Baseline Survey On Competition and Markets in Ethiopia

Baseline Survey on Competition and Markets in Ethiopia
Research Team
Mr. Roberto Zavatta, MA in Applied Economics, University of Michigan,USA Mr.Samuel Feyissa, Post Graduate Diploma in Industrial Project Management, Research Institute for Management Science, the Netherlands
June 2009
Produced and distributed by the Addis Ababa Chamber of Commerce and Sectoral Associations with inancial support from the Swedish Agency for International Development Cooperation, Sida
Sida
Private Sector Development Hub/Addis Ababa Chamber of Commerce and Sectoral Associations, 2009 P. O. Box 2458, Mexico Square, Addis Ababa, Ethiopia Tel: +251(0) 115 504570/ 542405, Fax: +251 (0) 115 542404, Email: psdhub@addischamber.com
All Rights Reserved No part of the publication may be produced or transmi ed in any form or by any means without the prior permission of the copyright holder. e only exception is for a reviewer, who may quote short excerpts in a review.
Disclaimer:- e views expressed in the study do not necessarily re ect the views of PSDHub or Addis Ababa Chamber of Commerce and Sectoral Associations or Sida. ey are solely the responsibilities of the authors.
CONTENTS
Introduction Part I Overview of Sectors and Markets Chapter 1: Pro les of Markets in Agriculture Chapter 2: Pro les of Markets in Industry Chapter 3: Pro les of Markets in Services Part II Analysis of Selected Markets Introduction Chapter 4: Food and Beverages Chapter 5: Agricultural Products and Inputs Chapter 6: Manufactured Goods Chapter 7: Financial Services Chapter 8: Transport Services Part III Findings and Recommendations Chapter 9: Summary of Findings Chapter 10: Recommendations Policy, Institutional and Legal Aspects Chapter 11: Recommendations Operational and Technical Aspects References
9 15 17 21 31 33 35 37 53 61 69 83 91 93 99 105 109
List of Tables
Table 1 : Table 2 : Table 3 : Table 4 : Ranking Markets in Terms of Distortions of Competition Results of a Quick Scan of Markets of Agricultural Products Results of a Quick Scan of Markets of Industrial Products Results of a Quick Scan of Markets in Services An Illustration 13 18 22 31 37 40 43 46 48 51 62 65 69 72 73 74 76 77 Ethiopia vs. Kenya 78 79 81 84 86 88 93 95
Table 5 : Key Indicators for the Flour Industry Table 6 : Basic Features of Ethiopian Breweries Table 7 : Table 9 : Basic Features of Leading Mineral Water/Soft Drinks Companies Basic Features of Leading Ethiopian Edible Oil Producers Table 8 : Basic Features of Sugar Factories/Projects Table 10 : Prices for Domestic and Imported Edible Oil Table 11 : Key Indicators for the Textiles and Apparel Industry Table 12 : Basic Features of Cement Producers Table 13 : Basic Features of Ethiopian Banks Table 14 : Relative Importance of Categories of Banks Table 15 : Market Concentrations Table 17 : Regional Presence of MFI Table 18 : Concentration of Regional Markets Table 19 : Key Indicators for the Insurance Business Table 20 : Basic Features of Insurance Companies Table 21 : Market Concentrations Table 23 : Market Concentration Ethiopia vs. Kenya Dry and Liquid Cargo Table 22 : Basic Features of Ethiopian Freight Transport Operators Table 24 : Basic Features of Selected Passenger Transport Operators Table 25 : Summary of Factors Impacting on Competitive Conditions Table 26 : Ranking of Markets Ethiopia vs. Kenya Table 16 : Distribution of Outstanding Loans by Type of Borrower (2008)
List of Figures
Figure 1 : Category of Ethiopian Product Markets Figure 2 : Broad Components of the Ethiopian Markets Figure 3 : Overview of Markets in Agriculture Figure 4 : Overview of Markets in Industry Figure 5 : Prices of Maize and Wheat in Selected Urban Markets Figure 6 : Relative Importance of Various Categories of Imports Figure 7 : Market Shares Held by Leading Cement Sellers Ethiopia vs. Kenya Figure 8 : Composition of Banking Assets Overtime Figure 9 : Asymmetry in Size among Banks Figure 10 : Asymmetry in Size among Banks Ethiopia vs. Kenya Ethiopia vs. Kenya 10 11 17 21 56 59 66 72 73 81
Acronyms
AACCSA ACSI AEMFI AISE CBE CSA DAP DBE DECM EAB EAHG EAL EAPC ECX EFTC EGTE EIC ESDA FAO FFPPA GDP GoE MEWIT MFI MoFED MoTAC MoTI NBE NGO PASDEP PPESA PSD QSAE Sida TA ToR TPC USD Addis Ababa Chamber of Commerce and Sectoral Associations Amhara Credit and Savings Institution Association of Ethiopian Micro nance Institutions Agricultural Input Supply Enterprise Commercial Bank of Ethiopia Central Statistical Agency Di-ammonium phosphate Development Bank of Ethiopia Derba East Coal Mining East African Bottling East African Holdings Group Ethiopia Amalgamated Limited East Africa Portland Cement Ethiopia Commodity Exchange Ethiopian Freight Transport Corporation Ethiopian Grain Trade Enterprise Ethiopian Insurance Corporation Ethiopian Sugar Development Agency Food and Agriculture Organization Flour and Flour Products Producers Association Gross Domestic Products Government of Ethiopia Merchandise Wholesale and Import Trade Enterprise Micro nance Institutions Ministry of Finance and Economic Development Ministry of Transport and Communications Ministry of Trade and Industry National Bank of Ethiopia Non-governmental Organization Plan for Accelerated and Sustained Development to End Poverty Privatization and Public Enterprise Supervising Authority Private Sector Development Quality and Standards Authority of Ethiopia Swedish Agency for International Development Cooperation Transport Authority Terms of Reference Trade Practices Commission United States Dollar
INTRODUCTION
is report was prepared in response to the Terms of Reference (ToR) for a Baseline Survey on Competition and Markets in Ethiopia. e objective of the assignment is to provide an assessment of the level of competition prevailing in the Ethiopian economy. More speci cally, it is intended to provide indications of the costs borne by the private sector and/or by the population at large as a result of monopolistic positions held by certain operators, and especially government intervention, in the form of restrictive regulations and/or of other policies de facto limiting the emergence of competitive market conditions. e report presents the results of the work carried out in line with the ToR and the inception report submitted on 19 December 2008. A draft version of the report was presented at a workshop held in Addis Ababa on 20 May 2009. e workshop was attended by over thirty representatives of chambers of commerce, private operators, government bodies and nancial institutions. e comments forwarded during the workshop are incorporated in this nal report. Part I of the report provides an overview of the status of competition in the Ethiopian economy, and Part II analyzes in detail the competitive conditions in selected markets, while the nal part summarizes the main ndings and forwards some recommendations regarding policy, institutional, legal and technical aspects. e information in this report are drawn from a variety of primary and secondary sources, including o cial statistics and documents, sector and market studies, research papers as well as articles published in learned journals. Useful information was also collected through a series of interviews held with representatives of private sector associations and public institutions. Finally, in order to present an updated situation, heavy reliance was made on articles published in the Ethiopian economic press. While the most recent statistics used for the report normally refer to the 2006-07 year, information on market developments, enterprises in operations and competitive practices are usually updated to February March 2009. Methodology e study was undertaken by adopting a three-stage approach: e rst involved a quick scan of all product markets (goods and services), in order to get an initial assessment of the degree and types of market distortions caused by uncompetitive practices. e second step involved the analysis of selected markets so as to gain a better understanding of prevailing competitive conditions along certain key 9
dimensions (level of concentration, importance of economic and regulatory barriers to entry, etc. e third step entailed the consolidated analysis of ndings, including a ranking of markets, in accordance with the degree of competition, and the provision of illustrative examples of anticompetitive behavior. e salient features of each of the above steps are illustrated in the following paragraphs.
Step 1 - Matrix of Markets/Initial Scanning

At a very general level markets can be classi ed into factor and product markets. On factor markets, inputs of production are traded --- usually, capital, labor and land are distinguished. Competition policy usually focuses on product markets. However the criteria for measuring competition (or the distortion/lack thereof ) can also be applied to factor markets. Nevertheless, due to the speci c features of property and labor markets (not only in Ethiopia) such as the long term nature or the importance of information asymmetries these two markets would each deserve a study of their own. Conversely capital markets are within the scope of the study as the provision of nance is also a product, and its market lacks the peculiarities of labor and property markets. Ethiopian product markets can be grouped into three broad categories, i.e. those for agricultural products, industrial/manufactured products and services. ese markets are served with products originating from domestic and import sources. Domestic production covers the bulk of agricultural products as well as simple manufactured goods and non-tradable services. Imports concern some primary commodities, but mostly consist of capital goods, sophisticated manufactured goods and energy products.
Figure 1 Category of Ethiopian Product Markets
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e three broad market categories are further classi ed into di erent components. Details of the components under each category are illustrated in the gure below.
Figure 2 Broad Components of the Ethiopian Markets
e above classi cation formed the basis for the initial quick scanning of competition conditions in Ethiopian markets. A total of 17 lines of business/ markets were taken into account and reviewed according to a standard format, using available secondary sources. e results of this exercise are presented in detail in the following consecutive chapters.
Step 2 - Analysis of Selected Markets

e analysis of markets focused primarily on structural aspects which, based both on practical experience and scholarly research, appear to have a greater impact on competitive conditions. Six themes/dimensions have in particular been identi ed to assess the degree of competition. 1. e market share held by leading operators (i.e. held by, say, the rst four companies). 2. e level of asymmetry in size (i.e. whether there is a major disequilibrium among the key players). 11
e presence of state-owned or endowment enterprises (who, de jure or de facto often enjoy a preferential treatment whenever dealing with government authorities) 4. e presence of vertically integrated operators (e.g. a construction company which also owns a cement factory is in a completely di erent situation compared with a non-integrated competitor). 5. e height of economic and technical entry barriers (which depends on the amount of money and level of complexity required by a new entrant). 6. e presence of regulatory barriers to entry (i.e. the prohibition of foreign investment presence in some sectors). Here two aspects especially deserve to be commented upon: (a) In the case of western economies, the analysis of competition usually does not pay much attention to the ownership of enterprises, as in most cases private and public companies are expected to operate under the same rules (e.g. the French automaker Renault which was under state ownership for more than 40 years, used to compete on an equal footing with private companies, such as Peugeot). However, this is normally not the case in emerging economies where state-owned enterprises often enjoy a preferential treatment. is justi es the inclusion of the presence of public/endowment companies among the key variables to be analyzed. (b) e market shares held by leading suppliers and the asymmetry in size among enterprises are two aspects of the same phenomenon, i.e. concentration. In principle, the two aspects could be analyzed simultaneously and, indeed, anti-trust authorities often make reference to all encompassing indicators of concentration1. Unfortunately, the calculation of these indicators requires very detailed information, which is not available in the case of this study. erefore, for analytical purposes, the two aspects are dealt with separately. e analysis conducted under Step 2 covered a set of markets representing a wide range of market conditions (from fairly competitive to monopolistic markets). At the same time, the analysis concentrated on markets/lines of business which display a signi cant contribution to the national economy.
3.
Step 3 Consolidated Analysis of Findings

is stage involved the review of the evidence collected and an overall assessment of the degree of competition, including a ranking of the markets analyzed under step 2, and the identi cation and review of typologies of markets.
1
12
This is the case, notably, of the so called Herndahl-Hirschman Index (HHI). The HHI is used by antitrust authorities both in the US and in the EU, especially to determine the degree of market power in the case of mergers.
Regarding the ranking of the markets analyzed, the exercise took into account the six dimensions mentioned previously (market shares, asymmetry in size, entry barriers, etc.). For each variable, the level of distortion of competition was assessed and a score assigned on a 1 to 5 scale, broadly corresponding to levels such as very low, low, average, high, very high distortion. e overall score of the degree of competition distortion was obtained by calculating the (un-weighted) average scores of all the dimensions. e markets getting the highest scores are obviously those where competition is most limited or absent. An illustration of the approach is provided in Table 1 below, which refers to two hypothetical markets (Market X and Market Y). For each of the two markets, a score of 1 to 5 is assigned for each of the six criteria retained. e total score column presents the calculated average score of distortion of competition, and the nal column the rank of the market among all markets surveyed. In the example provided, Market Y has a signi cantly higher score, indicating that competition is more distorted than in Market X.
Table 1 Ranking Markets in Terms of Distortions of Competition An Illustration
Dimensions of competition distortion * Presence of State -Endowment Operators Presence of Vertically Integrated Operators/ Privileged Relations Economic & Technical Entry Barriers Distorted Competition Rank
Market
Market Share of Leading Operators
Asymmetry among Operators
Presence of Regulatory Obstacles
TOTAL Score
Market X
Market Y
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* Level of competition assessed on a scale of 1 to 5 where 1 is very low, 2 low, 3 average, 4 high and 5 very high.
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PART I
OVERVIEW OF SECTORS AND MARKETS
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CHAPTER ONE
Pro les of Markets in Agriculture
Agriculture is Ethiopias most important sector accounting for almost half of its GDP (46 percent in 2006-07).It provides employment to more than 80 percent of the labor force. Over the last few years, the agricultural sector displayed a positive performance, with growth rates in excess of 10 percent per annum. At the same time, the prices of many agricultural commodities recorded impressive increase, re ecting both international and domestic factors. Production is overwhelmingly of a subsistence nature, although the existences of signi cant imbalances among the various regions generate considerable ows of domestic trade. A selected number of products, including co ee (Ethiopias largest foreign exchange earner), pulses, oilseeds, cut owers and horticultural products are exported. An overall presentation of markets in the agricultural sector is provided in the gure below.
Figure 3 Overview of Markets in Agriculture
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Table 2 Results of a Quick Scan of Markets of Agricultural Products

Market/Product 1. Grain ,Crops (Cereals, pulses and oilseeds) Characteristics Product market destination Description All cereals produced are targeted to the domestic markets. ere were few cases of export in the past, but the government has now temporarily suspended the export of cereals to stabilize domestic prices of cereals. Similarly, pulses produced are mostly absorbed by the domestic market. Low volumes are exported. Oilseeds are equally important grains targeted both to domestic and export markets. ey are used as input in food manufacturing industries. Cereals in general make up the staple food of the country. Much of the production comes from small peasant holdings and is consumed at farm level. Marketable surpluses are released to urban consumers and export market through grain dealers. According to the Central Statistical Agency (CSA), cereals represent the lions share of grain production. Some 86% of the grain production in 2005/06 was attributed to cereals. Pulses ranked second. Production of pulses in 2005/06 was estimated at 15.8 million quintals, representing 11% of the countrys grain production (CSA). e contribution of oilseeds to the countrys foreign exchange earnings is not negligible. e country exported oilseeds worth USD 188 million in 2006/07, representing about 24% of the foreign exchange earnings from agricultural product exports (MoTI). Intermittent drought occasionally a ects production of small holding farmers. Excessive rainfall in some areas of the country is also a problem. Inadequate extension package and fertilizer and improved seed shortages are also issues farmers usually raise. Lack of adequate infrastructural facilities such as rural road networks, warehousing etc., are among the factors that prohibit e cient marketing. ere are sizable numbers of grain dealers in the major cities and towns of the country, including one giant state-owned grain dealer --- the Ethiopian Grain Enterprise (EGE). Farmer cooperatives and unions also began to emerge in large numbers as grain dealers and as agricultural input suppliers to farmers, and the government plays a key role in strengthening and promoting them. Free market competition seems to prevail in the market. However, there are cases where the government intervenes to regulate the market to protect the welfare of consumers. e future, however, seems to lead to monopolistic competition among cooperatives and their umbrella organizations, if the government continues to support and promote them. e government plans to raise their market share of agricultural products to 60% by end of the PASDEP period in 2009/10. e market is open for exit and entry.
Economic importance
Operational problems
Marketing problems Key players in the market
Level of competition
Anticompetition issues/concerns requiring further investigation
Existence and abuse of dominance as a result of the existence of EGE. Impacts on competition of price regulation and control by the government. Refusal to supply. Vertical integration practice. Existence of cross-subsidization by rms handling slow moving grain as well. - Existence of tying and bundling practices. - Other factors substantially lessening competition and excluding competitors.
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Market/Product 2. Spices: (Pepper, coriander seed, ginger etc.)
Characteristics Product market destination
Description Spices are marketed both in the domestic and export markets. Flavoring Ethiopian dishes with di erent types of spices is very common, thus having a rm ground in the domestic market. e country earned a foreign exchange of USD 10.8 million from the export of spices in 2006/07 (Ministry of Trade and Industry). Earning uctuates from year to year, mainly due to global market price uctuation and pressure of domestic demand. Exporters complain of supply problems. Local regional governments fail to provide land for commercialization of spice production. Problems mentioned under grain and crops market apply here as well. In addition, operators developed a tendency of hoarding in this particular agricultural product market, creating arti cial shortages to maximize pro ts. For instance, the price of pepper, which was varying between Birr 250 to 400 per 17 kg in the recent past, suddenly jumped above Birr 1000.00 due to the e ect of hoarding and remained in that range for sometime before showing any decline. It dropped by a substantial amount after the government intervened. Domestic retailers and exporters of spices are the major operating forces in the spice market. Free market competition is assumed to prevail. However, in some speci c spice markets such as pepper, operators tend to collude and agree in an o cial manner to distort the market in their favor. e practice of collusion in the spice market. - Refusal to supply. - Abuse of dominance etc. Fruits and vegetables are catered for both the domestic and export markets. Fruits and vegetables are produced in commercial volumes by state owned farms and few private commercial farms. Small holding farmers also produce them side by side with staple food crops, though not in commercial volume. e problems under grain and crops apply to small holding farmers. e commercial farms, although producing on irrigable lands, are very likely to be a ected by natural calamities. Fruits and vegetables are easily perishable agricultural products. general is constrained by lack of adequate preservation facilities. e market in
Economic importance
Operational problems Marketing problems
Key players in the market Level of competition Anticompetition issues/concerns requiring further investigation 3. Fruits and vegetables: (Banana, papaya, oranges, tomato, potato, onions etc.) Product market destination Economic importance
A large number of small retailers operate in the market. ere are also six enterprises playing prominent roles in fruit and vegetable marketing. ree of them are state owned and the rest are private. At retail level competition appears to be free of anticompetitive behavior. e involvement of state enterprises and dominant large private enterprises are suspects of free market competition abuse. Abuse of dominance. Impact of state dominance in the market.
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Market/Product 4. Cash crops: (Co ee, cotton, tea etc.)
Characteristics Product market destination Economic importance
Description e target markets for cash crops are the domestic and export markets. Among the agricultural products co ee holds a prominent position in the economy of the country. Its share in the countrys total merchandise export earnings in 2006/07 stood at about 36%, showing an increase of 19.7% compared to the year before (MOFED). Problems of general nature have not been documented in the cash crop sector, apart the obvious problems stated under grain and crop. e Ethiopian Co ee Inspection and Auction Centre identi ed a series of operational problems related to co ee auctioning, inspection etc. Immediate solutions are sometimes at hand and pending issues are corrected by involving all stakeholders. e Ethiopian Co ee Inspection and Auction Centre reported cases of fraudulent practices among co ee exporters. ese are believed to a ect the principle of free market operation. Co ee exporters are the key operators in the co ee market. registered exporters in the country. ere are over 35
Marketing problems Key players in the market Level of competition
e government has liberalized the cash crop market and encouraged the private sector to be involved in cash crop marketing. Co ee, the major cash crop, is now sold to exporters by auction, the bid price of which is decided on the basis of global co ee price trends. - Impacts of operational and marketing problems on competition. - Transparency of auctioning procedures. - Market dominance and abuse of dominance etc. Livestock consisting of cattle, sheep, goats, camels, etc. are by and large destined for the domestic markets. ousands are slaughtered in residential backyards and abattoirs for domestic consumption. Some are exported live to the Middle East and neighboring countries.
Anticompetition issues/concerns requiring further investigation 5. Livestock : (Cattle, sheep, goats etc.) Product market destination
Economic importance
e country has one of the largest livestock inventories in Africa with livestock ownership supporting and sustaining the livelihood of the rural poor (FAO). Cattle provide traction power for 95% of grain production in the highlands of the country. Small holding farmers and the pastoral population of the country su er from shortages of grazing lands and water points, mainly due to intermittent drought and increasing livestock density. Information on marketing problems not available. Livestock traders and exporters. Free market competition prevails. - Existence of market dominance.
Marketing problems Key players in the market Level of competition Anticompetition issues/concerns requiring further investigation
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CHAPTER TWO
Pro les of Markets in Industry
e industrial sector registered an average annual growth rate of 10.6 percent over the last four years, covering the period 2003/04-2006/07 (MoFED). About 13.4 percent of the countrys GDP in 2006/07 has been contributed by the industrial sector. e export performance of the manufacturing industries still remains low. eir products are mainly targeted to the domestic market, mainly due to their low competitive position in the global market. In 2006/07 the domestic market contributed 93 percent of their total sales, while only 7 percent of it came from the export market. e average capacity utilization of the manufacturing industries remained low. For instance, in the fourth quarter of 2006/07 the average utilized capacity stood at about 55 percent (CSA). Raw material shortages, lack of markets and power and water supply interruptions were reported as the major reasons for under capacity utilization of the manufacturing industries. An overall presentation of markets in the industrial sector is provided in Figure 4.
Figure 4 Overview of Markets in Industry
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Table 3 Results of a Quick Scan of Markets of Industrial Products

