Update on Ethiopia’s New Investment Regulation No. 474/2020
Following the enactment of the Investment Proclamation No. 1180/2020 (“Investment Proclamation”), the much awaited Investment Regulation No. 474/2020 (“New Regulation”) came into effect. The New Regulation partially replaced its predecessor – the Investment Regulation No. 270/2012. (“Old Regulation”). Together with the Investment Proclamation, the New Regulation introduces new changes to investment admission and administration in Ethiopia.
In this piece of our legal update, we highlight the key aspects of the New Regulation. (For a summary of the Investment Proclamation, find our legal update here.)
Prohibited and Restricted Investment Sectors
In accordance with article 6(2) of the Investment Proclamation, the New Regulation provides a list of investment sectors that are prohibited or restricted to foreign investment under the following three categories (“Negative List”):
- Areas reserved for joint investment with the government
- Areas reserved for domestic investors and
- Areas reserved for joint investment with domestic investors.
Five (5) sectors are reserved for joint investment with the government, thirty-two (32) sectors exclusively reserved for domestic investors and seven (7) sectors for a joint venture with domestic investors. All sectors that are not listed in these categories are open for foreign investment.
Areas Reserved for Joint Investment with Government
Article 3 of the New Regulation provides that investors may only invest in the following five (5) sectors jointly with the government:
- manufacturing of weapons, ammunition and explosives used as weapons or to make weapons
- import and export of electricity
- international air transport services
- bus rapid transit; and
- postal services excluding courier services;
The key change introduced with this category is the removal of previous government monopoly of some sectors and presenting the opportunity for joint venture (JV) with the private sector. Areas listed under (ii-v) above, which were exclusively reserved for the government, are now eligible for JV with government.
In addition, two sub-sectors that were government monopolies are now open for domestic investors (see next category). These are:
- distribution of electricity through the integrated national grid and
- domestic air transport services above a seating capacity of 50 passengers.
Sectors reserved for joint investment with the government are generally areas where government seeks to retain majority ownership. The New Regulation enables the government to form such joint ventures with domestic and foreign investors if and when it desires. However, the New Regulation does not provide a mandatory ownership cap for foreigners investing in this category, leaving the decision to the discretion of the government.
Areas Reserved for Domestic Investors
The definition of domestic investors under the Investment Proclamation includes:
- Ethiopian nationals
- Foreign nationals of Ethiopian origin (“Ethiopian Diaspora”) and
- Foreign nationals recognized as domestic investors by special legislations.
Article 4 of the New Regulation provides a list of thirty-two (32) sectors that are exclusively reserved for domestic investors. Sectors listed in this category reflect continuous government policy in restricting foreign participation in selected areas of the economy. Chief among these are financial, media and legal services, import, wholesale and retail trade. Other sectors in this category are primarily small and medium businesses that aim to protect domestic investors and encourage linkages with manufacturing industries. Article 4 also provides a number of exceptions in which foreign investment may be permitted.
For the purpose of this legal update, we feature below few sectors that are now opened as a result of the amendments made to the definition of a “domestic investor”, the shift to the Negative List and exceptions provided under Article 4.
i. Investment by the Ethiopian Diaspora
The Investment Proclamation abolished the distinction between Ethiopian nationals and foreign nationals of Ethiopian origin removing sectors that were exclusively reserved for Ethiopian nationals. This is consistent with amendments made to sector specific laws such as the Banking Business Proclamation and the Insurance Business Proclamation. Consequently, Ethiopian diaspora are now eligible to invest in:
- Banking, insurance and micro-credit services
- Packaging, forwarding and shipping agency services
- Media services
- Attorney and Legal consultancy services
- Preparation of indigenous traditional medicines
- Advertisement, promotion and translation works:
- Domestic air transport services
While the New Regulation eliminates previous distinction between Ethiopian nationals and Ethiopian diaspora, it defers to sector legislations for specific rules that may apply. For example, the Banking Amendment Proclamation No. 1159-2019, which preceded the New Regulation in liberalizing the banking sector for foreign nationals of Ethiopian origin, provides special rules which are applicable to Ethiopian Diaspora investing in the banking sector. Notable among these is the requirement that Ethiopian diaspora may invest (acquire shares of banks) only in convertible foreign currency and not in Ethiopian Birr, while restricting their right to repatriate profits in convertible currency. This is a departure from the equal treatment that the Investment Proclamation offers to domestic investors.
ii. Notable Openings
Transport Services: previously the provision of transport services, including, air, railway, ground and marine was closed to foreign investment. The New Regulation lifts this restriction to allow foreign investment in the following transport services areas:
- railway transport
- cable car transport
- cold-chain transport and
- freight transport
Additionally, more transport services are partially liberalized for joint investment with domestic investors. (See below Areas Reserved for JV with Domestic Investors). The relaxation of restrictions on the transport services follows the partial liberalization of the logistics sector in 2018, which was previously reserved for Ethiopian nationals only.
