IFC, Investment Climate TF (2013-19)

According to the Impact Assessment delivered by Economisti in June 2019, phase 1 of the Investment Climate pillar delivered the following results: 1) Addressing binding constraints to increased investment  With IFC support, the Ethiopia Investment Commission (EIC) was restructured as an autonomous government entity, directly accountable to the prime minister. The EIC also served as the Secretariat of the Ethiopian Investment Board (EIB), the highest decision-making power on investment policy issues, headed by the prime minister. The EIB has held six meetings since its establishment in 2014, which according to the impact assessment, were instrumental in introducing policy and legislative reforms. The IFC assisted the EIC in identifying foreign investor issues and conducting analytical work to draft legislation. Through IFC support, the visa regime underwent reform and six (6) sector liberalizations that were enacted to lower barriers to investment entry. These sector liberalizations include: (i) the leasing financing sector (opened to foreigners 2016); (ii) the manufacturing sector that uses cement as inputs (fully liberalized 2016); (iii) proposals allowing foreign investors’ participation in the local bonded input supply warehouse scheme (2017); (iv)  the maintenance services sector (2017); (iv) the logistics services sector, which was opened to foreign investment, with foreigners allowed to invest up to 49 percent in joint ventures (late 2018); (v) the printing sector (2019). To make the regulatory framework for FDI more transparent and secure for foreign investors Ethiopia had signed 31 BITs by 2019. In addition, reforms were implemented to establish a constructive dialogue between foreign investors and the government; these reforms focused on issues affecting the country’s business climate and: (i) allowed foreign investor associations to officially register; and (ii) established a structured public-private dialogue (PPD) platform between investor associations and the EIC (including other government agencies as relevant to the dialogue topic). According to the impact assessment, the PPD platform was made fully operational and has already been successful in addressing investment concerns. As an illustration of its efficiency, the impact assessment reports that following the first investment policy dialogue platform (in November 2017), the National Bank of Ethiopia issued three directives improving foreign currency access, allocation, and management for businesses. Since mid-2015, IFC-supported interventions have successfully attracted 32 operational investments. Specifically, these investments included: (i) 25 in the Hawassa, Mekelle, and Kombolcha industrial parks, specialized in textile and apparel production; (ii) five in the liberalized sectors of value-added cement and clay product manufacturing and maintenance services; and (iii) two in the pharmaceutical industry. Of these investments, the impact assessment estimates that IFC support can be attributed to having contributed to realizing between $228 million and $281 million of of investments associated with upstream and downstream support. This estimation includes the 32 aforementioned investments, to which the IFC-support can be attributed to have generated between 5,600 and 11,400 new jobs. These figures were estimated by the impact assessment team by attributing a percentage of the total investments and job-creation reported by investors that could be linked to IFC-supported reforms. To estimate the effect of IC reforms on foreign direct investment (FDI) and job creation a synthetic control method (SCM) was adopted covering a time period from mid-2015 to end-2018/early 2019. Therefore, it is important to highlight that these figures should be seen as indicative.    2) The Trade Logistics component The impact assessment report that the number of days required to comply with import and export regulations has decreased due to IFC-supported reform of Ethiopian customs legislation and risk management procedures. On average, the time to import was reduced by six days and by 3-5 days regarding time to export based on the base year (2012).  In addition, the impact assessment concludes that IFC-supported reform has led to an improved efficiency in imports risk management facilitation and automation with, imported goods subject to physical inspection decreased from 60 percent of import declarations in 2012 to about 30 percent in 2018. However, arisk management system was not yet automated for exports. Through to IFC's support to the Ethiopian Revenues and Customs Authority (ERCA) to streamline customs documentary requirements, eight (8) (out of 25) documents for imports and four (4) (out of 11) documents for exports could be eliminated. According to the impact assessment, this reform also made ERCA services more centralized and unified.  