Understanding the conflict in northern Ethiopia and the roles of party affiliated endowment companies

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“Then you will know the truth, and the truth will set you free” John 8:32.

Minga Negash0F1
November 20, 2020

Introduction

Whether the conflict that was started on November 3, 2020, in Northern Ethiopia will be short-lived or a protracted one that turns itself into stalemate, guerrilla warfare and draws the Greater Horn of Africa region into larger conflict is unclear Former diplomats and institutions like the United States Institute of Peace (USIP) went as far as describing the conflict as “the largest state collapse” in the Horn of Africa unless it is de-escalated. The institute’s experts urged the international community to speak in “one voice” and underscored the need for a “negotiated settlement”. An expert at Brookings Institute followed a similar theme and proposed cessation of hostilities, mutual recognition of each other, and election. The propositions are in line with what TPLF/Tigray Regional Government offered. Western media outlets and sensational reporters echoed the messages that came out from the think tank institutions. The United Nations, the African Union and major powers (China, Russia and the United States) are either silent or issued statements that have no immediate effect on the ground. The federal government is resisting negotiation at this stage, claiming the detrimental nature of the proposal for its “law enforcement mission” and maintaining the territorial integrity of the country.

The spark of November 3, 2020 was a result of the simmering tensions that were allowed to build up within the once invincible ethnic coalition that ruled Ethiopia for 27 years. The history of the Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF) resembles that of the final days of the communist parties of the former USSR and Yugoslavia. Ethnic and religious cleavages cut through all state institutions, including in the defense and security establishments. There are party networks within the state institutions. The tensions within the party gradually escalated into a split and into an open military conflict that mainly involved the federal government and the Amhara Regional Government on one hand and the Tigray Regional Government on the other. At the time of writing this commentary, the federal government is appealing to Ethiopian patriotism and claiming the upper hand in that it has been progressively controlling areas that were previously occupied by the special force and militia in Tigray. The de facto Tigray Regional Government on the other hand continues to appeal to regional nationalism and presents a different picture of the conflict. Despite the international pressure, the chances for a

  • The author is a Professor of Accounting at the Metropolitan State University of Denver and the University of the Witwatersrand Johannesburg. The opinion expressed here is the author’s own and does not reflect in any way the views of the institutions he is affiliated to. The commentary has benefited from earlier work with Professor Seid Hassan of Murray State University. A project that aimed at examining the reform options available for transforming party-owned businesses into investable economic entities, using interview and archival data, was abandoned because of the continued tension between the federal government and regional governments, the sensitivity of the topic, and general instability in the country. negotiated settlement appear slim. The veracity of the claims and counterclaims are difficult to ascertain. In this fourth installment on the Ethiopian protests and violence, I attempt to limit the scope of the analysis to economic matters and provide a dispassionate rejoinder to show that “the Tigray conflict” has as much to do with resource control as it is with politics. De-escalation of the conflict requires the understanding of the stakes for the parties to the conflict.

In its November 19, 2020 edition, Foreign Policy correctly identified the problem when it wrote “This war is ultimately a battle for control of Ethiopia’s economy, its natural resources, and the billions of dollars the country receives annually from international donors and lenders. Access to those riches is a function of who heads the federal government—which the TPLF controlled for nearly three decades before Abiy came to power in April 2018, following widespread protests against the TPLF-led government.” The competition for resources in Ethiopia comes in three forms. First, it has a center-periphery characteristic, an aspect of fiscal decentralization (federalism). Second, it about the control of agricultural lands (e.g. Humera, Wolkait, Tselemet, Tsegede, and Raya) which are claimed by both the Amhara Regional State and the Tigray Regional State1F 2. The third is ownership, management, and jobs in party affiliated endowment companies and the gains that stem from controlling central government institutions. The armored personnel, the combat aircraft, the drones, the missiles, and the hundreds of thousand personnel involved in the conflict show that though sugar-coated with ethnicity, identity, self-determination, and patriotism, equally true is that the fight is also about resources.

In this respect, with the advancement of the federal forces and the Amhara special force and militia, the latter appears to claim that it has retrieved its lost lands in Welkait, Tsegede, Tselemt, and Raya. On the other hand on November 17 2020 the federal government froze the bank accounts of 34 EFFORT (Endowment Fund For the Rehabilitation of Tigray) companies for their alleged involvement in the conflict. Added to the currency change and the political costs, the freezing of the accounts creates additional strain in the operation and liquidity of the enterprises, and unless managed carefully risks tens of thousands of jobs and destroys scarce assets which could be put to better use.

