Baseline Survey on Competition and Markets in Ethiopia

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Baseline Survey on Competitionand 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

Sida

Produced and distributed bythe Addis Ababa Chamber of Commerce and

Sectoral Associations with inancial support fromthe Swedish Agency for

International Development Cooperation, Sida


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Private Sector Development Hub/Addis Ababa Chamber of Commerce and SectoralAssociations, 2009

P. O. Box 2458, Mexico Square, Addis Ababa, EthiopiaTel: +251(0) 115 504570/ 542405, Fax: +251 (0) 115 542404,

Email: [email protected]

All Rights Reserved

No part of the publication may be produced or transmi ed in any form or by any means without theprior 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.


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CONTENTS

Introduction 9Part I Overview of Sectors and Markets 15

Chapter 1: Pro les of Markets in Agriculture 17

Chapter 2: Pro les of Markets in Industry 21

Chapter 3: Pro les of Markets in Services 31

Part II Analysis of Selected Markets 33Introduction 35

Chapter 4: Food and Beverages 37

Chapter 5: Agricultural Products and Inputs 53

Chapter 6: Manufactured Goods 61

Chapter 7: Financial Services 69

Chapter 8: Transport Services 83

Part III Findings and Recommendations 91Chapter 9: Summary of Findings 93

Chapter 10: Recommendations Policy, Institutional andLegal Aspects 99

Chapter 11: Recommendations Operational andTechnical Aspects 105

References 109


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List of Tables

Table 1 : Ranking Markets in Terms of Distortions of Competition An Illustration 13 Table 2 : Results of a Quick Scan of Markets of Agricultural Products 18Table 3 : Results of a Quick Scan of Markets of Industrial Products 22Table 4 : Results of a Quick Scan of Markets in Services 31Table 5 : Key Indicators for the Flour Industry 37Table 6 : Basic Features of Ethiopian Breweries 40Table 7 : Basic Features of Leading Mineral Water/Soft Drinks Companies 43Table 8 : Basic Features of Sugar Factories/Projects 46Table 9 : Basic Features of Leading Ethiopian Edible Oil Producers 48Table 10 : Prices for Domestic and Imported Edible Oil 51Table 11 : Key Indicators for the Textiles and Apparel Industry 62Table 12 : Basic Features of Cement Producers 65Table 13 : Basic Features of Ethiopian Banks 69

Table 14 : Relative Importance of Categories of Banks 72Table 15 : Market Concentrations Ethiopia vs. Kenya 73Table 16 : Distribution of Outstanding Loans by Type of Borrower (2008) 74Table 17 : Regional Presence of MFI 76Table 18 : Concentration of Regional Markets 77Table 19 : Key Indicators for the Insurance Business Ethiopia vs. Kenya 78

Table 20 : Basic Features of Insurance Companies 79Table 21 : Market Concentrations Ethiopia vs. Kenya 81Table 22 : Basic Features of Ethiopian Freight Transport Operators 84Table 23 : Market Concentration Dry and Liquid Cargo 86Table 24 : Basic Features of Selected Passenger Transport Operators 88Table 25 : Summary of Factors Impacting on Competitive Conditions 93Table 26 : Ranking of Markets 95


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List of Figures

Figure 1 : Category of Ethiopian Product Markets 10Figure 2 : Broad Components of the Ethiopian Markets 11Figure 3 : Overview of Markets in Agriculture 17Figure 4 : Overview of Markets in Industry 21Figure 5 : Prices of Maize and Wheat in Selected Urban Markets 56Figure 6 : Relative Importance of Various Categories of Imports 59Figure 7 : Market Shares Held by Leading Cement Sellers Ethiopia vs. Kenya 66Figure 8 : Composition of Banking Assets Overtime 72Figure 9 : Asymmetry in Size among Banks Ethiopia vs. Kenya 73Figure 10 : Asymmetry in Size among Banks Ethiopia vs. Kenya 81


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Acronyms

AACCSA Addis Ababa Chamber of Commerce and Sectoral Associations ACSI Amhara Credit and Savings Institution AEMFI Association of Ethiopian Micro nance Institutions AISE Agricultural Input Supply EnterpriseCBE Commercial Bank of Ethiopia CSA Central Statistical Agency DAP Di-ammonium phosphateDBE Development Bank of Ethiopia DECM Derba East Coal Mining

EAB East African Bottling EAHG East African Holdings GroupEAL Ethiopia Amalgamated LimitedEAPC East Africa Portland CementECX Ethiopia Commodity ExchangeEFTC Ethiopian Freight Transport CorporationEGTE Ethiopian Grain Trade EnterpriseEIC Ethiopian Insurance CorporationESDA Ethiopian Sugar Development Agency FAO Food and Agriculture OrganizationFFPPA Flour and Flour Products Producers AssociationGDP Gross Domestic ProductsGoE Government of Ethiopia MEWIT Merchandise Wholesale and Import Trade EnterpriseMFI Micro nance InstitutionsMoFED Ministry of Finance and Economic DevelopmentMoTAC Ministry of Transport and Communications

MoTI Ministry of Trade and Industry NBE National Bank of Ethiopia NGO Non-governmental OrganizationPASDEP Plan for Accelerated and Sustained Development to End Poverty PPESA Privatization and Public Enterprise Supervising Authority PSD Private Sector DevelopmentQSAE Quality and Standards Authority of Ethiopia Sida Swedish Agency for International Development CooperationTA Transport Authority ToR Terms of ReferenceTPC Trade Practices CommissionUSD United States Dollar


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9

INTRODUCTION

is report was prepared in response to the Terms of Reference (ToR) for a Baseline Survey on Competition and Markets in Ethiopi a . e objective of the assignmentis to provide an assessment of the level of competition prevailing in the Ethiopianeconomy. More speci cally, it is intended to provide indications of the costs borneby the private sector and/or by the population at large as a result of monopolisticpositions held by certain operators, and especially government intervention, in theform of restrictive regulations and/or of other policiesde factolimiting the emergenceof competitive market conditions.