Market/Product Characteristics Product Market destination Economic importance Description e local manufacturing industries mainly target their products to the domestic market. Imported food products also compete in the domestic market. e value of production of the domestic food manufacturing industries stood at Birr 5,403.8 million in 2005/06, of which 48% corresponded to value of production in the private sector and 52% to state-owned food industries (CSA). e country also imported food items worth USD 246.6 million and 204.4 million in 2005/06 and 2006/07, respectively (Macroeconomic Development Reports - MoFED). Some 95% of the domestic food manufacturing industries reported operational problems in 2005/06. e major operational problems include shortage of raw material supplies, absence of market demand and lack of working capital in that order of importance (CSA). ese are major reasons that contributed to under capacity utilization in most domestic food industries.
1. Food and beverage Products: (Sugar, bakery & pastry products; macaroni & spaghetti; beer, wine and other spirits; soft drinks & mineral water; edible oil, our etc.)
Marketing problems
About 27% of the domestic food industries reported marketing problems (CSA). eir products are slow moving in the food market, perhaps due to inferior quality or high price compared to other competing products.
Key players in the market
e key players in the food market are better described by speci c food products. All the four sugar factories, currently existing and operational in the country, are owned by the state. ere are no private sugar factories. Out of the six breweries in operations, three are state-owned, one is endowment a liated and two are in private hands. In the case of soft drinks, there are only two brands being sold in the country. All in all out of a total of 373 medium and large food manufacturing industries, 43 are under state control, while the remaining are in private hands of di erent forms of ownership. From the ownership point of view of individual food products such as those mentioned above, the key players are easily recognizable. Monopoly market structure applies to some food products. e sugar market, for instance, falls under this structure. e state-owned Sugar Support Project O ce has the upper hand to decide on selling prices of sugar and the factories are price receivers. e current selling price of sugar stands much higher than the price the factories otherwise charge with reasonable rate of pro t margin. Although free market competition seems to prevail in the beer market, competing breweries are suspected of forming collusions to increase prices of beer. e uniformity of the recent price increase on bottled and draft beers of di erent brands justi es this statement. Existence of dominant position in selected food markets. Existence of collusion practices. Abuse of dominance. Existence of tying and bundling practices in the food market. Refusal to sell or supply. Existence of entry barriers or exit barriers etc. Lack of fair competition. Locally produced food items fail to compete with imported food items. Food items obtained through donation are directly or indirectly monetized and distort market competition. - Level of state involvement.
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Market/Product 2. Textiles and textile products: (Textile fabrics and wearing apparel made from textiles etc.)
Description e textile industries produce cotton and nylon fabrics both for the domestic and export markets. Woolen fabrics and apparels made from di erent textile fabrics are also imported into the country. A total of 73 medium and large textile fabrics and related products and wearing apparel production facilities currently exist in the country. eir combined gross value of production during the year 2005/06 was estimated at Birr 998.9 million (CSA). About 89% of this amount has been a contribution from the spinning, weaving and nishing facilities. e textile industry is the largest employment opportunity creator among the group of medium and large manufacturing establishments, absorbing about 26,200 persons in 2005/06.
Economic importance
e textile industries also reported similar operational problems as the food industries, though the degree varies. About 36% of the existing textile industries reported shortage of supply of raw materials as their major problem (CSA). Only 24%, including the wearing apparel manufacturing enterprise, of them reported lack of demand for their products in the domestic market. Most of the textile industries operate using outdated machineries and equipment. e domestic wearing apparel manufacturers seem to have marketing problems. According to CSA, in 2005/06 out of the existing 29 medium and large wearing apparel manufacturers, 12 reported absence of market demand for their products. Is the marketing problem associated with antcompetition practices among competing enterprises or something else? is shall be veri ed during the eld assessment if this market is selected.
Marketing problems
Substantial involvement of the state exists in the textile market as well. Out of the total 42 medium and large spinning, weaving and textile nishing facilities in 2005/06, 15 were under state control and one belonged to an endowment a liated enterprise and the rest fell under private hands with di erent forms of ownership. Large number of wearing apparel wholesalers and retailers also operate in the textile market and there are probably dominant groups in the market. e textile fabric market is state dominated, suggesting that free market competition remains at stake. In a market where there is state dominance, it is unlikely for a free market competition to exist. e wearing apparel market, on the other hand, operates under a free market competition environment.
- State dominance and abuse of dominance. - Entry barriers, probably due to high cost of investment and/or limited alternative source of nance. - Tying and bundling practice. - Cross subsidization practice. - Exclusionary and predatory pricing practice etc.
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Market/Product 3. Leather and leather products: (Finished leather, leather garments, leather shoes etc.)
Description Leather and leather products are targeted both to the domestic and export markets. e domestic market for leather and leather products is one of the biggest in the country. Much of the produce such as leather shoes, garment, and bags are absorbed in the domestic market. Export markets for nished leather and leather products are less attractive to exporters, mainly due to their low competitive position in terms of price and quality. However, they have a strong position in the export market for semi-processed hides and skins. e leather and leather products manufacturing establishments are important economic areas of investment. ese are areas that enjoy a comparative advantage in terms of their major input requirement-hides and skins, which are locally available in potential volume. e numbers of medium and large establishments operating in the leather industry were estimated to be 63 in 2005/06, comprising 18 leather tanning and dressing and 45 leather footwear manufacturing establishments, their combined gross value of production in 2005/06 was estimated at Birr 1,022.7 million. ey created employment opportunities for about 8, 000 persons in 2005/06. e leather industry also faced some operational problems. About 91% of the companies reported facing operational problems in 2005/06. e major ones include raw material supply problem and absence of market demand for their products. About 39% of the reporting establishments faced raw material shortages, while 32% reported lack of market demand for their products. ese problems were more manifested in the leather footwear manufacturing establishments. e footwear industry o ers footwear made from leather, plastic rubber, canvas etc. ese product mixes are not close substitutes in all categories of consumers. eir substitution impact varies according to the income category of consumers. In the recent past leather footwear manufacturing plants led complaints on imported footwear from China. Importers handling cheap products usually develop a tendency to misguide retailers and retailers in turn to misinform consumers to gain competitive advantage over domestic products. In the case of the footwear market consumers nally realized that imported footwear from China was not leather footwear and gradually shifted to local shoes. However, there are still a large number of consumers exposed to this kind of misinformation throughout the country. e number of large and medium manufacturing establishments in the leather industry comprised those still remaining under the ownership of the state, and di erent forms of private ownership. Out of the total 63 establishments in 2005/06, four were under the state ownership, 17 under individual ownership, 32 established under private limited company status and the rest owned in partnership and share companies. ese were the major players in the leather industry. ere are also quite a large number of small scale footwear manufacturing plants operating throughout the country. e leather and leather products market seem to operate in a free market competition environment, with some enterprises, probably having some upper hand in their product quality, price and other factors. e role of the Quality, Standards and Authority of Ethiopia in ensuring quality benchmark for products marketed. Existence of abuse of dominance. Existence of collusion. Misuse of information to weaken competitors. Existence of exit and entry barriers.
Economic importance
Marketing problems
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Market/Product 4. Paper and allied products: (Paper, paper products, publishing and printing etc.)
Description Paper and paper products are produced for the domestic market. Publishing and printing houses also provide printing services and publish books and magazines for the domestic market as well. e domestic market is also served with imported paper and paper products.
Economic importance
e number of medium and large paper industries increased from 82 in 2004/05 to 87 in 2005/06 (CSA), corresponding to a growth rate of 6%. e gross value of production of the industry was estimated at Birr 795.9 million in 2005/06, contributing 5% of the value generated by medium and large industries as a whole. e market as mentioned above was supplemented by imports worth Birr 746.8 in 2006/07.
About 93% of the establishments reported operational problems which they faced in 2005/06. Absence of market demand for their products was mentioned as a major problem followed by shortages of raw material supply --- 32% reporting the former and 23% the later problem.
Marketing problems
Out of a total of 68 medium and large domestic paper industries that reported their reasons for not operating at full capacity, 32 underscored the absence of market demand for their products (CSA). Absence of demand for products usually arise when an enterprise fails to become competitive in quality and price. ere are other factors as well. It is possible, however, that the marketing problems that the industries faced to arise out of mal practice against competition.
ere are large enterprises that still remained under the ownership of the state in the paper and paper products industries. According to CSA survey report of 2005/06, there are 4 paper and paper products making establishments and 9 publishing and printing houses in the country run under state ownership. Among those under private ownership, 29 fall under individual ownership, while 35 were registered as private limited companies. e remaining fall under di erent forms of ownership such as partnership, cooperatives and share companies. Importers of paper and paper products and the retail outlets for stationery items also play a key role in paper transaction.
Free market competition seems to prevail. However, state- owned enterprises may have an upper hand in the market.
- Existence of transaction costs that reduce competition. - Existence of dominance and how it is practiced in the paper industry. - Abuse of dominance.
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Market/Product 5. Chemicals and chemical products: (Fertilizer, paints, pharmaceutical products, soap and detergent, etc.)
Description e chemical and chemical products markets of the country are served with the output of the local industries and a substantial volume of imports. Exports from the local industries to the rest of the world are negligible. e chemical industry provides essential input for economic and social growth in the agricultural and health sectors. For example, fertilizer is an output of the chemical industry that is used as an input in the agricultural sector to increase the output of the farmer. Similarly, the health sector and other economic sectors of the country bene t from the outputs of the chemical industries. e domestic industries supplied to the market di erent types of chemical and chemical products worth Birr 595.8 million, while import dominating the market with products worth Birr 4,225 million in 2005/06. e lions share was held by fertilizer and pharmaceutical products, each holding a share of 27% and 33% in terms of value, respectively. e domestic chemical and chemical products industries also encounter some operational problems in a given year. In 2005/06 out of a total of 48 reporting medium and large manufacturing industries, 19 reported shortages of raw material supply and 12 as having less demand for their products in the domestic market. Absence of market demand might have been caused either by production and marketing structural set up of the industries being a ected or anti competition practices by competing industries. State owned enterprises are both engaged in domestic production of chemicals and chemical products and imports of the same. For instance the bulk of local production of pharmaceutical products and importation of fertilizers are handled by state owned, endowment a liated enterprises and farmers cooperatives and unions in the case of fertilizer. eir presence and involvement in market transaction could have induced some elements of anticompetition practices to dominate the market. Among the domestic medium and large industries, 11 out of a total of 53 establishments operating in the market during the year 2005/06 were under state ownership and the rest under private hands in di erent forms of ownership. State enterprises also have a prominent stake in import transactions of selected chemical products. For instance, the bulk of fertilizer imports has been undertaken by one state owned enterprise and farmers cooperatives and/ or unions. Free market competition seems to dominate in most chemical and chemical products markets, but in the case of fertilizer and pharmaceutical products the level of competition may have diminished as a result of the presence of state owned and endowment a liated enterprises. e reality on the ground shall be investigated if the markets are selected for further diagnosis. e degree of market dominance and existence of abuse of dominance. e degree of collusion. - Existence of entry and exit barriers etc.
Economic importance
Marketing problems
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Market/Product 6. Rubber and Plastic Products: (Tires, inner tubes, plastic dishes, plastic crates, etc.)
Description Rubber and plastic products are catered solely for the domestic market. Local manufacturing establishments and import are the major sources of supply. e gross value of production of rubber and plastic products in domestic medium and large industries was estimated at Birr 983.1 million, while the value of imports stood at Birr 1,780.7 million during the year 2005/06. Imports grew to Birr 1,922.8 million in the following year. Out of a total of 63 establishments only one is engaged in manufacturing rubber and rubber products, while all the rest are plastic products manufacturers. In ve years time the number of establishments grew from 39 in 2001/02 to 63 in 2005/06, suggesting that the market is attractive to new investors. e rubber manufacturing plant is a joint venture between the government and Czech interests and there are also 5 establishments in the plastic sector under government control, while the rest are under private ownerships of di erent forms.
Raw material supply shortages and absence of demand are the two major operational problems reported by 20 and 19 establishments, respectively. e rubber and plastic products manufacturing establishments largely depend on imported raw materials. Shortage of foreign exchange could be one possible factor that created raw material shortages in most industries that depend on imported raw materials.
Marketing problems
As indicated earlier in other product markets there could be several factors a ecting demand for a product. Quality and prices are the main factors contributing to absence of market demand for rubber and plastic products. Locally manufactured plastic products are not comparable in quality with the imported ones. Absence of market demand, as reported by the establishments, could have been due to their inability to stand competition. It may require further investigation to check whether anticompetition practices contribute to the problem
ere is only one state-owned domestic manufacturer of tires and inner tubes in the country. e enterprise competes with private wholesalers and retailers of imported tires and inner tubes. Similarly the domestic plastic products manufacturers are facing erce competitions with importers.
Free market competition exists in the rubber and plastic products market. e existence of the state owned rubber products manufacturer may have some impact on the operation of the market.
- Existence of market power and its impact on market competition. - Entry barrier.
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Market/Product 7. Non-metallic products: (Cement, lime, gravel, marble, ceramic oor tiles, cement blocks and tubes etc.)
Description Most products under non-metallic group are highly demanded in the domestic market. Much of the supply to the market comes from domestic industries. Import and export are not signi cant in volume. Most of the products under the non-metallic product group are related to the activities in the construction sector. Construction activities in the country are fast growing, demanding huge volumes of products such as cement and cement products, ceramic products etc., from the non-metallic group. A total of 152 medium and large manufacturing establishments are engaged in non-metallic products production (CSA). Nearly 44% of them reported shortages of raw material supply. e main raw material for most of the establishments is cement, which is also highly demanded by the construction sector. Other operational problems reported by a good number of establishments include lack of working capital, frequent machinery failure, absence of market demand etc. Demands for most products in the non-metallic group are met from domestic sources. Prices are invariably sky rocketing. Most activities in the construction sector have been temporarily suspended as a result. Currently there are two cement production facilities in the country one owned by the state the other by an endowment a liated enterprise. In general out of the 152 establishments operating in the non-metallic product group, 22 are owned and run by the state. e state seems to have a high stake. e involvement of the state brings some doubts about the existence of fair trade in the non-metallic product group. e cement market operates under a monopolistic market. Prices are jointly decided by the two enterprises. Existence of dominance and abuse thereof. Existence of collusion.
Level of competition Anticompetition issues/concerns requiring further investigation 8. Iron and steel products: (Iron bars, wires, nails, iron sheets, metallic door and window etc.) Product market destination Economic importance
e end use market for products under this group is mainly the construction sector and households. Products are retailed in building materials and hardware stores and retail outlets. Products under this group are used as major inputs in the construction sector. e gross value of iron production alone was estimated to reach Birr 1,374.1 million during the year 2005/06. Nearly twice as much in terms of value was imported to ll the demand gap during the same year. Very few cases of raw material supply shortage among the medium and large manufacturing establishments were reported during 2005/06. Current prices of basic iron and steel are beyond the a ordability level of most buyers. e temporary suspension of some construction activities emerged partly due to expensiveness of construction materials such as iron bars. State-owned and private enterprises are currently serving the market. Although the state owned establishments are few in number, currently 3 out of a total of 18, the size of their capacity would put them in a leading position in one way or another. Free market competition may exist in most products of iron and steel. However, in those products where the state has high stake or market share, it is unlikely that competing players have equal standing or fair ground for competition. Existence of collusion practices. Abuse of dominance. Exit and entry barriers
Operational problems Marketing problems Key players in the market
Level of competition Anticompetition issues/concerns requiring further investigation
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Market/Product 9. Construction markets: (Road construction, building construction, construction of dams and bridges etc.)
Description Construction market exists in all economic and social sectors of the country.
e construction sector contributed 5% to the GDP of the country during 2005/06, corresponding to a value of Birr 4,525.9 million at constant prices. Its employment creation capacity is huge; though it is generally temporary. Timely completion of construction projects appears to be a problem of universal nature, especially in developing countries. Delay complaints are common virtually in all types of construction activities. Delay in timely release of funds as per the contractual agreement, unexpected and sudden rise of prices of construction materials etc., could be reasons for delay of project completion. No information is currently available on marketing problems contractors are facing. Lack of transparency in bidding process or practice of favoritism in awarding contracts often exists in some instances. ere are quite a large number of di erent categories of private contractors operating in the construction market. e Government also has a construction wing that is engaged in public construction works. e sector is open to foreign contractors as well. Chinese contractors in the road sector are having a dominant position.
Marketing problems
Competition in general follows the principles of free market competition. However, market dominance by virtue of work quality and price is expected to prevail. - Abuse of dominance. - O ering exclusive right of engagement in a contract. - e extent of transparency in bidding construction activities.
Anticompetition issues/concerns requiring further investigation 10. Electricity and water Economic importance and Level of competition
Electricity and water are considered as natural monopolies in the country. e Ethiopian Electric Power Corporation, which is under state ownership, has been the sole supplier of electric power throughout the country. e supply and distribution of water is also monopolized by the state. However, in some remote rural areas, communities have access to potable water through WASH (water, sanitation and hygiene) projects undertaken by some local and international non-government organizations (NGO). e country has a total installed generating capacity of 819,333 KW, of which 81.6% has been installed in hydropower stations, while the balance comprised thermal and geothermal stations. e installed capacity grew nearly twice as much in 2005/06 compared to what was available some ten years back. Similarly actual production of electricity exhibited tremendous growth starting from year 2002/03 and now stands at 2,896,595 thousand KWH per year. e price of electricity varies according to the type of customers. e Ethiopian Electric Power Corporation applies four di erent tari rates to charge its customers for the use of its product. e highest charge fall in the industrial tari rate, while the lowest is the domestic tari rate. A similar approach is applied in selling water. is is worth considering in the light of the experience of other countries.
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CHAPTER THREE
Pro le of Markets in Services
According to the macroeconomic development report of the Ministry of Finance and Economic Development for the year 2006/7, the contribution of the service sector to the overall GDP product has been constantly increasing, its average share amounting to 40.3 percent during the period 2003/4 2006/7; while its contribution in 2006/7 stood at 41.2% trying to balance with the share of agriculture. e growth of the service sector was attributed to fast developments registered in real estate and business, hotels and restaurants activities; nancial, education and health services.
Table 4 Results of a Quick Scan of Markets in Services
Market/Product 1. Transport and communication market (Road transport, air transport, xed line communication, mobile communication, postal communication, radio communication etc.) Characteristics Economic importance Description is is the most vital market on which all other markets entirely depend for e ciency and survival. e Ethiopian transport market consists of road and air transports. Both markets are divided into two major markets, namely, passenger and freight transportation. e communication market consists of mainly telephone, postal and radio communication. Ethiopian Airlines, being owned by the state, entirely dominates the domestic ight and the international ight in competition with airlines of di erent countries permitted to operate in Ethiopia such as Lufthansa of Germany, KLM of the Netherlands etc. ere are few private airlines operating small aircrafts. e Ethiopian Telecommunications Corporation and the Ethiopian Postal Service are the only state bodies providing communication and postal services. Road transport services, on the other hand, are delivered in the majority of the cases by private transport providers. However, there are also endowment a liated enterprises operating both in passenger and freight transport services. Many of the transport providers are organized in the form of associations. ere is only one railway, Ethio-Djibouti Railway, engaged in passenger and cargo transport services along the railway line connecting Djibouti with Ethiopia. No competition whatsoever exists in air and railway transport, and telecommunication and postal communication services. ey are all owned by the state and are probably considered as natural monopoly. Further investigation or analysis is worth doing to verify their quali cation to be a natural monopoly. In the road transport sector a free market competition is believed to prevail but some assessment on modality and transparency of operation such as route assignment, departure and arrival procedures to be followed etc., needs to be carried out to see how the market functions.
State monopoly. Abuse of dominance. Justi cation for a natural monopoly. Collusion practices etc.
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Market/Product 2. Financial and insurance markets : (Commercial banks, micronance institutions, insurance service etc.)
Characteristics Economic importance
Description Market operators, investors, individuals in every walk of life etc., often require nancial services and some form of insurance coverage. e present government has made all encouraging transformation in the nancial and insurance sector. Banking and insurance services are now open for the private sector. ey are now operating alongside state owned commercial banks and insurance companies. In regional states micro nance institutions have been also established by the regional governments with the aim of expanding service to grass root level.
Commercial Bank of Ethiopia, the largest bank, has been operating for long under state ownership. e state also owns two other banks Construction and Business Bank and Development Bank of Ethiopia. Private commercial banks are increasing; the current number stands at 8 and others are still under formation. Public banks had a total branch network of 255 throughout in 2006/07 (CSA), while private banks had only 185 branches. In the insurance market there are altogether, including one state owned insurance company, 9 insurance companies providing insurance services. ey have a total of 146 branch throughout the country.
ere is no variation among the banks on interest rate on deposits and short and long-term loans. ese are subject to government regulation through the National Bank of Ethiopia. e banking sector is not open to foreign investors. Free market competition seems to prevail in the nancial and insurance service markets with government control and supervision in the banks.
e degrees of involvement of the National Bank Ethiopia in comparison to the experience of other countries either in promoting or retarding competitions.
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PART II
ANALYSIS OF SELECTED MARKETS
33
INTRODUCTION
is part of the report is devoted to the detailed analysis of competition conditions in selected markets. e markets to be analyzed were selected taking into account three main criteria: their socio-economic importance (in terms of contribution to GDP formation, exports, etc.), the nature of the markets in geographical terms (from national to regional/local markets) as well as in product terms (homogeneous and di erentiated products), and the presence of varied competitive conditions (from monopoly or quasi-monopoly to workable competition). In total, the exercise covered 14 markets subdivided into ve sectors. ese are: i) Consumer Goods Flour Milling Beer Soft Drinks and Mineral Water Sugar Edible Oil ii) Agriculture and Agricultural Inputs Cereals Fertilizers iii) Manufactured Goods Textiles and Apparel Cement iv) Financial Services Banking Micro nance Insurance v) Transport Services Road Freight Transport Road Passenger Transport e analysis follows a standard format, including a presentation of the salient features, including the identi cation of the key operators; a de nition of the relevant market in geographical and product terms; a review of the factors impacting upon the competitive conditions; and an analysis of anticompetitive practices. e analysis was based on a variety of sources ranging from sector studies and market reports to statistics on production and sales. e use of o cial sources was largely complemented with information drawn from the Ethiopian economic press, which also allowed for an updating of events up to approximately March/April 2009. Whenever possible, comparative elements were added in order to put the analysis of Ethiopian markets in the right perspective. For that purpose, reference was normally made to the situation in Kenya.
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CHAPTER FOUR
Food and Beverages
e food and beverages sector is one of the main components of Ethiopias manufacturing sector. Based on o cial industrial statistics, total employment can be estimated at some 53,000 while the value of sales is almost 7 billion Birr. Value added generated by the sector is in the order of Birr 3 billion, equivalent to little less than 2% of the GDP. e sector includes a wide variety of activities, mostly linked to the transformation of domestically produced agricultural products. In certain cases, reliance is made on imported products. For the purposes of this study, the attention was focused on ve sub-sectors, namely: our milling; beer, soft drinks and mineral water, sugar and edible oil. e salient features of these sub sectors are illustrated below.
Flour Milling
Salient Features
e total value of domestic our production is about Birr 1-1.1 billion. As imports and exports are negligible, the value of production basically coincides with that of total sales in the market. Flour milling is obviously a ected by developments in the grain market and, over the last couple of years, there have been signi cant uctuations in the availability of wheat, with major repercussions on prices2. e our industry consists of some 20,000 micro-operators (artisans) providing grain milling services directly to households, and about 80 more structured industrial operations. Artisans employ a much larger share of people (over 60,000) than industrial operators (some 4,000), whereas the value of production is more or less evenly split between the two components. Key indicators on the structure of the industry are provided in the following table.
Table 5 Key Indicators for the Flour Industry Indicator Number of plants Number of employees Value of sales (In million Birr) Value added (In million Birr) Artisans 19,744 61,250 508 184 Industrial Operations 84 3,697 518 67 Total 19,828 64,947 1,026 251
Source: Central Statistical Agency
For a review of developments in the cereals sector, please refer to the next chapter.
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Market De nition
Flour is by de nition a homogenous product. Although there might be di erences in the quality provided by various operators, there is no real di erentiation and, therefore, no segmentation along product lines. In contrast, the our market is highly segmented in geographical terms. Micro-grain millers are merely proximity businesses, serving the population at the village or kebele level. Industrial operations have larger radius of operations, but they also operate in local markets, at the sub-regional/regional level.
Competition-related Aspects
Presence of state-owned enterprises: Overall, state-owned enterprises play a moderate role in the our business. In 2007, the four plants indicated as stateowned by CSA accounted for about 12 percent of total production. However, when only the value of industrial operations is taken into account, the share of stateowned operators increases to around 25 percent. According to information provided by PPESA, all public our mills are slated for privatization in the near future. However, at times the nalization of privatization transactions may pose problems. For instance, Yerer Flour Factory was put on tender in 2007 but the transaction reportedly failed because the winning bidder refused to take over the company after a closer inspection of existing liabilities. Concentration and asymmetry in size among operators: Detailed data on the size of our companies are not available. In general, based on CSA data, the 26 largest our mills, meaning those employing more than 50 people, accounted for some 30 percent of the total value of production. Given the geographically fragmented nature of the our market, it is possible that some companies do enjoy a dominant position in some rural areas and smaller towns, whereas the situation is more competitive in urban centers. Given the average size of the largest mills (85 employees), di erences in size among main operators do not seem to be marked. Vertical integration: Several operators are downward integrated into the production of our-based products, such as pasta and baked goods (bread and biscuits), in order to add value to the output of milling operations. An example is provided by Anbassa, part of the East African Holdings Group, which uses about 60 percent of its our output to produce pasta. Downward integration is a logical way of adding value on our: while it may a ect competition in downstream activities, it does not impact directly on competition in the our industry. e most problematic issue faced by our mills is access to raw materials. Over the last two years, our producers have often been facing di culties in securing a stable supply of wheat, with a negative impact on production levels and, in certain cases, even with the closing down of activities. e problem is so severe, that members of the Flour and Flour Products
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Producers Association (FFPPA) have envisaged the establishment of a joint company, speci cally tasked with the import and distribution of wheat. If implemented, this initiative would increase the degree of vertical integration in the industry. However, as the initiative seems to be supported by a signi cant number of our mills, this would not alter signi cantly competitive conditions. Entry barriers: Investment outlays vary enormously, depending upon the size and sophistication of operations. Domestic grain milling machines sometimes used by artisans sell for very small amounts (sometimes, even less than 100 USD). Smallscale commercial mills are in the USD 2,000 to USD 20,000 range. Industrial mills are obviously much more expensive, but major di erences can be found among producers (i.e. Swiss made Buhler equipment sells at a multiple price compared with Turkish and Indian made mills) and good opportunities can be found in the second- hand market. Overall, economic entry barriers cannot be regarded as a major deterrent, and this explains the relatively large number of players even at the industrial and semi-industrial level. As for regulatory barriers, our milling is one of the activities reserved for domestic operators only. However, given the nature of the business, this does not appear to be a major constraint to competition.
Alleged Anticompetitive Practices

