Ethiopian Public Enterprises in Light of Competition Neutrality. The Case in Banking Sector

Research Paper (undergraduate) , 2019 , 75 Pages

Business economics - Banking, Stock Exchanges, Insurance, Accounting

The main objective of this study is to explore Ethiopian public enterprises in light of competition neutrality framework with particular emphasis to the banking sector.

Establishing SOEs is one of the modes of government intervention in the economy. Such direct role of the government in the economy will have both positive and adverse effects in the commercial environment. It has positive contributions since public enterprises tried to achieve different social objectives as their primary roles. In contrast, as a result of being owned by the government, they are preferential treated in different manners that impede business activity of private undertaking in the same market. Such preferential advantages are not based on better performance, superior efficiency, better technology or superior management skills but are merely government-created. To overcome such adverse effects the OECD come up with a competition neutrality framework that connotes a similar set of rules to public enterprises and private undertaking. It further demonstrates major set of rules from different countries experiences. These are the similar rules in taxation regime, procurement rules, bankruptcy rules and proceeding, the general applicability of the competition law and its enforcement, and the prohibitions of subsidies including exclusive market advantages.

Currently the Ethiopian government own public enterprises in different sectors of the economy that needs critical assessment from competition neutrality points of view. The Ethiopian banking sector in general and one of the state owned bank called CBE conducts are criticized as competition distorting. This triggers the study to explore the status of SOEs in light of the areas of competition neutrality framework particular emphasis to the banking sectors. The research was conducted based on qualitative research approach by analyzing laws, documents and data collected through interview. This research is particularly studied by exploring the legal and practical treatment of private and public banks from Ethiopian taxation regime, public procurement ,competition law and enforcement, bankruptcy laws and de facto/de jure exclusive markets. Moreover, it tried to pin point adverse effects of such anti competition neutrality rules on private banks.

Table of Contents

List of abbreviations/Acronyms

Abstract

CHAPTER ONE
INTRODUCTION
1.1.Background of the study
1.2.Statement of the Problem
1.3.Objective of the study
1.3.1.General objective
1.3.2.Specific Objective
1.4.Research Question
1.4.1.General Research Question
1.4.2.Specific Research Question
1.5.Significance of the Study
1.6.Review of Literature
1.7.Research Methodology
1.7.1.Research Design
1.7.2.Data sources and Collection Tools
1.7.3.Sampling Techniques
1.7.4.Method of Data Analysis and Interpretation
1.8.Scope and Limitation of the study
1.9.Organization of Chapters

CHAPTER TWO
GENERAL OVERVIEW OF STATE OWNED ENTERPRISES AND BANKING BUSINESS IN ETHIOPIA
2.1. Introduction
2.2. Meaning of State Owned Enterprises
2.3. The Raison d’être for the Establishment of State Owned Enterprises
2.4. Major Distinctions of Public and Private Enterprises
2.4.1. Differences in Objectives and Proximity to the Government
2.4.2. Difference in Legal Framework and Extent of Public Accountability
2.5. The Current Legal and Policy Environment of Banking Business in Ethiopia

CHAPTER THREE
COMPETATION NEUTRALITY FRAMEWORK IN GENERAL
3.1. The Concept of Competitive Neutrality Framework (“CNF”)
3.2. The Major Priority Areas of Competitive Neutrality Framework
3.2.1. The Treatment of SOEs under the Taxation Legal Regime
3.2.2. The Scope of Competition Law and its Enforcement on SOEs
3.2.3. The proper Application of Procurement Rules and procedures
3.2.4. The scope of the Bankruptcy laws and proceeding
3.2.5. Monopoly Power and Exclusive Rights
3.2.6. Controlling of Direct and Indirect subsidies to SOEs
3.3. Corporate Governance of SOEs and Competitive Neutrality Framework

CHAPTER FOUR
ETHIOPIAN PUBLIC ENTERPRISES IN LIGHT OF COMPETITION NEUTRALITY; THE CASE IN BANKING SECTOR
4.1. The Current Roles of Ethiopian Government in the Business
4.2. Competitive Neutrality Framework in Ethiopia
4.2.1. Ethiopian Public Enterprises In Light of Taxation Neutrality: Focus On Banking Business
4.2.1.1. Ethiopian SOEs from Business Taxation Perspective
4.2.1.2. Ethiopian Public Enterprises from Value Added Tax Outlook
4.2.1.3. Ethiopian Excise tax and Custom Proclamation in light of Competitive Neutrality
4.2.2. The Scope of Ethiopian Bankruptcy Laws and Proceeding on SOEs
4.2.3. Exclusive Advantages and Subsidies to Public Enterprises: Focus in Banking Busines..
4.2.3.1. Civil Servants’ Salary Payment Restrictions
4.2.3.2. Financing of Grand Housing Program
4.2.3.3. The Exclusive rights of CBE to process Letter of credit
4.2.3.4. Private Banks Obligation to Buy Government Treasury Bonds
4.2.3.5. Practical Restrictions to Open Branches in Industrial Park and Public Universities
4.2.3.6. Anti competition Neutrality Rules under the Civil and Commercial codes of Ethiopia.
4.2.4. Ethiopian Public Enterprises Under the Competition Law and Enforcement Scheme
4.2.4.1. Objectives of Ethiopian Competition Law
4.2.4.2. The Scope of Ethiopian Competition Law
4.2.4.3. The Enforcement of Ethiopian Competition Law against SOEs and Its Challenges
4.2.4.4. The Case of Merger Regulation in the Ethiopian Banking Sector
4.2.5. Ethiopian Public Procurement From Competition Neutrality Viewpoint
4.2.5.1. The scope of the Ethiopian procurement Law
4.2.5.2. The power of the Federal Public Procurement and Property Administration Agency