e report presents the results of the work carried out in line with the ToR and theinception report submitted on 19 December 2008. A draft version of the report waspresented at a workshop held in Addis Ababa on 20 May 2009. e workshop wasattended 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 theEthiopian economy, and Part II analyzes in detail the competitive conditions inselected markets, while the nal part summarizes the main ndings and forwardssome 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 privatesector associations and public institutions. Finally, in order to present an updated

situation, heavy reliance was made on articles published in the Ethiopian economicpress. While the most recent statistics used for the report normally refer to the2006-07 year, information on market developments, enterprises in operations andcompetitive 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), inorder to get an initial assessment of the degree and types of market distortionscaused 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


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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 theprovision 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. Onfactor markets, inputs of production are traded --- usually, capital, labor and land

are distinguished. Competition policy usually focuses on product markets. Howeverthe criteria for measuring competition (or the distortion/lack thereof) can also beapplied to factor markets. Nevertheless, due to the speci c features of property andlabor markets (not only in Ethiopia) such as the long term nature or the importanceof information asymmetries these two markets would each deserve a study of theirown. 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 intothree broad categories , i.e. those foragricultural products, industrial/manufactured products and services. ese marketsare served with products originating from domestic and import sources. Domesticproduction covers the bulk of agricultural products as well as simple manufacturedgoods 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 theinitial 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 detailin the following consecutive chapters.

Step 2 - Analysis of Selected Marketse analysis of markets focused primarily onstructural aspects which, based both

on practical experience and scholarly research, appear to have a greater impact oncompetitive conditions. Six themes/dimensions have in particular been identi ed toassess the degree of competition.

1. e market share held by leading operators (i.e. held by, say, the rstfour companies).

2. e level of asymmetry in size (i.e. whether there is a majordisequilibrium among the key players).


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3. e presence of state-owned or endowment enterprises (who, de jure or de factooften enjoy a preferential treatment whenever dealing with government authorities)

4. e presence of vertically integrated operators (e.g. a constructioncompany 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 (whichdepends on the amount of money and level of complexity requiredby 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 privateand public companies are expected to operate under the same rules (e.g. theFrench automaker Renault which was under state ownership for more than40 years, used to compete on an equal footing with private companies, such asPeugeot). However, this is normally not the case in emerging economies wherestate-owned enterprises often enjoy a preferential treatment. is justi es theinclusion 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 . Inprinciple, 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). Atthe same time, the analysis concentrated on markets/lines of business which display a signi cant contribution to the national economy .

Step 3 Consolidated Analysis of Findingsis 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 This is the case, notably, of the so called Herndahl-Hirschman Index (HHI). The HHI is used by anti-trust authorities both in the US and in the EU, especially to determine the degree of market power in thecase of mergers.


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Regarding the ranking of the markets analyzed, the exercise took into accountthe six dimensions mentioned previously (market shares, asymmetry in size, entry barriers, etc.). For each variable, the level of distortion of competition was assessedand 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 scoresof 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 twohypothetical 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 scorecolumn presents the calculated average score of distortion of competition, and the

nal column the rank of the market among all markets surveyed. In the exampleprovided, Market Y has a signi cantly higher score, indicating that competition ismore distorted than in Market X.

Table 1 Ranking Markets in Terms of Distortions of Competition An Illustration

Market

Dimensions of competition distortion *

DistortedCompetition

Rank

Market Share of Leading

Operators

Asymmetry among

Operators

Presenceof State

-Endowment Operators

Presence of Vertically Integrated

Operators/PrivilegedRelations

Economic& Technical

Entry Barriers

Presence of Regulatory Obstacles

TOTAL

Score

Market X 2 2 1 1 1 1 8 9

Market Y 5 4 5 4 4 2 24 2

* 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 ONEPro les of Markets in Agriculture

Agriculture is Ethiopias most important sector accounting for almost half of itsGDP (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 positiveperformance, with growth rates in excess of 10 percent per annum. At the sametime, 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 thevarious 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 presentationof 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 Characteristics Description

1. Grain ,Crops(Cereals, pulsesand oilseeds)

Product market destination

All cereals produced are targeted to the domestic markets. ere were few casesof export in the past, but the government has now temporarily suspendedthe export of cereals to stabilize domestic prices of cereals. Similarly, pulsesproduced are mostly absorbed by the domestic market. Low volumes areexported. Oilseeds are equally important grains targeted both to domestic andexport markets. ey are used as input in food manufacturing industries.

Economicimportance

Cereals in general make up the staple food of the country. Much of theproduction comes from small peasant holdings and is consumed at farm level.Marketable surpluses are released to urban consumers and export marketthrough grain dealers. According to the Central Statistical Agency (CSA),cereals represent the lions share of grain production. Some 86% of the grainproduction 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 contributionof oilseeds to the countrys foreign exchange earnings is not negligible. ecountry exported oilseeds worth USD 188 million in 2006/07, representing about 24% of the foreign exchange earnings from agricultural product exports(MoTI).

Operationalproblems

Intermittent drought occasionally a ects production of small holding farmers.Excessive rainfall in some areas of the country is also a problem. Inadequateextension package and fertilizer and improved seed shortages are also issuesfarmers usually raise.

Marketing problems Lack of adequate infrastructural facilities such as rural road networks, warehousing etc., are among the factors that prohibit e cient marketing.

Key players inthe market

ere are sizable numbers of grain dealers in the major cities and towns of thecountry, including one giant state-owned grain dealer --- the Ethiopian GrainEnterprise (EGE). Farmer cooperatives and unions also began to emerge inlarge numbers as grain dealers and as agricultural input suppliers to farmers,and the government plays a key role in strengthening and promoting them.