The ownership and governance of EFFORT and similar party-owned enterprises have been a subject of much debate (Negash 2008;2013, Hassan 2019, Legesse ‘s 2016 የመለስ ልቃቂት). Hassan and Negash (2019) underscored the need for unconventional reform measures that include “big bang” in that normal anticorruption mapping strategies and attempts to separate party and state did not work in the presence of state capture. The freezing of the bank accounts may signal the beginning of considered measures that may lead to making party owned and controlled enterprises accountable and investable. In

  • This is a sticky issue in all areas where population pressure is high. In the case of Welkait, etc. there are alleged atrocity crimes that include forced demographic change and annexation. The human rights aspects of the conflict are not covered in the terms of reference of the Commission for Administrative Boundaries and Identity Issues.

Many also argue that the current constitution is not the correct framework for settling annexation and territorial issues. For more on this, see Kidane Mausha’s (Voice of the Victims) presentation at Vision Ethiopia’s fifth conference. The presentation starts at 1:17:45 minutes. what follows I shall document the policy options that may be useful for post-conflict economic recovery and stabilization program.2F3

Analysis and reform options

The concept of the reform is grounded on public accountability. Accountability for wars, war crimes, atrocity crimes, and transitional justice are often dictated by who the victor is. For the International Committee of the Red Cross (ICRC) accountability in war “must be

viewed comprehensively as a triangular relationship between political/military forces, humanitarian organizations and the people affected by the conflict. Today, the main

emerging issue should therefore be that of accountability of the former towards the latter: people affected by conflict have rights and cannot be treated as mere objects of charity.” In governance, the terms accountability, answerability, responsibility, and liability are used interchangeably. Writing in the context of corporate accounting, Sinclair (1995) states that accountability is a “cherished concept, sought after but elusive” and has a “chameleon quality”. There are at least five forms of accountability. They are political, public, managerial, professional, and personal.

In a more recent paper, using Varieties of Democracy (V-Dem) dataset that relates to 173 countries across a period of 1900-2012, Mechkova, Lührmann and Lindberg (2019) examined accountability in government and documented that accountability is realized in sequence, and “de-facto vertical accountability precedes other forms of accountability.” For Mechkova et al (2019), there are three forms of accountability: – “vertical accountability (elections and political parties), horizontal accountability (legislature, judiciary, and other oversight bodies), and diagonal accountability (civil society and media) .” The authors “argue that governments are more likely to allow for de-facto [as opposed to de jure] accountability if the costs of supplying accountability decrease and the costs of suppressing the demand for accountability increase.” They document regional variations (Eastern Europe and Central Asia, Latin America, the Middle East, and North Africa, etc.), with Sub Sahara Africa (SSA) scoring low in many of the parameters used. Taking a cue from Mechkova et al’s (2019) findings and the mixed results of political liberalization in SSA countries (Takeuchi, 2007), an interesting question arises. If sovereignty is not at stake, assuming that is Tigray has no intention of actualizing de facto statehood, then one can argue that the conflict can be explained by power (political) games and control of resources. In other words, it is essential what TPLF and the regional government would give up avoiding the conflict and what each party has already lost by entering the conflict.

What Tigray and the rest of the Ethiopian State have lost is incalculable. Cutting losses depends on how one sees his/her position in the conflict. If things go the federal government’s way, TPLF bosses will face a multitude of criminal charges, the regional legislating body will be abolished on the ground of clinging to power by holding an “illegal election”, and the region will be administered by a Chief Executive Officer appointed by

  • At the time of writing, this commentary refugees are fleeing to Sudan and their numbers are in tens of thousands. For more on this and the challenges of the transition period see Vision Ethiopia’s 9th Virtual Conference Report (October 28, 2020) and the videos.

the federal government. Apparently, this is/will not be acceptable to TPLF/Tigray Regional Government. It is important however to ask what if things do not go the federal government’s way. In both cases, the transition to normalcy will not be easy and short. The scars are to stay for generations, to be manipulated for yet another cycle of violence.