CHAPTER FIVE
CONCLUSION AND RECOMMENDATION
5.1. Conclusion
5.2. Recommendation

Bibliography

List of abbreviations/Acronyms

Art. Article

ATMs: Automatic Teller Machines

CBE: Commercial Bank of Ethiopia

CG: Corporate Governance

CNF: Competitive Neutrality Framework

CPO: Cash Payment Order

EBA: Ethiopian Bankers Associations

ERCA: Ethiopian Revenue and Customs Authority

FDRE: Federal Democratic Republic of Ethiopia

MoFED: Ministry of Finance and Economic Development

NBE: National Bank of Ethiopia

OECD: Organization for Economic Cooperation and Development

SOEs: State Owned Enterprises

TCCPP: Trade Competition and Consumer Protection Proclamation

UNCTAD: United Nations Conference on Trade and Development

VAT: Value Added Tax

Abstract

Establishing SOEs is one of the modes of government intervention in the economy. Such direct role of the government in the economy will have both positive and adverse effects in the commercial environment. It has positive contributions since public enterprises tried to achieve different social objectives as their primary roles. In contrast, as a result of being owned by the government, they are preferential treated in different manners that impede business activity of private undertaking in the same market. Such preferential advantages are not based on better performance, superior efficiency, better technology or superior management skills but are merely government-created. To overcome such adverse effects the OECD come up with a competition neutrality framework that connotes a similar set of rules to public enterprises and private undertaking. It further demonstrates major set of rules from different countries experiences. These are the similar rules in taxation regime, procurement rules, bankruptcy rules and proceeding, the general applicability of the competition law and its enforcement, and the prohibitions of subsidies including exclusive market advantages.

Currently the Ethiopian government own public enterprises in different sectors of the economy that needs critical assessment from competition neutrality points of view. The Ethiopian banking sector in general and one of the state owned bank called CBE conducts are criticized as competition distorting. This triggers the study to explore the status of SOEs in light of the areas of competition neutrality framework particular emphasis to the banking sectors. The research was conducted based on qualitative research approach by analyzing laws, documents and data collected through interview. This research is particularly studied by exploring the legal and practical treatment of private and public banks from Ethiopian taxation regime, public procurement ,competition law and enforcement, bankruptcy laws and de facto/de jure exclusive markets. Moreover, it tried to pin point adverse effects of such anti competition neutrality rules on private banks.

Therefore, the study found that, in Ethiopia, the state has no comprehensive competition policy that clearly demonstrates the competition neutrality stands of the government. This affects the entire rules and practices of different government bodies to act in favor of state owned enterprises. In some points, like the business taxation regime and bankruptcy rules, it is consistent with competition neutrality rules. In other areas the study reviled the existence of volume of anti competition neutrality rules. These are VAT withholding system, the public procurement practices of governmental bodies, the weak enforcement of the competition law against state aid, and the presence of different exclusive markets given to CBE that contravenes with the interest of private banks. It is a result of different related legal and institutional challenges. Accordingly, this research provides explicit recommendations to concerned organs ranging from enacting competition policy to a specific revision of anti competition neutrality laws and practice.

CHAPTER ONE

INTRODUCTION

1.1. Background of the study

Public enterprises are one of the methods of government intervention in the economy. The difference on the reasons why they established and the extent of the role assumed by the entities differ according to the political economy or/and ideology of a state.¹ There is no consensus about the definition of state owned enterprises, but the name suggests that the enterprises are controlled by the state rather than by private actors.² SOEs are known by many names–government corporations, government business enterprises, government-linked companies, parastatals, public enterprises, public sector units or enterprises and so on.³ It has different characteristics among other it includes, government ownership, control and management, public accountability, part of political and administrative structure, public purpose and they are economic enterprise as well.⁴ Most of these features lead SOEs to advantageous position than private firm. Such advantages are not based on better performance, superior efficiency, better technology or superior management skills but are merely government-created.⁵ To overcome such problem, the Organization for Economic Cooperation and Development (OECD) formulate a grand principle called competition neutrality.⁶ Competition neutrality can be understood as a regulatory framework “(i) within which public and private enterprises face the same set of rules and (ii) where no contact with the state brings competition advantage to any market participant.”⁷

The other solution supportive of competition neutrality is the existence of an independent board of directors for the management of public enterprises.⁸ In Ethiopia, SOEs have been established by different regimes. The policy reasons for establishing the enterprises and their role in the economy was and is different in each regime.⁹ With the change of policy following the demise of the derg, public enterprise reform was launched requiring these enterprises to operate on a competition basis in a free market setting, competing with private firms.¹⁰ However, the Ethiopian public enterprises and the government act in different sectors of the economy faced different criticism as it violates market competition specially in banking business.¹¹

