The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 342

CHAPTER SEVEN
PUBLIC ENTERPRISES IN ETHIOPIA
Enterprise means a wholly state-owned public enterprise established
pursuant to this Proclamation to carry on for gain manufacturing,
distribution, service rendering or other economic and related activities;
Every enterprise shall be established by regulations to be issued
pursuant to this Proclamation. The establishment regulations shall
contain:

1. the name of the enterprise;

2. a statement that the enterprise shall be governed by this

Proclamation;

3. the purposes for which the enterprise is established;

4. the authorized capital;

5. the amount of the initial capital paid up both in cash and in kind;

6. a statement that the enterprise shall not be liable beyond its total
assets;

7. the head of the enterprise;

8. a statement that may authorize the enterprise to open branches;

9.the name of the supervising authority

10. duration for which the enterprise is established.

This definition embodies three basic elements that determine the
feature of a public enterprise. The first element relates to ownership
and requires an enterprise to be wholly owned by the state so that it
can be characterized as a public enterprise. Hence, mere existence of
public investment share in an enterprise does not suffice (irrespective
of its percentage) unless the government is the sole owner. The law
excludes enterprises in which we find joint investment of the two
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 343
sectors, namely, private and public, irrespective of the quantum of
the investment.
The second element requires establishment under the proclamation. The
proclamation sets the legal framework for entities established by the State for
the purpose of economic activities for gain. The requirements for their formation,
operation, structure, and exit are embodied in the proclamation. The government’s
act should indicate that the entity established is governed by this legislation13 if it
is a public enterprise. The third element in the definition of ‘public enterprise’
under Proclamation No. 25/1992 is the purpose of the entity which distinguishes it
from the main function of the State. Public enterprises are commercial entities as
distinguished from administrative agencies which carry out regulatory activities
and render public service.
Characteristics
A public enterprise is necessitated by the need “to find an effective
and efficient economic organization under socially satisfying
conditions.”25 Hence, the economic and social aspects converge in a
single entity. It is a borderline entity sharing the features of a public
entity and business. A public enterprise combines dual features (in
status and functions) as enterprise aiming at profit while at the same
time having public nature as a public entity.
It is proposed that the most effective methodology for
identification is to specify the tests which need to be met if an
institution can properly be identified as a public enterprise. To this
end, certain tests can be employed, namely: ownership test, public
purpose test, the field of activity test, the concept of investment and
return, the concept of marketing and the commercial accounts. These
tests are believed to enable us conceptualize the notion of public
enterprises and have a better understanding of the entity based on its
features.26