What one witness today is a reversal of the conflict of the late 1980s. The martyrs’ museum in Makele, though one sided, reminds the severity of the then conflict. Ethiopians have not learned from it. Since the May 1991 capture of Addis Ababa by the guerrilla forces of the TPLF/EPRDF and the EPLF, politics and economics have been organized along ethnic lines. Despite warnings and against the advice of institutions like the African Peer Review Mechanism (APRM), regions were given sovereign status, to the extent of building their own special forces. Party and State are de facto inseparable. At least half of the 108 registered political parties are ethnic parties with no discernable program to advance other than ethnicity. No one knows whether the parties are regularly audited. Over the last three decades, party-affiliated businesses that were owned by the TPLF thrived, controlling key and strategic sectors of the economy. EFFORT companies got preferential treatment in government procurement and construction contracts and, enjoyed the channeling and cancellations of debts owed to state banks. Conflict assets were converted into normal business. The TPLF partners that shared the levers of power were encouraged to create their own endowment companies. The unaccountable institutions, including the House of Federation, that the TPLF/EPRDF established, came to haunt it.

Six months after the ruling party claimed 100% victory in the May 2015 regional and federal elections, slow motion and fragmented protests engulfed the country, and the ruling party started to show cracks. The equilibrium within the wings of the ruling party changed, with the Oromo displacing the Tigrayan. This was also observed in endowment companies. For instance, in April 2017, Tiret (the holding company of Amhara endowments) changed its powerful board Chairman, a rare event which was followed by expulsion from the party and imprisonment. In July 2019, the media reported that the two major endowment companies are also going private. The Amhara Endowment Fund (Tiret Corporate) announced that it will sell all its shares in 10 companies. The companies include Tikur Abay Transport, Ambasel Trading House, Bahir Dar, and Kombolcha Textile Share Companies, Dashen Brewery, and Gondar Malt Factory. At about the same time, the Governor of the State of Tigray announced that EFFORT will report to the regional legislative body (instead of to the party), and three of its companies (Mesebo Cement factory, SUR Construction, and Trans Ethiopia PLC) will be privatized in special share offerings that target a segment of the Ethiopian/Tigrayan diaspora. The news from EFFORT did not indicate whether the privatization is partial or total. This action initially appeared in line with the new Prime Minister’s intent to stamp out corruption and privatize several SOEs (see commentary Negash et al 2018).

On January 5, 2020, the TPLF officially broke up its three decades long relationship with the EPRDF. The new Prime Minister created his own Prosperity Party attempting to fuse (mistakenly) ethnicity with American prosperity theology in the same institutional (regulative, normative, and cognitive) framework and in predominantly collectivist and age-old Orthodox Christian and Islamic cultures. It is administering what it refers to as “homegrown” economic policy and is silent about party endowment companies. Hence, the fight for resources between political parties is intense as the economic stakes are high and poverty is rampant. The key to mitigating the conflict is making de facto vertical accountability the cornerstone of the post-conflict transition. Neutralizing the party-affiliated endowment companies from the equation is one way. This policy has several advantages including but not limited to making elections contestable, reducing the incentives to spoil elections, reducing the intensity of ethnic/region-based competition, improving the chances for de facto horizontal accountability and stamping out corruption.

Concerning party business ownership, Abegaz (2011:4), using Taiwan’s KMT’s and Ethiopia’s EPRDF endowment companies as examples, examined why certain former guerrilla forces that became governing parties “prefer to build party-controlled business empires rather than to amass individual wealth by funneling state assets as well as siphoning off some of the profits and rents from politically affiliated private business groups.” He concludes that party business decision “revolves around: regime insecurity, its organizational capacity and discipline, its ideology, and the degree of centralization of the state it inherited.” Abegaz (2011: 10) identifies countries where political parties have direct business interests: Rwanda, Malawi, Uganda, South Africa, and Zimbabwe.

Gul, Munior, and Zhang (2016) examined the link between ethnicity, government, and company performance using the ethnic diversity of board members of Malaysian companies. Political connections and ethnicity were found to be important factors in accentuating /attenuating earnings quality (opaqueness). Nasir, Ali, and Ahmed (2019), using Malaysian companies’ data reported a significant positive relationship between the proportion of Malay directors on corporate boards and financial statement fraud. Harymawan and Nowland (2016), using Indonesian data, reported that “increased government effectiveness reduces the benefits of political connections, requiring politically connected firms to be more responsive to market pressures and resulting in higher earnings quality.” Agesa (2000) documents that African SOEs have become sanctuaries to “ preferentially hire workers on the basis of non-productive attributes-ethnicity and nepotism-rather than their operational skills”. One can infer that the Ethiopian case is worse.