Level of competition

Free market competition seems to prevail in the market. However, there arecases where the government intervenes to regulate the market to protect the

welfare of consumers. e future, however, seems to lead to monopolisticcompetition among cooperatives and their umbrella organizations, if thegovernment continues to support and promote them. e government plans toraise their market share of agricultural products to 60% by end of the PASDEPperiod in 2009/10. e market is open for exit and entry.

Anticompetitionissues/concernsrequiring furtherinvestigation

- 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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2. Spices:(Pepper,coriander seed,ginger etc.)


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.

Economicimportance e country earned a foreign exchange of USD 10.8 million from the exportof spices in 2006/07 (Ministry of Trade and Industry). Earning uctuates fromyear to year, mainly due to global market price uctuation and pressure of domestic demand.

Operationalproblems

Exporters complain of supply problems. Local regional governments fail toprovide land for commercialization of spice production.

Marketing problems

Problems mentioned under grain and crops market apply here as well. Inaddition, operators developed a tendency of hoarding in this particularagricultural 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 thee 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 thespice market.


Free market competition is assumed to prevail. However, in some speci cspice markets such as pepper, operators tend to collude and agree in an o cialmanner to distort the market in their favor.


- e practice of collusion in the spice market.- Refusal to supply.- Abuse of dominance etc.

3. Fruits and vegetables:(Banana,papaya,oranges,tomato, potato,onions etc.)


Fruits and vegetables are catered for both the domestic and export markets.

Economicimportance

Fruits and vegetables are produced in commercial volumes by state ownedfarms and few private commercial farms. Small holding farmers also producethem side by side with staple food crops, though not in commercial volume.

Operationalproblems

e problems under grain and crops apply to small holding farmers. ecommercial farms, although producing on irrigable lands, are very likely to bea ected by natural calamities.

Marketing problems

Fruits and vegetables are easily perishable agricultural products. e market ingeneral is constrained by lack of adequate preservation facilities.


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. einvolvement of state enterprises and dominant large private enterprises aresuspects of free market competition abuse.


- Abuse of dominance.- Impact of state dominance in the market.


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


e target markets for cash crops are the domestic and export markets.

Economicimportance

Among the agricultural products co ee holds a prominent position in theeconomy of the country. Its share in the countrys total merchandise exportearnings in 2006/07 stood at about 36%, showing an increase of 19.7%compared to the year before (MOFED).

Operationalproblems

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 eeInspection and Auction Centre identi ed a series of operational problemsrelated to co ee auctioning, inspection etc. Immediate solutions are sometimesat hand and pending issues are corrected by involving all stakeholders.

Marketing problems

e Ethiopian Co ee Inspection and Auction Centre reported cases of fraudulent practices among co ee exporters. ese are believed to a ect theprinciple of free market operation.


Co ee exporters are the key operators in the co ee market. ere are over 35registered exporters in the country.


e government has liberalized the cash crop market and encouraged theprivate sector to be involved in cash crop marketing. Co ee, the major cashcrop, is now sold to exporters by auction, the bid price of which is decided onthe 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.

5. Livestock :(Cattle, sheep,goats etc.)


Livestock consisting of cattle, sheep, goats, camels, etc. are by and largedestined for the domestic markets. ousands are slaughtered in residentialbackyards and abattoirs for domestic consumption. Some are exported live tothe Middle East and neighboring countries.

Economicimportance

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 highlandsof the country.

Operationalproblems

Small holding farmers and the pastoral population of the country su erfrom shortages of grazing lands and water points, mainly due to intermittentdrought and increasing livestock density.

Marketing problems

Information on marketing problems not available.


Livestock traders and exporters.


Free market competition prevails.


- Existence of market dominance.


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CHAPTER TWOPro les of Markets in Industry

e industrial sector registered an average annual growth rate of 10.6 percent overthe last four years, covering the period 2003/04-2006/07 (MoFED). About 13.4percent of the countrys GDP in 2006/07 has been contributed by the industrialsector. e export performance of the manufacturing industries still remains low.

eir products are mainly targeted to the domestic market, mainly due to theirlow competitive position in the global market. In 2006/07 the domestic marketcontributed 93 percent of their total sales, while only 7 percent of it came fromthe export market. e average capacity utilization of the manufacturing industries

remained low. For instance, in the fourth quarter of 2006/07 the average utilizedcapacity stood at about 55 percent (CSA). Raw material shortages, lack of marketsand power and water supply interruptions were reported as the major reasons forunder capacity utilization of the manufacturing industries. An overall presentationof 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


1. Food andbeverage

Products:(Sugar, bakery & pastry products;macaroni &spaghetti;beer,

wine andother spirits;soft drinks& mineral

water; edibleoil,

our etc.)

Product Market destination

e local manufacturing industries mainly target their products to the domesticmarket. Imported food products also compete in the domestic market.

Economicimportance

e value of production of the domestic food manufacturing industries stoodat Birr 5,403.8 million in 2005/06, of which 48% corresponded to valueof production in the private sector and 52% to state-owned food industries(CSA). e country also imported food items worth USD 246.6 millionand 204.4 million in 2005/06 and 2006/07, respectively (MacroeconomicDevelopment Reports - MoFED).

Operationalproblems

Some 95% of the domestic food manufacturing industries reported operationalproblems in 2005/06. e major operational problems include shortage of raw material supplies, absence of market demand and lack of working capital inthat order of importance (CSA). ese are major reasons that contributed tounder capacity utilization in most domestic food industries.

Marketing problems

About 27% of the domestic food industries reported marketing problems(CSA). eir products are slow moving in the food market, perhaps due toinferior quality or high price compared to other competing products.


e key players in the food market are better described by speci c foodproducts. All the four sugarfactories, currently existing and operational inthe country, are owned by the state. ere are no private sugar factories. Out

of the six breweriesin operations, three are state-owned, one is endowmenta 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 mediumand large food manufacturing industries, 43 are under state control, whilethe remaining are in private hands of di erent forms of ownership. From theownership point of view of individual food products such as those mentionedabove, 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 ProjectO ce has the upper hand to decide on selling prices of sugar and the factoriesare price receivers. e current selling price of sugar stands much higher thanthe 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 withimported food items. Food items obtained through donation are directly or indirectly monetized and distort market competition.

