and preceding investment policy,
17 investment lawyers/advisors established by proclamations, regulations etc.
EIC in January 2019 ▪ Benchmarking - In-depth desk research on best practice countries (~25
countries)
▪ Working mode- The working group operated ▪ Empirical evidence - gathered from international investment policy leads -
under the supervision of the EIC Management UNCTAD, WBG etc
which guides, reviews and approves each
milestone
▪ Key Informant Interview
– Federal government – one-to-one discussion with over 20 federal agencies
▪ Methodology- The working group leveraged – Regional investment commissions - Oromia, Amhara and Tigray
various methodology to deliver on tasks ▪ Feedbacks received from investor associations
▪ Four staged approach ▪ Private sector survey
– Comprehensive diagnostics
– Reform recommendation ▪ Public sector validation
- July 4th 2019
– Stakeholder validation
- All relevant federal and regional agencies
– Legal drafting ▪ Private sector validation
– Revision of draft - July 6th 2019
- 200+ private sector representatives (local and FDI)
▪ Draft law shared with all relevant ministries/agencies and investor
associations
- Feedback collected from over 20 Ministries/Agencies
 1 Investment law reform: policy considerations
A. Rethinking long-held assumptions on global investment order D. Focus on domestic investment and linkages
▪ Quickly changing global investment context, dynamic rules needed ▪ Facilitate access to foreign capital, skills and technology
▪ FDI inflow changing in size, composition and modality ▪ Nurture entrepreneurship
▪ GVCs moving ▪ Enhance market/supply linkages
B. Revising objective setting with changing local context (Home
Grown Economic Reform etal) E. Investment administration
▪ More and better jobs ▪ Effective IPA – targeted promotion, aftercare and problem
▪ Expanding productive sectors and leveraging enabling sectors solving
(including services) ▪ Simple, modern, transparent and accountable administration
▪ Enhancing export competitiveness ▪ Effective coordination
▪ Capital mobilization, leveraging the diaspora and FDI ▪ Agile structure and manpower
▪ Supporting business startups
▪ Inclusive investment, FDI-domestic investment linkages
C. The need to take a holistic approach towards improving F. Ecosystem approach
investment => attraction, retention and expansion ▪ Promotion Vs encouragement Vs opening Vs regulation
▪ Relaxing entry barriers ▪ Successful realization of investment attraction and retention
even in selected few sectors requires well-functioning
– Sector restriction
ecosystems
– Capital limits
– Licensing/permit
– Visa
▪ Addressing operational barriers
– Inter-agency coordination (vertical/horizontal)
– Expanding OSS
– Protection and guarantees
2 Investment definition, scope and screening

Area Gaps under current law Draft law

▪ Limited to establishment of new ▪ Recognizes acquisition of shares

a Investment enterprises and 50-100% ▪ Recognizes all forms of IPRs
definition expansion/upgrading
▪ Limited definition of capital (patent)

▪ Exclusion limited to investments in ▪ Exclusion adds natural gas

Scope minerals and petroleum
b

▪ Limits possible investments in local ▪ Exception for investment in

Minimum capital startups and innovative ideas innovative local startups by PE,
c for foreign ▪ Limits investment retention, venture capital, angel investors etc
investment expansion and diversification ▪ Exception for existing investments
($200,000 – ▪ Requires minimum capital during wanting to engage in new areas
150,000) transfer of share in FDI firm and on ▪ Exception as main FDI firm and/or
conversation of a PLC into SC PLC fulfilled the requirement
3 Investment facilitation

Area Gaps under current law Draft law

▪ Limited to federal/EIC (FDI) ▪ Expansion to regions (for domestic

a OSS ▪ Limited to per-establishment stage investment)
▪ Expand to post-establishment
stage (business license renewal)
▪ Restrictive ➔ entry barrier ▪ EIC facilitation role defined
▪ Right to request from 3rd country
b Visa ▪ 3 years multiple entry investment
visa
(for owner, shareholder, top
management, board member,
frequently visiting professional staff )
c Work permit ▪ Loose on the terms of employing ▪ Expat employment rules firmed-up
expats and duty to train/replace (to promote local employment)
▪ Restrictive for spouses ➔ entry ▪ Right to work permit for cohabiting
barrier spouse of an investor & expat
employee
4 Investment administration