Ten months after the breakup and two months after holding its parliamentary election (September 9, 2020 where TPLF won 98.2% of the seats), the Tigray appeared Spain’s Catalonia, just short of holding a referendum, and poised for a de facto independent country, with renewed defiance of the center, vitality, inspirational patriotic and war songs, colorful military parades that involved formidable regional police and militia force, backed by EFFORT companies which control a significant portion of the Ethiopian corporate sector. The federal government did the same. Something went wrong in the calculation. Suddenly the tide did not go in the regional government’s favor. The endowment companies are now caught in the middle of the crisis. Ethiopia’s party endowment companies are also populated by party loyalists and overseen by boards whose chairs and members are dominated by ”sitting members from the Central Committee” Young 1997:85), with employment discrimination and employing tens of thousands of people.

Senior government officials are also listed as founding shareholders.

Each of the four components of the EPRDF (TPLF, ADP, ODP, and SPDM) have had their own endowment companies. EFFORT, TIRET, Tumsa/DINSHO, and Wendo Trading & Investment Pvt Ltd., respectively control a few subsidiary companies. For example, EFFORT (which owns companies across multiple sectors) operates in five interlocking sectors: industry, mining, finance, trade, construction, transport, and agriculture and owns numerous subsidiaries. TIRET in turn operates in manufacturing, services, agro- processing, and construction. As its webpage indicates, the list of companies that DINSHO owns and runs are many. Together with affiliated youth, women, religious, and development associations and structures of ethnicity are strong. With the escalating conflict, TPLF’s companies are singled out and accused of aiding the conflict. The Attorney General’s office reportedly stated that the accounts were frozen for the alleged participation of the companies “in financing ethnic- based violence, acts of terrorism, connection with the TPLF, which seeks to overthrow the constitutional order.” The central question thus is whether the federal government has the political will for de facto vertical accountability and use the opportunity to reform party affiliated enterprises across the depth and breadth of the economy. Notwithstanding. identifying the pros and cons of reform options is important. The table below provides the advantages and disadvantages of some of the reform options. The table is indicative and by no means exhaustive. The options are constrained by institutional voids such as modern company law, sound financial sector reform and an organized stock market.

Reform options for Ethiopian political party endowment enterprises

OptionsAdvantagesDisadvantages
Do Nothing:-Continue   to   serve   the   currentHigh  political  cost;  continued  resentment;
Keep the status quo andbeneficiaries of the creators of thecorruption; inefficiency and stifling economy;
lettheendowmentpost-1991 system of ownership.interference in elections; the burden on the
companies  continueasfinance sector; debt write-offs for the state
they are.banks; distortion in the product, financial and
labor markets; institutionalization of corruption
DosomethingbyMay  solve some constraints if theyWhether  they  can  serve  as  regulated
restricting their areasofhave  no  political  influence  in  theindustries as in public utilities is doubtful in that
operations for example inshaping  of  national  or  regionaltheir survival has been critically dependent on
areas where there are nogovernment policy, and do not becomethe captured state of state institutions.
commandingheightsofa burden on foreign exchange and
theeconomy. Reinstateregional/national government budgets.
thedebtsthat  were
written off.
Do something byThe  political  cost  of  endowmentSo  long  as  regional  governments  are
keeping them under thecompanies and corruption might becontrolled by the party, the level of inefficiency
administration ofrelatively lower.and  corruption  will  be  the  same  as  the
regional governments,inefficiency and lack of accountability in SOEs.
i.e. make them regionalFurthermore, it serves as regional financial
SOEsresponseandstrengthenssecessionist
movements  if  federal  government  makes
restrictions on endowment companies.
Transfer all political partyOpportunities  to  salvage  funds  isThe  riskthattheentitieswill  berun
affiliated  enterprisestobetter; assets might be put into betterinefficiently   and   vulnerable   to   political
thefederalgovernmentworking  orders;  the  potential  forintervention isstillhigh;   opportunitiesfor
to be administered by atransforming companies and be run bycorruption. Given the dominance of the federal

 