Banking business in Ethiopia started in 1905, with the establishment of the Bank of Abyssinia which was formed via the partnership agreement of the Ethiopian government and the National Bank of Egypt.¹² The main purpose of this bank was issuance of bank notes and controlling the legal tender of the state.¹³ The public fund and government deposits saved in this institution as later to be paid in cheque when deemed necessary.¹⁴ But it was not structured. The well structure banking system started its initial stage after the Italian departure.¹⁵ Following 1942 a government state owned bank as well as other foreign and private banks was in competition until they become nationalized in 1976.¹⁶ However, later the competitions become extinguished “the competitive banking situation that started to flourish during the 1960s and 1974s was nipped in the bud by the command system that reign over the 1974-1991 periods.”¹⁷ Meanwhile, after 1991 because of the change of government, several policy measures were taken to liberalize the financial markets. Accordingly, several private banks were entering in to the banking sector.¹⁸ To date sixteen private banks now operating along with two public banks, namely the Commercial Bank of Ethiopia and development Bank of Ethiopia.¹⁹ The commercial bank of Ethiopia granted with several benefits at the expense of profitability of private banks and benefits of competition.²⁰ Nevertheless, competition among the commercial banks whether private or public, has advantageous, such as improvement of the quality of bank services, the creation of new financial services, and lower costs.²¹ It has also advantage for the national economy, since private banks will provide loan to have small and medium scale businesses, which government owned banks may not do.²² To this end, equal set of rules to both private and public undertaking is necessary. In a nutshell, Ethiopian public enterprises including the state owned bank needs assessment based on the competition neutrality framework designed by OECD.

1.2. Statement of the Problem

The regulation of state-owned enterprises presents challenges from market competition perspective. SOEs seldom seek to solely maximize profit and are often instructed to pursue public interest goals which can be contrary to profit maximization.²³ The combination of profit and non-profit objectives as well as other aspects has increased the incentives to be treated preferentially than private undertaking contrary to competition neutrality framework. Competition neutrality is one aspects of competition policy of a state. It is widely practiced to cover different priority areas that strengthen the equality of private and public undertakings. OECD tries to pin point major components (areas) of competition neutrality framework taking into consideration state practices.²⁴ These are the treatment of SOEs under the taxation regime, the scope of competition law and its enforcement on SOEs, procurement rules and practices, applicability of bankruptcy rules, monopoly power and exclusive rights, and Controlling of direct and indirect subsidies to SOEs.²⁵ Creating equal playing fields to private and SOEs in all these situations are linked with either competition policy of the state or other specific legislations in the area. Nonetheless, Ethiopia still failed to have a competition policy that clearly recognizes the equal treatments of SOEs and private undertaking in every set of rules. It doesn’t mean that every rules and practice of the government today unfairly treat private enterprises. However, among the pillars of competition neutrality framework, enforcement of competition law against SOEs and prohibition of exclusive advantages (benefit) to SOEs from the government at least repeatedly mentioned as neglected.²⁶

This problem is especially intense in the banking sectors.²⁷ The Ethiopian government owns public enterprises engaging in commercial activities either in monopoly or competing with the private sector. One of the public enterprises undertaking banking business equally with the private sector is, the Commercial Bank of Ethiopia which is blamed by private commercial banks as a cause for distortion of competition.²⁸ Thus, apart from other priority areas of competition neutrality, the conducts and activities of Ethiopian pubic enterprises in general and CBE in particular lack the follow up of the competition authority unlike that of the private undertaking conducts.²⁹ Moreover, the government employs still clear exclusive advantages of contracts to public enterprise at the expense of private firms; this is particularly overt in CBE.³⁰ These are exemplary areas of anti-competitive neutrality practice. These trigger the researcher to evaluate the general legal framework of the Ethiopian public enterprises through the major competition neutrality priority areas. For such conditions the researcher explores the government anti competition neutrality rules and practices in the banking sector.

1.2. Objective of the study

1.2.1. General objective

The main objective of this study is to explore Ethiopian public enterprises in light of competition neutrality framework with particular emphasis to the banking sector.

1.2.2. Specific Objective(s)

From state practice the OECD demonstrates different priority areas under the principle of competition neutrality. These are taxation neutrality, scope of competition law and enforcement, procurement rules neutrality, the applicability of bankruptcy law and the absence of exclusive advantages and subsidies to SOEs.³¹ Hence, the specific objective is designed to explore Ethiopian SOEs in general and banking business in particular with each component of competition neutrality. Accordingly,

- Examines the magnitude and reasons of Ethiopian government to depart from competition Neutrality.
- To explore the status of Ethiopian public enterprises in light of the taxation legal regime.
- To explore the place of public enterprises under the scope and enforcement of Ethiopian competition law.
- To analyze the treatment of public enterprises in light of Ethiopian Procurement rules and practice.
- To examine the specific exclusive advantages and/or subsidies given to the commercial Bank of Ethiopia.
- To examine the treatment of public enterprises in light of Ethiopian bankruptcy legal regime.

1.3. Research Question(S)

1.3.1. General Research Question

What are the current legal and practical situations of Ethiopian public enterprises in light of competition Neutrality Framework particularly in the banking sector?

1.3.2. Specific Research Question(s)

- How does Ethiopian taxation legal regime does treated public enterprises?
- How does scope of Ethiopian competition law and its enforcement treated state owned enterprises conducts?
- How Ethiopian Procurement rules and practices do treated state owned Enterprises?
- What is the place of State owned enterprises under the Ethiopian bankruptcy laws and proceeding?
- What are the specific exclusive advantages and/or subsidies given to the commercial Bank of Ethiopia?
- Why the Ethiopian governments depart from competition Neutrality specially in banking sector?

1.4. Significance of the Study

The study concerned on protection of consumers through prohibiting hoarding and diverting of goods under Ethiopian law with practical applicability /enforcement in Dessie city. Hence, it may contribute much to the forthcoming amendment of trade competition and consumer protection proclamation and enables the ministry how they will determine the acceptable personal and/or family consumption and the allowable storage time. It will also have particular contribution for the legislative body, the judges, prosecutors, trade office of the city, professionals and lawyers in creating awareness. Furthermore, concerned bodies can take a rectifying measure to tackle the raised practical problems by using the recommendations forwarded by the researcher as an input. It can also serve as a stepped stone for further research on the subject matter and it may also serve as a reference material.