e scarcity of raw materials has sometimes generated signi cant increases in prices. For instance, during 2008 increases of up to 50 percent (from Birr 550 to 850/ quintal) were recorded, sometimes in a matter of a few weeks. ese price increases prompted the usual allegations of pro teering from government circles, although in certain cases it was ascertained that the price hike was actually initiated by some state-owned enterprises. Irrespective of the private or public nature of the culprits, these price increases appear to have been the initiative of individual companies and do not seem to be the result of a concerted action, which is made scarcely feasible by the relatively large number of operators in the market.
Beer
Salient Features
Overview: Western beer, as opposed to the traditional tella beer, was introduced in Ethiopia in the early 20th century, and the rst brewery, St. George, was established in the early 1920s. Over time, beer has become an increasingly popular beverage and consumption is currently estimated at about 3-3.5 million hectoliters (hl)/year, with a remarkable increase over the hl one million consumed in the late 1990s. e beer market is predominantly supplied by local producers, with only limited quantities of special beers imported. Exports are also very limited, with small quantities sold to 39
North America and European countries, where sometimes Ethiopian beer is available in ethnic restaurants. e total market is worth probably around USD 200 million. Main Operators: At present, there are 6 breweries in Ethiopia. ey are controlled by 5 companies, of which three are state-owned, one is owned by an endowment fund and one fully private and controlled by foreign interests (the French Castel group, known locally as BGI). Almost all the companies have recently implemented or announced expansion programs to keep up with growing demand. In the recent past, plans for the establishment of additional breweries were also announced (e.g., by the Star Business Group in Adama), but have not been implemented. e salient features of the current operators are summarized in Table 6 below.
Table 6 Basic Features of Ethiopian Breweries
Companies BGI Bedele Meta Abo Dashen Harar Establishment 1998 1993 1963 Late 1990s 1980s Ownership Private State-owned State-owned Private State-owned Brands St. George, Bati, and Castel Bedele Meta Dashen, Royal Beer Harar, Hakim Stout and Harar So Nationalized during the Derg period and modernized in the 1990s Endowment enterprise, owned by ENDEAVOUR Comments Two plants, in Addis Ababa (privatized in 1998) and Kombolcha (green eld operation).
Source: Company websites and press reports.
Market De nition
In geographical terms, the market for beers can be regarded as having a national character, as the various brands are generally distributed across the whole country. An exception is represented by Harar So , a non-alcoholic beer sold predominantly in eastern parts of the country. Also, for logistical reasons, draft beer is sold primarily in local markets, i.e., in areas close to breweries. In terms of product lines, the main distinction is between bottled/canned beer and draft beer, the latter being consumed only in bars and restaurants. Apart from that, each brand has its own distinctive features, owing to both objective and subjective characteristics (e.g., Hakim Stout and Royal Beer have a higher alcoholic content, Meta is sometimes perceived as sweet, etc.). But they can all be considered in competition with each other. Taken
40
together, industrial beers are in competition with traditional beer, which is often homemade or produced by small scale artisan-like operations3.
Presence of state-owned and endowment enterprises: As indicated above, three of the ve breweries currently in operations are state-owned. It should be noted that in the past several tenders were launched for the sale of these companies to private investors. In some cases, o ers were formulated by prospective investors (in 2003 both South African Breweries and BGI bid for the three companies, o ering respectively, USD 65 and USD 55 million) and in some cases negotiations were started (in 2006, East African Breweries was in negotiations for the purchase of Meta Abo). However, none of these transactions was eventually nalized. According to the information provided by PPESA, a renewed round of privatization tenders will be launched in 2009/10. As for endowment enterprises, Dashen is controlled by ENDEAVOUR, an endowment fund of the Amhara National Democratic Movement. Initially, Dashen was partly owned by BGI, which had a 40 percent shareholding, but the foreign partner left after a few years, reportedly because of disagreements regarding expansion plans. Concentration and asymmetry among operators: With a capacity well in excess of hl 1 million/year, BGI is by far the leading player, with an estimated overall market share of about 50 percent. BGIs position is even stronger in the case of draft beer, as its St. George brand is considered to account for 70-75 percent of draft beer sales in Addis Ababa. Competitors are much smaller, with capacities ranging from hl 250,000 (Bedele) to hl 500,000 (Meta Abo). Overall, BGI seems capable of exerting a strong in uence on market developments, although the rapidly growing market and the existence of consumer loyalty has so far left enough room for maneuver to its competitors. It should be noted that high concentration is a common feature of the beer market in developing countries, especially in Africa. For instance, in other East African countries, like Kenya, Uganda and Tanzania, the beer market is divided up between two main players, East African Breweries and SABMiller, with the leading company typically holding between 60 percent and 90 percent. Vertical integration: Malt and hops are the main raw materials used by the brewing industry. Since the mid 2000s, Ethiopias only producer of malt (Assela) has been unable to supply breweries in the required quantities (currently, about 50,000 tons)
3
To some extent, beers can also be considered to be competing with other beverages, such as wine, soft drinks and even mineral water. e degree of substitutability varies, depending upon the context in which beverages are consumed (during meals, in bars, etc.) and the inherent motivations for consumption (thirst quenching, social drinking, etc.). According to this approach, relevant markets are not de ned along simple product and geographical lines but rather taking into account consumers behavior in di erent occasions and even in di erent seasons (e.g. icy soft drinks are more likely to be a substitute for beers or mineral water and vice versa during the hot season). is analytical approach was adopted in important antitrust cases in the EU and the US, mostly involving Coca Cola and other leading sellers/distributors of carbonated drinks.
41
and signi cant amounts of malt had to be imported, at increasingly high prices. In turn, this negatively impacted on the price of beer. In early 2009, Dashen announced plans to establish a second malt factory, with estimated investment costs of Birr 150 million. e project seems to have a combination of economic and social motivations (i.e. providing a new source of income to farmers in areas close to brewery) and, if implemented, could give Dashen a signi cant leverage vis--vis competitors. Entry barriers: Brewing is a quite capital intensive business. e green eld operation established by BGI in Kombolcha in the late 1990s required an investment of some USD 23 million. A similar gure (Birr 200 million) was mentioned for the hl 300,000 project proposed by the Star Business Group in Adama, while the expansion plans implemented or announced by nearly all breweries over the last few years were in the order of USD 10-12 million. Operations are also technically complex and recourse to expatriate beer masters is fairly common. Under these conditions, only large operators, with signi cant experience in the sector, could conceivably consider entering the market.

Over the last few years, there were a few instances in which the proper functioning of the market appeared to be at risk. In particular, at the end of 2007/beginning of 2008, a generalized increase in selling prices was recorded. e price increase was certainly triggered by the higher costs faced by breweries for the purchase of imported malt. However, the fact that prices were raised virtually simultaneously and by similar margins by most of the companies, irrespective of their individual operating and cost conditions, inevitably raised the suspicion of a concerted move. Also, at the end of 2006, Meta Abo accused BGI of adopting predatory practices, consisting mainly in the refusal to sell St. George beer to bars carrying Metas draft beer. Within the framework of this study it was not possible to investigate in detail the evidence related to these speci c cases, but it is clear that the prevailing market structure does create an environment conducive for restrictive practices, thereby requiring enhanced surveillance from antitrust authorities.
Mineral Water and Soft Drinks

Salient Features
Overview: anks to its rich hydrological resources, Ethiopia has a long tradition in mineral waters, the rst bottling plant having been established back in the 1930s. Soft drinks are a more recent phenomenon, with the rst operations dating from the 1950s. Since the fall of the previous regime, the demand for both mineral water and soft drinks has been on the rise, with a particularly marked increase during the last few years. At present, the Ethiopian market for mineral water can be estimated 42
at some 45-50 million liters, while sales of soft drinks are in the order of 40 million crates of 24 bottles each. e combined value of mineral water and soft drinks sales appears to be in the order of USD 70-80 million per year. Both mineral waters and soft drinks are mostly produced locally for the domestic market, and both imports and exports are negligible. Main Operators: At present, there are 10-15 rms active in mineral water and/ or soft drinks, of which four play a major role. All enterprises are fully or majority controlled by private operators and there is a signi cant presence of foreign investors. e salient features of the leading operators are summarized below.
Table 7 Basic Features of Leading Mineral Water/Soft Drinks Companies
Companies Ambo Mineral Water Babile Mineral Water East African Bottling (EAB) Establishment 1938 Ownership Private (privatized in 2007) Private (privatized in 2007) Private Products/Brands Mineral water (Ambo) Mineral water (Babile) Soft drinks (Coca Cola, Sprite, Fanta) and mineral water (Crystal) Soft drinks (Pepsi Cola, 7Up, Mirinda Orange & Tonic) and mineral & puri ed water (Kool) Comments Nationalized in the 1970s and modernized in the early 1990s Nationalized in the 1970s and modernized in the early 1990s Two plants, in Addis Ababa (privatized in 1998) and Dire Dawa (green eld operation). Part of the MIDROC Group. ree plants, in Addis Ababa, Bure (privatized in 2004) and Hawassa
1953
1995
Moha Soft Drinks
1997
Private
Market De nition
From the viewpoint of consumers, mineral water and soft drinks are di erent products, displaying a limited degree of substitutability. However, on the supply side, the two lines of business share a number of features (same distribution channels, same or similar equipment, etc.). erefore, for the purpose of this study, they can be treated as a single market. In geographical terms, the big brands are fairly evenly distributed across the country, whereas small and medium sized operators tend to have local or regional markets (e.g., Babile Mineral Water, based near Harar, is selling primarily in eastern regions).
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Presence of state-owned enterprises: e state has almost completely withdrawn from the mineral water and soft drinks business. After several unsuccessful attempts, the last two companies in state hands, Ambo and Babile, were eventually privatized in 2007. At present, the state, through PPESA, only retains a minority shareholding (32 percent) in Ambo Mineral Water. Concentration and asymmetry among operators: e soft drinks business is largely dominated by two heavyweights, namely East Africa Bottling, the Coca Cola franchiser and subsidiary of the homonymous group operating across the whole of East Africa, and Moha Soft Drinks, the Pepsi franchiser, part of the MIDROC Group. While precise data are not available, Moha is generally accredited with the leading position, accounting perhaps for 60 percent of the market4. However, EAB recently completed an expansion program that raised production capacity from 14 to 18-19 million crates, and this may alter the situation. Likewise, the arrival in the Ethiopian market of the beer and soft drinks giant SABMiller (now a shareholder in Ambo along with South West Development) may also lead to changes in the market. In the mineral water market, Ambo is by far the leader, usually accredited with a market share of 85 percent, with the rest subdivided among the two soft drinks producers and other, smaller, players. But also in this sector the leading companys position might be threatened by new entrants. In particular, Moha is currently building a new mineral water plant in Hawassa, which is expected to produce an average of 18 million liters per year. Vertical integration and entry barriers: A direct access to water sources is a must for mineral water producers and highly recommended for soft drink producers. However, there is no scarcity of natural springs in Ethiopia and access to water resources is not a signi cant constraint. As a matter of fact, the government appears to have issued a number of permits that exceeds the number of enterprises in operations, indicating a fairly liberal attitude on the matter. In the soft drinks business, the main barrier is obviously represented by the possibility of becoming a franchisee of one of the leading brands. is is why in most countries the industry tends to become a duopoly, centered on the Coke and Pepsi franchisees, with producers of local brands operating at the fringes. e amounts required for initial investments vary, depending upon the nature of operations. A small scale water bottling plant aimed at serving the local/regional market can be set up with modest investments, even less than USD 1 million if reliance is made on second-hand equipment (these
4
According to press sources, there could be an indirect linkage between EAB and Moha. In 2008, an associate of Sheik Mohammed Al-Amoudi (owner of MIDROC and, hence, of Moha) reportedly bought a minority shareholding in one of the companies who control EAB (see Coca Cola hits the brake a ected by foreign currency shortage, e Reporter, 14 March 2009). However, the traditional rivalry between the two world brands does not seem to allow for any type of concerted action.
44
days, second-hand bottling lines and ltering equipment can be bought at rockbottom prices from many EU suppliers). Instead, the establishments of large scale operations, including the logistics to distribute products nationwide, are much more expensive. For instance, the modernization plan recently implemented by EAB involved an investment of some USD 12 million.

Soft drinks companies tend to impose exclusivity agreements upon resellers of their products, thereby limiting opportunities for new entrants. e issue of exclusivity has been debated in a number of antitrust cases (including the famous settlement agreement between the European Commission and Coca Cola) and, in general, a tendency towards the prohibition of exclusivity agreements has emerged. In Ethiopia, the enforcement of such a prohibition is made more di cult by the very nature of some players, namely the fact of Moha being part of a conglomerate with interests also in some distribution trades (and, in fact, Coca Cola is not available at Sheraton Hotel). In late February to early March 2009, signs of a severe shortage in the soft drinks market started to emerge, and press reports indicated that in some cases this had led to a considerable increase in prices at the retail level. e fact that the shortage a ected both Moha and EAB more or less at the same time inevitably raised the suspicion of an agreement among the two competitors in order to be able to increase prices. However, as it became abundantly clear in the subsequent weeks, the shortage was largely due to technical reasons (shortage of corks), combined with di culties in importing raw materials because of the unavailability of foreign exchange, with the exclusion of any type of anticompetitive behavior5.
Sugar
Salient Features
Overview: In Ethiopia, honey has long been the preferred sweetener and per capita consumption of sugar is rather low, at about kg 5 per person compared with an African average of about kg 15. Nonetheless, with the progressive westernization of dietary habits and, especially, the growth in population, total consumption has grown to the respectable gure of 400,000 - 450,000 tons. In monetary terms, at wholesale prices the sugar market can be estimated at Birr 3 billion. Domestic production covers approximately two thirds of consumption and the rest is imported. While posting an overall de cit, Ethiopia is also exporting small quantities of sugar, taking advantage of privileged access to the EU market, where prices are higher than in the international market. e export quota reserved by the EU to Ethiopia has gradually increased from 11,000 tons in 2001 tons to 24,000 tons in 2008. e sugar industry is also important for its by-products, molasses (often used in the
5
Forex Crunch Deepens Soft Drinks Shortage, Addis Fortune, 8 March 2009.
45
production of feedstock) and, especially, ethanol, increasingly used as an alternative fuel in motor vehicles. Ethiopia currently produces some 8 million liters of ethanol, which is blended locally with gasoline, while molasses is exported. Operators: In Ethiopia, production of sugar started in the 1950s, when the Dutch company HVA built the rst sugarcane plantation and processing plant in Wonji. In 1968 a second plant was built by HVA in Metahara, while a third plant was built by the government in Finchaa at the end of the 1990s. ese three plants are still in operation and have a combined processing capacity of approximately 280,000 tons. e industry is currently undergoing a major expansion, involving an increase in the processing capacity of existing plants as well as the building of a new plant in Tendaho (expected to reach a processing capacity of 600,000 tons). e expansion plan also covers ethanol, whose production is expected to increase signi cantly to well over 100 million liters. e salient features of sugar companies are summarized in the following table.
Table 8 Basic Features of Sugar Factories/Projects
Companies Wonji/Shoa Metahara Finchaa Tendaho Establishment 1960 1968 1997 2013 (expected) Ownership State-owned State-owned State-owned State-owned Products & By-products Sugar, molasses Sugar, ethanol Sugar, molasses Sugar, ethanol Comments Nationalized in the 1970s. Expansion program ongoing. Nationalized in the 1970s. Expansion program just completed Major expansion program ongoing. Under construction.
Source: ESDA and press reports
Market De nition
Sugar is a typical commodity, widely traded internationally, and in this sense Ethiopias sugar sector can be regarded just as a component of the broader world sugar industry. At the same time, the functioning of the international market is a ected by a variety of restrictions (import quotas and duties, subsidies to domestic producers), which e ectively contribute to segment the market along regional/national lines. For the purpose of this study, the relevant market basically coincides with the country.
Presence of state-owned enterprises and concentration: For all practical purposes, Ethiopias sugar industry can be regarded as state monopoly. Not only the three factories in operations (as well as the Tendaho project) are fully state owned, but overall industry developments are presided over by a government body, the Ethiopian Sugar Development Agency (ESDA). In particular, ESDA is responsible
46
for overseeing developments at the plant level (including the management of tenders for the ongoing expansion plans) and for importing sugar and reselling it to private merchants through tenders, with the purpose of stabilizing prices. Part of the distribution is also done through the state-owned wholesaling enterprise, Merchandise Wholesale and Import Trade Enterprise (MEWIT). Vertical integration: In Ethiopia, sugar mills are vertically integrated into sugar cane production. is contributes to increase in investment costs but, at the same time, provides an easier access to raw materials than in the case of plants relying on sugar cane obtained through out-grower schemes (as in Kenya). As all plants are state-owned and vertically integrated, this aspect does not impact appreciably on market conditions. Entry barriers: e sugar industry is heavily capital intensive. e cost of the ongoing expansion plan is in the order of Birr 15 billion, of which 8 billion for the green eld Tendaho project alone. ese are considerable amounts also for the government budget, and indeed in order to nance the expansion plan the Government had to secure a supplier credit package of some 640 million USD from Indias EXIM Bank. e major investment outlays required inevitably limit the number of potential entrants into the industry. Some projects are reportedly being developed by large foreign investors (Indias Chandra Group in Oromia Regional State) but the current status of these initiatives is not known. As for regulatory barriers, the main issue relates to the fact that import trade (which plays an important role in sugar) is one of the activities explicitly reserved to domestic operators, with explicit exclusion of foreign investors.

In late 2008 and early 2009, a major price hike was recorded, with retail prices increasing by 20 percent and more. Seemingly triggered by fears of scarcity generated by technical problems at the Metahara plant (whose production capacity declined to less than one third), the price hike induced the usual sequel of accusations vis--vis traders. is also prompted ESDAs reaction, with the mobilization of reserves to stabilize the price.
Edible Oil
Salient Features
Overview: Precise data are not available on oil seeds consumption in Ethiopia, but the market can be grossly estimated at 70 to 100,000 tons. Considering an average retail price of Birr 15 per liter, total market value is in the order of 1.1-1.7 billion birr. In Ethiopia, edible oil comes in the form of re ned oil (mostly sold in urban 47
areas) and crude oil, which dominates in rural areas and smaller centers. Ethiopia is a major producer of oil seeds. An estimated 3 million farmers are involved in growing sesame, neug, linseed and other oil seeds, with an area under cultivation of about 800,000 hectares and a production of some 500-600,000 tons6. However, an increasingly large share of oil seeds output is exported and domestic production of edible oil accounts for only part of domestic consumption. erefore, the market relies heavily on imported oil, mostly re ned palm oil originating from other developing countries (Madagascar, South East Asia) and soybeans oil, purchased from Europe. In years of drought, commercial imports are supplemented by edible oil imported as food aid. Operators: ree categories of operators are active in the edible oil market: industrial producers, micro enterprises, and importers of re ned oil. Currently, there are 1215 industrial enterprises active in the production of re ned oil. eir production capacity is estimated at some 72,000 tons (2005 data), but due to the lack of raw materials, capacity utilization is in the order of 30-40 percent. Crude oil is produced by a multitude of micro enterprises operating small presses, mostly of Chinese or Indian origin. Depending upon the sources, their number is variously estimated at anywhere between 500 and 1,000. Importers include general trading companies as well as specialized branches of large conglomerates, such as East African Holdings Group. Some information on key players is provided in Table 9 below.
Table 9 Basic Features of Leading Ethiopian Edible Oil Producers
Companies Addis Modjo Edible Oil Complex Mulat Abegaz Plc Dil Edible Oil Hamaressa Edible Oil Bahir Dar Edible Oil East African Holdings Group Location Addis Ababa & Modjo Addis Ababa Addis Ababa Harar Bahir Dar Addis Ababa Ownership Private (privatized in 2008) Private Private (restituted in 1999) Private (privatized in 2008) Private (privatized in 2008) Private Comments Processing capacity of about 16,000 tons Processing capacity of about 9,000 tons Processing capacity of about 5,000 tons Processing capacity of about 4,500 tons Processing capacity of about 4,500 tons Involved in import and wholesaling. Reportedly considering the setting up of a palm oil plant
Source: Various reports and press articles.