- Level of state involvement.


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2. Textilesand textileproducts:

(Textile fabricsand wearing apparel madefrom textilesetc.)


e textile industries produce cotton and nylon fabrics both for the domesticand export markets. Woolen fabrics and apparels made from di erent textilefabrics are also imported into the country.

Economicimportance

A total of 73 medium and large textile fabrics and related products and wearing apparel production facilities currently exist in the country. eir combinedgross value of production during the year 2005/06 was estimated at Birr 998.9million (CSA). About 89% of this amount has been a contribution from thespinning, weaving and nishing facilities. e textile industry is the largestemployment opportunity creator among the group of medium and largemanufacturing establishments, absorbing about 26,200 persons in 2005/06.

Operationalproblems

e textile industries also reported similar operational problems as thefood industries, though the degree varies. About 36% of the existing textileindustries 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. Mostof the textile industries operate using outdated machineries and equipment.

Marketing problems

e domestic wearing apparel manufacturers seem to have marketing problems. According to CSA, in 2005/06 out of the existing 29 medium andlarge wearing apparel manufacturers, 12 reported absence of market demandfor their products. Is the marketing problem associated with antcompetitionpractices among competing enterprises or something else? is shall be veri ed

during the eld assessment if this market is selected.


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 facilitiesin 2005/06, 15 were under state control and one belonged to an endowmenta liated enterprise and the rest fell under private hands with di erent formsof ownership. Large number of wearing apparel wholesalers and retailers alsooperate in the textile market and there are probably dominant groups in themarket.


e textile fabric market is state dominated, suggesting that free marketcompetition remains at stake. In a market where there is state dominance, itis 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 Characteristics Description3. Leather

and leatherproducts:(Finishedleather, leathergarments,leather shoesetc.)


Leather and leather products are targeted both to the domestic and exportmarkets. e domestic market for leather and leather products is one of thebiggest in the country. Much of the produce such as leather shoes, garment,and bags are absorbed in the domestic market. Export markets for nishedleather and leather products are less attractive to exporters, mainly due to theirlow competitive position in terms of price and quality. However, they have a strong position in the export market for semi-processed hides and skins.

Economicimportance

e leather and leather products manufacturing establishments are importanteconomic areas of investment. ese are areas that enjoy a comparativeadvantage in terms of their major input requirement-hides and skins, whichare locally available in potential volume. e numbers of medium and largeestablishments operating in the leather industry were estimated to be 63 in2005/06, comprising 18 leather tanning and dressing and 45 leather footwearmanufacturing establishments, their combined gross value of production in2005/06 was estimated at Birr 1,022.7 million. ey created employmentopportunities for about 8, 000 persons in 2005/06.

Operationalproblems

e leather industry also faced some operational problems. About 91% of the companies reported facing operational problems in 2005/06. e majorones include raw material supply problem and absence of market demand fortheir products. About 39% of the reporting establishments faced raw materialshortages, while 32% reported lack of market demand for their products.

ese problems were more manifested in the leather footwear manufacturing establishments.

Marketing problems

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 ledcomplaints on imported footwear from China. Importers handling cheapproducts usually develop a tendency to misguide retailers and retailers inturn to misinform consumers to gain competitive advantage over domesticproducts. In the case of the footwear market consumers nally realized thatimported footwear from China was not leather footwear and gradually shiftedto local shoes. However, there are still a large number of consumers exposed tothis kind of misinformation throughout the country.


e number of large and medium manufacturing establishments in the leatherindustry comprised those still remaining under the ownership of the state,and di erent forms of private ownership. Out of the total 63 establishmentsin 2005/06, four were under the state ownership, 17 under individual

ownership, 32 established under private limited company status and the restowned in partnership and share companies. ese were the major players inthe leather industry. ere are also quite a large number of small scale footwearmanufacturing plants operating throughout the country.


e leather and leather products market seem to operate in a free marketcompetition environment, with some enterprises, probably having some upperhand in their product quality, price and other factors.

Anticompetitionissues/concerns

requiring furtherinvestigation

- e role of the Quality, Standards and Authority of Ethiopia inensuring 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.


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Market/Product Characteristics Description4. Paper

and alliedproducts:(Paper, paperproducts,publishing andprinting etc.)


Paper and paper products are produced for the domestic market. Publishing and printing houses also provide printing services and publish books andmagazines for the domestic market as well. e domestic market is also served

with imported paper and paper products.

Economicimportance

e number of medium and large paper industries increased from 82 in2004/05 to 87 in 2005/06 (CSA), corresponding to a growth rate of 6%. egross value of production of the industry was estimated at Birr 795.9 millionin 2005/06, contributing 5% of the value generated by medium and largeindustries as a whole. e market as mentioned above was supplemented by imports worth Birr 746.8 in 2006/07.

Operationalproblems About 93% of the establishments reported operational problems whichthey faced in 2005/06. Absence of market demand for their products wasmentioned 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 thatreported their reasons for not operating at full capacity, 32 underscored theabsence of market demand for their products (CSA). Absence of demandfor products usually arise when an enterprise fails to become competitive inquality and price. ere are other factors as well. It is possible, however, thatthe marketing problems that the industries faced to arise out of mal practiceagainst competition.


ere are large enterprises that still remained under the ownership of the statein the paper and paper products industries. According to CSA survey reportof 2005/06, there are 4 paper and paper products making establishments and9 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 fallunder di erent forms of ownership such as partnership, cooperatives and sharecompanies. 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 enterprisesmay 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 Characteristics Description5. Chemicals

and chemicalproducts:

(Fertilizer,paints,pharmaceuticalproducts, soapand detergent,etc.)


e chemical and chemical products markets of the country are served withthe output of the local industries and a substantial volume of imports. Exportsfrom the local industries to the rest of the world are negligible.