1.1 Public Dimension

The ascertainment of the public dimension in the realms of ownership,
purpose or otherwise, is recurrent in the discourse on public
enterprises. Public enterprises are singled out as part of the broader
stream of the public sector.27 Hence, questions may be posed as to
what makes a purpose public or how public are public enterprises.
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview
344
The term “public” can mean accessibility and benefit to the general
public, ownership by the public, or ownership and control by
public authorities. With regard to public
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 345
enterprises, it is ownership by public authorities which stands out
even though that is not the only factor which determines the status of
the entity.28
It is necessary to identify the features which bestow on it public
character. There is no consensus on the elements which fairly
describe the public aspect of enterprises. For some, it is non-private
accretion of net benefit, public decision making and social
accountability which primarily stand out.29 For others, the critical
factor is the question of public purpose.30 At any rate, in the absence
of consensus on the factor which fundamentally establishes the
‘publicness’ of a public enterprise, we can select some essential
factors as highlighted below.
a) Public ownership.
One manifestation of the public dimension of public enterprises is
that they are owned by the public. Sometimes distinction is made
between ownership in the legal sense as a formal claim in the
framework of the legal order and ownership in the economic sense
which inquires into the actual beneficiary from the thing.31 The public
is presumed to exercise the ownership through the state, the
government, local authorities or municipalities. The word “public” is
therefore used as “ of or pertaining to the people, relating to or
belonging to, or affecting a nation, state or community at large; as
opposed to private”.32 Obviously, an enterprise becomes public if it is
wholly owned by public authorities. In other words, there will
usually be no doubt about the nature of an entity if ownership
exclusively belongs to a public authority.33 In this regard,
Proclamation No. 25/1992 is explicit and considers as public only
those which are wholly owned by the state.
.
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 346
However, public ownership of enterprises becomes ambiguous
when ownership is not full. Ownership may vary “along a
continuum from zero to one-hundred percent presenting” a challenge
to specify the cut-off point which distinguishes public from private
enterprises.34 A predicament may thus arise regarding enterprises
that are only partly owned by a public authority as in the case of joint
investment or ventures. In the different laws which define the term,
we have seen that although ownership is an essential element, the
extent of public investment is not resolved. It is assumed that a
majority shareholding by a public authority makes the enterprise a
publicly owned. According to this view, an entity becomes a public
enterprise if it is owned by public authorities, central, state or local,
to the extent of 50% (fifty percent) or more as that ensures managerial
control.35
From the various definitions examined above, we can observe that
certain proclamations merely require the existence of public share in
an investment to consider it public. However, it may be inquired
whether an enterprise in which the stake of the government is less
than private contribution and consequently with reduced financial
stake and control can be considered as a public enterprise.
It can be argued that an entity with minority governmental
shareholding may still be regarded as a public enterprise depending
on whether the other elements of the public dimension are present.
Accordingly, it is submitted that with adequate measure of public
control and public management, an enterprise becomes public even if
the government has minority holding.36 What if the minority holding
is devoid of any other characteristic of a public entity? In response to
such challenges, some suggest that the ownership boundary should
be set at 50 percent37 which appears to be the logical way
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 347
of determining the public aspect of such enterprises based on the
stake of the government.
We can also inquire into the effect of indirect ownership. Where a
fully state owned public enterprise acquires majority holding in a
newly formed enterprise, or if two public enterprises that are fully
owned by the government set up an enterprise, the question becomes
whether indirect ownership by the sate confers public character on
the new entity. In such cases, the government is the indirect source of
finance. Yet, one of the laws which extend the application of the term
to partial public ownership, excludes (from the definition) those
share companies in which the state owns shares through public
enterprises.38 Distinction is often made between ownership by the
Government and ownership of public enterprises which are
autonomous and independent legal persons. Even though the
Government ultimately owns the net assets of such enterprises, it is
doubtful to conclude that what is owned by the enterprises is owned
by the state. One can thus argue that ownership should be limited to
direct ownership by the state, the government, or local authorities.
b) Public purpose
A public enterprise has multiple purposes, including public purpose.
The designation of purpose is one of the conceptual differences
between public and private enterprises. In particular, the impact of
the activities of the enterprise on the society is an essential element of
the distinction. The goals of public enterprises emanate from the state
and the society and are meant to attend to public purpose. But public
purposes enunciated by public enterprises to some extent depend on
value judgment in addition to preferences of functions assigned to
the enterprises.39
Moreover, the role of public enterprises hinges on the role and
nature of the state which in turn depends on economic and political
considerations. Ideally, the state may be considered as representative
of the people, which will administer public enterprises on behalf of
the latter. However, in reality, it may become an agent of the ruling
class or group or interest groups. Thus, it is argued that the state may
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 348
not define public purpose in such a way that the public enterprise
would serve the interest of the people as a whole.40
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 349
The establishment of a public enterprise usually presupposes the
attainment of some public policy goals. The rationale for setting up
these enterprises is that they are better instruments for promoting
developmental goals. This could be reflected in the corporate
objectives of or the allocation of resources in an enterprise. For
instance, one of the purposes of Ethio- Telecom is “to engage, in
accordance with development policies and priorities of the
government, in the construction, operation, maintenance and
expansion of telecommunications networks and services.”41 Unlike
ordinary enterprises, the priority is set by the government
irrespective of economic returns and prudent business practice.
Ethiopian Grain Trade Enterprise, inter alia, aims at the stabilization
of markets for farmers' produces so that they will be encouraged to
increase their outputs.42 These objectives may not be profitable in
business terms. However, the idea is that the public benefits from the
realization of the objectives.
Unlike a private business, profit is not the only motive that drives
the enterprise or its decisions. It has public purpose to achieve such
as employment, public service, access, fair distribution, economic
development, and other elements of public interest. However, the
question remains whether they are supposed to cater for a particular
public purpose though it could threaten the commercial existence of
the enterprise. This issue was raised when Ethiopian Grain Trade
Enterprise submitted its report to a committee of the Council of
Peoples’ Representative. In response to a query posed by the
committee, it was argued that stabilizing the market cannot be
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 350
undertaken unless the government guarantees to make up for the
imminent loss43 incurred by the Enterprise.
c) Public Control and Management
Government’s inherent power enables it to exercise control on private
or public enterprises. However, the control it has over public
enterprises as an owner is internal control which involves “agent-
principal” relationship between the government and the enterprise.44
As enterprises are controlled by persons who have made the
investment, government control over public enterprises is primarily
practiced through its power to appoint top management.45
A public enterprise is controlled and managed by the owner, i.e.
the relevant public authority. Accordingly, one of the items to be
stated in the establishing legislation is the name of the supervising
authority46 which protects and promotes the interest of the public in
the enterprise. The designated public authority is responsible to
appoint and remove the members of the board who are empowered
to appoint and direct the management of the enterprise.47 It also
appoints external auditors, approve financial reports of the enterprise
and external audit reports and approve the investment plan of the
enterprise submitted to it by the Board.48 It is through these tools that
public authorities control public enterprises.