6
48
J. Wijnands and others, Oilseeds business opportunities in Ethiopia, Ministry of Agriculture and Rural Development, Food and Quality, e Hague, May 2007.
Market De nition
e market for edible oil displays a certain degree of product di erentiation. Each type of cooking oil (sesame, rapeseed, etc.) has its own peculiar characteristics in terms of avor and taste, but the main distinction is between re ned oil and crude oil. Re ned oil is clearly a superior product, although in certain circumstances it can be substituted with crude oil. In geographical terms, the market shows the same type of territorial segmentation found for other food products, with cottage operations selling in local markets and industrial enterprises operating at the regional level. e Addis Ababa market is supplied by some 200 operators, located within a radius of some 100 kilometers.
Presence of state-owned and endowment enterprises: e state has almost completely withdrawn from the production of edible oil. Indeed, edible oil enterprises were among the rst to be privatized, with half a dozen companies (Dil, Edget, Dire Dawa, Tigray, Teramaj, Akaki) being returned to their former owners or sold through commercial tenders in the second half of the 1990s. In 2008, the last state-owned enterprises, Addis Modjo Edible Oil Complex and Bahir Dar Edible Oil, were also privatized. e state remains active in the distribution of edible oil, through MEWIT. In particular, at the beginning of 2009, MEWIT was requested by the GoE to import signi cant quantities of edible oil (1.7 million liters), in an attempt to stabilize market prices. Imported oil handled by MEWIT is intended for direct sale to consumers, bypassing wholesale and retail traders. No information is available on enterprises controlled by endowment funds. Concentration and asymmetry among operators: Data on market shares held by various operators are not available, but the market seems to display a relatively modest level of concentration. With reference to data on production capacity from 2005, Addis Modjo accounts for about 22 percent of total capacity, Mulat Abegaz for 13 percent, and Dil, Hamaressa and Bahir Dar for approximately 6-7percent each. Vertical integration: In principle, the erratic supply of oil seeds provides a powerful incentive into vertical integration for edible oil producers. However, so far, only Addis Modjo appears to have established signi cant backward linkages. In fact, at privatization the company was bought by Amibara Agricultural Development Plc, an agro-industrial complex also active in commercial farming, including the cultivation of cotton seed. e move has been reportedly resented by some competitors of Addis Modjo, who complain about increasing di culties in securing raw materials for their operations. 49
Entry barriers Investment outlays and technical aspects: Investment outlays vary, depending upon the size and sophistication of operations. e Hamaressa plant was built at the end of the 1990s at a cost of Birr 55 million, while the much larger Addis Modjo was recently privatized for almost 74 million Birr. In contrast, the cost of small scale plants is in the order of 5 to 7 million Birr. is is an amount within reach for many potential investors, and helps in explaining the large number of crude oil producers. Similar considerations apply for technical and managerial aspects. Crude oil cottage operations are very simple and do not require special skills, whereas industrial plants, required to ful ll higher qualitative and hygienic standards, require specialized personnel. Entry barriers Government regulations: Edible oil is one of the sectors reserved for domestic operators. Apart from that, the industry is not subject to restrictive government regulations. Because of obvious health considerations, the GoE is promoting an improvement in quality standards. e problem is serious, as in mid-2008 there was a major incident with poisonous edible oil in Lideta and Kolfe Sub-cities, with the death of 8 people and the hospitalization of another 94. Unfortunately, only a tiny minority of edible oil plants currently in operations appear to meet adequate standards. Only 17 oil producers hold a license from the Quality and Standards Authority of Ethiopia (QSAE), while operations in the myriad of cottage operations are often carried out in dubious hygienic conditions, with a high risk of contamination.

In recent times, the price of edible oil has been displaying a marked upward trend, and this has prompted the usual allegations of hoarding, pro teering and the like. In reality, this appears as an inevitable consequence of the growing imbalance between demand and supply. On the one hand, demand of edible oil has been increasing, due to improved living conditions (and expansionary monetary policy). On the other hand, growers of oil seeds nd it more convenient to export their produce rather than supplying it to the oil processing industry. e shortage has prompted the reaction of the GoE, which rst (in 2008) removed import duties on cooking oil imports7, and then (in early 2009), decided to call upon MEWIT to import and distribute large quantities of edible oil8. Domestic producers often complain about unfair competition from imports and these complaints have become more vociferous since the GoE decided to remove duties on imported palm oil. It is a fact that imported oil has become increasingly more competitive in the Ethiopian market. As shown in Table 10 below, the price ratio between locally produced and imported cooking oil dramatically shifted in
7
50
Government Lifts Sur Tax on Edible Oil, Soap, ENA, 29 March 2008. Edible oil price relief on its way, Capital, 9 February 2009
favor of the latter in virtually all major markets, with imported products displaying a price advantage sometimes in the order of 25-30 percent. However, it is fairly obvious that importers are also in the business of making money and, therefore, their more competitive prices are not the result of unfair competition but, simply, of a higher level of competitiveness. It is true that in the edible oil market contraband and other illegal practices (namely, under invoicing) have been quite common, and it is certainly possible that in certain cases this may have allowed importers to sell at more competitive prices. However, if anything, the abolishment of import duties on edible oil imports has reduced (if not eliminated altogether) the incentives for these illegal practices, contributing to create a level-playing eld.
Table 10 Prices for Domestic and Imported Edible Oil
Period August 2005 Type of Oil Imported Domestic Domestic August 2007 Imported Domestic August 2005 September 2006 August 2007 Tigray Amhara Oromia SNNP Addis Ababa
Unit Price (Birr per liter) 12.12 11,59 11.81 13.89 16.73 19.30 96% 118% 115% 11.9 12.05 12.40 12.83 17.07 21.09 101% 103% 124% 12.51 11.25 12.79 11.48 17.22 18.66 90% 90% 108% 12.89 11.20 13.67 11.65 17.77 17.87 87% 85% 101% 12.89 11.78 13.45 13.23 17.30 22.21 91% 98% 128%
September 2006 Imported
Price Ratio (domestic/imported)
In the past, a factor that greatly contributed to distort the proper functioning of the edible oil market was the presence of signi cant imports as food aid. e problem was particularly severe in the 1990s and early 2000s, when signi cant amounts of edible oil were distributed for free to the population. is negatively impacted on domestic producers, to the point that some were even forced out of business9. However, the problem was solved in recent years, when it was decided that the bulk of cooking oil funded by donors would be monetized, i.e. would be sold for distribution in the local market through an auction mechanism. e mechanism is supervised by the Ministry of Trade and Industry and, precisely in order to avoid unfair competition with local producers, the auction starting price is set equal to the import parity price, inclusive of port handling charges, inland transport and pro t margins.
9
How Ethiopias cooking-oil industry got burned by USAID, Christian Science Monitor, 6 January 2004
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CAPTER FIVE
Agricultural Products and Inputs
In Ethiopia, the functioning of agricultural markets has a major impact on the rest of the economy. At the same time, farming activities are heavily dependent upon developments in the markets for agricultural inputs, such as seeds and fertilizers. For the purpose of this study, attention was focused on cereals, by far the main staple crop, and on fertilizers. e competitive conditions prevailing in these two markets are illustrated below.
Cereals
Salient Features
Cereals (te , wheat, maize, etc.) are the main component of Ethiopias agricultural production. e volume of production is subject to variations due to various factors (weather conditions, availability of inputs, etc.). But in recent years a positive trend has been recorded, with total output growing from 10 million tons in 2004 to 15.5 million in 200810. Only one third of total production is marketed, the remainder being devoted to auto consumption at the farm level. Domestic production is supplemented by imports, in the form of food aid and, lately, commercial purchases made by the GoE. Cereals are predominantly a smallholder crop: small farmers account for an estimated 95 percent of total output, the balance being provided by a small number of stateowned and private commercial farms. A signi cant share of commercial output (perhaps up to 50 percent) is sold directly by farmers to consumers and retailers, while the rest is marketed through cooperatives or sold to market intermediaries. e number of cooperatives has been increasing over the last decade and they are now estimated to be in operation in 35 percent of Ethiopias districts, with a much stronger presence in Tigray Regional State, where cooperatives are found in almost all kebeles11. Regarding traders and other intermediaries, precise gures are not available. Yet earlier studies indicate the presence of some 2,500 traders countrywide, supplemented by brokers operating in Addis Ababas grain market. A certain role is also played by the state-owned Ethiopian Grain Trade Enterprise (EGTE), the successor of the agricultural marketing board which used to monopolize the market during the tenure of the previous regime.
10 11
USAID WFP, Ethiopia Food Security Update, February 2009. Tanguy Bernard et alius, Smallholders Commercialization through Cooperatives - A Diagnostic for Ethiopia, IFPRI Discussion Paper 00722, October 2007.
53
Market De nition
Cereals are obviously a heterogeneous category, encompassing di erent crops, as well as di erent varieties within each crop (e.g., durum wheat, bread wheat). e market is also segmented along geographical lines, given the high share of cereals commercialized in local or regional markets. Strictly speaking, all these di erences give rise to separate relevant markets, in which competitive conditions should be assessed separately. However, the various cereals share important features, especially the structure of commercialization channels, and price movements for most crops and local markets are highly correlated. erefore, for the purpose of this study, these similarities allow for a uni ed treatment.
Concentration and entry barriers: As indicated above, cereals are predominantly smallholder crops, with only a fraction of total production generated by large scale farming operations. erefore, at the production level, concentration is negligible. Similar considerations apply at the wholesale trade level. Recent gures are not available, but early studies found that the market share held by the four leading traders was below 33 percent for most local markets and crops12. Low concentration combines with modest entry barriers. Cereal traders are typically small sized operators, requiring only limited initial investment, typically to buy a warehouse, more rarely to purchase a vehicle. If anything, entry in the cereals trade business is comparatively more constrained by non- nancial aspects, namely the access to a wide network of contacts and the build-up of a good reputation, both of which are the result of long involvement in the trade and/or of family connections. Reputation is of an overriding importance in the case of brokers, who act as intermediaries between traders located in di erent (and typically distant) markets. e Growing Role of Cooperatives: e role of agricultural cooperatives, as pointed out earlier, is expanding and the GoE is actively supporting this trend. e impact of agricultural cooperatives on market concentration is still little documented, but some observers suggest that in some cases cooperatives may have acquired a dominant position. e issue was raised during the workshop for the presentation of this report, when representatives of some local chambers of commerce suggested that private traders are being increasingly bypassed by state-supported cooperatives. e point deserves to be analyzed in more detail in the framework of follow up work. Presence of state-owned and endowment enterprises: State-owned farms play a minimal role in cereals production and trade, as the share of all commercial farming operations, including both private and public operations, is estimated to account for not more than 5 percent of total output. e same applies at the wholesale
12
54
Eleni Z. Gebre-Madhin, Market Institutions, Transaction Costs, and Social Capital in the Ethiopian Grain Market, IFPRI Research Report 124, 2001.
trade level. In normal times EGTE is handling less than 5 percent of domestic grain trade, although its role can be greater at times of crisis. e in uence of endowment enterprises is di cult to assess, due to lack of data. Regulatory aspects and public policy: e government liberalized the grain market in 1990, lifting all restrictions on private inter-regional trade, removing o cial pricing and quotas, and eliminating the monopoly status of the marketing board. At present, the main remaining restriction concerns the ban on exports, introduced in 2006 in order to address the issue of raising prices and food insecurity. Apart from that, the government plays primarily a promotional role on the supply side, namely through the distribution of fertilizers and seeds, as well as a stabilizing role in moments of crisis, through the import and distribution of cereals by EGTE. A major innovation in public policy towards cereals (and, indeed, the whole agricultural sector) is the recent establishment of the Ethiopia Commodity Exchange (ECX). Inaugurated in 2008, ECX is the rst attempt in Ethiopias history to create a uni ed market mechanism, capable of bringing together operators from all parts of the country. Consisting of a trading oor in Addis Ababa, six warehouse delivery locations, and 20 electronic price tickers in major market towns, ECX is designed to provide a reliable system for handling, grading, and storing agricultural products, thereby reducing considerably the transaction costs that have traditionally hampered the proper functioning of agricultural markets. At present, ECX is involved only in spot trading of white maize (as well as of a number of co ee varieties), but operations are expected to expand gradually to other cereals.

e issue of anticompetitive practices in the cereals market has come to public attention in connection with the recent hike in prices. Starting in the late 2006, prices of cereals (as well as those of other food items) showed a marked upward trend. Prices reached a peak between the summer and the beginning of the 2008 meher season, with maize and wheat selling at well above Birr 600/quintal. Prices declined towards the end of 2008, as a result of the new crop and of stabilization e orts by the GoE, which imported signi cant quantities of wheat, but at the beginning of 2009 a new upward trend was discernible in some cases. An overview of price movements for wheat and maize in selected urban markets is provided in the following gure.
55
Figure 5 Prices of Maize and Wheat in Selected Urban Markets
Source: Reproduced from USAID WFP, Ethiopia Food Security Update, February 2009.
e dramatic increase in cereal prices is the result of a variety of factors, including many of an exogenous nature (such as the generalized increase in international commodity prices recorded until mid-2008 and the parallel increase in some key agricultural inputs, such as fertilizers). However, in certain cases the speculative behavior of market operators, especially traders, has also been called into question. For instance, in 2007 government authorities pressed charges against some traders accused of hoarding (as well as of illegal export) before the Trade Practices Commission (TPC). In 2008, a tendency by cereal traders and farmers cooperatives to withhold stocks was also noted in certain areas by international observers monitoring the food security situation, although an increase in the competition among intermediaries was found in other areas. While there is little doubt that expectations of further price increases have provided a powerful incentive to withhold stocks, the available evidence regarding the alleged abuses is sometimes inconclusive, as re ected also in the verdicts issued by the TPC (some defendants were acquitted and other received relatively mild nes).
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Fertilizers
Salient Features
Fertilizers were rst introduced into Ethiopia in the late 1960s, within the framework of a FAO project. Fertilizers utilization remained at very low levels for many years, but started picking up in the mid-1990s. In 2006-07 total consumption reached 400,000 tons, further progressing to more than 450,000 tons in 2007-08. Fertilizers are applied to about 40 percent of farmland under crop production, and usage is heavily concentrated on a few cereals, namely wheat, te and maize. Another 15 percent of cultivated area receives natural fertilizers. Fertilizers are not produced in Ethiopia and the country relies entirely on imports, primarily from Gulf countries. In 2007-08, the total value of fertilizer imports was about USD 267 million. A more widespread use of fertilizers has been a centerpiece of the GoEs strategy aimed at reducing food insecurity through increased cereal productivity. is involved the mobilization of signi cant nancial resources as well as a major redesign of the distribution system (see below), but results appear to be mixed. In fact, while total use of fertilizers has increased at a fast pace, unit application rates have remained largely unchanged, at some 35 kg/ha of commercial product. Also, the adoption of largely centralized import and distribution system contributed to reduce the cost of fertilizers, but this was coupled with serious ine ciencies in distribution, with frequent complaints from farmers about late deliveries. Overall, the situation remains far from being satisfactory and, according to some analyses, the increase in agricultural output recorded in recent years is only marginally attributable to the use of fertilizers13.
Market De nition
Two types of fertilizers are currently sold in Ethiopia, urea and di-ammonium phosphate (DAP). While each product has its own peculiarities, commercialization channels are essentially the same. From a geographical point of view, fertilizers being an internationally traded commodity, the Ethiopian market can be seen as simply one component of the international market. Within Ethiopia, di erent prices are found in various locations, but these di erences only re ect di erences in transportation and distribution costs, and do not suggest the existence of separate markets.
Concentration and presence of state-owned and endowment enterprises: e market for fertilizers is highly concentrated and the government exerts a pervasive in uence at all levels. e import business is de facto monopolized by the state13
For a detailed review of these aspects, see Byerlee D. et alius, Policies to Promote Cereal Intensi cation in Ethiopia: A Review of Evidence and Experience, IFPRI Discussion Paper 00707, June 2007.
57
owned Agricultural Input Supply Enterprise (AISE), the successor of the parastatal that monopolized the fertilizers business during the previous governments period. In recent times, AISE was the only participant in tenders for the allocation of foreign exchange to be used for the import of fertilizers, and given the expected large size of import lots, all indications are that the situation will not change in the future. Wholesale distribution is also largely handled by AISE, while the last stage is mainly left to agricultural cooperatives (largely government sponsored) and, in certain areas, to agents of extension services (also controlled by the government). e fertilizers business also sees the presence of several endowment trading enterprises, such as Ambassel, Guna, Dinsho and Wondo. Together with AISE, these enterprises displaced the private operators that played a signi cant role in the mid-1990s. However, in recent times endowment enterprises appear to have lost signi cant ground in favor of cooperative unions. Entry barriers and vertical integration: e fertilizer business was liberalized in two steps: in 1993, when private operators were allowed to enter what had been a strict state monopoly, and in 1996, when pricing was liberalized and state subsidies abolished. Formally, the regulatory regime has not signi cantly changed, and remains prima facie quite liberal. However, in practice things have moved in the opposite direction. Regarding the import of fertilizers, the signi cant size of import lots (25,000 tons) and the mechanism devised to allocate the necessary foreign exchange puts private operators at a disadvantage vis--vis AISE and endowment enterprises, which can count on privileged relationships with the banking sector. As for subsidies, they have been replaced by a credit guarantee scheme funded by regional governments. Under this scheme, fertilizers are delivered on credit at belowmarket rates, with an implicit subsidy element. In addition, to ensure repayment of credit, for some time reliance was made on extension agents with the powerful backing of local authorities, a fairly e ective recovery mechanism, which, however, was never available to private operators. Taken together, these elements certainly do not contribute positively to the emergence of a level-playing eld in which various operators can freely compete on merit.

e current market structure is quite di erent from the situation that prevailed in the early mid 1990s, immediately after the liberalization of the fertilizers market. At that time, the role of AISE in the import business was much more limited and the company was in competition with some sizeable private competitors, which in some years managed to snatch a market share of up to 30%. A similar situation was found in distribution, with the presence of no less than 67 private wholesalers and 2,300 retailers. e situation started to change in the late 1990s, with the 58
entry of endowment enterprises into the fertilizer import business. In parallel, some discriminatory measures were adopted by the government regarding the calculation of price (essentially, AISE was allowed to include cost calculation items such as overheads, interest and transportation whereas private operators were denied this possibility) and con icts started to emerge between AISE and private operators. Particularly serious was the con ict opposing AISE and the then leading private competitor, Ethiopia Amalgamated Limited (EAL), which repeatedly complained about a number of abuses, ranging from denial to access market places to the forced closure of facilities and the threatening of clients. e matter was even investigated by some representatives of the donor community, and this led to recommendations that further adjustments [were] in order to allow a level playing eld for involvement of private wholesalers14. e end result was that the main private competitors (EAL and Fertiline) eventually left the market [EAL was nished o a bit later on, when the state-owned Commercial Bank of Ethiopia put on auction its assets15] and the private players were replaced by endowment enterprises and, later on, by agricultural cooperatives. e dramatic change in the market shares held by various market participants is vividly illustrated by the data shown in Figure 6.
Figure 6 Relative Importance of Various Categories of Importers
500 400 300 200 100 0 1995 1996 1997 1998 1999 2000 2001 2004 2005 Coops Private Endow ment AISE
Source: Reproduced from Byerlee D. and others, Policies to Promote Cereal Intensi cation in Ethiopia: A Review of Evidence and Experience, IFPRI Discussion Paper 00707, June 2007.
14
UNDP, 1996 Fertilizer Situation: Progress, Problems and Programs, September 1996. Accessible through http:// www.africa.upenn.edu/eue_web/fertlz96.htm. Ethiopian Amalgamated appeals against auctioned properties, Capital, 25 November 2003.
15
'000 t
59
CHAPTER SIX
Manufactured Goods
Manufacturing plays a crucial role in supporting economic development. Leaving aside the industries already analyzed in the previous chapters (food and beverages, sugar), manufacturing accounts for a total employment of over 145,000, while the value of sales is about Birr 13.5 billion. Value added generated by the sector is in the order of Birr 5 billion, equivalent to more than 3 percent of GDP. e manufacturing sector includes a wide variety of activities, ranging from basic consumer goods to furniture and from construction materials to pharmaceuticals. For the purposes of this study, attention was focused on two sub-sectors, namely textiles and apparel, and cement. e salient features of these sub-sectors are illustrated below.
Textiles and Apparel