Economicimportance e chemical industry provides essential input for economic and social growthin the agricultural and health sectors. For example, fertilizer is an output of thechemical industry that is used as an input in the agricultural sector to increasethe output of the farmer. Similarly, the health sector and other economicsectors of the country bene t from the outputs of the chemical industries. edomestic industries supplied to the market di erent types of chemical andchemical products worth Birr 595.8 million, while import dominating themarket 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.

Operationalproblems

e domestic chemical and chemical products industries also encountersome operational problems in a given year. In 2005/06 out of a total of 48reporting medium and large manufacturing industries, 19 reported shortagesof raw material supply and 12 as having less demand for their products in thedomestic market.

Marketing problems

Absence of market demand might have been caused either by production andmarketing structural set up of the industries being a ected or anti competitionpractices by competing industries. State owned enterprises are both engagedin domestic production of chemicals and chemical products and imports of thesame. For instance the bulk of local production of pharmaceutical productsand importation of fertilizers are handled by state owned, endowment a liatedenterprises and farmers cooperatives and unions in the case of fertilizer. eirpresence and involvement in market transaction could have induced someelements of anticompetition practices to dominate the market.


Among the domestic medium and large industries, 11 out of a total of 53establishments operating in the market during the year 2005/06 were understate ownership and the rest under private hands in di erent forms of ownership. State enterprises also have a prominent stake in import transactionsof selected chemical products. For instance, the bulk of fertilizer imports hasbeen undertaken by one state owned enterprise and farmers cooperatives and/or unions.


Free market competition seems to dominate in most chemical and chemicalproducts markets, but in the case of fertilizer and pharmaceutical products thelevel of competition may have diminished as a result of the presence of stateowned and endowment a liated enterprises. e reality on the ground shallbe 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.


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Market/Product Characteristics Description6. Rubber

and PlasticProducts:(Tires, innertubes, plasticdishes, plasticcrates, etc.)


Rubber and plastic products are catered solely for the domestic market. Localmanufacturing establishments and import are the major sources of supply.

Economicimportance

e gross value of production of rubber and plastic products in domesticmedium and large industries was estimated at Birr 983.1 million, while thevalue 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 totalof 63 establishments only one is engaged in manufacturing rubber andrubber products, while all the rest are plastic products manufacturers. In veyears time the number of establishments grew from 39 in 2001/02 to 63in 2005/06, suggesting that the market is attractive to new investors. erubber manufacturing plant is a joint venture between the government andCzech interests and there are also 5 establishments in the plastic sector undergovernment control, while the rest are under private ownerships of di erentforms.

Operationalproblems

Raw material supply shortages and absence of demand are the two majoroperational problems reported by 20 and 19 establishments, respectively. erubber and plastic products manufacturing establishments largely depend onimported raw materials. Shortage of foreign exchange could be one possiblefactor that created raw material shortages in most industries that depend onimported 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 factorscontributing to absence of market demand for rubber and plastic products.Locally manufactured plastic products are not comparable in quality with theimported ones. Absence of market demand, as reported by the establishments,could have been due to their inability to stand competition. It may requirefurther investigation to check whether anticompetition practices contributeto the problem


ere is only one state-owned domestic manufacturer of tires and inner tubesin the country. e enterprise competes with private wholesalers and retailersof imported tires and inner tubes. Similarly the domestic plastic productsmanufacturers are facing erce competitions with importers.


Free market competition exists in the rubber and plastic products market. eexistence of the state owned rubber products manufacturer may have someimpact on the operation of the market.


- Existence of market power and its impact on market competition.- Entry barrier.


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Market/Product Characteristics Description7. Non-metallic

products:(Cement, lime,gravel, marble,ceramic oortiles, cementblocks andtubes etc.)


Most products under non-metallic group are highly demanded in the domesticmarket. Much of the supply to the market comes from domestic industries.Import and export are not signi cant in volume.

Economic

importanceMost 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 andcement products, ceramic products etc., from the non-metallic group.

Operationalproblems

A total of 152 medium and large manufacturing establishments areengaged in non-metallic products production (CSA). Nearly 44% of themreported shortages of raw material supply. e main raw material for mostof the establishments is cement, which is also highly demanded by theconstruction sector. Other operational problems reported by a good numberof establishments include lack of working capital, frequent machinery failure,absence of market demand etc.

Marketing problems

Demands for most products in the non-metallic group are met from domesticsources. Prices are invariably sky rocketing. Most activities in the constructionsector have been temporarily suspended as a result.


Currently there are two cement production facilities in the country one ownedby 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 areowned 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 fairtrade in the non-metallic product group. e cement market operates under a monopolistic market. Prices are jointly decided by the two enterprises.

Anticompetitionissues/concerns

requiring furtherinvestigation

- Existence of dominance and abuse thereof.

- Existence of collusion.

8. Iron and steelproducts:(Iron bars,

wires, nails,iron sheets,metallic doorand window etc.)


e end use market for products under this group is mainly the constructionsector and households. Products are retailed in building materials and hardwarestores and retail outlets.

Economicimportance

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 wasimported to ll the demand gap during the same year.

Operationalproblems

Very few cases of raw material supply shortage among the medium and largemanufacturing establishments were reported during 2005/06.

Marketing problems

Current prices of basic iron and steel are beyond the a ordability level of mostbuyers. e temporary suspension of some construction activities emergedpartly due to expensiveness of construction materials such as iron bars.