Consultancy, Health, Education and Cement Manufacturing – through the Negative List, the New Regulation reverses prohibitions that were introduced in 2012 under the Old Regulation. For example, investment in health services, which was previously restricted to foreigners that were willing to construct hospitals is now open at all levels except small and medium health services. Further, restrictions in cement manufacturing, education, management consultancy and other services are removed under the New Regulation.
Wholesale Trade and Electronic Commerce: consistent with previous policies, the New Regulation limits wholesale trade to domestic investors except wholesale of petroleum and petroleum products and wholesale of own products manufactured in Ethiopia. Further, Article 4 of the New Regulation expands the exception to permit foreign investors to engage in wholesale trade that is carried via electronic commerce. The New Regulation does not provide a definition of electronic commerce and the qualifications required to benefit from such exception.
Retail Trade and Electronic Commerce: under previous laws, foreign investors engaged in the manufacturing sector were only permitted to wholesale their own products. Retail of own products were not permitted and could only be carried out through local intermediaries. Like wholesale trade, the New Regulation exempts retail trade carried out via electronic commerce from such restriction. As there is no definition or guidance as to what constitutes “electronic commerce” and whether all types of retail will be permitted on electronic platforms, it is too early to opine on the implication of such exemption. The scope of application of electronic commerce will likely be determined by sector specific legislation or directives to be issued by the Ethiopian Investment Commission.
Areas Reserved for Joint Investment with Domestic Investors
Article 5 of the New Regulation introduces a new category of sectors where foreign investment is permissible only if it is carried out on a joint venture with domestic investors. This follows the precedence set by the logistics sector allowing a maximum of 49% foreign ownership. The New Regulation lists seven (7) sectors where foreign investment is permissible only up-to a maximum of 49% ownership. These are:
- freight forwarding and shipping agency services
- domestic air transport services
- cross-country public transport service using buses with seating capacity of more than 45 passengers
- urban mass transport service with large carrying capacity
- advertisement and promotion services
- audiovisual services; motion picture and video recording, production and distribution and
- accounting and auditing services.
Investment Board Discretion
It is worth noting here that Article 6 (4) of Investment Proclamation authorizes the Ethiopian Investment Board to revise any of the sector listings provided in the New Regulation if and when it deems necessary. This mandates the Board to continuously examine the application of the new investment laws and determine areas to be closed or opened depending on emerging government policy. At the same time, unless detailed guidelines are introduced, it may introduce a level of uncertainty on the uniform and consistent application of the law.
Detailed Rules and Procedures
The New Regulation establishes detailed procedures and required documents that investors must prepare in order to obtain investment permits. Further, it provides specific rules and timeline within which the investment commission must respond to investment applications, and the list of grounds on which active investment permits may be suspended or revoked. These rules aim to provide regulatory transparency and predictability to investors.
Article 20/21 of the New Regulation partially repealed the previous Investment Regulation No. 270/2012. Those provisions related to investment incentives will remain in force until a separate regulation is enacted.
It is anticipated that the Ethiopian Investment Commission will enact further implementation directives and guidelines that will elaborate and simplify investment admission and administration.
The changes to the investment laws find their roots in the wave of economic and legal reforms that have been underway since 2018. Building on the successes of the past decade, the new laws aim to increase in-bound investment and address some of the administrative challenges facing investors on the ground. The new legislations do not introduce fundamental shift in policy or practice from what has been in place for the past two decades. Rather, the changes relax restrictions on some categories of investors such as the Ethiopian Diaspora, and foreign nationals that have lived in Ethiopia for generations. Moreover, investment sectors restricted for foreign investment since 2012 are now permitted with the expectation to attract more investment in services, IT, tourism, education and health.
With respect to existing investors in the country, the changes will offer more opportunities to expand current investments to other sectors due to larger sector options. Existing investors will also benefit from new rules on investment dispute and grievance handling procedures that is likely to streamline administrative process at federal and regional levels.
Finally, the shift to the Negative List will likely send a positive signal that Ethiopia is more open for investment. Considering that the Negative List approach is likely to generate foreign investor interest in hitherto untested sectors, the new laws are likely to test the regulatory capacity of the Ethiopian Investment Commission (EIC). To implement the new laws in a consistent and predictable manner, EIC should proactively draft and publish detailed implementing rules and directives providing clarity and practical guidance to investors.