Salient Features
Overview: Ethiopias rst modern textiles plant was established in 1939, during the Italian occupation16. In the post war period, the sector developed rapidly, with renewed impetus during the previous governments period, when a number of factories were established with state funds. Today, the textiles and apparel industry is one of the largest employers in manufacturing, with a total workforce of some 38,000. Domestic production is estimated at 1.4 billion Birr, of which 1.1 billion is for textiles and 0.3 billion for apparel. Domestic production is supplemented by substantial imports, especially of apparel, which in 2007 reached the level of Birr 2.4 billion (USD 266 million), while exports (mostly cotton fabrics) were much more modest, at some 140 million Birr (USD 15 million). e GoE places great hopes in the development of textiles and garment exports, and an ambitious target of USD 500 worth of exports has been set for the year 201117. Main Operators: According to available statistics, the sub-sector consists of some 70 medium sized and large industrial plants, of which 39 are in textiles and 31 in apparel production. e bulk of production is performed by 47 plants with more than 50 workers each, which account for about 90 percent of total output and for 75 percent of total employment. ese include a combination of public and private enterprises, the latter being newly established, green eld operations or the result of privatization. At the opposite end of the spectrum, there are over 4,000 small and micro- enterprises, mostly involved in the artisan manufacture of garments.
Embassy of Ethiopia in the US, Investing in Ethiopia: Textiles, s.d. For an overview of recent developments, see also Rahel Abebe, AGOA: e Case of the Ethiopian Textile Sub-Sector, May 2007. 17 Cotton projected to spin $ 500m from 2011, Capital, 19 August 2008.
16
61
Cumulatively, these micro- operators account for 23 percent of employment and for 5 percent of sales. Key indicators on the structure of the industry are provided in the table below.
Table 11 Key Indicators for the Textiles and Apparel Industry Indicator Number of plants Medium & Large Small Total Value of sales (In million Birr) Medium & Large Small Total
Source: Central Statistical Agency.
Textiles 39 419 458 1,098 18 1,116
Apparel 31 3,936 3,967 273 62 335
Total 70 4,355 4,425 1,371 80 1,451
Market De nition
e sub-sector includes a wide range of markets. e rst obvious distinction is between textiles and apparel. In turn, each broad category of products includes a wide variety of items with their peculiar features, that give origin to separate markets (mens jackets are obviously quite di erent and cannot be substituted for ---womens skirts, and the same applies for virtually each type of garment). Even within each product group, there may be major variations, due to qualitative factors and brand considerations: top quality products sold in boutiques are quite di erent from what can be bought from street merchants, and they e ectively constitute a separate market. From the geographical point of view, the main distinction is between urban centers, where a wider range of products is available, and rural areas, where often only basic items are available. In sum, the textiles and apparel industry can be seen as encompassing a large number of separate markets, each one having its own peculiar features. is inevitably limits the signi cance of the aggregate analysis carried out in the study.
Presence of state-owned and endowment enterprises: e state has e ectively exited the production of apparel but still plays an important role in textiles, where a dozen mills are still in state hands. Starting from the late 1990s, several plants active in various lines of business have been privatized (e.g., Gondar Ginnery, Akaki Blanket Factory, Addis Garments, etc.) through commercial tenders, while others were leased under management contracts. In general, the GoE has displayed an open attitude towards private investors, including foreign ones, but in certain cases privatization has proved di cult to achieve and/or there have been some reversals. For instance, in early 2009, the GoE had to take back Arbaminch, which had
62
previously been leased to a Turkish company18. Similar problems were encountered in the past with the Chinese company managing Nazareth Garments. e state is also active in the growing of cotton, one of the main input for the textiles industry. Signi cant tracts of land have been transferred to private commercial farmers, whose cotton output has been increasing. However, the GoE is still investing heavily in some cotton growing schemes (e.g., Upper Awash Valley, Abebo, etc.), in order to support the anticipated expansion of textiles sales in export markets. e presence of endowment organizations appears to be limited to Almeda, which is controlled by EFFORT. Concentration and asymmetry in size among operators: Detailed data on the size of rms operating in the various relevant markets are not available. Obviously, there are market leaders (e.g. Almeda in cotton fabric, MAA in casual wear, KK in blankets, etc.). But overall the level of concentration appears to be moderate to low. is is especially the case in the garments industry, where domestic producers account for only a minority, possibly less than one third, of the total market. Vertical integration: e only fully integrated company is Almeda, which includes a spinning mill, a weaving mill, a dyeing department, etc. is certainly confers a cost advantage, but it does not unduly impact on the level of competition in the relevant markets. Entry barriers Capital intensity and technical aspects: Investment outlays vary enormously, depending upon the line of business and the size of operations. Textiles is a fairly capital intensive business. Almedas fully integrated plant reportedly cost nearly USD 100 million. Textiles projects approved by the Ethiopian Investment Agency (EIA) were typically in the 500 - 550 million Birr range. Due to scale economies, larger plants tend to enjoy a signi cant cost advantage over smaller operations. Apparel manufacture is much less capital expensive: based on EIA data, investments for industrial operations typically fall in the 10 to 50 million Birr range, while cottage operations can be started with as little as 150,000 Birr. Even in the case of industrial operations, the entry ticket can be considerably lower in the case of privatization deals. For instance, SABCo reportedly privatized the Nazareth Garment Factory for 8.5 million Birr. Apparel manufacture is also relatively simple from the technical point of view, whereas textiles mills are complex operations, requiring high level of skills. Entry barriers Regulatory aspects: Entry in the textiles and apparel business is open to all operators, including foreign investors, and there are no particular barriers. On the contrary, the sector enjoys a high level of protection, with import duties in the order of 35 percent.
18
State Takes Back Textile Co. from Turkish Firm, Addis Fortune, 22 March 2009.
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No signi cant instances of anticompetitive behavior have been noted in the markets for textiles and apparel products. ere are cases of under invoicing of imports, but these fall in the category of frauds rather than of anticompetitive behavior, as in the case of the Chinese businessman recently sentenced to 15 years for customs fraud and bribery19. In line with the emphasis placed by the GoE on the development of textiles and garment exports, some operators appear to have had a comparatively easier access to funding from state-owned banks. But this seems to apply to both public and private companies, including foreign-owned or operated (e.g., the Turkish-managed Hawassa getting 150 million Birr loan from DBE), without any serious discrimination.
Cement
Salient Features
Overview: e cement industry is a crucially important component of Ethiopias industrial sector, as it supplies an essential input to support much needed infrastructure development. Over the last few years, the demand for cement has increased at a fast pace, due to massive investment in public works and a spectacular growth in real estate development. Currently, the total market is estimated to be in the order of 4-4.5 million tons, with expectations to reach 6 millions in a few years. Domestic production is also increasing, with several major projects underway, but current output is still around 2 million tons. e structural gap between demand and domestic supply has been lled with imports, although occasionally there have been cases of shortage. Inevitably, this reverberated on the price level, which has shown a generally increasing trend. Main Operators: e bulk of output comes from three main producers, namely Messebo (Mekelle), Mugher (near Addis Ababa), and National Cement (Dire Dawa). Starting from the mid- 2000s, several new players have entered the market, with the revitalization of some old plants (e.g. Addis Ababas old plant, now leased to an Israeli company) or the establishment of some green eld operations. However, new entrants are typically small to medium scale operations, involved in grinding and packing and relying on clinker bought from the leading producers or imported. Also, some of the new operations are captive, in the sense that they are intended to serve the needs of speci c, large scale infrastructure projects. Much more important are the expansion projects currently underway at Mugher (installation of a third production line) and National Cement (construction of a green eld plant, after the revamping of an old one). Even more signi cant is the project for a new cement factory launched by Derba MIDROC, part of the MIDROC group, which is 64
19
Federal Court Hands Chinese 15 Yrs Sentence for Customs Fraud, Addis Fortune, 9 April 2009.
expected to produce in excess of 2 million tons/year. Other giant projects have been announced by several players, such as the Nigerian tycoon Dangote20, Frances Lafarge (which has a leading position in neighboring Kenya)21, and the US North Holding Investments. However, it is not clear if these projects, much discussed in the press, will actually see the light. e salient features of leading current and future cement producers are presented in the following table.
Table 12 Basic Features of Cement Producers
Companies Mugher Cement Establishment 1984 Ownership State-owned Capacity 800 900,000 tons/year Comments A major investment with the intent of adding another production line is ongoing. Capacity is expected to reach 1.4 million tons/year. Owned by EFFORT. An energy e ciency program (conversion from fuel to coal) is ongoing. Data refer to an old plant recently revamped. A new plant with a 750,000 tons/year capacity is to be erected. A small line (135,000 tons/year) is already operational, while the main plant is under construction.
Messebo
2000
Private
600 - 700,000 tons/year 200 250,000 tons/year
National Cement
1936
Private 80% State 20%
Derba MIDROC
2010 (expected)
Private
2- 2.5 million tons/year
Given the major imbalance between domestic production and demand, an important role is also played by importers. ese include both construction companies, who import cement to be used in their own projects (e.g. Eney, which also has a project for building a factory), and commercial importers, such as Jaz Trading, Ecostar Trading, Jema, etc.
Market De nition
Cement is a fairly homogeneous product. In Ethiopia, the two main types are Ordinary Portland Cement and Pozzolana Portland Cement. Although each type has its own peculiarities and preferred uses, on the whole they belong to the same product market. From a geographical point of view, the market for cement is typically highly fragmented, because the unfavorable ratio between weight and value discourages transportation over long distances. While this is certainly true in developed countries, geographical segmentation is less pronounced in developing countries experiencing shortages, as is the case of Ethiopia, because the comparatively higher price typically compensates for transportation costs.
20 21
Dangote To Invest $250 Million Into Ethiopian Cement Industry, e Times of Nigeria, 9 September 2008. Lafarge setting up cement plant in Ethiopia, ENA, 20 October 2008.
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Presence of state-owned and endowment enterprises: e state still plays an important role, but its in uence appears to be on a declining trend. While the largest producer, Mugher, has been owned by the state since 2005 the control over National Cement (formerly, Dire Dawa Cement) is e ectively conferred to a private company, East Africa Holdings Group. Even more important, all the new entrants in the market, including those promoting large scale investments, are private operators. When the role of importers is taken into account, the private sector is already accounting for the majority of the cement used in the Ethiopian market and it is reasonable to expect that private operators will also account for the majority of domestic output in the near future. e endowment fund-owned Messebo also plays an important role, being the second largest producer. However, with the coming into play of new plants, its role is likely to be increasingly con ned to the northern part of the country. Concentration and asymmetry in size among operators: Due to the high capital intensity and scale economies (see below), cement is typically a highly concentrated industry, and Ethiopia is certainly no exception. At present, Mugher holds a market share of about 20%, closely followed by Messebo, with about 18 percent, while National Cement is a distant third with some 5 percent. Altogether, the three companies account for about 40 percent of the market. Ethiopia does not compare unfavorably with the situation found in other countries in the region. For instance, in Kenya, more than 90 percent of the market is controlled by only three companies, Bamburi, East Africa Portland Cement (EAPC) and Athi River Mining (ARM), with Bamburi accounting alone for more than 50 percent. e situation is made worse by the fact that the investor controlling Bamburi, which is Lafarge, also has minority but signi cant stakes in both EAPC and ARM. If a recently proposed merger between Bamburi and EAPC were to be implemented, Kenyas cement would e ectively become a monopoly. In this respect, the market structure currently prevailing in Ethiopia is more competitive and the situation is likely to further improve once the projects currently ongoing or envisaged will be implemented.
Figure 7 Market Shares Held By Leading Cement Sellers Ethiopia vs. Kenya*
Top 3 Sellers Ethiopia
100%
Top 3 Sellers Kenya

100%
75%
75% 55%
50%
50% 30%
25%
20%
17% 5%
25% 5% 0%
0%
* Approximate values, referred to 2008
66
Source: Various articles which appeared in the Ethiopian and Kenyan economic press.
Vertical Integration: Cement factories are normally integrated with quarrying operations, in order to reduce operating costs. In Ethiopia a new form of vertical integration is emerging, with reference to coal. In 2008 Derba MIDROC and EAH have established a joint venture, Derba East Coal Mining (DECM), to extract coal that will be used by the new plants in Derba and Dire Dawa22. Access to a cheaper source of energy will obviously confer an important cost advantage to these companies (the production of clinker is heavily energy intensive). But as long as other players are not prevented to buy coal at market prices and/or to develop their own coal mines, this cannot be regarded as unduly impacting on the level of competition. Entry barriers Capital intensity and technical aspects: Cement is a highly capital intensive industry and capital intensity is enhanced by the scale economies characterizing some parts of the production process. Indeed, it has been estimated that plants operating below the so called minimum e cient size face a considerable cost disadvantage vis--vis their competitors. Available information on investment costs in Ethiopia de nitely con rms that the production of cement is reserved to investors with deep pockets. e Derba project is estimated to cost no less than USD 351 millions and even MIDROC had to resort to international nancial institutions to nance the initiative23. Of a comparable size are the other large scale initiatives announced (e.g., Dangote USD 250 million) and the expansion project undertaken by Mugher (USD 130 million). In the case of the new plant envisaged by National Cement and of an initiative announced by Ethio Cement (Eney Group), investment costs are lower, in the order of USD 60 70 million, but still quite signi cant. Also, the production of cement is a complex business, requiring specialized skills that are not always easily available. For instance, in its early years of operations, Messebo plant encountered signi cant problems in achieving an acceptable utilization of rated capacity, and the company had to resort to the recruitment of a foreign management team (Cementech International). All in all, economic and technical entry barriers are quite signi cant in the cement industry, and this inevitably reduces the number of operators. Entry Barriers Regulatory aspects and import regime: Entry in the cement industry is open to all operators, including foreign investors, and there are no particular regulatory barriers. Plants have to ful ll environmental protection standards and the nal product is to be certi ed by QSAE, but these are normal requirements. A bit less normal is the fact that quality controls requested by QSAE are reportedly performed by laboratories at Mugher and Messebo24. If con rmed, this might cast doubts about the impartiality of the tests. A factor signi cantly
Derba East Africa Coal Mining Company on the Edge of Extracting Coal. Addis Fortune, 25 March 2008. EIB lends EUR 29 million for Derba Midroc Cement Factory, EIB Press Release, 26 June 2008. 24 Standards Authority Suspends Abyssinia Cement Production, Addis Fortune, 13 April 2009.
22 23
67
impacting upon the functioning of the cement market is the import regime. Over the last few years, the Governments position on the matter has been oscillating from the outright prohibition of imports, in order to protect domestic producers, to the allowance of duty free imports, in an attempt to stabilize prices. For instance, a duty free regime was introduced in 2006, in the face of rapidly increasing prices, but then it was revoked in February 2008, when an import ban was introduced. e ban was short-lived, and in June 2008 imports were again liberalized. But a new ban was reintroduced in early April 2009, largely because of the increasingly di cult situation regarding foreign exchange reserves25. is stop and go approach is indicative of the di culties encountered by the GoE in reconciling two di erent (and, actually, opposed) objectives, i.e., fostering the development of local production and keeping prices under control.

In the cement industry, as in many other markets analyzed in this study, allegations of anticompetitive practices have mostly focused on instances of hoarding and arbitrary price increases. ese instances have been met by the GoE with the usual harsh approach reserved to speculators. For instance, in March 2008, i.e., right after the reintroduction of the cement import ban, a dozen shops were closed down in Addis Ababa for arbitrary price hikes. In reality, the ups and downs displayed by cement prices are the inevitable consequence of the frequent changes introduced by the GoE in the import regime, which themselves create opportunities for speculative behavior. For instance, after the liberalization of June 2008, prices declined from about Birr 360/quintal in July to Birr 320 in August. During the rest of 2008, as imports entered the market, prices continued to decline, until they reached a level of about Birr 250/quintal. However, at the beginning of 2009, as soon as it became apparent that the di cult foreign exchange situation would have sooner or later prompted another ban on imports, prices started again to increase, reaching Birr 320/quintal26. It is worth noting that these oscillations refer to retail prices. Exfactory prices have been also on the rise, but this is linked primarily to increased production costs (at Messebo, the cost of oil per ton of clinker escalated from Birr 180 in 2003 to 345 in 2007)27, rather than to market power.
68
Govt Bans Cement Imports, Addis Fortune, 12 April 2009. Cement prices rise despite global ease, Capital, January 2009. 27 Biniam Taddele, Technical, economical, and environmental comparative analysis of fuel oil with coal as energy source in the cement industry, Masters Degree esis, Addis Ababa University, January 2008.
25 26
CHAPTER SEVEN
Financial Services
e nancial sector plays a crucial role in supporting other economic activities through the provision of payment services, the provision of nancing to new initiatives, the protection against risks through insurance, etc. In Ethiopia, as in most developing countries, the nancial sector is dominated by banking services, which account for an estimated 80 percent of total assets in the sector. Traditional banking is complemented by a number of micro nance institutions, providing savings and lending facilities to the poorer strata of the population that do not have access to formal banking services. Insurance is the third element of Ethiopias nancial sector. Other nancial mechanisms and intermediaries, such as private equity funds, security trading operators, etc., are non-existent or still scarcely developed. All included, the value added generated by nancial activities accounts for about 5percent of the GDP, while total employment can be roughly estimated at some 15,000.
Banking Services
Salient Features
At present, Ethiopias banking sub-sector consists of 13 banks, including 11 commercial banks and 2 specialized institutions. ree banks are state-owned, one owned by an endowment fund, and the remaining 9 fully private. e state-owned banks were established during the socialist period, when pre-existing private banks were nationalized and merged. e market for banking services was opened to private operators in 1994, and the rst private bank (Awash) was established immediately thereafter. e two youngest commercial banks (Oromia International and Zemen) were established in 2008. e basic features of banks currently in operations as of June 2009 are provided in the table below.
Table 13 Basic Features of Ethiopian Banks
Name Commercial Bank of Ethiopia Development Bank of Ethiopia Construction and Business Bank Awash International Bank Dashen Bank Bank of Abyssinia Establishment 1963 1970 1994 1994 1995 1996 Activity Commercial banking Development banking Housing nance and commercial banking Commercial banking Commercial banking Commercial banking Ownership State-owned State-owned State-owned Private Private Private Comments Nationalized in the mid 1970s Actually re-established in 2003 Successor of the Housing and Savings Bank
69
Name Wegagen Bank United Bank Nib International Bank Cooperative Bank of Oromia Lion International Bank Oromia International Bank Zemen Bank
Establishment 1997 1998 1999 2004 2006 2008 2008
Activity Commercial banking Commercial banking Commercial banking Commercial banking Commercial banking Commercial banking Commercial banking
Ownership Private Private Private Private Private Private Private
Comments Endowment company
Mostly targeting cooperatives in Oromia State
Source: BKP Development, Assessment of the Impact of GATS on the Ethiopian Financial Services Sector, 30 April 2007, and press reports.
Over the last few years, Ethiopias banking sector showed some signs of dynamism, with the entry of some new players and an increase in most parameters. However, the sector remains largely undeveloped by international standards. In particular: Despite the increase recorded since the early 2000s, both deposits and lending are still low in comparison with the size of the economy. In June 2008, total loans outstanding were Birr 42 billion, which represents a mere 17 percent of GDP, compared with 28 percent found in neighboring Kenya. Likewise, deposits stood at 26 percent of GDP, compared with 43 percent in Kenya; Lending is not only relatively scarce but also directed primarily to trading activities, which account for about 45-50 percent of total bank lending. Agriculture, despite its overriding importance, is receiving only 15-20 percent of total loans; Banking services coverage remains low, with approximately 140,000 people per branch, compared with about 45,000 in Kenya (and 10,000 in South Africa). Moreover, banking services are largely concentrated in urban areas: the eight largest cities account for over 50 percent of total branches, with Addis Ababa alone accounting for about 35 percent ; e limited presence of branches combines with a low degree of innovativeness in banking systems and methods: ATMs are still rare and plastic cards (credit cards, debit cards) are o ered only by few banks. In contrast, in mid-2008 Kenya had 1,100 ATM in operation and over 2 million plastic cards in circulation (one for every 17 people).
Market De nition
Geographical Market: In geographical terms, the market for banking services can be broadly regarded as having a nationwide character, but with signi cant di erences between urban centers and rural areas. As indicated above, in rural areas
70
the banking network is still largely undeveloped, and this gives rise to situations of local monopoly, i.e., locations with only one bank branch. In contrast, in urban areas the bank network is much more dense, therefore making it possible for users (i.e., depositors and borrowers) to switch from one bank to another. Product Market: In general, the de nition of banking services encompasses a range of products and services (short, medium and long term lending; domestic and international payment services, deposits with di erent maturities, etc.), and this may give origin to separated or at least only partially interlinked markets. In Ethiopia, some banks specialize in certain products (i.e., DBE in long term lending, CBB in housing nancing) and others show an inclination to deal with certain sectors (e.g., Wegagen and United appear to be comparatively more involved in international trade transactions). But, in general, most banks can be regarded as universal banks, o ering or, at least, potentially able to o er, all the various services. A completely separate line of business is represented by micro nance. In some African countries, micro nance institutions (MFI) have shown a tendency to upscale their operations, providing larger loans with longer maturities, and some of these institutions have become, de jure or de facto, commercial banks. An example is provided by Pro-Credit, a nancial institution active in many developing countries, which typically combines micro nance products with traditional banking. In other cases, commercial banks have launched special programs specially targeted at micro-enterprises, therefore combining mainstream commercial banking with micro nance. An example of this trend can be found in Kenya, where four commercial banks (Equity Bank, Cooperative Bank, K-REP Bank and Family Bank), are active in providing micro nance products and services. In Ethiopia, this overlapping between mainstream banking and micro nance is still very limited (CBE is providing loans to some MFI while some credit and savings organizations are among the founders of a couple of banks), and therefore the micro nance sector is analyzed separately.
Presence of state-owned and endowment banks: Despite the opening up of the market for banking services to private operators, state-owned banks still largely dominate the sector. Taken together, the three public banks account for between two thirds and three quarters of the total, depending upon the variable taken into consideration (total assets, capital, loans outstanding, etc.). Only in the case of the number of branches with private and public banks having more or less the same share is the situation more balanced. However, the degree of public dominance has been declining over time. For instance, in the case of total assets, since the mid-1990s the share held by public banks has declined by about 20 percentage points, from about 94 percent to 77 percent. e role of endowment entities is relatively modest, with Wegagen Bank accounting for 3 percent to 7 percent of the total, depending on the variable considered. Relevant data are provided in Table 14 and Figure 8 below.
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Table 14 Relative Importance of Categories of Banks

Types of Banks State-owned Banks Private Banks Of which: Endowment Banks Total Assets (2006) 77% 23% 3% Loans Outstanding (2006) 59% 41% 6% Capital (2008) 66% 34% 5% Branches (2008) 47% 53% 7%
Source: BKP Development, Assessment of the Impact of GATS on the Ethiopian Financial Services Sector, 30 April 2007 and NBE.
Figure 8 Composition of Banking Assets Overtime

100%
6% 9% 1 1 % 1 3% 1 6% 1 7% 1 8% 21 % 23% 27%
94%
91 %
89%
87%
84%
83%
82%
79%
77%
73%
0%
1997/98
1998/99
1999/00
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
Public Banks
Private Banks
Source: BKP Development, Assessment of the Impact of GATS on the Ethiopian Financial Services Sector, 30 April 2007 and own estimates based on NBE data.
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Concentration and asymmetry in size among operators: e state-owned Commercial Bank of Ethiopia (CBE) is by far the largest operator, accounting alone for 68 percent of total banking assets. CBEs role is comparatively less important, but still predominant, in lending activities, where it accounts for about one third of loans outstanding. Overall, Ethiopias banking sector is highly concentrated, with CBE and the other three largest banks accounting for 86 percent of total assets. A high level of concentration is not uncommon in the banking industry in African countries, and there are several examples of (usually small) countries where the banking sector is dominated by only a couple of nancial institutions. However, when compared with the banking sector of African economies of comparable size, such as Kenya, Ethiopia shows a much higher level of concentration and, especially, a marked asymmetry between the leading bank and its followers. Relevant data are provided in Table 15 and Figure 9 below.
2006/07
Table 15 Market Concentration Ethiopia vs. Kenya*

Ethiopia (2006) Market share of largest bank Market share of top 4 banks Market share of top 8 banks
* Calculated with reference to banking assets
Kenya (2007) 17% 45% 68%
68% 86% 97%
Source: BKP Development, Assessment of the Impact of GATS on the Ethiopian Financial Services Sector, 30 April 2007, and Central Bank of Kenya
Figure 9 Asymmetry in Size among Banks Ethiopia vs. Kenya*

Size Distribution of Top 10 Banks Ethiopia (2006)
100%
Size Distribution of Top 10 Banks Kenya (2007)

100%
75%
68%
75%
50%
50%
25% 6% 0% 6% 6% 4% 3% 2% 2%
25%
17%
12%
10%
2%
7%
6%
0%
5%
4%
4%
4%
3%
0%
* Calculated with reference to banking assets Source: BKP Development, Assessment of the Impact of GATS on the Ethiopian Financial Services Sector, 30 April 2007, and Central Bank of Kenya.
Entry Barriers: In line with the Licensing and Supervision of Banking Business Proclamation No.84/1994, the establishment of banks is subject to the licensing of the National Bank of Ethiopia (NBE), which is also responsible for overall supervision of the banking sector. e minimum capital for the setting up of a commercial bank is set at Birr 75 million, equivalent to some 6.8 million USD. is is at an intermediate level compared with what is found in other African countries (Kenya: USD 3.6 million; UEMOAWest African Economic and Monetary Union --countries: USD 10 million) and does not seem to pose any signi cant barrier to the entry of new operators. e real entry barrier concerns the fact that the banking business is reserved to domestic investors, with an explicit prohibition to the entry of foreign operators. Ethiopias restrictive regime contrasts with what is found in most African countries. For instance, in neighboring Kenya 10 banks out of the 45 in operations are controlled by foreign investors and foreign interests own about 45 percent of total banking assets. e prohibition of foreign participation in Ethiopias banking sector has been repeatedly criticized by international organizations and observers, and has also become a contentious issue in the framework of negotiations
73
for accession to the World Trade Organization. However, this position remains a key element of government policy, as recently re-con rmed by the Prime Minister. Vertical Integration: Strictly speaking, the notion of vertical integration has limited signi cance in the banking sector. Instead, the existence of privileged relationships, i.e., of special linkages between banks and their clients, especially borrowers, may introduce distortions to competition, especially in the markets where privileged partners operate. is is indeed the case in Ethiopia, as several commercial banks are participated by large industrial groups. Regulatory Aspects: NBEs prudential regulations are applicable to all banks, irrespective of their status and ownership. erefore, these measures, although sometimes criticized by the banking community on various grounds (as in the case of the increase in reserve and liquidity requirements), do not have any signi cant impact on competition. A minor limitation is represented by the setting of minimum rates on deposits (lending rates were liberalized in 1998), but the impact of this measure appears to be modest. On the other hand, the NBE has tried to reduce the risk of cartelization among banks by prohibiting the simultaneous presence of certain individuals in the board of directors of more than one nancial institution, but unfortunately this pro-competitive attitude has been challenged in courts.