State-owned and private enterprises are currently serving the market. Althoughthe state owned establishments are few in number, currently 3 out of a totalof 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. Anticompetitionissues/concernsrequiring furtherinvestigation

- Existence of collusion practices.- Abuse of dominance.- Exit and entry barriers


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Market/Product Characteristics Description9. Construction

markets:(Roadconstruction,

building construction,constructionof dams andbridges etc.)


Construction market exists in all economic and social sectors of the country.

Economicimportance

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.

Operationalproblems

Timely completion of construction projects appears to be a problem of universal nature, especially in developing countries. Delay complaints arecommon virtually in all types of construction activities. Delay in timely releaseof funds as per the contractual agreement, unexpected and sudden rise of pricesof construction materials etc., could be reasons for delay of project completion.

Marketing problems

No information is currently available on marketing problems contractors arefacing. 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 contractorsoperating in the construction market. e Government also has a construction

wing that is engaged in public construction works. e sector is open toforeign contractors as well. Chinese contractors in the road sector are having a dominant position.


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.

10. Electricity and water

Economicimportanceand Level of competition

Electricity and water are considered as natural monopolies in the country. eEthiopian Electric Power Corporation, which is under state ownership, hasbeen the sole supplier of electric power throughout the country. e supply and distribution of water is also monopolized by the state. However, insome remote rural areas, communities have access to potable water through

WASH (water, sanitation and hygiene) projects undertaken by some local andinternational non-government organizations (NGO).

e country has a total installed generating capacity of 819,333 KW, of which81.6% has been installed in hydropower stations, while the balance comprisedthermal and geothermal stations. e installed capacity grew nearly twiceas 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. eprice of electricity varies according to the type of customers. e EthiopianElectric Power Corporation applies four di erent tari rates to charge its

customers for the use of its product. e highest charge fall in the industrialtari rate, while the lowest is the domestic tari rate. A similar approach isapplied in selling water. is is worth considering in the light of the experienceof other countries.


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CHAPTER THREEPro le of Markets in Services

According to the macroeconomic development report of the Ministry of Financeand Economic Development for the year 2006/7, the contribution of the servicesector to the overall GDP product has been constantly increasing, its average shareamounting to 40.3 percent during the period 2003/4 2006/7; while its contributionin 2006/7 stood at 41.2% trying to balance with the share of agriculture. e growthof the service sector was attributed to fast developments registered in real estate andbusiness, hotels and restaurants activities; nancial, education and health services.

Table 4 Results of a Quick Scan of Markets in ServicesMarket/Product Characteristics Description

1. Transport andcommunicationmarket

(Road transport,air transport,

xed linecommunication,

mobilecommunication,postalcommunication,radiocommunicationetc.)

Economicimportance

is is the most vital market on which all other markets entirely depend for e ciency and survival. e Ethiopian transport marketconsists of road and air transports. Both markets are divided into twomajor markets, namely, passenger and freight transportation. ecommunication market consists of mainly telephone, postal and radiocommunication.

Key players in themarket Ethiopian Airlines, being owned by the state, entirely dominates thedomestic ight and the international ight in competition with airlinesof di erent countries permitted to operate in Ethiopia such as Lufthansa of Germany, KLM of the Netherlands etc. ere are few privateairlines operating small aircrafts. e Ethiopian TelecommunicationsCorporation and the Ethiopian Postal Service are the only statebodies providing communication and postal services. Road transportservices, on the other hand, are delivered in the majority of the casesby private transport providers. However, there are also endowmenta liated enterprises operating both in passenger and freight transportservices. Many of the transport providers are organized in the formof associations. ere is only one railway, Ethio-Djibouti Railway,engaged in passenger and cargo transport services along the railway lineconnecting Djibouti with Ethiopia.

Level of competitionNo competition whatsoever exists in air and railway transport, andtelecommunication and postal communication services. ey are allowned by the state and are probably considered as natural monopoly.Further investigation or analysis is worth doing to verify theirquali cation to be a natural monopoly. In the road transport sectora free market competition is believed to prevail but some assessmenton modality and transparency of operation such as route assignment,departure and arrival procedures to be followed etc., needs to be carriedout to see how the market functions.


- State monopoly.- Abuse of dominance.- Justi cation for a natural monopoly.- Collusion practices etc.


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2. Financial andinsurancemarkets :(Commercialbanks, micro-

nanceinstitutions,insurance serviceetc.)

Economicimportance

Market operators, investors, individuals in every walk of life etc., oftenrequire nancial services and some form of insurance coverage. epresent 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 stateowned commercial banks and insurance companies. In regional statesmicro nance institutions have been also established by the regionalgovernments with the aim of expanding service to grass root level.

Key players in themarket

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 at8 and others are still under formation. Public banks had a total branchnetwork 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 companiesproviding insurance services. ey have a total of 146 branchthroughout the country.

Level of competition ere is no variation among the banks on interest rate on deposits andshort and long-term loans. ese are subject to government regulationthrough the National Bank of Ethiopia. e banking sector is not opento foreign investors. Free market competition seems to prevail in the

nancial and insurance service markets with government control andsupervision in the banks.


- e degrees of involvement of the National Bank Ethiopia in comparison to the experience of other countries either inpromoting or retarding competitions.


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PART II

ANALYSIS OF SELECTEDMARKETS


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INTRODUCTIONis 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 accountthree main criteria: their socio-economic importance (in terms of contribution toGDP formation, exports, etc.), the nature of the markets in geographical terms(from national to regional/local markets) as well as in product terms (homogeneousand di erentiated products), and the presence of varied competitive conditions(from monopoly or quasi-monopoly to workable competition). In total, the exercisecovered 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 salientfeatures, including the identi cation of the key operators; a de nition of the relevantmarket in geographical and product terms; a review of the factors impacting uponthe competitive conditions; and an analysis of anticompetitive practices.

e analysis was based on a variety of sources ranging from sector studies and marketreports to statistics on production and sales. e use of o cial sources was largely

complemented with information drawn from the Ethiopian economic press, whichalso 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 Ethiopiasmanufacturing sector. Based on o cial industrial statistics, total employment canbe estimated at some 53,000 while the value of sales is almost 7 billion Birr. Valueadded generated by the sector is in the order of Birr 3 billion, equivalent to little lessthan 2% of the GDP. e sector includes a wide variety of activities, mostly linked tothe 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 illustratedbelow.