Area Gaps under current law Draft law

▪ Manual ▪ Online system recognized
▪ Lack of transparency & due process ▪ Timeline for permit approval
Investment permit ▪ Maximum 2 renewal (limits defined, Grounds and process for
a issuance renewal innovative investments) suspension and revocation clearly
and cancelation defined
▪ 3 times renewal allowed for start
ups and innovative investments
▪ Lack of clear platform for investment ▪ Process for grievance handing
grievance management ➔ outlined
Grievance handling
b investment down-sizing, - against final decision of EIC &
cancelation, arbitration other agencies
- escalation mechanism set (to EIB)
- Duty to execute
Dispute ▪ No rule on dispute settlement ➔ ▪ Provides ADR and court options
settlement/Investm limits investment
c
ent protection protection/investors’ confidence
(especially sizeable investments)
5 Investment organs

Area Gaps under current law Draft law

Ethiopian ▪ General mandate in view of ▪ Mandate clarified (proactive
a Investment international best practice and its investment promotion, aftercare, IC
Commission role on the ground improvement, investor feedback loop
etc)
▪ Lack of clarity on membership ▪ 2 non-voting private sector rep.
▪ Lack of transparency with ▪ Directive to be issues on procedures
Ethiopian decisions made for submission of apps, decision
b
Investment Board ▪ Infrequent meetings making, dissemination of decisions
▪ Meeting frequency pushed to
quarterly
▪ Delink in investment ▪ Federal-regional coordination and
administration problem solving platform
Standing Council on ▪ Increasing number of grievances ▪ Strategic and high-level issues
c Inter-Gov. Relations investment down-sizing, ▪ Chaired by the PM, includes regional
(on inv. admin.) cancellation and arbitration presidents, A/A & D/D city mayors,
investment commissioners/heads
▪ Discipline/timeframe on land approval
 6 Investment sector regulation
Current law Gaps Draft law
Positive listing ▪ Restrictive by design Negative listing
▪ Rigid, limits innovation and new
Listed sectors: open for FDI developments Listed sectors: fully or partially
▪ Restricts integrated business restricted for FDI
All other sectors: closed/ restricted models All other sectors: open for FDI
for FDI ▪ Restricts investments in value
adding and enabling service EIB mandated to revise the list
sectors (add or remove from the negative
Open for FDI
▪ Policy reversal from the past 3 list)
consecutive laws
▪
JV with Govt
Against global trend and best Open for FDI
Reserved for Gov
practice
Reserved for Ethiopian
nationals
Reserved for
domestic investors
Reserved for domestic
investors
JV with
domestic
Closed for FDI investors

JV with
Govt
Annex
Role of investment for development: Investment plays an increasingly vital as a source of development finance
and economic competitiveness; its in recognition of this that developing countries have put in place investment
policy and legislation that primarily aim to attract and retain quality investment to their economies

✓ Largest and less volatile source of external

finance, surpassing official development
assistance (ODA)

✓ Access to foreign markets

✓ Transfer of technology and innovation for

better productivity and competitiveness

✓ More and better jobs

✓ Technical know-how, managerial and

organizational skills

✓ Domestic firms upgrading through linkages

and spillover
Changing global investment trend: Global FDI inflow dropped by 13% to $1.3 trillion in 2018; host countries are
taking investment reform measures to diversify investment sectors and remain competitive

• In 2018, 55 countries adopted 112

investment policy measures affecting foreign
investment

• Two thirds of these measures sought to

liberalize, promote and facilitate new
investment
Changing global investment modalities: new forms/modes of investment, additional source of foreign capital

✓ Fund managers for idle resources/funds such as

pension funds

✓ Impact investments, Angle investors

✓ Incubators & Accelerators

✓ About $3 trillion valued assets are globally

managed through Pes

✓ Africa is becoming an attractive destination for

PE, especially for investments in consumer-
driven SMEs.

✓ PE going to Africa is generally increasing both in

number and value
Changing global investment composition: Service sector accounts for the largest share of FDI inflow (both green
and brown field)

Value and number of announced FDI greenfield projects, by sector and selected industries, 2017-2018

Value and number of net cross-boarder M&As, by sector and selected industries, 2017-2018

Leading service sector for FDI: Business services, finance, transportation and storage, ICT,
construction
Ethiopia's Investment Profile- In the past five years, FDI flow to Ethiopia has increased by more than four folds
In the past five years, FDI flow to Ethiopia has increased by more than
four fold
5000
4000
3000
2000
1000
0
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
Total FDI Manufacturing FDI