In Ethiopia, the issue of anticompetitive practices has often been raised with reference to state-owned/endowment banks, which are often said to grant more favorable conditions to other state-owned/endowment entities, especially regarding access to credit facilities. Available data con rm that state-owned enterprises, as well as cooperatives, rely overwhelmingly on lending from state-owned banks, while the situation of endowment banks cannot be easily ascertained. e relevant gures are provided in the following table. Table 16 Distribution of Outstanding Loans by Type of Borrower (2008)
Types of Borrower State-owned Enterprises Cooperatives Private Enterprises Total Source: NBE. State-owned Banks 8.8 3.0 13.0 24.8 Private Banks 0.0 0.1 16.3 16.4 Total 8.8 3.1 29.3 41.2 (In billion Birr)
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In any event, it is important to note that instances of privileged relationships can also be found in the case of some private banks, and in some cases lending to related
parties resulted in signi cant problems. e point is illustrated by the di culties experienced during the nancial year 2007/08 by Bank of Abyssinia, which su ered signi cant losses as a result of loans extended to some of its shareholders (or their associates), namely the Star Business Group and the Ethio-Investment Group28.
Micro nance
Salient Features
As of June 2008, there were 28 MFI in operation in Ethiopia. Most of these entities were established in the second half of the 1990s and in the early 2000s, although some (e.g. Digaf, Harar, Tesfa, and Lafayeda) were recently founded. Ethiopia was one of the rst African countries to adopt a coherent framework for the regulation of micro nance activities (Proclamation No. 40/1996), and this allowed for an orderly development of the sector. Indeed, Ethiopias MFI sub- sector is fairly large relative to the banking sector: in mid-2008, MFIs total assets were at some 5.3 billion Birr, above 10 percent of the corresponding value in the banking sub-sector. Also, the two largest MFIs, Dedebit and Amhara Credit and Savings Institution (ACSI), have both assets and loan portfolios well above Birr 1 billion, making them broadly comparable with the smallest commercial banks. Overall, Ethiopian MFIs provide service for an estimated 1.5-2 million people, reaching very high penetration rates in some areas (more than 80 percent of households in Tigray Regional State). MFI operations are usually run in an e cient manner: operating costs are low and the quality of portfolio is fairly high (non-performing loans at about 5 percent), and this translates into relatively low interest charges. Ethiopian MFI are represented by the Association of Ethiopian Micro nance Institutions (AEMFI). Established in 1999, AEMFI is a solid organization, providing assistance and training to its members, with support from various donors.
Market De nition
Geographical Market: e market for micro nance services is largely segmented along regional lines. Indeed, the majority of Ethiopias MFI, and especially the largest ones, are active in only one regional state. Only a handful of medium sized MFI (e.g. Wisdom, PEACE, SFPI) operate in more than one regional state. e presence of various MFI in Ethiopias regions is presented in Table 17 below.
28
Sick Loans Plunge Abyssinias Pro t by 75 Percent, Addis Fortune, 8 December 2008.
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Table 17 Regional Presence of MFI

MFI Dedebit Amhara CSI (ACSI) Addis CSI (ADCSI) Oromia (OCSSCO) Omo Micro nance Diredawa Micro nance Harar Micro nance Benishangul-Gumuz MFI Aggar Micro nance Africa Village Fin. Services Bussa Gonofa Micro nance Digaf Micro nance Eshet Micro nance Gasha Micro nance Ghion Micro nance Harbu Micro nance Letta Micro nance Meket Micro nance Meklit Micro nance Metemamen Micro nance PEACE SFPI Shashemene MFI Sidama Micro nance Wasasa Micro nance Wisdom Micro nance Lefayeda MFI Tesfa Micro nance Tigray Amhara Addis Ababa Oromia SNNP Dire Dawa Harar Benishangul
Source: AEMFI and NBE.
Product Market: Micro nance includes a wide range of products, from solidarity and individual micro loans in the order of Birr 1,000 to 5,000 to more sophisticate products, such as housing loans of 40-50,000 Birr and micro leases of up to Birr 200,000. While classical micro lending is o ered by virtually all MFI, more advanced products are provided only by the largest MFI and/or by those operating in urban areas.
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Presence of state-owned and endowment operators: Several MFI were established by regional governments/endowment funds and/or enjoy nancial support from these entities, in the form of loans, donations or guarantees. is is especially the case of the largest MFI, such as Dedebit, ACSI, OCSSCO and Omo Micro nance, which are actively supported by the local governments of, respectively, Tigray, Amhara, Oromia and SNNP. Medium sized MFI are largely connected with NGO and civil society organizations, although several MFI also see a signi cant participation of individuals. At times, the involvement of local governments and/or endowment funds in the ownership of MFI has been criticized for being an instrument to create political consensus. On the other hand, as indicated above, these political motivations do not seem to have had any negative impact on the e ciency of MFI operations. Concentration: At the national level, the MFI sector is largely dominated by a few large players. In particular, Dedebit and ACSI have a cumulated market share of about 65 percent. e market share increases to 85- 90 percent when the three other large MFI are added (ADCSI, OCSSCO, and Omo Micro nance). In reality, given the geographically fragmented nature of the micro nance sector, the level of concentration in regional markets is signi cantly higher, with several cases of absolute monopoly. More competitive conditions are found in Addis Ababa, Oromia and SNNP, but even there the leading player is estimated to account for at least 70- 75 percent of the market. e relevant data are provided in Table 18.
Table 18 Concentration in Regional Markets*
MFI Number of MFI in operation Leading MFI Estimated market share of leading MFI Tigray 1 Dedebit 100% Amhara Addis Ababa 4 ACSI >95% 10 ADCSI >75% Oromia 12 OCSSCO >70% SNNP 8 Omo MFI >75% Dire Dawa 1 Dire MFI 100% Harar Benishangul 1 Harar MFI 100% 1 Benishangul MFI 100%
* Data refer to MFI total assets.

Source: AEMFI and NBE.
Entry Barriers: e minimum capital required to establish an MFI has been set at Birr 200,000, i.e., about USD 18,000. is is a very modest amount, much lower than in other African countries (in Kenya an amount 15 times higher is required even for non-deposit taking MFI) and this helps to explain the large number of small MFI in operations. As in the case of commercial banks, MFI cannot be owned or participated in by foreign entities. However, MFI are entitled to receive funding, in the form of grants or loans, from foreign NGO as well as from donor programs. 77
Regulatory Aspects: NBEs prudential regulations apply to all MFI, irrespective of their ownership/a liation status, and therefore have no impact on competition. Lending rates were liberalized at the end of the 1990s, while NBE still sets minimum rates deposits, which are set at the same level for both MFI and commercial banks.
Insurance
Salient Features
In Ethiopia, the insurance business started in the early 1950s, with the establishment of the Imperial Insurance Company of Ethiopia, a joint venture between Ethiopian investors (including HM the Emperor) and British interests. is was followed by the establishment of several other operators, mostly foreign-owned. An appropriate regulatory framework for the insurance business was introduced in 1970, and this included the establishment of an independent supervisory authority, the Controller of Insurance, a fairly innovative arrangement for the period. ese early, favorable developments were brought to a drastic halt during the socialist period, when all insurance companies were nationalized and consolidated into the Ethiopian Insurance Corporation (EIC). e market for insurance services was revived after the fall of the regime. Proclamation No. 86/1994 opened the market for insurance services and products to (domestic) private operators and conferred supervisory responsibilities upon the NBE. Despite the opening up of the market to private operators, the development of Ethiopias insurance sector has been fairly modest, also in comparison with other African countries. Total annual premiums are worth little more than Birr 1 billion, a gure that is less than one fth of what is earned by the insurance industry in Kenya. Accordingly, expenditure for insurance is at a mere USD 1.5 per capita, compared with about USD 21 per capita in Kenya. Also, activities concentrate in the so called general insurance business and life insurance remains largely undeveloped. Some comparative data on the insurance industries in Ethiopia and Kenya are presented in Table 19 below.
Table 19 Key Indicators for the Insurance Business
Indicator Total Premiums (General Insurance and Life Insurance) Share of Life Insurance Business Insurance Penetration Rate (total premium as % of GDP) Insurance Density (premium per capita)
Ethiopia vs. Kenya

Kenya (2007) USD 754 million 32% 2.65% USD 21.4
Ethiopia (2007) USD 113 million 6% 0.60% USD 1.5
Source: BKP Development, Assessment of the Impact of GATS on the Ethiopian Financial Services Sector, 30 April 2007, and Association of Kenya Insurers.
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At present, there are 12 active insurance companies in Ethiopia, of which one is stateowned, one controlled by an endowment fund and 10 fully private. Private insurance companies are often participated by commercial banks, as sometimes signaled by the use of similar denominations (e.g., Awash Insurance and Awash Bank). Apart from EIC, the majority of insurance companies were established during the 1990s and in the early 2000s, but recently there have been three new entries (Lion Insurance in 2007, Ethio-Life and Oromia Insurance both in early 2009). In the year 2000, the insurance sector witnessed the only merger of note that occurred so far in Ethiopias nancial sector, with the take-over by United Insurance of an ailing insurer. Most companies are active in both general insurance and life insurance, with few cases of specialization. e salient features of insurance companies in operations are summarized in the following table.
Table 20 Basic Features of Insurance Companies
Name Ethiopian Insurance Corporation Awash Insurance Company Africa Insurance Company United Insurance Company Establishment 1980 Activity General and life insurance General and life insurance General and life insurance General and life insurance General insurance only General and life insurance General and life insurance General insurance only General insurance only General insurance only Life insurance only General and life insurance Private Private Private Ownership Public Comments Resulting from the amalgamation of insurers nationalized in the mid 1970s Participated by Awash Bank and Nib Bank Endowment company Participated by United Bank Took over Lion Insurance in 2000 Controlled by Nib Bank and Bank of Abyssinia Controlled by Bank of Abyssinia Participated by Dashen Bank Participated by Wegagen Bank, endowment company Controlled by Nib Bank Participated by Lion Bank
1994 1994 1994
Private Private Private
National Insurance Company of Ethiopia Nile Insurance Company Nyala Insurance Company Global Insurance Company
1994
1995 1995 1997
Nib Insurance Company Lion Insurance Company Ethio-Life Insurance Oromia Insurance Company
2002 2007 2009 2009
Private Private Private Private
Participated by Oromia-based nancial institutions and Awash Bank
Source: Hailu Zeleke, Insurance in Ethiopia, August 2007 and BKP Development, Assessment of the Impact of GATS on the Ethiopian Financial Services Sector, 30 April 2007.
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Market De nition
Geographical Market: e market for insurance services can be broadly regarded has having a nationwide character, but with one important quali cation. As in the case of banking services, the network is largely concentrated in the main urban areas, with Addis Ababa alone accounting for 51 percent of all the branches in operations (88 out of 172). Accordingly, in some rural areas and smaller towns there are cases of local monopoly, where clients are not in a position to choose among di erent insurance companies. Product Market: e insurance business includes two main lines of business, namely, general insurance and life insurance. e former is further subdivided into several segments, such as motor insurance (for both individual and commercial entities), engineering insurance, aviation and maritime insurance, re insurance, accident and health insurance, etc. Strictly speaking, each of these activities does constitute a separate product market in its own right, as obviously there is no substitutability among di erent types of insurance policies. However, in the case of Ethiopia (as well as of other developing countries), specialization is fairly rare and most insurers operate across the whole range of insurance businesses. Indeed, at present there is only one company specializing in life insurance (the just established Ethio-Life), while three others (Global, Nib and National) only deal with (the various types of ) general insurance business. In practice, this means that the majority of companies currently operating in the country are e ectively in competition with each other.
Presence of state-owned and endowment operators: e presence of the state in the insurance business is quite signi cant, but not as dominant as in the case of banking services. Starting from the mid-2000s, the state-owned EIC has accounted for little less than 50 percent of total premiums. EICs share is higher (above 60 percent) in the life insurance business, which however accounts for only a fraction of the total. e endowment fund-owned Africa Insurance Company accounts for about 9 percent of total premiums (about the same for life insurance), while fully private insurers cumulatively hold a market share of about 45 percent (30 percent for life insurance). Concentration and asymmetry in size among operators: e Ethiopian insurance industry is highly concentrated. Apart from the absolute leadership exerted by EIC, the top four companies hold a cumulated market share of 72 percent. is is about 2.3 times bigger than the market share held by the top four insurers in Kenya (see Table 21 below). e high concentration is associated with a marked asymmetry in size among operators, with EIC being four times bigger than its closest competitor 80
(Nile Insurance). Again, this is at odds with the situation found in other countries, where a more balanced situation among the leading players is often found (see Figure 10). As a result of the above, the current situation can be described as one where private insurers are simple followers or imitators of EIC, rather than being capable of devising and implementing autonomous development strategies.
Table 21 Market Concentration Ethiopia vs. Kenya* Market share of largest insurer Market share of top 4 insurers Market share of top 8 insurers Ethiopia (2007) 44% 72% 100% Kenya (2007) 9% 31% 51%
* Calculated with reference to total gross premiums (life + general insurance). Source: BKP Development, Assessment of the Impact of GATS on the Ethiopian Financial Services Sector, 30 April 2007, and Association of Kenya Insurers.
Figure 10 Asymmetry in Size among Insurance Companies Ethiopia vs. Kenya*

Size Distribution of Top 10 Insurers Ethiopia (2007) Size Distribution of Top 10 Insurers Kenya (2007)
50% 44%
50%
25%
25%
11%
9%
9%
9%
9%
7% 3% 0% 0%
9%
8%
8%
6%
5%
5%
5%
5%
4%
4%
0%
0%
* Calculated with reference to total gross premiums (life + general insurance).

April 2007, and Association of Kenya Insurers.
Source: BKP Development, Assessment of the Impact of GATS on the Ethiopian Financial Services Sector, 30
Vertical Integration: As in the case of other nancial services, the issue of vertical integration is scarcely relevant in insurance. More important is the issue of privileged relationships existing between some insurance companies, banks and other economic groups, which may open the door to favoritism and abusive practices. Entry Barriers and Regulatory Aspects: Minimum capital requirements for the establishment of an insurance company are set in Proclamation No. 86/1994 and vary from Birr 3 million for general insurance companies to Birr 4 million for life insurers to Birr 7 million for companies active in both general and life insurance. 81
ese are extremely low amounts, corresponding to one tenth of what is required for the same lines of business in Kenya, and certainly do not constitute a signi cant barrier to the entry of new operators. As in the case of other nancial activities, the insurance business is reserved for domestic investors. However, Ethiopian companies are free to deal with foreign re-insurers, to whom they pass part of the risks underwritten. NBE regulations are sometimes criticized by insurance operators as being poorly adapted to the sub-sector, but in general they do not seem to have any appreciable impact on the level of competition.

Private insurers have sometimes complained about the fact that state-owned enterprises are instructed to do business only with EIC, thereby depriving competitors of a signi cant slice of business. Indeed, some years ago there was a letter form the Government essentially recommending public enterprises to think twice before switching from EIC to other companies. According to government o cials interviewed on the matter, the letter was motivated by considerations regarding EICs stronger nancial situation and should not be interpreted as a sign of favoritism. Whatever the motivations of this speci c episode, it is a fact that in practice state-owned enterprises tend to rely on EIC, while private insurers mainly work with private operators. In this respect, it should be noted that at times private insurers have themselves showed an inclination for dubious deals with related parties, and this has certainly not contributed to enhance con dence in their nancial solidity. An example is provided by the nancial guarantees issued in 2008 by Nile Insurance in favor of the Star Business Group and other shareholders which resulted in signi cant losses29.
29
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On this subject, see Central Bank Eliminates Two Directors from Nile Insurance, Addis Fortune, 24 June 2008 and Central Bank Sacks General Manager of Nile Insurance, Addis Fortune, 1 July 2008.
CHAPTER EIGHT
Transport Services
e transport sector plays a crucially important role in Ethiopia, owing to the countrys vast surface and landlocked nature. Transport provides service for all other sectors of the economy and it is estimated to account for about 8 percent of the GDP. All transport modes and technologies are used in Ethiopia, from horse/oxdrawn carts to railways and from motorized road transport to shipping. Motorized road transport is the dominant mode, accounting for 95 percent of all passenger and freight movements. Accordingly, this chapter focuses on the two typologies of road transport: freight transport and passenger transport.
Road Freight Transport

Salient Features
Overview: According to the latest statistics published by the Ministry of Transport and Communications (MoTC), in 2005/6 dry freight transport reached a volume of 7.8 million tons (2,321 million tkm), while liquid cargo (basically, fuels) was at 1.1 million tons (372 million tkm). Overall, freight cargo has displayed a growing trend over the years, in line with the growth in economic activity. In 2006/7, Ethiopias cargo eet included over 43,000 vehicles. About one third of vehicles are owned and operated by businesses in various sectors and used for own-account transportation, leaving a total of 37,400 vehicles for commercial (i.e., for hire) transport, of which 35,600 for dry cargo and 1,800 for liquids. Trucks with a low to medium capacity (up to 18 tons) are the most common, and only one fth of vehicles are long vehicles, with a capacity of 30-40 tons. e Ethiopian truck eet is pretty old: some 40 percent of vehicles have been in service for 16 years or more, and fewer than 20 percent are less than ve years old. Many vehicles are in precarious conditions and this, combined with widespread malpractices (e.g., overloading, long hours at the wheel), contribute signi cantly to Ethiopias negative record in terms of tra c safety. Given the countrys geographical position and heavy reliance on international trade, the Addis Ababa Djibouti route, via Adama, Awash, Mile, Gali , is by far the main corridor. Due to the imbalanced nature of tra c along the corridor (imports are much more important than exports), load factors are relatively low. is is especially the case for liquid cargo, and basically all tankers en route to Djibouti travel empty. Productivity is further a ected by the long waiting times at Djibouti port and by various structural factors, such as the poor conditions of certain roads, the lack of bypass roads to avoid congested urban areas, etc. Despite all these weaknesses, overall the Ethiopian road freight system does not perform too badly. Transport does
83
represent a signi cant share of the total cost of exports and imports, but the situation is not worse than in other landlocked African countries. In fact, unit rates have been declining in real terms for some years, and at times their level has been judged lower than operating costs. Main Operators: In freight transport, there are two main types of operators, namely transport associations, and transport companies. Transport associations are organizations of a cooperative nature, grouping individual truckers and small trucking rms. eir main function is to secure cargo for their members, in exchange for a commission. Some associations also provide ancillary services, such as maintenance. According to the data provided by the Transport Authority (TA), there are at present about 90 associations in operations, of which about 20 have eets of between 100 and 400 trucks. Some associations collaborate closely with transport companies (especially state or endowment-owned see below), for whom they work as subcontractors. Transport companies include some state-owned entities resulting from the breaking up of the state corporation which dominated the sector during the socialist period (Ethiopia Freight Transport Corporation EFTC), as well as newly established private and endowment companies. At present there are an estimated 60 - 70 transport companies, with eets ranging from a mere 10 15 trucks to up to 350 vehicles. Most companies specialize either in dry cargo or in liquid cargo, but some (e.g. Trans Ethiopia) are active in both lines of business. Some transport companies are also engaged in other, more or less related, lines of business, such as the provision of maintenance services, the import and distribution of spare parts and, sometimes, vehicles and construction equipment. e salient features of the leading freight transport operators are presented in Table 22 below.
Table 22 Basic Features of Ethiopian Freight Transport Operators
Companies Typology and Ownership Dry Cargo (capacity in tons) Trans Ethiopia United Dry Cargo Association Africa Dry Cargo Association Selam Dry Cargo Association Bekelcha Transport East-West Transport Yahel Transport Tana Liquid Cargo Association Vision Liquid Cargo Abas Trade and Transport Transport Company - Endowment Fund Transport Association Transport Association Transport Association Transport Company - State-owned Liquid Cargo (capacity in 000 liters) Transport Company - Private Transport Company - Private Transport Association Transport Company - Private Transport Company - Private 90 90 102 60 46 3,678 3,292.9 2,425.2 2,440.5 1,983.7 351 449 206 296 191 13,071 12,566 7,375 6,411 6,330 Fleet (Number of Trucks) Lifting Capacity
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Source: Interviews and database from the Transport Authority.
Market De nition
In terms of product market de nition, freight transport is a composite business, including various separate lines of business. e rst, obvious, distinction is between dry cargo and liquid cargo. But even within each of these two categories, there are important distinctions. For instance, a trailer used for carrying containers cannot be easily converted to transport agricultural produce in bulk. Also, gasoline and milk are both liquids, but they obviously require dedicated vehicles. e market is also segmented along geographical lines. While trucks are, by de nition, movable assets, which can be quickly relocated from one area to another, depending upon needs, in practice such relocation is di cult to achieve, because of various factors (lack of previous business relationships, drivers unfamiliarity with the terrain and road network, etc.). e existence of regional/sub-regional markets, con rmed by the existence of widely diverging tari rates, inevitably limits the signi cance of the aggregate analysis carried out in this chapter.
Presence of state-owned and endowment enterprises: At present, there are four state-owned transport enterprises, of which three are active in the dry cargo business (Comet, Bekelcha and Shebele) and one in the liquid cargo (Weyira). Some stateowned enterprises involved in trading, such as MEWIT and EGTE, do own and operate their own eets of vehicles. Reportedly, they are occasionally carrying cargo on a commercial basis, in order to minimize the impact of empty hauls30. ere are three endowment enterprises active in road freight transport: Trans Ethiopia, owned by EFFORT; Blue Nile Transport, owned by ENDEAVOR; and Dinsho Transport, part of the Dinsho Group. Trans Ethiopia is one of the key players in the industry, operating in both the dry cargo and liquid cargo segments (as well as in related lines of business, such as import and distribution of tires, fuel distribution). Overall, state-owned and endowment companies play a signi cant role in the business, but they cannot be regarded as holding a dominant position. However, their in uence is enhanced by the existence of collaboration agreements with some transport associations, which act as force multipliers. Concentration and Asymmetry in Size among Operators: In dry cargo transport, prima facie, the level of concentration is rather modest. Data provided by the TA indicate that the rst four operators account for not more than 21 percent of total lifting capacity (measured in terms of tons), while the rst 8 hold a share of 33 percent. Figures are even lower when concentration ratios are calculated with respect to trucks, with the top four operators accounting for 17 percent and the top 8 for 27 percent. Higher gures would be obtained if one were to consider the transport associations working as subcontractors, but on the whole concentration does not
30
World Bank, Transport Costs in Ethiopia: An Impediment to Exports?, 18 March 2004.
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reach alarming levels, at least at national level (see below). Concentration is higher in liquid cargo transport, but this is in line with the more specialized nature of the business. e top 4 companies account for 46 percent of capacity and 44 percent of trucks, while the top 8 reach levels of, respectively, 67 percent and 71 percent. It is important to note that the above data refer to concentration measured at national level. While in the case of liquid cargo this seems to be a good approximation of conditions prevailing in the relevant market (most liquid cargo transport is done along the Addis Ababa Djibouti corridor), in the case of dry cargo higher concentration gures may well occur in the regional/sub-regional markets, where fewer companies are likely to operate.
Table 23 Market Concentration Dry and Liquid Cargo Dry Cargo Market share of top 4 operators Market share of top 8 operators Market share of top 4 operators Market share of top 8 operators
Source: Database provided by the Transport Authority.
Liquid Cargo 44% 67%
In Terms of Lifting Capacity 21% 33% In Terms of Trucks 17% 27% 46% 71%
Vertical Integration: Vertical integration is of limited relevance in the road transport sector. Almost all the large transport companies and associations have their own mechanical shops and other auxiliary services, but this responds to understandable cost minimization logic, without any appreciable impact on competition. A factor having a much more substantial impact on competition, is Comets position as a de facto inland dry port manager, as its yard in the southern outskirts of Addis Ababa has been used as an inland clearance depot for the tra c coming from Djibouti31. However, the recent launch of a proper inland dry port facility at Modjo, managed by a Dutch company, has modi ed this situation. Entry Barriers Economic and Regulatory Factors: Economic factors do not constitute a serious barrier to new entrants. Obviously, trucks (and, especially, tankers) do not come cheap. But there are plenty of opportunities for second-hand vehicles. As shown by the some 3,000 new licenses for freight transport granted by MoTC in 2005/6, the size of the initial investment cannot be regarded as a major obstacle. As for regulatory aspects, the dry cargo business has been completely liberalized, and rates are freely set, with the TA simply monitoring their evolution. In the liquid cargo business, transport rates are indirectly set by the GoE, as a result of
31
86
COWI GOPA, National Transport Master Plan Study Road Transport, Working Paper 15, September 2006.
the setting of both the purchase and selling prices for oil products. e liberalization of rates for liquid cargo has been repeatedly requested by operators, who complain about the limited pro tability of the business. Other regulatory barriers refer to the high import duties levied on vehicles, which tends to slow down the modernization of the eet, and the prohibition of entry vis--vis foreign operators.