1.2 Private Dimension

The dual nature of a public enterprise gives it the features of a
business enterprise, as well. The entity preserves its public features
without at the same time undermining its enterprising dimension.
The reason why a government opts to set up the entities in this form
is to enable them operate as business entities. They operate in the
same manner as private enterprises engaged in commercial activities.
Thus, they have the following attributes.
a) Commercial Nature
Public enterprises are formed to undertake manufacturing,
distribution, service rendering or other economic and related
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 351

activities with a view to selling goods and services.

The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 352
view to ensuring that there is return on investment. This confers on
them “commercial nature” making them subject to the rules of the
market. Their commercial character is manifested in different forms.
First, a business enterprise cannot engage in trade activities without
registration in the commercial register.49 Accordingly, a public
enterprise is required to register in the commercial register of the
Federal government or a regional state as the case may be.50 It also
needs to have business license to carry out the commercial activities
stated in the establishing regulation.51
Second, persons “bring together contributions for the purpose of
carrying out activities of an economic nature and participate in the
profit and losses arising from the commercial activity”.52 On the other
hand, the government puts resources at the disposal of the enterprise
it establishes, after which the enterprise is expected to sustain and
develop itself through its profit. After its establishment, a public
enterprise obtains its income from its economic activities and through
the charges paid by users. This distinguishes public enterprises from
administrative authorities which receive annual budget allocations
from the State. A public enterprise must be viable so that it can
remain in the market. That is why the law makes it a ground for
dissolution if a public enterprise loses 75 % of its capital53. It is also to
be noted that a public enterprise may encounter bankruptcy if it
suspends payment.54 Its survival thus depends on economic viability
at least to the threshold of maintaining its capital.
The third manifestation of a public enterprise’s private dimension
relates to its competitiveness in the market. Any business entity
markets its output whereas a public service institution provides these
outputs free of charge.55 Even though public enterprises address
social purposes, they cannot survive unless there are schemes that
make up for the loss sustained while undertaking unprofitable
activities. These enterprises should thus either set the price of goods
or services based on the market, or losses must be
 The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 353
shouldered by the State. The mere fact that they are organized as public
enterprises demands that they set price based on the market unless
the government decides to subsidize the enterprise as in the case of
certain public utilities.
b) The accounting concept
Public enterprises and other government institutions are subject to
different accounting systems. The establishment of a public
enterprise is contingent upon its capital which is indispensable for its
existence.56 Moreover, its capital serves as security for its creditors
because of its limited liability.57 Owing to its commercial nature, the
law requires it to maintain two books of account, i.e., a balance sheet
and a profit and loss account. It should also follow generally accepted
accounting principles in maintaining financial records and preparing
financial documents.58
A public enterprise is required to close its accounts at least once a
year. The annual closing of accounts shall be completed within three
months following the end of the financial year.59 Unlike other public
entities which utilize their annual budget, an enterprise shall pay to
the Government dividend within seven months following the end of
the financial year.60 The relevant laws concerning taxes and duties are
applicable to enterprises61 sometimes raising the issue whether the
government should tax itself. The accounts of each enterprise shall be
audited by external auditors appointed by the supervising
authority.62 All these duties are incidental to the commercial aspect of
public enterprises which are not imposed on other government
institutions.