With $3.3 billion FDI inflow in 2018, Ethiopia stands as the 5th largest FDI
recipient in Africa
✓ Nearly half of total inflow to East Africa
✓ Largely in light manufacturing/textile and apparel via industrial parks
FDI: 13% of total investment, about 5% of GDP (2017), 7x higher in terms
of capital invested than domestic investment
Investment to GDP ratio: averaged 37.5% over the last 5 years ( average of
31% for (2009 - 2013) and an average of 26.3% (2004 -2008)
Public investment has been the main driver of the country’s rapid growth
(Share of public investment in GDP rose from 5% in the early 1990s to 17%
in the 2013/14 fiscal year); but it has declined to 13.8% in 2017/18
Ethiopia's Investment Profile: Productive and enabling sectors of the economy are yet to be effectively
enhanced, and role of FDI yet to be optimized

50
▪ Services: traditional, restricted,
40
limited jobs
30 ▪ Agriculture: low productivity,
Sectoral 20 technology, know-how,
aggregation
contribution 10
▪ Industry: declining
0
to GDP 2012/13 2013/14 2014/15 2015/16 2016/17 2017/2018
manufacturing share in industry

Agriculture Industry Services

Construction Contracting
Including Water Well Drilling Agriculture

Real estate,
Machinery and • Manufacturing is the
Equipment Rental
and Consultancy biggest driver of FDI
Investments Tour Operation,
Service accounting for 69% of total
FDI inflow, and 50% of all
per sector Transport and
Communication
Hotels (Including Resort Manufacturing investment projects
Hotels,Motels and Lodges) and
Restaurants
Health
Electricity (Generation, Education
Tranismition and Distribution)
Mining
Services sector in Ethiopia: Restrictions in the service sector affects Ethiopia’s economy at various levels

Estimated global inward FDI stock by

Restriction in the service sector affects Ethiopia’s economy at various levels
sector, 2001, 2007 and 2015

Services Trade Restrictions Index Services Trade Restrictions Index by Sector

100 100
90
80 80
70
60
60
50 40
40
30 20
20
0
10
Accounting and Air Passenger Legal Services Telecommunications
0 Auditing International
Ethiopia Global EU-20 Uganda Rwanda Kenya
average Ethiopia Global average Uganda Rwanda Kenya

✓ Limited product value addition/sophistication undermining export

competitiveness
✓ Lost investment/FDI opportunities
✓ Lost job opportunities: Services account for 74% jobs in high income
countries, 40% in upper-middle income countries and 33% in lower-middle-
income countries
Changing local policy context - Measures taken by the government in that last year is a clear indication of the
distinctive shift towards enhanced private sector participation in the economy

▪ A range of political and economic policy reforms which appear to signal a significant departure
from the previous practice of State-led economic grow and provide for a greater space for private
sector involvement and enhance the role of the private sector in the economy; Some of the clear
indications of this shift include the following:
– More and better jobs
– Expanding productive sectors of the economy
– Privatization program involving partial equity sales in the four strategic sectors (airlines,
telecom, power, and logistics); plan to fully privatize several other state enterprises (sugar plants,
Clear shift
railways, industrial parks, etc.);
towards more
private sector – Leveraging private investment for development financing: PPPs
participation – Improving Ease of doing business for local and SME businesses, increased linkages
– Regional integration and multilateral trade agreements – ratification of the African Continental
Free Trae Area (AfCFTA) and accession to the World Trade Organization (WTO), implies
significant liberalization in trade in goods and services and introduce disciplines on investment,
intellectual property and competition policy.
Evolution of the sector listing approach - Since the introduction of a free market economy in 1991, Ethiopia has enacted four
proclamations regulating investment and all except the current one followed negative listing approach
PROCLAMATION TO PROVIDE FOR THE ENCOURAGEMENT, INVESTMENT PROCLAMATION NO. 280/2002 ( 280/1994)
EXPANSION AND COORDINATION OF INVESTMENT NO 15/1992 ▪ Negative list approach
(15/1984) 1. Government (2- Grid, Postal)
Negative List approach 2. JV with Government (weapons, telecom)
1. Government (5) (large scale, B & I) 3. Ethiopian Nationals (4 - B&I, Broadcasting,
2. JV with Gov’t (3) shipping, airport)
3. Ethiopian Nationals - small scale air, rail, marine 4. Domestic Investors (19 Sectors) –
transport, electricity supply. 5. All others sectors open
4. All others Open.