e analysis does not reveal any particular instance of anticompetitive behavior. In some cases, reference is made to the privileged treatment reserved to state-owned and endowment fund-owned enterprises, but the supporting evidence appears limited32. As a matter of fact, the low rates recorded, at least along the main corridor, suggest that competitive forces are at work. However, there is an element that appears to require a deeper investigation. A recent study from MoTC33, indicates a wide variation in freight costs across regions, with unit rates ranging from Birr 1.46 in the Tigray and parts of Afar regions to Birr 0.52 in Central Ethiopia. ese marked di erences are largely explained by the more severe road conditions found in certain parts of the country, as well as by other factors, such as the type of cargo and the length of hauls (the shorter the trip, the higher the incidence of handling costs). However, as indicated above, it is also possible (indeed, likely) that in selected regional/subregional markets concentration is higher than at the national level, implying a higher degree of market power and/or facilitating collusive practices. is is certainly an area where more detailed work would help in reaching a better understanding of situation.
Road Passenger Transport

Salient Features
Overview: e passenger road transport business includes two main segments, namely urban transport and intercity transport. According to MoTC data, in 2006/7 urban transport reached a total of 186 million passengers, while intercity transport stood at 133 million passengers. Service is provided by a eet of about 37,000 vehicles, including some 20,000 taxis and minivans, 13,000 minibuses (seating 9 to 12), 4,500 midi-buses (seating 13 to 45) and 1,000 maxi-buses (seating more than 45) . Taxis, minivans and minibuses are mostly used in urban transport, together with a certain number of city buses. Intercity service is performed with midi and maxi-buses. As in the case of freight transport, the eet is in less than ideal conditions, with some 50 percent of all vehicles having been in use for more than 20
For instance, the World Bank report cited above indicates that only GoE approved transport companies are allowed to move gas from Sudan and Ethiopia. However, the information dates back to 2004 and it was not possible to nd a con rmation of the problem in more recent documents. 33 MoTC, Commercial Road Freight Transport Review of Freight Haulage Costs in Ethiopia, May 2007.
32
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years. Again, this negatively impacts on the level of service and, especially, on road safety, with minibuses being responsible for a large share of road accidents. Main Operators: In urban transport there are three typologies of operators: public transport companies, taxis and minibus associations/companies, and individual taxis. With a eet of some 350 serviceable city buses, Anbassa is the leading urban transport operator, providing services in Addis Ababa and in Jimma. Established back in 1943, initially Anbassa was also involved in inter city transport, but later transferred this line of business to another state-owned enterprise. More limited public transport services are also reportedly provided in Mekele, Hawasa, Dire Dawa, Bahir Dar and Adama. Taxi and mini bus associations have eets of a variable size. A new taxi company (Sheger) was recently launched in Addis Ababa, for the provision of metered taxi services. Inter-city transport sees the presence of 15 - 20 transport associations, mostly active on short and medium routes, and of a few transport companies, active in long distance travel. e latter include one state-owned enterprise (Walia), some companies established by regional development associations (e.g., Selam) and some newly established private companies (e.g., GTS Commercial Transport, Emperor Fasil, etc.). e salient features of selected passenger transport operators are provided in the following table.
Table 24 Basic Features of Selected Passenger Transport Operators
Companies Anbassa Establishment 1953 Ownership State-owned Fleet 350 city buses Comments Also active in Jimma. Recently bought 90 midi-buses from China, with GoE funding.
Sheger City Meter Taxi Selam
2008
Private
150 taxis (expected)
A new initiative, intended to become operational within the rst half of 2009. Starting in 2006 opened the capital to private investors, with aim to reduce public shareholding to 40%. Inherited the inter city business from Anbassa. e company is facing nancial di culties and attempts to privatize it have failed.
1996
Tigray Development Association State-owned
Some 20 luxury buses
Walia Bus
1995
Between 30 and 110 intercity buses (varies upon sources)
Source: PSD Hub, e Management of Commercial Road Transport in Ethiopia, 2 April 2009, company websites and press reports.
Market De nition
e passenger transport sector must be seen as a collection of separate markets. Apart from the obvious distinction between urban and intercity transport, there are a number of other factors that contribute to segmentation. For instance, a ride on 88
an overcrowded, 20-year-old collective taxi is obviously very di erent from a ride in a metered taxi. In urban transport, there is some degree of substitutability between some transport means (one can substitute a ride with Anbassa buses, with minibus services, provided that they go in the same direction). Instead, in intercity transport, each route does constitute a separate market. As in the case of freight transport, the presence of various relevant markets in product and/or geographic terms, inevitably reduces the signi cance of the aggregate analysis carried out in this chapter.
Presence of state-owned and endowment enterprises: In urban transport, city bus services are provided only by state-owned enterprises, while minibuses and taxis are operated by private entities. State-owned enterprises play an important role only in Addis Ababa, where Anbassa is estimated to account for anything between one third and a half of total motorized movements. In other cities, the market is dominated by private operators34. For instance, in Dire Dawa, the local municipal bus company is reported to carry a mere 800 passengers per day, compared with the 130,000 transported by minibuses, taxis and rickshaw. In intercity transport, data referred to 2006 show that Walia and Selam accounted for less than 3 percent of the eet. However, Walia was also counting on a series of associates, which cumulatively accounted for little more than 20 percent of the eet, while the rest was accounted for by transport associations. Overall, the role of state-owned enterprises (including those established by regional development associations) is limited and on a declining trend. Concentration and asymmetry in size among operators: Urban passenger transport is subject to government regulation, and the level of concentration and asymmetry among operators is a comparatively less important indicator than in other businesses. In Addis Ababa, the market is basically divided up between Anbassa and three large transport associations, with a few other players operating at the fringes. Limited information is available for intercity transport, and this does not allow calculating market shares. However, the overall limited number of operators active in this business suggests that on speci c routes concentration may be substantial. Vertical integration and economic barriers to entry: As in the case of freight transport, vertical integration is of limited signi cance to judge the level of competition. Minibus associations sometimes provide back up services for their members, but this does not have any appreciable impact. Economic barriers mainly relate to the investment cost associated with the purchase of vehicles. Again, this does not seem to be a major limitation, as the Dubai second-hand market o ers plenty of opportunities at convenient prices. Brand new buses recently bought by transport
34
For detailed information, see PSD Hub, Report to Improve and Update the Study on the Management of Commercial Road Transport in Ethiopia, 2 April 2009.
89
companies were imported from low cost producing countries (Anbassa from China, Selam from Brazil), a clear indication that alternatives to expensive couches do exist. Regulatory Barriers: Passenger transport is subject to regulation by the TA. First and foremost, TA is responsible for licensing operators and for determining schedules. While entry is in principle open, in practice membership in one association is a prerequisite for being licensed. Dispatch schedules are agreed between the TA and transport associations. en, schedules are allocated by each association to its members. Overall, the mechanism appears based on cooperative principles, where fairness considerations take precedence over e ciency concerns. Regulation also extends to the setting of fares. Regarding urban transport, Anbassa fares are set at below cost levels, in order to enhance accessibility, and the di erence is covered by subsidies. Mini bus and taxi rates are also subject to regulation, although this is based on proposals formulated by transport associations. In intercity transport, fares for short and medium routes, operated by transport associations with mini and midi-buses, have been deregulated. Fares for long distance trips are still subject to approval, with the exception of premium services. Regulators are required to consider justi ed requests for increases, but there are complaints that current rate levels are not remunerative (and, indeed, Selam decided to pull out from standard service and to move into premium services).

Urban passenger transport is a rather special case, because of obvious social and environmental considerations. e licensing of operators, the setting of minibus and taxi fares, and the subsidization of Anbassa certainly have an impact on competition but must be regarded as legitimate measures, aimed at achieving social objectives. If anything, a stricter regulation on qualitative aspects (e.g., age and conditions of vehicles, quali cations of drivers), could be envisaged, although this is likely to encounter signi cant resistance. In intercity transport, social considerations are also present, but appear as less compelling. Under these conditions, some form of licensing appears justi ed (again, on quality and safety grounds) whereas tari s could be completely liberalized. An aspect probably worth looking into in detail is the functioning of transport associations, and especially their role in allocating routes among members. In fact, while the presence of these intermediate bodies clearly facilitates the task of regulators, it could also act as a brake to the introduction of innovative services by more enterprising small operators.
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PART III
FINDINGS AND RECOMMENDATIONS
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CHAPTER NINE
Summary of Findings
is nal section summarizes the key ndings of the study. First are provided consolidated assessments of the analysis carried out in Part II. is involves the summary presentation of the factors impacting on competition in the selected markets and the ranking of markets in terms of obstacles to competition. en are grouped the various markets into homogeneous categories or typologies and the main issues and consequences of obstacles to competition reviewed.
Ranking of Markets
e key factors impacting on competitive conditions in the selected markets analyzed in Part II are summarized in the table below.
Table 25 Summary of Factors Impacting on Competitive Conditions
Markets Flour Factors Impacting on Competition Limited concentration of production, although in some local markets sellers may have a stronger position Modest public presence (12% of total output), expected to decline as a result of privatization Modest nancial and technical entry barriers and no regulatory barriers of signi cance (foreign presence is forbidden, but this is scarcely relevant in this business) Some downward vertical integration, but not impacting on competition. Upward integration into cereals envisaged for defensive reasons (shortage of wheat) Presence of a clear market leader (50%), battling with small but not insigni cant competitors Presence of state-owned and endowment companies is signi cant (50%) but fragmented (and could decline if scheduled privatizations are eventually nalized) Signi cant economic and technical entry barriers, but no regulatory obstacles Upward integration into production malt envisaged by one brewery Duopolistic structure in soft drinks and near monopoly in mineral water (but situation is evolving) Total absence of state/endowment companies High (in soft drinks) to moderate (in mineral water) economic barriers. No regulatory barriers De facto state monopoly (although situation may change as result of new projects envisaged by private investors) Distribution partially done through public companies as well Very high nancial entry barriers (huge investments) also because of vertical integration into sugar cane production No regulatory barriers, apart from the general prohibition of foreign presence in the import business
Beer
Soft Drinks & Mineral Water
Sugar
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Edible Oil
Low concentration of production, with the leader facing some close competitors Extremely low presence of state/endowment companies Low economic and technical entry barriers No regulatory obstacles of signi cance, apart from the prohibition of foreign presence
Cereals
Low to moderate concentration among grain traders in local markets (but role of cooperatives is growing) Limited direct public presence (some commercial farms and EGTE) while government-sponsored co-ops are gaining ground Low economic and technical entry barriers No regulatory obstacles of signi cance apart from export ban (deemed to be transitory) and the general prohibition of foreign presence in the import business De facto state monopoly in the import business Near state monopoly in wholesaling and highly controlled distribution system (coops, local extension services) High nancial barriers to entry in import business (due to increasing size of lots) No regulatory obstacles of signi cance apart from the general prohibition of foreign presence in the import business Modest presence of state/endowment companies (mostly in textiles) Moderate to low concentration, thanks to opening of market to imports Moderate to low nancial and technical barriers No regulatory obstacles
Fertilizers
Textiles and Apparel
Banking
Dominant position of state-owned banks, but their share is declining Modest presence of endowment banks Moderate nancial entry barriers (moderate minimum capital), but prohibition of foreign presence Bank supervision and regulations implemented uniformly, irrespective of the ownership status. Minimum deposit rates are mandated, but this has a modest impact Dominant position of endowment/regional government supported organizations, with cases of absolute monopoly in some regions Low nancial entry barriers (moderate minimum capital) but prohibition of foreign presence No regulatory obstacle of signi cance, apart from setting of minimum deposit rates Leadership of state-owned insurer (44%), but its market share is declining Moderate presence of endowment insurance Low nancial entry barriers (moderate minimum capital), but prohibition of foreign investments Insurance supervision and regulations implemented uniformly, irrespective of the ownership status. Limited direct presence of state-owned/endowment companies Moderate concentration (at least along the main corridor, maybe higher in certain regions) Low nancial and technical barriers No regulatory barriers, but prohibition of foreign presence Limited direct presence of state-owned/endowment companies Moderate concentration (at least at the national level, may be higher on speci c routes) Low nancial and technical barriers Licensing and setting of some tari s as well as prohibition of foreign presence
Micro nance
Insurance
Road Freight Transport
Road Passenger Transport
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e above elements can be used to achieve a ranking of markets following the methodology illustrated earlier in the report. In particular, competitive conditions in each market are assessed with respect to six main dimensions on a 1 to 5 scale, where 1 means low (i.e. no constraint or very low constraint to competition) and 5 means high (i.e., very high obstacle to competition). e results of this exercise are summarized in Table 26.
Table 26 Ranking of Markets
Dimensions of competition distortion Presence of State -Endowment Operators 1 5 2 3 1 5 1 3 3 3 4 3 2 2 Presence of Vertically Integrated Operators/ Privileged Relations 1 4 2 1 2 4 1 1 1 2 3 2 1 1 Economic & Technical Entry Barriers 1 4 2 3 3 5 2 3 5 2 1 2 2 2 Distorted Competition Rank
Market
Market Share of Leading Operators 2 5 2 4 4 5 3 2 3 4 5 4 3 3
Asymmetry among Operators
Presence of Regulatory Obstacles
TOTAL Score
Cereals Fertilizers Flour Beer Soft Drinks & Min. Water Sugar Edible Oil Textiles & Apparel Cement Banking Micro nance Insurance Freight Transport Passenger Transport
2 3 2 3 4 5 2 2 2 4 5 3 2 2
1 2 1 1 1 1 1 1 2 4 4 4 1 2
8 23 11 15 15 25 10 12 16 19 22 18 11 12
14 2 11 7 7 1 13 9 6 4 3 5 11 9
Review of Market Typologies

e above ranking exercise allows for the identi cation of four typologies of markets. (i) Monopolized/highly concentrated markets, dominated by stateowned or endowment enterprises. is typology includes the markets for fertilizers and for sugar, plus the special case of micro nance. In these markets, basically there is no competition to speak of and state/ endowment a liated entities are fully in control. (ii) Highly concentrated markets with a dominant, but declining state/ endowment funds presence. is includes banking and insurance, plus the cement market. In the nancial sector, state-owned enterprises are still largely in command, but their position has been gradually eroded 95
by private competitors. In cement, the dominant position of state/ endowment producers has been undermined by imports, and it is likely to decline further as new private initiatives operations become operational. (iii) Highly concentrated markets with private sector dominance. is typology includes the markets for beer and soft drinks/mineral water. Here, large private companies play a dominant role but competition among operators, albeit imperfect, is indeed present. (iv) Low-moderately concentrated markets with private sector dominance. is includes the markets for cereals, our, edible oil as well as road transport for both freight and passengers. e situation is not perfect and some degree of dominance may exist in speci c local markets, but overall competition appears to be fairly e ective. e salient features of each typology are brie y discussed below. (i) Monopolized/Highly concentrated markets dominated by state-owned/ endowment organizations. In the sugar industry, state dominance is largely connected with structural features, namely the extremely high nancial entry barriers in terms of investment outlays, especially taking into account the fact that sugar plants are vertically integrated with sugarcane plantations, whose development in turn may require signi cant investment in irrigation infrastructure. Fertilizers are a completely di erent story. In the early days of liberalization, private presence in the fertilizers trade was quite signi cant and at times threatened the leading role of AISE. It was out of deliberate choice that private operators have been largely expelled from the fertilizers business. As the experience of Kenya shows, there is no inherent economic reason why the fertilizers business should be monopolized by stateowned and endowment enterprises. Micro nance is a special case in many respects. First, the market is largely segmented along geographical lines, with very few MFI operating in several regions. Second, in this case the dominant role is played by endowment organizations and public support is provided by regional governments rather than by central authorities. ird, dominance is not the result of regulatory or nancial barriers, which on the contrary are quite low. Fourth, in contrast to the other two markets, dominance is not detrimental to e ciency. On the contrary, available evidence indicates that the Ethiopian micro nance sector is highly e cient and plays on important role in supporting broad-based economic development. (ii) Highly concentrated markets with dominant but declining state presence. Relatively easy entry of domestic private operators has been created for both banking and insurance. Also, regulatory power has been used impartially, without any serious discrimination vis--vis private banks. Taken together, these two factors have led to the gradual emergence of a domestic private banking sector, which has progressively 96
eroded the initial state monopoly. State-owned entities are still exerting a major in uence, but a more competitive environment is being progressively put in place. However, the fact that the entry of foreign operators is prohibited, combined with the inevitably limited means available to domestic operators, has probably slowed the process of innovation as witnessed by the scarce di usion of advanced nancial mechanisms and products, from ATM to life insurance to leasing. In cement, state/ endowment companies still account for the bulk of domestic production, which however accounts for less than half of the market, the remainder being imported by a number of private operators. More importantly, the GoE has adopted an open attitude towards the entry of private investors, and signi cant players are heavily investing in new cement mills, which will ultimately further reduce both concentration and state presence. (iii) Highly concentrated markets with dominant private presence. e high level of concentration found in the beer and soft drinks/mineral water markets owes much to the structural features of these businesses and at any rate is not unusual, as similar levels of concentration are found in other African countries (as well as in Western countries). State presence is still signi cant in the beer business, but this appears to be unintentional, as some attempts were made in the past to privatize the three state-owned breweries. In any event, state-owned breweries appear to be largely commercially oriented and the same applies to the endowment fund-owned Dashen beer. It is in these sectors that private dominance may lead to classical anticompetitive practices, such as price xing, as well as to vertical restraints, in the form of refusal to sell/exclusive agreements, which if not adequately supervised, could be seriously detrimental to consumers. (iv) Low or moderately concentrated markets with private sector dominance. e markets for cereals, edible oil, our and road transport appear to represent the best approximation to the concept of workable competition found among the markets analyzed in the study. In the cereals and our markets, the relatively large number of operators seems to be the best guarantee against the emergence of grossly anticompetitive practices, while the modest role played by state-owned entities contributes to improve the overall e ciency of operations. Certainly, the functioning of both markets is still negatively a ected by a number of structural factors (from poor infrastructure to variations in output due to climate), and this leaves room for opportunistic behavior. But these are to be regarded as largely transitory phenomena, whose impact is expected to diminish as the quality of market infrastructure improves, for instance, through initiatives such as the establishment of ECX. In edible oil, the level of concentration is a bit higher (at least for re ned oil), but all state-owned enterprises have been privatized and government intervention is limited to import to stabilize prices. If anything, a stricter enforcement of quality standards would be advisable to ensure that products are in line with basic health 97
standards. Similar considerations apply to road freight transport. Concentration is at acceptable levels (although it is likely to be higher in selected local markets). ere is a non-negligible presence of state-owned and endowment transport companies, but competition appears to function e ectively, at least for tra c along the main corridor. Passenger transport is somewhat a special case, as direct state presence through state-owned enterprises is supplemented by regulation of entry and by the setting of some rates. However, regulation has not prevented the entry of a number of private operators, and on the whole, competitive forces appear to be at work.
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CHAPTER TEN
Recommendations Policy, Institutional and Legal Aspects
Introduction
In this chapter we concentrate on issues at the institutional, legal and policy level, whose solution may require a re-orientation of current policies and/or the adoption of institutional or legal reforms. An analysis of technical and resource related aspects with the formulation of recommendations of an operational nature, is provided in the next chapter.
Key Policy Recommendation: Reconcile Competition Policy with Other Government Policies
In Ethiopia, as in any developing country, achieving higher levels of socio-economic development is obviously the overriding concern of government authorities. Given the multidimensional nature of development (higher economic growth, but also more and better jobs, improved food security, etc.), decision-makers are often faced with major trade-o s, and this may lead to subordinate the creation of a truly competitive environment (whose bene ts tend to accrue over the medium to long term) to the achievement of other development goals, regarded as more pressing at least in the short term. e impression derived from the results of this study is that in Ethiopia the bene ts of competition have been too often sacri ced to the achievement of other policy objectives. Even more importantly, it appears that in a number of cases, this has been done without performing a careful analysis of the pros and cons of the various policy options, with some counterproductive results. An example is provided by the decision to restructure the fertilizer sector, which involved a substantial backtracking compared with the liberal approach adopted in the early 1990s. is decision was obviously motivated by the commendable objective of making fertilizers available at a ordable prices to the largest possible number of farmers, in order to intensify cereal production and, therefore, reduce the risk of food insecurity. However, while this policy has been successful in keeping prices under control, it has also led to serious ine ciencies in distribution, with an overall modest impact on agricultural output. In a similar vein, the policy of preventing foreign investors participation in certain sectors, has certainly served the purpose of fostering the emergence of an Ethiopian entrepreneurial and managerial class, but at the same time has deprived the country of the bene ts that the superior technologies and organizational models possessed by international operators could have generated.
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erefore, the main general recommendation stemming from the results of this study is that, whatever the issue at hand, comparatively more attention should be devoted to competition-related aspects. In this respect, it would be particularly important that government authorities incorporate some kind of cost bene t analysis in the decision making process, with the explicit identi cation of the positive and negative impacts on competition.
Structural Measures to Enhancing Competition ---- Policy Aspects