2. Forms of Public Economic Enterprises

In this section, we use the term ‘public economic enterprises’ in
reference to all enterprises set up by the state or public authorities to
carry out business activities thereby avoiding the confusion arising
from a particular definition of the term ‘public enterprise’. As
highlighted above, the scope of the term ‘public enterprise’ can
extend to all public economic enterprises or it can be
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 354
limited to public enterprises ‘proper’ depending on the law one relies
on. Apart from such legal conundrum, no clear-cut universal legal
theory of the public economic enterprise has emerged so far.63
Moreover, the classification of public economic enterprises does not
pursue a consistent pattern. In the Ethiopian context, current public
economic enterprises are formed as enterprises, corporations or share
companies.
The difference in the legal form (or designation) in which a public
enterprise is established is expected to have impact on the autonomy
of its management from the intervention of the government or other
agencies.64 But this envisages express articulation of such variation in
the features and autonomy of various forms of public enterprises.
Currently, public economic enterprises are established as enterprise
(Ethiopian Airlines Enterprise), a share company (Construction and
Business Bank S.C) or a corporation (Ethiopian Sugar Corporation).
However, there are no clear elements of demarcation that explain the
selection of a specific form, and it is also difficult to identify the basic
distinction between these different forms.
Essentially, the entities are subject to the same legal regime despite
their variation in designation. In the absence of a policy or legal
parameter in Ethiopia, we can resort to the experience of other
countries. A study conducted on ten enterprises from different
countries sheds doubt whether the choice of form results from any
distinctive consideration,65 and the situation is not any different in
Ethiopia.

2.1 Departmental undertakings

Historically, the expansion of activities of the government to
economic activities was achieved through departmental
undertakings. Through this model, a business activity was carried
out as an integral part of the government itself. They were not
established as independent legal entities; rather they were established
by an executive decision as part of an existing state organ or an
independent unit. Departmental undertakings did not have legal
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 355
personality and their activities were not distinct from the regular
function of the state. Thus, both administrative and business
activities were carried out by a single entity as part of the state
structure.

63
Wolfgang Friedmann, “Governmental (Public) Enterprises”, in Alfred Conard
(ed.) International Encyclopedia of Comparative Law, Vol. XIII, p. 71.
64
V.V. Ramanadham (1986), Public Enterprise Studies in Organizational
Structure, (Franc Cass & Co. Ltd.), p. 13.
65
Ibid, p. 263.
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 356
As a result of inclusion in the state structure, departmental
undertakings shared many features with government organs. They
were under a ministry which ultimately assumed the responsibility
to manage them. Their employees were civil servants and their
budget was part of the national budget.66 They were rather public
enterprises run as a department of the government, organized,
financed and controlled like any administrative agency.67 They were
subject to the accounting and audit systems applicable to other
government departments.
For example, before the Ethiopian Electric Power Corporation was
established as a corporation under Regulation No. 18/1997, it was
organized as Ethiopian Electric Light and Power Authority in 1956.
The corporation is engaged in the production, transmission,
distribution and sale of electric energy to the public and undertakes
any other lawful business incidental or appropriate thereto. 68 It is
indeed challenging to run business activity under the auspices an
administrative organ which is incompatible with business operations.
The first challenge relates to lack of autonomy because a
departmental undertaking does not have the freedom required in
efficient business operations. Second, a governmental department is
exposed to unrestricted political influence emanating from its
structure. It thus lacks flexibility due to bureaucratic delay in decision
making. Such delays are, inter alia, attributable to undue intervention
from civil servants and inadequate autonomy of professional
management. In general, the structure and workings of a
departmental undertaking is incompatible with the financial,
logistics, production, operational and marketing requirements of a
competitive business enterprise.69