The impact assessment states that IFC support was critical in achieving the aforementioned results in the trade and logistics component. Based on an attribution rate of 20 percent, an estimated $61.4 million in Private Sector Savings (PSS) could be attributed to the IFC supported Ethiopian Trade Logistics (ETL) project (USD 55.7 million for imports and USD 5.7 million for exports). Thus exceeding the USD 18 million target by 3.4 times. The impact assessment uses a attribution rate as many factors, aside from IFC support, contributed to these changes. In addition, the impact assessment states that the ETL Project also generated other types of savings from the elimination and reduction of duties or fees accrued to individual passengers, staff of firms in industrial parks, and private sector operators or individuals filing customs declarations. These estimated additional annual savings include USD 3.2 million from the new passenger personal effects directive, which reduced the number of duties collected on previously non-exempt goods; USD 800,000 from the new industrial parks regulation, which decreased the number of duties collected for personal effects imported into Ethiopia by the staff of companies located in-country; and USD 1.6 million resulting from the new customs declarations directive, which reduced private operator costs by saving fees paid to customs brokers for filing low-value goods declarations. The impact assessment reports that Doing Business reports recorded a positive performance in Ethiopia. Since 2015, the Ethiopian score improved by 17 points, with the country climbing 14 positions in the Starting a Business indicator and moved from a score of 52 (and rank of 168) in 2015 to a score of 56 (and rank of 154) in 2018 in the ‘Trading Across Borders’ indicator. According to the impact assessment, reform acknowledged were largely associated with IFC-supported reforms.    3) The business registration and licensing According to the impact assessment, the Ethiopia Business Regulation (EBR) Project supported by the IFC played a major role in reforming business registration and licensing procedures in Ethiopia. IFC-supported reforms under this segment include: (1) the Trade Name Directive; (2) the 2016 CRBLP and subordinated legislation; and (3) two directives to simplify the business licensing regime. The Trade Name Directive was issued to provide clearer guidance on trade name approvals. According to the impact assessment, this reform decreased the time and costs required to successfully comply with Ethiopian trade name requirements. In parallel, the commercial registry’s IT solution online trade registration and licensing system – the OTRLS – was updated and expanded. However, no clear evidence on actual OTRLS usage rates was not available in the evaluation.   The impact assessment reports that four business registration requirements were removed through the 2016 Commercial Registration and Business Licensing Proclamation (CRBLP). These reforms supported simplified business registration and licensing procedures and documentation by removing: (1) the paid-in minimum capital to incorporate a Private Limited liability Company (PLC), which was 15,000 Ethiopian birr; (2) the requirement to have official letters to open and unblock a bank account; (3) the requirement for certain types of businesses to have lease agreements authenticated by the Documents Authentication and Registration Office; and (4) by reducing and relaxing the requirement to publish the business trade name in a national newspaper for 15 days. In addition, the 2016 CRBLP also abolished annual renewal requirements for both commercial registration certificates (CRC) and certificates of competence (CoC). With IFC support, the Ethiopian Standard Industrial Classification (ESIC) was streamlined in 2018, which reduced the business licensing system down from 1,352 to 519 business categories. In May 2018, the certificate of competence (CoC), designed to certify the applicant’s capacity to operate the envisaged business activity has reduced the scope of the CoC to cover 429 business activities related to environmental protection, public health, animal health, and plant health. The impact assessment states that there is information from the Ministry of Trade that this scope will be further reduced to cover 313 business activities, however, by the time of this assessment no additional simplification was not yet operational. According to the impact assessment, business registration and licensing reforms promoted institutional transparency, predictability, and accountability by (1) eliminating the previously high degree of arbitrariness for public officials to interpret proposed trade names; (2) making application processes more easily trackable through the OTRLS; and (3) reducing the likelihood of bribes by simplifying hard-to-comply-with CoC requirements. To highlight this, in the domestic firm survey sample conducted by the impact assessment team to measure perceptions of the legal and regulatory framework’s evolution in IC areas, over 70 % of the firms stated ‘Business Registration and Licensing’ had improved either significantly or somewhat.  Furthermore, the impact assessment states that IFC-supported reforms in business registration and licensing were estimated to have generated BCS worth $34 million over the 2015-2018 period. This value exceeded the 25 percent compliance cost reduction target (equalling $25 million in BCS). Monetary savings (e.g. from fees) and cost savings (e.g. from travel and accommodation) each accounted for about 50 percent of total savings. Most savings were generated by: (i) eliminating (annual) commercial registration certificate renewal and (ii) improving the trade name registration process. Furthermore, the assessment reports that BCS for the reduced CoC scope can be expected to be higher in the coming years as BCS for this reform were only computed for seven months (between May 2018 and December 2018).  In terms of supporting enterprise formation, the impact assessment reports that about 7 percent of surveyed domestic firms established after 2015 mentioned that the streamlined business registration procedures positively impacted their registration. If by estimation the impact assessment suggesrs that, the program could have helped establish between 22,000 and 45,000 new operational firms. However, this estimate should be regarded with extreme caution due to the lack of consistent business registration data. Furthermore, according to the survey conducted by the impact assessment team, IFC-supported reforms were not a major driver for businesses to enter the formal economy. Rather, government pressure, growth intentions, and the ability to secure better access to finance, customers, and suppliers were the most important motivations to formalize. This indicates that streamlined business registration procedures most likely had a limited impact on business formalization.   