1992 2002
1996 2012

INVESTMENT PROCLAMATION NO 37/1996 (37/1988) CURRENT INVESTMENT PROCLAMATION NO. 769/2012

▪ Negative approach- (769/2005)
1. Government (same as 1992) ▪ Positive list + Negative List.
2. Ethiopian Nationals (B & I, Energy up to 25MW, 1. Government – Grid, postal and air
air transport upto20) 2. JV with Government –weapon + Tele
3. Domestic investors (18 Sectors) - 3. Ethiopian nationals -
4. JV with domestic investors – (4 sectors) – 4. Domestic Investors -
Pharma, Fertilizer, Chemical (20mil +27%) 5. Foreign Investors -
5. All areas that were not mentioned in 1-4 were
open for FDI
Sector listing approach: Open Vs. Restrictive system
DEEP DIVE NEXT PAGE

OPEN-SYSTEM APPROACH RESTRICTIVE-SYSTEM APPROACH

✓ Host country admits FDI without a formal ✓ Host country puts conditions for admission,
screening and approval process or a mere ▪ Sector specific restrictions
filing or notification requirement ▪ Equity restriction or local management
✓ Fully open countries are not many requirement
✓ OECD Regulatory restrictiveness Index ▪ Performance requirements
shows: ▪ Case-by-case approval/ screening
▪ EU member States, Eastern Europe, ✓ Further divided into a positive listing and
Chile and Argentina negative listing approaches.
▪ From Africa: Rwanda and Mauritius
stand out
Sector listing approach: Restrictive system approach

POSITVE LISTING APPRAOCH NEGATIVE LISTING APPRAOCH

✓ Exhaustive enumeration of all sectors ✓ Enumeration of sectors or sub-sectors
or sub-sectors in which foreign in which foreign investors are
investors may invest in. prohibited or restricted.
✓ It’s a static document and is not seen ✓ Any sector or sub sector that does not
as progressive appear on the list is considered open.
✓ Fails to cope with technological ✓ On the list may be prohibitions,
evolutions and pace of business in a ownership limitations, screening
globalized World requirement, minimum investment
requirement, and performance
requirements are the major ones.
Sector listing approach: The shift back to the negative list is based on the review of 25 countries
Review of the legislations of 25 countries
▪ Selection based on policy similarities, historical and
economical comparators
▪ To mention few: Uganda, Kenya, Tanzania, Ghana, Rwanda,
Mauritius, Vietnam, Sri-Lanka, Philippines, Brazil, Argentina,
China, India, and Khazakhstan among others.
▪ General takeaways:
✓ Historical trend towards more liberalization
✓ Shift from positive to negative
✓ Most still maintain restrictive approaches
✓ Specific country policy priorities reflected
✓ Every country is different on the details but
overwhelming general similarity on prohibitions,
equity restrictions, local content requirements and
special approvals
Global benchmarking: economy-wide and sector specific investment regulations

Region Mining, oil Agri- Light Telecom Electricity Banking Insurance Transport Media Construction, Health Aver-
& gas culture manu- tourism & retail care age
facturing
East Asia &
Pacific 78.4 82.9 86.8 64.9 75.8 76.1 80.9 66.0 36.1 93.4 84.1 75

Eastern
Europe & 96.2 97.5 98.5 96.2 96.4 100 94.9 84.0 73.1 100 100 94.3
Central Asia
High-
income 100 100 93.8 89.9 88.0 97.1 100 69.2 73.3 100 91.7 91.2
OECD
Latin
America & 91.0 96.4 100 94.5 82.5 96.4 96.4 80.8 73.1 100 96.4 82.8
Caribbean
Middle East
& North
78.8 100 95.0 84.0 68.5 82.0 92.0 63.2 70.0 94.9 90.0 83.49
Africa

South Asia 88.0 90.0 96.3 94.8 94.3 87.2 75.4 79.8 68.0 96.7 100 88.2
Sub-
Saharan 95.2 97.6 98.6 84.1 90.5 84.7 87.3 86.6 69.9 97.6 100 90.2
Africa
Average 89.7 94.9 95.6 86.9 85.1 89.1 89.5 75.7 66.2 97.1 94.6

• UNCTAD Investment Policy Database

• OECD FDI Regulatory Restrictiveness Index
• WBG Investing Across Borders Database
Current Investment Law (Positive listing approach)

Positive list
Open for FDI

JV with Govt

Reserved for Gov

Negative list

Reserved for Ethiopian nationals

Reserved for domestic investors

Closed for FDI

What is neither in the positive nor in negative
list
New Investment Law (Negative listing approach)

Open for FDI What is not in the negative list

Reserved for
domestic investors

JV with
domestic
Negative list
investors

JV with
Govt
Thank you!