1.5. Review of Literature

While the researcher decided to study this research problem, he has made a detail review of literatures in the area of competition law in general and competition regime of public enterprise in particular. As the researcher mentioned in the problem part, the study concentrated on the analysis of Ethiopian public enterprises via the major components of competition neutrality frameworks. As far as my research is concerned, there is no prior similar research on the area, but the most related literature to my study was written by Yismaw Zemene.

Yismaw Zemene, in his article entitled the need to ensure fair competition in the Ethiopian Banking Business …, explore issues related with impact of exclusive advantage of the Commercial bank of Ethiopia (CBE) over privately owned banks from the perspective of market competition.³² He tried to explore mainly the major exclusive benefits granted to the bank.³³ The study finds that government has been providing legal backing that encourages the state-owned Commercial Bank on the one hand while discouraging private commercial banks on the other hand via different ways.³⁴ He further suggests that, the government is duty bound to ensure fair competition in the Ethiopian banking sector.³⁵ My study differs in several grounds. First, my study tried to show the major de jure exclusive advantages to other SOEs apart from the CBE. However, the research main emphasis become in the banking sectors. Secondly, competition neutrality framework encompasses different areas like competition law and enforcement, taxation neutrality, captive market (exclusive right), bankruptcy proceeding and the like .But his article only explore the incentives of the bank from the government. It doesn’t analyze other grounds of competition neutrality like the enforcement of competition law. Hence, my study explored the challenges of the competition authority in enforcing the competition law against CBE. The practical roles of the competition authority in follow up banking sector activities to protect market distortions. Thirdly, this study indicates diversified ways to the achievement of competition neutrality in Ethiopian market with a special emphasis of the banking sectors.

1.6. Research Methodology

1.6.1. Research Design

The researcher used a qualitative research strategy. Because this mode of research design squarely fit to address the research problem in general and research questions in particular; all of my research questions can actually be answered by this mode of design and in such case the research achieve the intended objectives.

1.6.2. Data sources and Collection Tools

The researcher, in doing this study, employed both primary and secondary data. Major legislations that are closely linked with competition neutrality points were examined. Among others the Ethiopian taxation legal régime, Ethiopian public enterprise laws, banking business proclamation, bankruptcy laws, procurement rules and procedures, competition law, other NBE directives and related legal documents was used as primary sources.

In order to appreciate the gaps of the legal and institutional framework in creating equal playing fields of SOEs and private undertaking in Ethiopia, interview used as a primary data collection tool. Hence, the researcher conducted semi- structured interview with officials and legal experts at the Ethiopian Revenues and Customs Authority (ERCA), Ethiopian Trade Competition and Consumers Protection Authority, National Bank of Ethiopia (NBE), FDRE Public Procurement and Property Administration Agency, Commercial Bank of Ethiopia (CBE), and Ethiopian Bankers Associations. A semi-structured interview was chosen for its flexibility. Meanwhile, books, journals, unpublished materials, reports, and cyber sources used as a secondary data.

1.6.3. Sampling Techniques

In this study, for collecting primary data through interview, the researcher used a non random sampling technique so as to take representative samples from the study population. Particularly, the researcher prefers purposive sampling because to know the depth of the problem from persons who have better exposure to the problem. Moreover, apart from the general exclusive benefits to all SOEs, sometimes the government gives specific exclusive advantages and/or made a contract for different purpose with its SOEs irrespective of private undertaking in different sectors of the economy.³⁶ To validate such government and SOEs deal, the researcher takes the banking sectors. Because the Ethiopian banking sector is the most criticized business areas from competition neutrality viewpoints.³⁷ Under the banking sectors there are two state owned banks, namely CBE and Developmental Bank. From those two banks the research explored the specific advantage to CBE. Because the functions of developmental bank is limited and it doesn’t commercially compete with other private banks. And CBE is mostly criticized for its dominance due to the special attachments and preference from the government against private banks.³⁸ To collect relevant data from private banks related to the problem, the study choose the Ethiopian Bankers Associations (EBA). Since EBA is an organization established to deal major problems of the banking sector.³⁹

1.6.4. Method of Data Analysis and Interpretation

A qualitative data analysis employed so as to fit with my research design. First the audio recorded responses of the interviewees changed in to written form. Then, the collected data from the interview grouped based on the similarity of opinions the respondents share, about the problem under study. Further, each group had given its own code. After this, the researcher systematically examines the relationship between the grouped data. Finally, conclusion taken from the result of the analysis of the relationship of the grouped data.

1.7. Scope and Limitation of the study

Both regional and federal government has the power to establish public enterprises under the current Ethiopian legal framework.⁴⁰ Accordingly, we have a public enterprise under the two structures. However, this research confined to deal the legal and practical conditions of federal public Enterprises in light of the federal laws that linked with competition neutrality areas. Not only the legal issues but also the practice in this regard examined from market competition perspective. Under federal structure there are diversified SOEs in different sector. All SOEs and government deal are not explored here. To be clear, first the legal framework which similarly applied to all SOEs explored in light of competition neutrality. Secondly, there are certain rules or practice that favored SOEs in different sector of the economy. So as to explore such sector specific anti competition neutrality rules and practices this research confined in the banking sector.

The major limitations that the researcher faced while conducting this research was, reluctance and unwillingness of participants to cooperate for interview. Most institutions were not as such cooperative enough to give relevant data.