2.2 Corporations
In US literature, the word ‘corporation’ merely represents a legal
entity separate and distinct from its stockholders. The word mainly
distinguishes the entity from partnerships. In the Ethiopian context,
however, various public enterprises use the word ‘corporation’. In
the earlier years, there were countries where the designation of a
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 357
public enterprise as a ‘corporation’ usually meant being “clothed
with the power of government, but possessed
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 358
70
with the flexibility and initiative of private enterprise.” The choice
of this form is basically driven by the need to cloak the entity with
autonomy so as to reduce interference in its operation. It can operate
basically as a private entity but at the same time it has support of the
government. But this virtue of the corporation form is said to have
become a fiction as the organizational autonomy of corporations have
been severely diluted in many countries.71
One cannot easily figure out why an enterprise owned by the state
is formed as a corporation. The term ‘corporation’ refers to a specific
legal form of organization of persons and material resources,
chartered by the state, for the purpose of conducting business.72 It is
submitted that a corporation has four essential features, namely
corporate body established by parliament, separate legal entity,
government ownership and financial independence.73 Others add to
this that employees are not civil servants.74
Under Ethiopian law, the essential features of corporations are
shared by other public enterprises. They are established by regulation
and are governed by Proclamation No. 25/1992 in the same manner
as other public enterprises. It is, thus, imperative to inquire into
their peculiarity which warrants their designation as corporations.
Comparing the establishing regulations of corporations and other
public enterprises, one can understand that they are crafted in line
with Article 6 of Proclamation No. 25/1992.
In most establishment regulations, the corporation is empowered
to issue bonds and borrow money from international financial
sources.75 Even if it is a power consistently conferred on corporations,
it cannot be concluded that all corporations or only those which
are designated as such do have the
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 359
power to issue debt instruments. One can find enterprises which are
not designated as corporations even if they have this power76 while
there are corporations which are not empowered to do so.77
The usage of the word ‘corporation’ in relation with entities that
hardly fall under public enterprises creates further ambiguities
regarding their salient features. For example, the Ethiopian
Broadcasting Corporation (EBC) is established under Proclamation
No. 858/2014 to broadcast main and current issues happening in the
country and abroad as well as educational and entertainment events
on the radio, television and website. This is a commercial activity
under Article 5(14) of the Commercial Code. However, it is not
organized as a business entity but as “an autonomous government
institution having legal personality and rendering public service.78
Although the public dimension of its function is explicit, the
corporation does not have the characteristics which justify the
classification of its activities as business undertakings. First, EBC does
not operate based on its capital, and it rather has budget from public
revenue, supportive budget and other sources.79 It is not necessarily
expected to make profit as it benefits from annual budget allocation.
Its employees are governed neither by the civil service law nor the
labour law of the country. The House of peoples’ Representatives is
empowered to issue regulations for the administration of employees
of the corporation.80
However, Ethiopian Broadcasting Corporation is subject to the
same financial and procurement system as public enterprises.81 Its
books of accounts and financial documents are audited annually by
the auditor general.82 As it is not a public enterprise, its establishment
proclamation makes selective reference to certain rules applicable to
public enterprises. Hence, an entity which is not a public enterprise
may, as in the case of EBC, be referred to as a corporation thereby
causing more uncertainty regarding the use of the term.

76
Art. 5(6) of Ethio-Telecom Establishment Regulation No. 197/2010.
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 360
77
Ethiopian Railway Corporation' Establishment Council of Ministers Regulation
No. 141/2007.
78
Ethiopian Broadcasting Corporation Establishment Proclamation No. 858/2014,
Federal Negarit Gazette, 20th Year, No. 49, November 2014, Art. 3(1)
79
Ibid, Art. 14.
80
Ibid, Art. 17.
81
Ibid, Art. 15.
82
Ibid, Art. 16(2).
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 361
Under Ethiopian law, the term public corporation does not
represent a distinct legal form with its own attributes. Notionally,
however, corporations are a response to the need for a distinct type of
“industrial and commercial enterprises of a major and complex
character conducted under the auspices and the financial
responsibility of the state, or of other public authorities” which led to
the development of a distinct type of public enterprise known as
public corporation.83 It is with this understanding that the
corporation form is opted. For instance, the transformation of the
Ethiopian Electric Light and Power Authority to the Ethiopian
Electric Power Corporation in 1997 was justified by the need to
commercialize and decentralize the entity.84 But it remains to be
examined whether the establishment of a public enterprise as a
corporation has any legal import. Given that they are subject to the
same governing law as other public enterprises and that one finds
entities which are not purely commercial designated as a corporation,
it can be concluded that those enterprises designated as corporation
do not constitute a distinctive legal form or category.