nationaltrusteeboardprofessionalsandnotpoliticiansgovernment by the Oromo wing of the party,
until  policy  is  set  andimproves;   decouplingthestate,other regional parties and wings of the ruling
institutionalvoidsarepolitical  parties  and  economics  isparty and population groups  mayperceive
filled.possible;  board  and  labor  diversitythat “their assets” are taken away by “others”
(ethnic, gender and religion) are betteror nationalized by the federal government;
served in SOEs.current board and employees as well as the
unemployed youth are more than likely to
resist this option.
BreaktheownershipPolitical costs could be lowered as theManagerial efficiency and effectiveness are
betweenfederalandregions feel that they have stake inunlikely to be different from SOEs. Tensions
regionalgovernmentsthe federal government.will also rise because of “the federalism”.
andnationalizethose
shares held by fronts and
shell companies
PrivatizeendowmentCash inflows for regional governmentsWhere  do  the  proceeds  go  to?  Risk  of
companies through directand   or   cash   trapped   centralunder/overvaluation,   corruption.Buyer
sale, via auction as wasgovernment.purchases rights, permits and licenses. The
the  case  in  sell-off  ofbuyers are more than likely to be those that
otherSOEsbytheaccumulated wealth during the period of state
privatization agencycapture, thereby increasing the chance for
state capture and rise of new oligarchs.
PrivatizeendowmentForeigncurrencyinflows,nationalCompany valuation problems; Current owners
companies through directbanks  policy  may  not  allow  thewould need to allow potential investors full
placementwithforeignregional government to have access toaccess to the company’s books; let minority
buyersthe foreign currency.investors vote on an independent board of
directors,  and  allow  them  to  approve
transactions between the company and its
controlling shareholder. Political liabitiy due to
disagreements on ways to privatize and hence
reach bottlencks for none of which are likely to
occur;  The  risk  that  key  assets  will  be
controlled  by  foreigners;  loss  of  national
sovereignty in a period of heightened tensions
in the Greater Horn of Africa region.
PrivatizeendowmentCashinflows,includingforeignLessons from Afrikaner nationalism, may lead
companiesthroughcurrency inflows. The existing boardto economic apartheid. Excessive risk for the
selling limited number ofdoes not feel threatened and would bebuyers of the shares in that the new money will
sharestotargetedmore receptive to this.  How Chinabe used to finance current deficits. Existing
populationgroups,issued IPOs in its SOEs might provideboard/management gets coushin rather than
includingthoseresidingsome insight.debt/sword and company may be obliged to
in the diasporaengage  in  profit  and  debt  manipulation.
Agency andand adverse selection prbolems
might be exacerbated.
Keepthecurrent statusBetter than the do-nothing option, if theSame as partial privatization plus losses that
and allow them to issuerestructuringofboardandmight come from the risk of bankruptcy.
IPOS,thatconverts themanagement is serious; would have
endowmentcompaniesmade sense if there was an organized
into share companies.stock market. The side effect could be
positive in that it serves to accelerate
the development of a stock market.
Shares can also be held by community
trusts, trade unions, etc.
IncreasedebtfinanceDebt finance may allow the lender toThe  cost  of  debt  must  rise  enough  to
and no new equity issuestake over the endowment company,incentivize  investors.  Unlikely  to  get  debt
convert the debt into equity. Currentfinance from open sources or government
lenders  might  end  up  owning  theguarantee; the risk that debt write-offs will
companies.continue to be borne by state banks, and debt
rescheduling negotiations will face political
interventions as in the past.
Reinstate the debt writtenMay allow the lender to get back itsLegal issues may come in that the lender must
off (if any) and covert themoneyprove to the  court  that  the  write off  was
debt to equityinappropriate.

 

Getting listed in a foreignMakes the shares investable to thePreparation  and  underwriting  costs  and
stock exchangeEthiopian diaspora as well as foreigncompliance  may  be  unknown  to  existing
investors. Restrictions can be imposedboard.  It  must  hire  foreign  companies  for
to cater for diversity and ownershipunderwriting and preparation.
concentration

 

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2 Comments

  1. የባንክ እዳቸውን ከእነ ወለዱ ይክፈሉ ። እስከ አሁን ድረስ ከግብር ነፃ tax exempt ተብለው ስንት አመታት ያልከፈሉት ግብር ተጣርቶ ከእነ ወለዱ የሁዋላ ግብር back taxes ይክፈሉ። ከእዛም እነ ስብሃት ነጋ እና እነ አዜብ መስፍን በፍርድ ቤት ለመምዋገት እድል ካገኙ የእነርሱን አቋም በፍርድ ቤት ይሞግቱ። መጨረሻውን ፍርድ ቤት ይፍረድ።

  2. EFFORT built its wealth by looting Ethiopia. TheTigrayans walked into Addis Ababa empty-handed. This multi-billion dollar capital company acquired its wealth by directly transferring state companies to its holdings, preferrential treatment in lending and acquiring contracts, tax exemption, monopoly of all businesses, etc. In short, it is an illegally built business empire to loot Ethiopia. And it did for 27 years. The owner of this must be the Ethiopian state — not TPLF.

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