1.8. Organization of Chapters

The study is organized into five chapters. The first chapter is devoted to the introduction part that provides an overview of the research. The second chapter is dedicated to explore general overview about state owned enterprises and the market environments of Ethiopia banking business. The third chapter is mainly explored conceptual framework of competition neutrality and basic components of it. The fourth chapter is devoted the legal and practical conditions of Ethiopian public enterprise in light of each and every pillars of competition neutrality. In doing so especial emphasis to the banking sectors. Finally, the last chapter provides conclusion and possible recommendation.

CHAPTER TWO

GENERAL OVERVIEW OF STATE OWNED ENTERPRISES AND BANKING BUSINESS IN ETHIOPIA

2.1. Introduction

Government and markets are inextricably linked. Government sets the legal and institutional frameworks within which markets operate.⁴¹ Specially, in recent years there has been a major revaluation of the role that the State is expected play in a modern economy. World events have necessitated this revaluation.⁴² There are different justifications for the intervention of the government in the economy. The most notable ground is related with market failure.⁴³ Market failures’ are situations where markets are prevented from working efficiently to provide the goods and services that are demanded by consumers and in the desired quantities.⁴⁴ Government also intervenes more widely in markets to achieve other policy goals like development.⁴⁵ However, government intervention in the market will not always result positive outcomes.

Government intervention can also inadvertently benefit regulated industry rather than the wider public (regulatory capture), promote inefficiency because of restricted competition or underplay the role of consumers by concentrating purely on the supply-side of the market.⁴⁶

Governments today have combination of different objectives when they intervene in the market. Some of the objectives of the government are clearly linked with public interests .These are maximizing social welfare, macro economic factors, socio economic and related factors can be mentioned.⁴⁷

The government also enters in to the market via different modalities.⁴⁸ These are via private laws, competition policy and law, regulation and administration.⁴⁹ The government intervention in the market via private laws is the first step of government intervention in the economy. This mode of intervention is based on consensual negotiation of market operators. In this approach the role of the government is enactment of different private laws like contract, extra contractual, property and other related laws that has a favorable condition for the market and market actors.⁵⁰ Hence, market actors can take part in the business via such legal framework framed by the government. This approach requires the government to act as a referee and impose penalties for foul play.⁵¹

The second mode of government intervention in the market is via competition law and policy. In the corporate world, competition is taken as a process whereby firms strive against each other to secure customers for their products.⁵² Competition policy refers to those governmental measures that directly affect the behavior of enterprises and the structure of industry.⁵³ The function of competition law is to prevent anti-competitive business practices by firms and to prevent unnecessary government intervention in the market place.⁵⁴ In this mode the main duty of the government in the economy is enactment of competition law that prohibits unfair commercial acts with strong enforcement. Moreover, the third mode of intervention is regulation that pertains to the various instruments by which governments impose requirements on business enterprises and citizens.⁵⁵ The government set or prescribes different subject matters in the economy.

Like a rule for production, distribution and consumption. The government may also regulate quantity, quality and price of certain goods and services.⁵⁶ The final intervention of government is through administration (Ownership Approach).In case of administration the government directly operating business by itself. State owned Enterprises comes in to picture in case of ownership approach.

2.2. Meaning of State Owned Enterprises

State-owned enterprises, also known as public enterprises are, as the name suggests, entities controlled by the state rather than by private actors. The World Bank uses the following definition: SOEs are “government owned or government controlled economic entities that generate the bulk of their revenues from selling goods and services”.⁵⁷ At national level, there are a multitude of definitions of an SOE. Most of these definitions have been developed for administrative or national budget purposes or by state ownership agencies.⁵⁸ In the Ethiopian legal framework different definition provided by several legislations despite the objective of such laws are poles apart. Accordingly, the first law which is proclamation 25/1992 defined public enterprises as:⁵⁹

Enterprise means a wholly state owned public enterprise established pursuant to this Proclamation to carry on for gain manufacturing, distribution, service rendering or other economic and related activities.

Subsequent to this definition, several proclamations have come up with different usages of this term.⁶⁰ The first modification is introduced by Privatization of Public Enterprises Proclamation No. 146/1998 which states: “enterprise means a public enterprise governed by the Public Enterprises Proclamation No. 25/1992 or an establishment designated by the Government as a public enterprise for the purpose of the application of this Proclamation.”⁶¹ The use of the term is broader as compared to the meaning under Proc. No. 25/1992, but it does not change the content of the definition for the purpose of the public enterprise proclamation.

It simply denotes that for the purpose of privatization some entities may be considered as public enterprises.⁶² Proc No. 412/2004 further offers another definition which considers public enterprise as an enterprise defined under Article 2(1) of the Public Enterprises Proclamation No. 25/1992, or as a wholly state-owned share company.⁶³ As compared to the previous definitions it extends the application of the term to share companies wholly owned by the state.⁶⁴

Each proclamation has its own objectives .It is clear that proclamation 25/1992 is overarching proclamation applicable to any public enterprise irrespective of the supervising authority designated. And Proclamation No. 412/2004 has no intention of defining public enterprises. In a nutshell, there are three cumulative requirements for undertaking to be considered as public enterprise under the Ethiopian legal framework.⁶⁵ The first requirement is full ownership by the government. Meaning, the law excludes enterprises in which we find joint investment of the private and public sectors.⁶⁶ The second element requires establishment under the proclamation.⁶⁷ The proclamation required to set the legal framework for entities established by the government. Furthermore, the manner of operation, structure will be again framed via this proclamation.⁶⁸ Lastly, the enterprises should be commercial entities as distinguished from administrative agencies.⁶⁹