Flour Milling Salient Features

e total value of domestic our production is about Birr 1-1.1 billion. As importsand exports are negligible, the value of production basically coincides with that

of total sales in the market. Flour milling is obviously a ected by developmentsin the grain market and, over the last couple of years, there have been signi cantuctuations in the availability of wheat, with major repercussions on prices2.

e our industry consists of some 20,000 micro-operators (artisans) providing grainmilling services directly to households, and about 80 more structured industrialoperations. Artisans employ a much larger share of people (over 60,000) thanindustrial operators (some 4,000), whereas the value of production is more or lessevenly split between the two components. Key indicators on the structure of theindustry are provided in the following table.

Table 5 Key Indicators for the Flour Industry

Indicator Artisans Industrial Operations TotalNumber of plants 19,744 84 19,828Number of employees 61,250 3,697 64,947Value of sales (In million Birr) 508 518 1,026Value added (In million Birr) 184 67 251

Source: Central Statistical Agency

2 For a review of developments in the cereals sector, please refer to the next chapter.


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Market De nitionFlour is by de nition a homogenous product. Although there might be di erencesin the quality provided by various operators, there is no real di erentiation and,therefore, no segmentation along product lines. In contrast, the our market ishighly segmented in geographical terms. Micro-grain millers are merely proximity businesses, serving the population at the village or kebele level. Industrialoperations have larger radius of operations, but they also operate in local markets, atthe sub-regional/regional level.

Competition-related AspectsPresence of state-owned enterprises: Overall, state-owned enterprises play a moderate role in the our business. In 2007, the four plants indicated as state-owned by CSA accounted for about 12 percent of total production. However, whenonly the value of industrial operations is taken into account, the share of state-owned operators increases to around 25 percent. According to information providedby 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 transactionreportedly failed because the winning bidder refused to take over the company aftera closer inspection of existing liabilities.

Concentration and asymmetry in size among operators: Detailed data on the sizeof 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 30percent of the total value of production. Given the geographically fragmented natureof the our market, it is possible that some companies do enjoy a dominant positionin some rural areas and smaller towns, whereas the situation is more competitive inurban 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 aredownward integratedinto the productionof our-based products, such as pasta and baked goods (bread and biscuits), in orderto 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 ouroutput 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 impactdirectly on competition in the our industry. e most problematic issue faced by

our mills isaccess to raw materials. Over the last two years, our producers haveoften been facing di culties in securing a stable supply of wheat, with a negativeimpact 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 , thisinitiative 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 outlaysvary enormously, depending upon the size andsophistication of operations. Domestic grain milling machines sometimes used by artisans sell for very small amounts (sometimes, even less than 100 USD). Small-scale commercial mills are in the USD 2,000 to USD 20,000 range. Industrial millsare 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 theindustrial and semi-industrial level. As forregulatory barriers,our milling is oneof 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 Practicese 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 increasesprompted the usual allegations of pro teering from government circles, althoughin certain cases it was ascertained that the price hike was actually initiated by somestate-owned enterprises. Irrespective of the private or public nature of the culprits,these price increases appear to have been the initiative of individual companies anddo 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.

BeerSalient FeaturesOverview:Western beer, as opposed to the traditionaltella beer, was introduced inEthiopia in the early 20th century, and the rst brewery, St. George, was establishedin the early 1920s. Over time, beer has become an increasingly popular beverage andconsumption is currently estimated at about 3-3.5 million hectoliters (hl)/year, witha remarkable increase over the hl one million consumed in the late 1990s. e beermarket is predominantly supplied by local producers, with only limited quantitiesof special beers imported. Exports are also very limited, with small quantities sold to


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North America and European countries, where sometimes Ethiopian beer is availablein ethnic restaurants. e total market is worth probably around USD 200 million.

Main Operators: At present, there are 6 breweries in Ethiopia. ey are controlledby 5 companies, of which three are state-owned, one is owned by an endowmentfund and one fully private and controlled by foreign interests (the French Castelgroup, known locally as BGI). Almost all the companies have recently implementedor announced expansion programs to keep up with growing demand. In the recentpast, 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 salientfeatures of the current operators are summarized in Table 6 below.

Table 6 Basic Features of Ethiopian Breweries

Companies Establishment Ownership Brands Comments

BGI 1998 Private St. George, Bati, and CastelTwo plants, in Addis Ababa (privatized in 1998) and Kombolcha (green eld operation).

Bedele 1993 State-owned Bedele

Meta Abo 1963 State-owned Meta Nationalized during the Derg periodand modernized in the 1990s

Dashen Late 1990s Private Dashen, Royal BeerEndowment enterprise, owned by ENDEAVOUR

Harar 1980s State-owned Harar, Hakim Stout andHarar So

Source: Company websites and press reports.

Market De nitionIn geographical terms, the market for beers can be regarded as having a nationalcharacter, 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 maindistinction is between bottled/canned beer and draft beer, the latter being consumedonly in bars and restaurants. Apart from that, each brand has its own distinctivefeatures, owing to both objective and subjective characteristics (e.g., Hakim Stoutand Royal Beer have a higher alcoholic content, Meta is sometimes perceived assweet, etc.). But they can all be considered in competition with each other. Taken


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together, industrial beers are in competition with traditional beer, which is oftenhomemade or produced by small scale artisan-like operations3.