Structural measures are aimed at creating the basic conditions for competitive market structures to emerge. e rationale is that the more competitive the market structure is (i.e., the greater the number of market participants, the lower the entry barriers, etc.) the less likely is the materialization of anticompetitive practices. Under the expression structural measures, several types of interventions are subsumed, including the break-up/down-sizing of existing monopolists or dominant players, the privatization of state-owned enterprises, the liberalization of conditions for trading (e.g. the dismantling/lowering of import duties, quotas and the like), etc. e results of this study suggest that three types of structural measures should receive high priority, namely: 1. e privatization of remaining state-owned enterprises; 2. Promoting the entry of new market participants: and 3. e opening of selected markets to foreign operators. ese aspects are discussed below. (1) Accelerating the privatization of state-owned enterprises. Privatization does not automatically result in a more competitive environment, and indeed there have been cases in which it has resulted simply in replacing state-owned monopolies with private ones. Having said this, in Ethiopia the state still controls a disproportionately large share of productive assets and a reduction of its direct involvement in economic activity would be certainly bene cial. In the short term, privatization of state-owned enterprises can be realistically achieved only in the case of some manufacturing and service sectors, such as breweries, our mills and road transport (with the exception of urban bus transport). It should be pointed out that the GoE has already attempted to sell its participations in these sectors and that transactions were not nalized for various reasons, including the lack of quali ed bidders. In sectors such as cement and sugar, regarded as having a strategic importance and characterized by heavy capital intensity, privatization can be envisaged only in the medium to long term. In these cases, an improvement in competitive conditions in the short to medium term should be sought primarily through other measures. (2) Promoting enhanced private participation. Whenever privatization is not a realistic option in the short term, e orts should be made to attract new entrants 100
from the private sector. is approach appears particularly relevant in the case of fertilizers, where the presence of private operators would introduce an element of exibility in the present system. Private traders could probably start serving the higher end of the market, namely those farmers who can a ord buying fertilizers without having to go through the standard credit scheme currently in force, and who place greater value in timely deliveries and, maybe, are interested in accessing a broader range of fertilizers. Overtime, the outreach of these traders could gradually increase and, in any event, their presence could serve as a stimulus to increase the e ciency of the system centered on AISE and farmers co-ops. Given the setback experienced by private traders in the 1990s, there is no doubt that signi cant e orts should be deployed in order to attract new operators in the business and that ample assurances should be provided by authorities regarding the absence of interference from AISE and other public/endowment entities. Another sector where the entry of new operators is expected to greatly enhance competition is cement. However, in this case the GoE has already adopted a rather liberal attitude towards private investors and, as documented earlier in this study, a number of new projects are already been implemented. (3) Allowing Foreign Investors Participation. e opening up of markets to foreign operators is relevant in the case of nancial services and, especially, of commercial banks and insurance companies. is is notoriously a contentious issue (inter alia being the subject of discussion within the framework of WTO negotiations) and therefore must be considered without ideological preconceptions. To begin with, it is important to acknowledge that foreign participation in the nancial sector should not be regarded per se as a panacea. In developing countries, there are numerous examples of nancial sectors dominated by foreign investors that have displayed a below-average performance, in terms of outreach capabilities, lending volumes, etc. e static conditions of Djiboutis nancial sector, until recently in the preserve of a couple of French-controlled banks, provide a clear example in this respect. Also, in retrospect, it has to be acknowledged that the policy of reserving nancial sector activities to domestic operators has generated some long lasting bene ts. Ethiopia can now count on a new breed of bankers and managers, and this constitutes an important asset, not available to many other African countries. Having said this, the potential for an entirely endogenous growth appears limited and many Ethiopian nancial institutions would de nitely bene t from some form of collaboration with foreign partners. is is especially true in the case of insurance, where the level of sophistication of local operators appears to be comparatively lower than in banking. Under these conditions, it could be useful to revisit existing limitations to foreign investment in nancial institutions, to allow at least the formation of joint ventures. In this way, some of Ethiopias nancial institutions would have the chance of establishing stable connections with large international groups (including those with an African origin), with the result of broadening the range of products on o er and of strengthening their operational capabilities. 101
(4) Opening Financial Markets to Foreign Operators: Dissenting Opinions. e appropriateness of opening Ethiopias nancial markets to foreign operators was the subject of a lively debate during the presentation of this report, with representatives of some banks voicing their doubts (if not their outright opposition). e argument put forward is that foreign nancial institutions, because of their very nature, are extremely unlikely to improve access to banking services, especially in rural areas and to poorer strata, and that if allowed to operate in Ethiopia they would tend to con ne themselves in the corporate banking business. Furthermore, recent developments in the global nancial sector indicate that large international banks are not necessarily more e cient and better managed than banks in developing countries. ese views are not without merit, but they tend to discount the positive systemic impact that the arrival of new entrants with better technologies and a more aggressive attitude could have in Ethiopias banking sector. Even if new entrants were to concentrate only in corporate banking, the ensuing greater competition would contribute to increase the quality of services o ered to Ethiopian businesses. Even more importantly, domestic banks would be pushed to expand their services in other market segments and/or geographical areas, thereby expanding the level of access. While it is perfectly understandable that existing banks perceive the possible arrival of foreign competitors as a threat, the experience of other African countries with a more liberal regime suggests that some foreign presence (which is di erent from foreign domination) in the banking sector can indeed bring about some bene ts for the economy as a whole. Fighting anticompetitive practices: Institutional, policy and legal aspects Whatever the e orts deployed to create market structures conducive to competition, the risk of anticompetitive practices remains signi cant. is is especially the case of developing countries, because of the thinness and segmentation of markets and of the comparatively greater exposure to exogenous shocks (abrupt changes in commodity prices, unfavorable weather conditions, etc.), which in turn create excellent opportunities for opportunistic behavior. e notion of anticompetitive practices is typically associated with the presence of private operators, because of their pro t-seeking motivation. However, state-owned enterprises are also not immune, either because they may also be commercially-oriented or because anticompetitive prices may help in prolonging their existence or provide some other form of bene t to politically appointed managers (i.e. over ful llment of targets and the like). In the case of the markets analyzed in this study three types of anticompetitive practices have emerged as having some relevance. ese were: (i) price xing and similar cartel-like arrangements, (ii) hoarding and price gouging, and (iii) exclusive distribution arrangements. In order to be tackled e ectively, these practices require a combination of institutional, policy and legal measures. ese aspects are dealt with in the following paragraphs. 102
(i) Price- xing/Cartelization. Price xing is universally regarded as one of the most serious infringements to competition and is normally severely sanctioned. In the case of the markets analyzed in this study, accusations of price xing have been leveled against producers and traders in several cases. e most suspicious episode is represented by the simultaneous price increase announced by beer producers in late 2007/early 2008. As already mentioned, the increase was justi ed by producers with the increase in the cost of malt and, reportedly, no action was taken by relevant authorities. is draws the attention to the main issue in price xing cases, namely the need to carefully disentangle episodes of cartelization from situations in which price increases may be due to changes in cost conditions. In turn, this calls for a strengthening of competition authorities. As illustrated in detail in another study carried by the PSD Hub Program35, the Ethiopian Trade Practices Commission (TPC) has so far played only a modest role, operating essentially as an adjudicatory body, i.e., very much like a civil court. If TPC is to play an active role in ghting cartels as well as other anticompetitive practices, two conditions must be ful lled. First, TPC investigative powers should be expanded, giving it the power to investigate independently suspect cases. Second, TPC should be endowed with the necessary means to e ectively discharge its functions. is concerns both the collection of relevant information (typically, evidence on price xing cases can only be retrieved through spot inspections) and the conduct of detailed analytical work. In this respect, TPC sta could bene t from some of the operationally-oriented initiatives illustrated in Chapter 11. (ii) Hoarding and price gouging. Hoarding di ers from price xing because the price increase is obtained indirectly, through the withholding of stocks. Allegations of hoarding are quite common in Ethiopia and, if anything, the in ation recorded over the last few years has made these allegations more frequent. In particular, instances of alleged hoarding have been found in the case of cereals, our, edible oil and sugar. It should be noted that hoarding can be a commercially viable strategy only in situations of signi cant imbalance between supply and demand and, indeed, all the markets where episodes of alleged hoarding have taken place have been characterized by signi cant supply shocks. In this respect, the only e ective way to combat the practice is to adopt measures aimed at restoring a satisfactory balance between supply and demand in the market. is extends inter alia to government policy regarding imports, which sometimes may provide a powerful incentive for stockpile products. e issue is neatly illustrated by developments in the cement market, where price movements appear to be closely correlated with the introduction or lifting of import bans. In this respect, the adoption of a less erratic policy regarding the import regime would greatly help in stabilizing economic operators expectations and, ultimately, would reduce the incentive to engage in speculative behavior.
35 PSD Hub, Review of the Legal and Institutional Framework for Market Competition in Ethiopia, November 2008.
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Another element that appears to contribute to hoarding is the lack of appropriate information on prices, and cases have been reported of defensive hoarding, i.e., where operators (often, farmers and farmers cooperatives) were withholding stocks because of a genuine uncertainty regarding price trends. In this respect, a signi cant improvement in the situation could be achieved by expanding the role and functions of the ECX. At present, ECX is only trading a handful of commodities. If its role were extended to all widely-traded agricultural products, the process of price formation would become much more transparent and the wide dissemination of information on prices established at the ECX would greatly contribute to undermine the rationale for hoarding. (iii) Exclusive distribution arrangements. Instances of restrictive distribution arrangements, involving the prohibition for retailers to carry competing products, have been mentioned in the case of beers and soft drinks. In many countries, exclusive distribution arrangements are not automatically regarded as an infringement to competition and their impact has to be assessed on a case by case basis. e rationale for this is that for certain products, typically complex manufactured products such as cars, the existence of exclusive agreements between the producer and resellers (dealers) may result in an overall reduction of costs, which is ultimately likely to bene t the consumers. In the case of developing countries, exclusive distribution agreements are likely to be found in consumer goods, for which the cost saving rationale is much less stringent. Under these conditions, the adoption of a restrictive attitude vis-vis restrictive distribution arrangements appears advisable. Essentially, this would involve reversing the burden of proof, so that exclusive distribution arrangements would be regarded a priori as unlawful unless convincing evidence of cost savings for the consumers is provided. is would have a greater deterrent e ect and would economize competition authorities scarce resources.
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CHAPTER ELEVEN
Recommendations Operational and Technical Aspects
is last chapter is devoted to the formulation of recommendations of an operational and technical nature. In so doing, the chapter focuses on aspects that do not require any major modi cation of government policy and/or of the institutional and legal framework. e rst aspect analyzed here relates to the possibility of facilitating public private dialogue on competition policy. e issue is, obviously, far from being merely operational or technical and potentially has vast rami cations. However, the approach proposed here is a modest one, and focuses on the establishment of a working group that could contribute to initiate the process. e other two aspects analyzed here deal with more technical aspects, namely the consolidation and dissemination of information on competition-related issues and the development of more detailed market studies. On all these aspects, it is envisaged that AACCSA could play an active role, either within the framework of the PSD Hub Program or as part of its regular activities.
Facilitate Public-Private Dialogue on Competition Issues

When it comes to issues related to competition, the Ethiopian private sector is currently con ned to a purely passive role and its voice is scarcely heard. To begin with, the private sector is not represented in the TPC, which for all practical purposes can be regarded as a branch of the government. Even more importantly, whenever instances of alleged anticompetitive behavior emerge, the GoE displays a tendency to quickly adopt harsh measures (typically, the seizure of the merchandise allegedly hoarded), and in doing so does not show much consideration for the views of the business community. At the same time, the attitude of the Government appears much more relaxed when complaints originate from the private sector and concern stateowned or endowment companies. is state of a airs has negative repercussions. On the one hand, government measures are often perceived as unduly punitive (and, sometimes, depicted as politically motivated), and this risks undermining the very legitimacy of competition policy in the eyes of private operators. On the other hand, it provides an excuse to relieve the business community from taking its share of responsibility in ensuring the proper functioning of markets. Under the above conditions, the establishment of a mechanism for enhancing communications between the GoE and the business community appears as an urgent measure. is could take the form of a working group consisting of representatives of both the public and private sectors and speci cally devoted to the analysis of issues related to competition and competition policy. e working group 105
would not have any formal role, thereby allowing for discussions to take place in an unconstrained manner and for the agenda to be set exibly. Topics to be analyzed could range from the review of competitive conditions in sectors/markets known for being problematic, in order to identify possible solutions and generate a consensus around them, to the assessment of competition-related implications of proposed government policies and measures. Whenever warranted, the working group could invite the relevant stakeholders (business associations, consumer organizations, etc.) to contribute their views. In order to discharge e ectively its functions, the working group would have to rely on the support of a secretariat (hence, the proposed active role of AACCSA), which would be responsible for adequately preparing the meetings with background memos and for following up with whatever additional analytical work that might be required. Permanent consultative bodies dealing with competition issues exist in several countries (e.g., South Africa, Pakistan, Australia, Canada, Belgium), while in others consultation mechanisms are established on an ad hoc basis, to analyze speci c problems or to review the impact of proposed pieces of legislation. ese bodies have proved e ective in enhancing mutual understanding and in defusing tensions between the parties involved, and there is no reason why a similar result could not be achieved also in Ethiopia.
Enhance the Collection and Accessibility of Information for Competition Analysis

In Ethiopia, information on aspects that may have a bearing in the analysis of competition-related issues is scarce and not easily available. is is witnessed by the di culties encountered in the preparation of this study, which had to rely on a variety of widely dispersed sources. Publications from sector ministries and the CSA do contain useful information to depict the broad trends prevailing at the sector level, but this is rarely su cient to understand the nature of competition (let alone to ascertain the existence of anticompetitive practices) in speci c product and geographical markets. One problem has to do with the limited integration between data on production and those on international trade. is makes it more di cult to appropriately measure the size of the market and, therefore, induces an excessive attention on domestic production. In fact, it is because of this distorted approach that the cement industry is often characterized as a near monopoly, while in reality the market is largely supplied by imports. Second, information on the size of leading operators is scarce and unsystematic. is is a common problem, found in many countries, but in Ethiopia it is made more severe by the dearth of updated sector studies and reports, as well as by the limited information disclosed by sector associations (annual reports and websites, when they exist, are more celebrative than
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informative). ird, whatever information is available, data often refer to the whole economy, with limited information on the situation in various regions and sub regions. is makes it virtually impossible to conduct any serious analysis in the case of geographically fragmented markets. A commendable exception in this respect is represented by CSA data on prices for consumers goods, which are available for a number of products in a variety of local markets (and, indeed, this allowed the comparison between the prices of locally produced and imported cooking oil). Given the above, it is recommended that an e ort is made to enhance the collection and accessibility of information that could be used in competition-related analyses. is could start with the compilation of a complete listing of available sources of information, be they statistics, descriptive studies, annual reports of sector associations, etc. is should be coupled with the identi cation of sources of information on the situation prevailing in other countries, which could be used as benchmarks. e initial compilation work would then lead to the development of a database consolidating quantitative information (domestic production, imports, exports, price levels, and the like), which could provide useful starting point for deeper analyses.
Perform Detailed Analyses on Selected Markets

In the case of sectors encompassing a variety of products and of geographically fragmented markets, a proper understanding of competitive conditions requires a much deeper analysis than the one carried out in the baseline study. erefore, it would be useful to follow up this initial work with a series of detailed studies on markets deemed to be of particular relevance, such as the markets for cereals, our, edible oil, beer and road freight transport. e results of these detailed studies could usefully feed into the works of the proposed working group on competition policy, and could contribute to clarify currently unresolved issues (e.g., is hoarding of grain really a rational strategy? If so, who really bene ts from it? What is the role played by agricultural cooperatives? Is state-support to cooperatives fully justi ed on social/food security grounds? Or is it unduly distorting competition?) on the basis of solid empirical evidence. ese market studies should be structured in a manner (and endowed with su cient resources) that allow(s) the testing of data gathering and analytical techniques that are adopted by well established competition authorities, including the performance of eld surveys of operators. In this respect, apart from their intrinsic informational value, the market studies could have a major educational value. erefore, it would be important that representatives of key stakeholders (government services, sectoral associations, consumer organizations) be associated with the exercise.
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REFERENCES
I. Books, Reports, Research Papers and Articles Published in Scholarly Journals
Ariga J. and others, Trends and Patterns in Fertilizer Use by Smallholder Farmers in Kenya, 1997-2007, presented at the Egerton University Tegemeo Institute Agricultural Policy Conference, Nairobi, 17 September 2008 Biniam Taddele, Technical, economical, and environmental comparative analysis of fuel oil with coal as energy source in the cement industry, Masters Degree esis, Addis Ababa University, January 2008 BKP Development, Assessment of the Impact of GATS on the Ethiopian Financial Services Sector, 30 April 2007 Booker Tate, Finchaa Sugar Project, s.d. Byerlee D. et alius, Policies to Promote Cereal Intensi cation in Ethiopia: A Review of Evidence and Experience, IFPRI Discussion Paper 00707, June 2007 CBI and others, World Wide Water - Export potential of Ethiopian mineral water, November 2004 COWI GOPA, National Transport Master Plan Study Road Transport, Working Paper 15, September 2006 David Gass, Challenges and Opportunities for the African Sugar Industry, International Policy Council, Washington, s.d. Eleni Z. Gebre-Madhin, Market Institutions, Transaction Costs, and Social Capital in the Ethiopian Grain Market, IFPRI Research Report 124, 2001 Embassy of Ethiopia in the US, Investing in Ethiopia: Textiles, s.d. Getaneh Gobezie and Carter Garber, Impact Assessment of Micro nance in Amhara Region of Northern Ethiopia, paper submitted at the FAO International Conference on Rural Finance Research: Moving Results into Policies, Rome, 19-21 March 2007 Hailu Zeleke, Insurance in Ethiopia, August 2007 KenAgri, Market Survey Ethiopia, Eritrea, Rwanda, Burundi, s.d. Loening Josef L, Dick Durevall, Yohannes Ayalew Birru, In ation Dynamics and Food Prices in an Agricultural Economy: e Case of Ethiopia, 4 October 2008 (preliminary draft) MoTC, Commercial Road Freight Transport Review of Freight Haulage Costs in Ethiopia, May 2007 109
PSD Hub, Report to Improve and Update the Study on the Management of Commercial Road Transport in Ethiopia, 2 April 2009 Rahel Abebe, AGOA: e Case of the Ethiopian Textile Sub-Sector, May 2007 Tanguy Bernard et alius, Smallholders Commercialization through Cooperatives - A Diagnostic for Ethiopia, IFPRI Discussion Paper 00722, October 2007 UNDP, 1996 Fertilizer Situation: Progress, Problems and Programs, September 1996 UNIDO, Pro le of the Food processing Industry in Ethiopia, Addis Ababa, October 2001 USAID WFP, Ethiopia Food Security Update, February 2009 Wijnands J. and others, Oilseeds business opportunities in Ethiopia, Ministry of Agriculture, Food and Quality, e Hague, May 2007 World Bank, Transport Costs in Ethiopia: An Impediment to Exports?, Washington, 18 March 2004
II. Articles Published in the Economic Press and Press Releases

Ethiopian Amalgamated appeals against auctioned properties, Capital, 25 November 2003 How Ethiopias cooking-oil industry got burned by USAID, Christian Science Monitor, 6 January 2004 Fertilizer Market Su ers Souring Prices, Limited Suppliers, Addis Fortune, February 2007 e Sad State of Fertilizer Import, Distribution, Addis Fortune, 11 March 2007 Derba East Africa Coal Mining Company on the Edge of Extracting Coal. Addis Fortune, 25 March 2008 Government Lifts Sur Tax on Edible Oil, Soap, ENA, 29 March 2008 Central Bank Eliminates Two Directors from Nile Insurance, Addis Fortune, 24 June 2008 EIB lends EUR 29 million for Derba Midroc Cement Factory, EIB Press Release, 26 June 2008 Central Bank Sacks General Manager of Nile Insurance, Addis Fortune, 1 July 2008 Cotton projected to spin $ 500m from 2011, Capital, 19 August 2008 Dangote To Invest $250 Million Into Ethiopian Cement Industry, Nigeria, 9 September 2008. 110 Lafarge setting up cement plant in Ethiopia, ENA, 20 October 2008 e Times of
Sick Loans Plunge Abyssinias Pro t by 75 Percent, Addis Fortune, 8 December 2008 Cement prices rise despite global ease, Capital, January 2009 Edible oil price relief on its way, Capital, 9 February 2009 Forex Crunch Deepens Soft Drinks Shortage, Addis Fortune, 8 March 2009 Coca Cola hits the brake a ected by foreign currency shortage, March 2009 e Reporter, 14
State Takes Back Textile Co. from Turkish Firm, Addis Fortune, 22 March 2009 Federal Court Hands Chinese 15 Yrs Sentence for Customs Fraud, Addis Fortune, 9 April 2009 Govt Bans Cement Imports, Addis Fortune, 13 April 2009. Standards Authority Suspends Abyssinia Cement Production, Addis Fortune, 13 April 2009.
III. Statistics and Annual Reports

AEMFI, Activity Performance Report of 2008 (January-December), Addis Ababa, January 2009 Association of Kenya Insurers, Insurance Industry Statistics Report for the Year 2007, Nairobi, s.d. Central Statistical Agency, Ethiopia Statistical Abstract 2007, Addis Ababa, January 2008 Central Statistical Agency, Large and Medium Manufacturing Industries Survey, 2006 2007 (1998 1999 EC), Addis Ababa, 18 December 2008 Central Statistical Agency, Ethiopia Small Scale Manufacturing Industries Survey 2005/06 (1998 EC), Addis Ababa, 19 February 2008 Central Statistical Agency, Retail Prices of Goods and Services 2006-2007 (1998-1999 EC), Addis Ababa, 20 December 2008 Central Bank of Kenya, Annual Report 2008, Nairobi, s.d. Central Bank of Kenya, Bank Supervision Annual Report 2007, Nairobi, s.d. Insurance Regulatory Authority, Report of the Insurance Regulatory Authority for the year ended 31st December, 2007, Nairobi, s.d. MoTC, Annual Statistical Bulletin 1999 EC (2006/2007), Addis Ababa, June 2008 National Bank of Ethiopia, Quarterly Bulletin, Addis Ababa, various issues National Bank of Ethiopia, Annual Report 2006/2007 (Ethiopian Fiscal Year 1999), Addis Ababa, s.d. 111
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Baseline Survey On Competition and Markets in Ethiopia

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Baseline Survey On Competition and Markets in Ethiopia

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Baseline Survey on Competition and Markets in Ethiopia

Step 1 - Matrix of Markets/Initial Scanning

Step 2 - Analysis of Selected Markets

Step 3 Consolidated Analysis of Findings

Market Share of Leading Operators

Asymmetry among Operators

Presence of Regulatory Obstacles

Table 2 Results of a Quick Scan of Markets of Agricultural Products

Marketing problems Key players in the market

Anticompetition issues/concerns requiring further investigation

Market/Product 2. Spices: (Pepper, coriander seed, ginger etc.)

Characteristics Product market destination

Operational problems Marketing problems

Marketing problems Key players in the market

Anticompetition issues/concerns requiring further investigation

Market/Product 4. Cash crops: (Co ee, cotton, tea etc.)

Characteristics Product market destination Economic importance

Marketing problems Key players in the market Level of competition

Table 3 Results of a Quick Scan of Markets of Industrial Products

Key players in the market

Anticompetition issues/concerns requiring further investigation

Characteristics Product market destination

Key players in the market

Anticompetition issues/concerns requiring further investigation

Characteristics Product market destination

Key players in the market

Anticompetition issues/concerns requiring further investigation

Characteristics Product market destination

Key players in the market

Anticompetition issues/concerns requiring further investigation

Characteristics Product market destination

Key players in the market

Anticompetition issues/concerns requiring further investigation

Characteristics Product market destination Economic importance

Key players in the market

Anticompetition issues/concerns requiring further investigation

Characteristics Product market destination Economic importance

Marketing problems Key players in the market

Operational problems Marketing problems Key players in the market

Level of competition Anticompetition issues/concerns requiring further investigation

Characteristics Product market destination Economic importance

Key players in the market

Key players in the market

Anticompetition issues/concerns requiring further investigation

Characteristics Economic importance

Key players in the market

Anticompetition issues/concerns requiring further investigation

Source: Central Statistical Agency

Alleged Anticompetitive Practices

Source: Company websites and press reports.

Alleged Anticompetitive Practices

Mineral Water and Soft Drinks

Moha Soft Drinks

Source: Company websites and press reports.

Alleged Anticompetitive Practices

Source: ESDA and press reports

Alleged Anticompetitive Practices

Source: Various reports and press articles.

Alleged Anticompetitive Practices

September 2006 Imported

Price Ratio (domestic/imported)

Alleged Anticompetitive Practices

Figure 5 Prices of Maize and Wheat in Selected Urban Markets