There are different SOEs in diversified sectors of the economy. To mention some of them, Industrial Parks Corporation, Commercial Bank of Ethiopia, Ethiopian airlines, Ethio telecom, Ethiopian Petroleum Supply Enterprise, Adola Gold Mine Enterprise, Ethiopian Sugar Corporation, Ethiopian Construction corporations and the like.⁷⁰

2.3. The Raison d’être for the Establishment of State Owned Enterprises

There are many reasons why governments decide to establish a market presence through a state controlled entity. First, SOEs can be driven by political and ideological reasons. Some countries have nationalized entire industry sectors because it was thought that ensuring the state had a significant presence in the economy would achieve a better distribution of wealth and power within society.⁷¹ This ideological and political motive has been mainly present in countries whose policies rest on the belief that governments can instruct SOEs to reduce prices, particularly for goods that are in demand by lower income earners, and thereby influence the distribution of real income within society.⁷² Social reasons can also be an important driver for developing a large presence of SOEs in the market.⁷³ Governments use SOEs to guarantee employment, offer better working conditions to the Labor force and improve industrial relations.⁷⁴ Furthermore, governments may decide to move into the market for economic reasons.⁷⁵ A market failure is the most common reason that justifies government intervention in the economy.⁷⁶ In a natural monopoly, for example, the presence of an unregulated private firm could lead to market exploitation in the form of increased prices,⁷⁷ while through an SOE the government could ensure that products and services are offered to consumers under “fair” terms and conditions.⁷⁸

It is easy to find government owned banks. There are two broad views about the role of government owned banks in the financial market. These are development and political views.⁷⁹ The development view connotes the necessity of financial development for economic growth. In some industrial countries it is common to see the roles of private banks to become vehicles of channeling private savings to industrial development.⁸⁰ But these are not always the case in developing states. So as to rectify such drawbacks, in developing countries, governments could step in, set up financial institutions, and through them help both financial and economic development.⁸¹ Turning to the second views of government ownership of banks, it emphasizes about the politicians desire of the government to control investment in the economy for different political purposes.⁸² Then they tried to provide employment, subsidies and other benefit to their supporters. Thus, beneficiaries later give support politicians through votes, political contributions and bribes. Much academic work supports this view through documenting the inefficiency of state enterprises.⁸³

2.4. Major Distinctions of Public and Private Enterprises

There are many points of difference between a public and a private enterprise. Some of such distinct features may place a public enterprise in a comparatively advantageous position and others may subject to a stiff situation.⁸⁴

2.4.1. Differences in Objectives and Proximity to the Government

The main difference between private and public firms is often seen in their different objective function. Regarding the function of private enterprises it is normally assumed that private firms maximize their profits.⁸⁵ In contrast, public enterprises are considered to follow different goals, often pursued in parallel. Unlike a private business, it has different public purpose to achieve such as employment, for access of public service, economic development, and the like.⁸⁶

Secondly, the closer tie to the government. Key positions in SOEs are often assigned to political allies, increasing their ability to lobby politicians; influence over government conducts like enactments of legislation.⁸⁷ But this is not the case in private enterprise since the ownership is principally held by private market actors. Because of such closer ties, public enterprises can be placed in advantageous position over private firms by acquiring competitive return through various governments granted subsidies and immunities.⁸⁸

2.4.2. Difference in Legal Framework and Extent of Public Accountability

Public enterprises are usually created by a special law. Their public duty necessitates special legislations, and ordinary commercial laws serve only for the purpose of gap-filling.⁸⁹ But all private enterprises subject matters (their formation, structure, management, rights and duties) will be governed by ordinary commercial legislations.⁹⁰

Moreover, both public and private enterprises are obligated for accountability to the publiac. But the accountability required of a public enterprise is considerably greater in degree and extent.⁹¹ Because the government control over public enterprises is like “agent-principal” relationship.⁹² So, the specific supervising authority of a given public enterprise mandated to protect and promote the public interest. However, such kind of strong controlling linkage will not be available between private enterprise and the public.

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¹ Tewodros Meheret, ‘The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview’ ,Mizan Law Review,2014,vol.1,No. 2, at p. 334 Available at http://dx.doi.org/10.4314/mlr.v8i2.3 <Last accessed in 01 December 2018> [Here in after, Tewodroes Meheret, public enterprise in Ethiopia ]

². David E.M Sappington and J. Gregory Sidak 'Competition Law for State Owned Enterprises' (2003) 71(2) ALJ Available at http://www.criterioneconomics.com/ <Last accessed 01 December 2018>

³ State owned Enterprises Catalyst for public value creation?2015p.8 available at https://www.PWC.com/gx/publication/...state owned enterprise-psrc.pdf< Last accessed in 01 December 2018>

⁴ Ibid

⁵ David Sappington and J. Gregory, 'Incentives for Anticompetitive Behavior by Public Enterprises' (2003) 22, 186 RIO Available at http://dx.doi.org/10.2139/ssrn.269489 <Last accessed in 12 December 2018>

⁶ OCED, State Owned Enterprises and the Principle of Competitive Neutrality (2009) 9 available at https://www.oecd.org/competition/competitive-neutralitBanks<last accessed 11 December 2018>[Here in after, OECD Principle of Competition Neutrality, Neutrality, OECD Principle of competition neutrality ]

⁷ Ibid

⁸ OECD Guidelines on Corporate Governance of State-Owned Enterprises (2005) 25 available at http://www.oecd.org/corporate/guidelines-corporate-governance-SOEs.htm [<last accessed 10 December 2018> [Here in after , OECD Guidelines on Corporate Governance of SOE ]

⁹ Tewodroes Mihret, public enterprise in Ethiopia , supra note 1,p.363

¹⁰ Ibid

¹¹ Yismaw Zemene, ‘The Need to Ensure Fair Competition in the Ethiopian Banking Business: An Appraisal of Legal Framework and Practice; International Journals of Ethiopian Legal studies, 2015,Vol. 1 ,No.1, p.58-60. [Here in after, Yismaw Zemene , Fair Competition in Ethiopia Banking Business)

¹² Aderaw Gashayie and Dr Manjit Singh, Development of Financial Sector in Ethiopia: Literature Review Journal of Economics and Sustainable Development, ISSN 2222-1700 available at https://iiste.org/Journals/ last accessed in 08 May 2019. [Here in after, Aderaw Gashayie and Dr Manjit Singh, Development of Financial Sector in Ethiopia.]