Competition-related Aspects

Presence of state-owned and endowment enterprises: As indicated above, threeof the ve breweries currently in operations arestate-owned . It should be notedthat in the past several tenders were launched for the sale of these companies toprivate investors. In some cases, o ers were formulated by prospective investors (in2003 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 werestarted (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 forendowment enterprises , Dashen is controlledby ENDEAVOUR, an endowment fund of the Amhara National DemocraticMovement. Initially, Dashen was partly owned by BGI, which had a 40 percentshareholding, 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 marketshare 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 salesin Addis Ababa. Competitors are much smaller, with capacities ranging from hl250,000 (Bedele) to hl 500,000 (Meta Abo). Overall, BGI seems capable of exerting a strong in uence on market developments, although the rapidly growing marketand the existence of consumer loyalty has so far left enough room for maneuver to itscompetitors. It should be noted that high concentration is a common feature of thebeer market in developing countries, especially in Africa. For instance, in other East African countries, like Kenya, Uganda and Tanzania, the beer market is divided upbetween 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 beenunable 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 eve

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 drinkare 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.


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and signi cant amounts of malt had to be imported, at increasingly high prices. Inturn, this negatively impacted on the price of beer. In early 2009, Dashen announcedplans to establish a second malt factory, with estimated investment costs of Birr 150million. 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 eldoperation established by BGI in Kombolcha in the late 1990s required an investmentof some USD 23 million. A similar gure (Birr 200 million) was mentioned for the hl300,000 project proposed by the Star Business Group in Adama, while the expansionplans implemented or announced by nearly all breweries over the last few years werein the order of USD 10-12 million. Operations are alsotechnically 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 considerentering the market.

Alleged Anticompetitive PracticesOver 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 individualoperating 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 draftbeer. Within the framework of this study it was not possible to investigate in detailthe 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 DrinksSalient FeaturesOverview : anks to its rich hydrological resources, Ethiopia has a long traditionin 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 fromthe 1950s. Since the fall of the previous regime, the demand for both mineral waterand soft drinks has been on the rise, with a particularly marked increase during thelast few years. At present, the Ethiopian market for mineral water can be estimated


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at some 45-50 million liters, while sales of soft drinks are in the order of 40 millioncrates of 24 bottles each. e combined value of mineral water and soft drinks salesappears to be in the order of USD 70-80 million per year. Both mineral waters andsoft drinks are mostly produced locally for the domestic market, and both importsand 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 CompaniesCompanies Establishment Ownership Products/Brands Comments

Ambo Mineral Water

1938 Private (privatizedin 2007)

Mineral water(Ambo)

Nationalized in the1970s and modernizedin the early 1990s

Babile Mineral Water

1953 Private (privatizedin 2007)

Mineral water(Babile)

Nationalized in the1970s and modernizedin the early 1990s

East AfricanBottling (EAB)

1995 Private Soft drinks (Coca Cola, Sprite, Fanta)and mineral water(Crystal)

Two plants, in Addis Ababa (privatized in1998) and Dire Dawa (green eld operation).

Moha SoftDrinks

1997 Private Soft drinks (PepsiCola, 7Up, Mirinda Orange & Tonic) andmineral & puri ed water (Kool)

Part of the MIDROCGroup. ree plants,in Addis Ababa, Bure(privatized in 2004)and Hawassa

Source: Company websites and press reports.

Market De nitionFrom the viewpoint of consumers, mineral water and soft drinks are di erentproducts, 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 canbe 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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Competition-related AspectsPresence of state-owned enterprises:e state has almost completely withdrawnfrom 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 islargely dominated by two heavyweights, namely East Africa Bottling, the Coca Cola franchiser and subsidiary of the homonymous group operating across the wholeof East Africa, and Moha Soft Drinks, the Pepsi franchiser, part of the MIDROCGroup. While precise data are not available, Moha is generally accredited with theleading position, accounting perhaps for 60 percent of the market4. However, EABrecently completed an expansion program that raised production capacity from 14to 18-19 million crates, and this may alter the situation. Likewise, the arrival in theEthiopian 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 witha market share of 85 percent, with the rest subdivided among the two soft drinksproducers and other, smaller, players. But also in this sector the leading companysposition might be threatened by new entrants. In particular, Moha is currently building a new mineral water plant in Hawassa, which is expected to produce anaverage of 18 million liters per year.

Vertical integration and entry barriers: A directaccess to water sources is a must formineral water producers and highly recommended for soft drink producers. However,there is no scarcity of natural springs in Ethiopia and access to water resources isnot a signi cant constraint. As a matter of fact, the government appears to haveissued 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, themain 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 tobecome 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 plantaimed 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 (these4

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 inone of the companies who control EAB (see Coca Cola hits the brake a ected by foreign currency shortage, eReporter, 14 March 2009). However, the traditional rivalry between the two world brands does not seem to allow for any type of concerted action.


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days, second-hand bottling lines and ltering equipment can be bought at rock-bottom prices from many EU suppliers). Instead, the establishments of large scaleoperations, including the logistics to distribute products nationwide, are much moreexpensive. For instance, the modernization plan recently implemented by EABinvolved an investment of some USD 12 million.

Alleged Anticompetitive PracticesSoft drinks companies tend to impose exclusivity agreements upon resellers of theirproducts, thereby limiting opportunities for new entrants. e issue of exclusivity has been debated in a number of antitrust cases (including the famous settlementagreement 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 withinterests also in some distribution trades (and, in fact, Coca Cola is not available atSheraton Hotel). In late February to early March 2009, signs of a severe shortage inthe soft drinks market started to emerge, and press reports indicated that in somecases this had led to a considerable increase in prices at the retail level. e fact thatthe 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 ableto 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 foreignexchange, with the exclusion of any type of anticompetitive behavior5.

SugarSalient FeaturesOverview : 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 westernizationof dietary habits and, especially, the growth in population, total consumption hasgrown 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. Domesticproduction 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,taki

Baseline Survey on Competition and Markets in Ethiopia

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