2.3 Share companies

The law recognizes that the government has the option to set up a
business firm in the form of a business organization which will be
governed by the legal regime applicable to private enterprises.85
Hence, the government can establish a public enterprise and convert
it to a business organization under the Commercial Code. It is
maintained that public enterprises are companies established by law
which must be subject to the same legal regime (under the
Commercial Code) applicable to share companies.86 The basis of this
view is the reference made to the Commercial Code under
Proclamation No. 25/1992.87 In line with this contention, public
enterprises are companies except that they are established by law.
However, the entities are distinct not only because they are subject to
separate legal regimes but also because they have their own
peculiarities. Even if the law provides for the establishment of a
public enterprise as a business organization, it is not specific about
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview
362
the form of business organization chosen out of the forms recognized
under the Commercial Code.
 The question becomes palpable when we, for example, consider a decision of the Government to
establishThe
a share company
Concept it wholly
and Characteristics owns.
of Public It is to be
Enterprises noted that
in Ethiopia: Proclamation
An Overview 363No. 146/1998 extends the
scope of the term ‘public enterprises’ to entities which are deemed to be enterprises for the purpose of
privatization. As discussed above, the purpose of stretching the meaning of the term ‘public enterprise’
(in spite of the definition set forth in Proclamation No. 25/1992) to accommodate organizations which are
not strictly public enterprises was to streamline the privatization process. Accordingly, the law facilitates
the conversion of public enterprises to share companies (as recognized under the Commercial Code).
These companies are vehicles of privatization which are employed to facilitate transfer of ownership
to the private sector. It can be observed, however, that we have several such companies which remained
in government ownership for a long time. At any rate, in the absence of a clearly declared intention, they
cannot be considered as public enterprises in the strict sense of the term. This scheme was not meant to
utilize the organizational form as a means of undertaking commercial activities by the state. Hence, the
law merely came up with a temporary solution88 to address the anomaly created by the conversion.
The required quantum of holding in the capital of such company is not explicit so that it can be
considered as a government owned or public company. It is maintained that in such companies the
government owns at least 51% of the total shares.89 Although the Commercial Code governs a share
company wholly owned by the Government, the enterprise is not subject to requirements which are
incompatible with its nature such as minimum number of shareholders,90 valuation of contribution in
kind, share,91 general meeting of shareholders92, appointment of directors,93 and qualification shares94.

CHAPTER 3. ORGANIZATION AND MANAGEMENT OF AN ENTERPRISE

7. Organization.

Each enterprise shall have:

1) a supervising authority;

2) a management board;

3) a general manager, deputy general managers as may be necessary; and

4) the necessary sta .

8. Powers and Duties of the Supervising

Authority. The supervising authority shall:

1) appoint and remove the members of the board subject to Article 12(2) of this Proclamation;

2) appoint the chairman of the board from among the members appointed by it;

3) x the allowances to be paid to the members of the board;

4) appoint external auditors;

5) cause the allocation of the initial capital of the enterprise;

6) decide the increase or decrease of the capital of the enterprise in accordance with Article 21 or s22.
Decrease of Capital. of this Proclamation;
7) cause the establishment of reserve funds or the allocation of funds by the Government so that the
authorized capitaland
The Concept of Characteristics
the enterprise shall
of Public be fullyin paid
Enterprises upAnwithin
Ethiopia: Overviewthe period
364 speci ed under Article
20(2) of this Proclamation;

8) determine, based on the proposals of the Board and following the relevant provisions of this
Proclamation, the amount of state dividends to be paid to the Government from the net pro ts of
each nancial year;

The Concept
9) approve nancialandreports
Characteristics
of theofenterprise
Public Enterprises
and inexternal
Ethiopia: audit
An Overview
reports; 365

10) approve the investment plan of the enterprise submitted to it by the Board;

11) propose, where necessary to the Council of MInisters the dissolution, amalgamation or division
of an enterprise under its control, or the transfer of the enterprise or its management in any other
manner;

12) approve, in consultation with the Board, the annual and long-term corporate targets of the
enterprise; and follow up their ful llment;

13) Without prejudice to the powers and duties given to the Board, perform other functions
necessary for the protection of the ownership rights of the State.

9. Formation of the Board.

1) The number of members of the board shall be at least three but not more than twelve.

2) Not more than one-third of the members of the board shall be elected by the general assembly of
the workers. The rest of the members of the board shall be appointed by the supervising authority.

3) The chairman of the board shall be appointed in accordance with Article 11(2) of this Proclamation.

4) The members of the board shall be appointed or elected on the basis of their profession,
experience and competence.

5) Any member of a board may also be appointed to act as a board member of any other non-
competing enterprise.

6) The term of o ce of the members of the board shall be at least 3 but not more than 5 years. When
necessary, a member of the board may be reappointed or reelected at the expiry of his term of o ce.