¹³ Solomon Abay , Financial market development, policy and regulation: the international experience and Ethiopia’s need for further reform, University of Amsterdam, 2011, PHD thesis, unpublished. P.11[Here in after, Solomon Abay , Financial market development and regulation]

¹⁴ Ibid

¹⁵ Aderaw and Dr Manjit , Development of Financial Sector in Ethiopia, supra note 12,p.4-7

¹⁶ Ibid.

¹⁷ Ibid.

¹⁸ Ibid.

¹⁹ NBE, 2009/2010, Quarterly Report of the National Bank of Ethiopia (Ethiopian Fiscal Year 2010), Addis Ababa, 2018,p.2 [Here in after,2010 first Quarter NBE report ]

²⁰ Yismaw zemene, Fair Competition in Ethiopia Banking Business, supra note 11,p.72

²¹ Charles Harvey, ‘Banking Reform in Ethiopia’ Available at https://www​.ids.ac.uk/files/Wp37.pdf < Last accessed 15 December 2019>

²² Ibid

²³ Jason Aproskie, Morné Hendriksz et al, State-Owned Enterprises and Competition: Exception to the r ule ?”, 2014, p.1 Available at http://www.compcom.co.za/wp-content. <Last accessed in 25 may 2019>

²⁴ The Secretary-General of the OECD (2012),National Practice of Competitive Neutrality Framework,p.16-17 [Here in after , OECD National Practices ]

²⁵ Ibid

²⁶ Moges Kibre ,’Policy-Induced Barriers to Competition in Ethiopia,’ CUTS International, Jaipur, India,2008, p.19-22[Here in after, Moges kibre, ’Policy-Induced Barriers to Competition ] Available at http://www.cuts-ccier.org/7up3/pdf/Policy-induced_Barriers_to_Competition_in_Ethiopia.pdf. <Last accessed in 25 may 2019>

²⁷ Fikre markos Merso et al, Review of the Legal and Institutional Framework for Market Competition in Ethiopia, Private Sector Development Hub/Addis Ababa Chamber of Commerce and Sectoral Associations,AddisAbaba, 2009, p.55 [Here in after, Fikre markos Merso et al, Review of the Legal and Institutional Framework for Market Competition in Ethiopia ]

²⁸ Yismaw zemene, Fair Competition in Ethiopia Banking Business, supra note 11,p.72

²⁹ Interview with Yibeltal Yimer, legal officer in the Ethiopian trade competition and consumer protection authority ,on Ethiopian competition law enforcement against SOEs,May 20,2019 [Here in after, Interview with Yibeltal Yimer, legal officer in the competition authority ]

³⁰ Yismaw Zemene,Fair Competation in Ethiopia Banking Business, supra note 11 and Moges kibre, ’Policy-Induced Barriers to Competition , supra note 26, p.11-13

³¹ OECD National Practices, supra note 24,p.10 and OECD Principle of Competition Neutrality, Supra note 6,p.35-47

³² Yismaw Zemene, Fair Competition in Ethiopia Banking Business , Supra note 11, pp.58-60

³³ Id ., p.58

³⁴ Id., p.72

³⁵ Id., p.73

³⁶ Yismaw zemene, Fair Competition in Ethiopia Banking Business, Supra note 11 , p.73

³⁷ Fikre markos et al, Review of the Legal and Institutional Framework for Market Competition in Ethiopia, supra note 27,p.55

³⁸ Ibid

³⁹ Interview with anonymous, officer in the Ethiopian bankers Associations, Interview on private banks complain,May 23,2019 [Here in after, interview with officer in the Ethiopian banker Associations]

⁴⁰ Federal Democratic Republic of Ethiopia Constitution, 1995, Federal Negarit Gazeta, Proc. No.1, implied reading from Article 96(3) and 97(7. Secondly, Commercial Registration and Business Licensing Proclamation of Ethiopia, 2010, Federal Negarit Gazeta, Proc. No.686, 16th Year No.42, Article 2(3) classify public enterprises into federal and regional.

⁴¹ Prepared by office of fair dealing, Government in markets, why competition matters a guide for policy maker,(2009) https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/284451/OFT1113.pdf pp.4 < Accessed on march 11/2019 >[Here in after refer, Office of Fair Dealing Document]

⁴² Ajit Karnik , “ Theories of state Intervention” ,University of Bombay, Department of Economics, working paper http://results.mu.ac.in/arts/social_science/eco/pdfs/depart/dwp38.pdf pp.3 <Last Accessed on March 09/2019> here in after cited as Ajit Karnik]

⁴³ Office of Fair Dealing Document, Supra note 42,p1-2

⁴⁴ Ibid

⁴⁵ .Id;p.1

⁴⁶ .Id;p.2

⁴⁷ ‘Objectives of SOEs to the public” available at https://courses.lumenlearning.com/boundless-economics/chapter/government-intervention-and-disequilibrium/. <last Accessed on march 11/2019 >

⁴⁸ Solomon Abay, 2010, "Designing the Regulatory Roles of Government in Business: The Lessons from Theory, International Practice and Ethiopia's Policy Path,"Journal of Ethiopian Law, Volume XXIII, No. 2, (2010) p.73-74 [Here in after, Solomon Abay , Roles of Government in Business ]

⁴⁹ Ibid

⁵⁰ Solomon Abay, Business Regulations, LLM Class Lecture delivered at the School of Law, Bahir Dar University, November 2018. [Here in after, Solomon Abay , Business Regulations Class Lecture ]

⁵¹ Ibid.