4) Reducing the time and costs of dealing with business taxes The IFC helped introduce two major, legal reforms in 2016 to (1) modernize the income tax system through the Federal Income Tax Proclamation (FITP); and (2) consolidate tax administration rules previously dispersed across different laws. These reforms increased income tax thresholds for wage earners and the self-employed in Ethiopia. The reforms also allowed microenterprises, even if incorporated, to be treated as self-employed. According to the impact assessment, these legal changes reduced the tax burden on small businesses, helping address inequality. The reforms also increased annual turnover thresholds for taxpayer categories. As a result, fewer taxpayers fell under taxpayer categories with complex, burdensome tax accounting rules and reporting obligations. Furthermore, the reforms introduced a simplified tax system for taxpayers with an annual turnover between 500,000- 1,000,000 Ethiopian birr (for reference, in 2016 there were 32,500 VAT registered taxpayers with a turnover in this bracket). According to the impact assessment, preliminary estimations show that the revised taxpayer threshold categorization could generate BCS worth about $22 million, exceeding the $18 million target. However, the impact assessment highlights that this value is not easy to estimate and ultimately depends on the estimated number of businesses that changed taxpayer category following the threshold revisions (for which there is no clear data presented). In addition to the reform of the tax system, the FTAP established a new Tax Appeal Commission (TAC) that became operational in September 2018, replacing the dissolved tax council under the attorney general’s office and reorganizing it as an autonomous dispute settlement body directly accountable to the prime minister; and removed the penalty and late payment interest payable for disputed tax from the deposit calculation (set by the tax assessment as 50 percent of the disputed tax amount) to be appealed to the TAC. To conclude, the impact assessment reports that these reforms reduced tax burdens on many Ethiopians living in poverty by decreasing the share of the poorest Ethiopians required to pay income tax. As a secondary result of this reform, the assessment also reports that perceptions of the tax system transparency and operational accountability also improved, even though surveyed participants still noted a significant margin for further improvement in tax authority service quality.   5) Additional outcomes - a gender perspective In terms of gender inclusion, the impact assessment report that the business regulation reforms had similar effects on male and female-owned enterprises. Savings resulting from revised business registration and licensing procedures were largely equal for male-owned and female-owned companies, with limited differences (for instance, CRC and CoC renewal savings were lower for the latter group). Sida notes, however, this analysis does not include effects on other gender barriers, such as e.g. security. The Investment Policy Promotion (IPP) Project positively impacted local female worker inclusion. Women accounted for a significant share – about 70 percent – of the jobs created by Investment Policy Promotion downstream support, and this share increased to more than 80 percent among foreign investors active in the textile and apparel sector. 

The overall objective of the Ethiopia IC Program is to streamline and simplify selected high priority regulations considered burdensome to private businesses and address investment climate issues that are holding back investment and productivity growth in Ethiopia. The project will adopt a sequenced 2-4 years Investment Climate Program that will allow for a realistic implementation that reflects client capacity, readiness and buy-in. To ensure flexibility, and to realistically reflect the volatile political context in Ethiopia, the project commits to delivering at least 2 out of the following 4 objectives by project end. The Program specifically aims at: (1) Addressing binding constraints to increased investment in one agribusiness and one tourism sub sector, generating at least three new high quality investments. (2) The Trade Logistics component will achieve the following outcomes at the end of the project (a) Time to export will be reduced by 15% from 42 days as measured by DB 2012 to 36 days at the end of the project while time to import will be reduced by 16% from 44 days as measured by DB 2012 to 37 days at the end of the project; (b) The number of documents to trade will be reduced by 10% (baseline DB 2012); (c) The project will lead to an improved risk management system and an improved level of automation in the trade logistics system. (3) The business registration and licensing component will increase the number of new or formal businesses that are registered by at least 10%, reduce the time and cost of business registration, and significantly streamline/eliminate licensing requirements (by a target that will be defined by the first PSR). (4) Reducing the time and costs of dealing with business taxes by 10%, and broaden the tax base by increasing the number of small businesses registered for tax purposes. The attached two statements of report for the period, summarize the lessons from the Investment Climate phase I period.