⁵² Harka, Haroye, ‘Competition Policy and Laws: Major Concepts and an Overview of Ethiopian Trade Practice Law.’(2008) 2(1) MZLR p.33[Here in after ,Harka Haroye Competition Policy and Laws]

⁵³ Id.,p.35

⁵⁴ Dessalegn Adera, ‘The legal and institutional framework for consumer protection in Ethiopia’(LLM thesis, Addis Ababa University ,2011) p.26 [Here in after ,Dessalegn Adera, consumer protection in Ethiopia’ ]

⁵⁵ Id,p.31

⁵⁶ Solomon Abay ,Business Regulations Class Lecture , supra note 51

⁵⁷ P. Shirley, Mary, 'Bureaucrats in Business: The Economics and Politics of Government Ownership' (1996) World Bank Research Paper 3/1996 31 < http://go.worldbank.org/TN3T2GBC80 > accessed 20 December 2018

⁵⁸ OECD Principle of competition neutrality , supra note 6, p.26

⁵⁹ Public Enterprises Proclamation, 1992, Federal Negarit Gazeta, Proc.No.25, 51st year, No.21, Art. 2(1) [Here in after, Public Enterprises Proclamation 25/1992]

⁶⁰ Tewodroes Mihret, Public Enterprise in Ethiopia , supra note 1, p.340

⁶¹ Privatization of Public Enterprise Proclamation, 1998, Federal Negarit Gazeta, proc.No.146,5th Year, No. 26, Art. 2(3). [Here in after, Privatization of Public Enterprise Proclamation 146/1998]

⁶² Tewodroes Mihret, Public Enterprise in Ethiopia , supra note 1,p.338

⁶³ Privatization and Public Enterprises Supervising Authority Establishing Proclamation, 2004, Federal Negarit Gazeta, Proc.No.412, 10th year, No. 57, Art.2 (2) [Here in after, Proc No. 412/2004].

⁶⁴ Tewodroes Mihret, Public Enterprise in Ethiopia , supra note 1,p.338

⁶⁵ Id., p. 337

⁶⁶ Ibid.

⁶⁷ Public Enterprises Proclamation No. 25/1992, Art. 6(2).

⁶⁸ Tewodroes Mihret, Public Enterprise in Ethiopia , supra note 1,p.337

⁶⁹ Ibid

⁷⁰ Nebiat Lemenih, The legal and Institutional Governance framework of state owned Enterprise in Ethiopia,LLM thesis, BDU school of law, 2017 ,[unpublished available at law library] p.48 [Here in after, Nebiat Lemenih, Governance framework of state owned Enterprise]

⁷¹ OECD Principle of Competition Neutrality, Supra note 6,p.27-28

⁷² Ibid

⁷³ Id.,, p.28

⁷⁴ Boycko, Shleifer and Vishny, A Theory of Privatization, 106 Econ. J., 1996. Available at https://scholar.harvard.edu/shleifer/publications/theory-privatization<Last accessed in 25 may 2019>

⁷⁵ Nebiat Lemenih, Governance framework of state owned Enterprise, supra note 71,p. 18

⁷⁶ Ibid

⁷⁷ OECD Principle of Competition Neutrality, Supra note 6,p.28

⁷⁸ Ibid

⁷⁹ P. S. Srinivas and Djauhari Sitorus, “The Role of State Owned Banks in Indonesia” Available at https://www.researchgate.net/.../229050270_The_Role_of_State_Owned_Banks_in_Ind... <Last accessed 08 may 2019>

⁸⁰ Ibid

⁸¹ Ibid

⁸² Ibid

⁸³ Ibid

⁸⁴ Dagnachew Asrat and Addissie Shiferaw , Law of Public Enterprises and Cooperatives Teaching Material, Prepared under the Sponsorship of the Justice and Legal System Research Institute 2009 , p.27, [Here in after, Dagnachew and Addissie, Teaching material on the law of public Enterprises]

⁸⁵ Id.,, p.28

⁸⁶ Tewodroes Mihret, Public Enterprise in Ethiopia , supra note 1,p.346

⁸⁷ By Hans W Friederiszick and Jakub Kałużny , On the Difficult Relationship between Competition Policy and Public Enterprises: What Can be Learned from Recent Developments in the Field of European State Aid Control , sponsored by Swedsh competition Authority,2009,p. 113

⁸⁸ Dagnachew and Addissie, Teaching material on the law of public enterprises, supra note 85,p. 85

⁸⁹ Ibid

⁹⁰ Ibid

⁹¹ Id.,, p.28

⁹² Tewodroes Mihret, Public Enterprise in Ethiopia, supra note 1,p.347

• Author: Saleamlak Yemane (Author)
• Publication Year: 2019
• Pages: 75
• Catalog Number: V595668
• ISBN (PDF): 9783346560254
• ISBN (Book): 9783346560261
• Language: English
• Tags: ethiopian, public, enterprises, light, competition, neutrality, case, banking, sector