7) In order to maintain the continuity of the activities of the board, the term of o ce of its members
shall not expire at the same time.

8) Where any member resigns from membership, the board shall bring the matter to the attention of
the supervising authority so that another person is assigned in the same manner as the member who
has left the board was assigned.

9) The supervising authority may, at any time, remove a board member where there are su cient
grounds that make him un t to be a member. Where this provision is applied to a member elected by
workers, the general assembly of the workers shall be noti ed of the removal and may elect another
member in replacement.

10. Procedure of the meeting of the board.

1) The board shall meet at least once a month.

2) The chairman shall call a meeting of the board, at any time, in cases of urgency or where at least
two members of the board so request.

3) The agenda of a board meeting shall, in advance, be communicated to the board members.

4) There shall be a quorum where a majority of the members are present.

5) The board shall take decision by majority vote. In case of a tie, the chairman shall have a casting
vote.
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 366
6) The board shall select and assign a secretary from among the employees of the enterprise.

7) The General Manager of the enterprise may attend meetings of the board without having the right
to vote.

8) The board shall keep minutes for every meeting, which shall be signed by the members present.

9) The board shall draw its own rules of procedure.

11. Powers and Duties of the

Board. The board shall:

1) decide on policy issues other than those to be submitted to the supervising Authority pursuant to
Article 11 of this Proclamation;

2) appoint and dismiss the general manager of the enterprise and x his salary and allowance;

3) approve the employment, assignment and dismissal of those o cers of the enterprise accountable
to the general manager, including their salaries and allowances;

4) approve the internal regulations of the enterprise as well as its work programme and budget;

5) approve long-term loans and credits of the enterprise;

6) approve the sale of xed assets that may not a ect the existence of the enterprise;

7) ensure that proper books of accounts are kept for the enterprise;

8) submit books of account to the auditors of the enterprise, and periodic reports on the state of
activities of the enterprise and nancial reports to the supervising authority;

9) propose to the supervising authority the increase or decrease of the capital of the enterprise.

12. Liability of Board Members.

1) The members of the board shall carry out their duties with due care.

2) They shall be jointly and severally liable to the enterprise for damage caused by their failure to
properly carry out their duties.

3) Notwithstanding sub-article 2 of this Article, a board member shall not be liable where he has
dissented from the decision of the board which caused damage.

13. Powers and Duties of the General Manager.

1. The general manager shall:

a) organize, direct, administer and control the enterprise;

b) represent the enterprise in all dealings with third parties and in legal proceedings brought by or
against it;

c) subject to the approval of the board, employ, assign and dismiss the o cers of the enterprise
accountable to him and de ne their functions;

The Concept
d) employ, assignand
andCharacteristics
dismiss otherof Publicemployees
Enterprises in of
Ethiopia: An Overview in accordance
the enterprise 367 with the internal
regulations of the enterprise and the appropriate law, and determine their salaries and allowances;

e) keep proper books of accounts of the enterprise, and open and operate bank accounts to the
enterprise;

f) enter into short-term loan contracts for the purpose of providing the working capital of the
enterprise, borrow money on a long-term basis with the approval of the board, and for those
purposes pledge or mortgage the movable or immovable property of the enterprise;

g) prepare and submit to the board the internal regulations as well as the work programme and
budget of the enterprise, and implement same upon approval;

h) sell xed assets that may not a ect the existence of the enterprise with the approval of the board;

i) implement and cause the implementation of the decisions of the board;

j) submit report to the board in such manner as it shall prescribe;

k) delegate his powers to the o cers and other employees of the enterprise to the extent deemed
necessary by him;

l) establish, and preside over the meetings of, a management committee that shall advise on the
operations of the enterprise and that may discuss on the progress, plans and decisions of the
enterprise;

m) perform other duties assigned to him by the board.

2. The General Manager shall be accountable to the board.

17. Responsibility and Liability of the General Manager.

The general manager shall be liable in accordance with the law, for damage he causes on the
enterprise through negligence or intentionally.

18. Agency.

Any enterprise shall carry out its activities, acquire rights and incur liabilities by its general manager
and other agents authorized in accordance with this Proclamation.
CHAPTER 8. DISSOLUTION AND WINDING-UP

39. Grounds for Dissolution.

An enterprise may be dissolved for any one of the following reasons:

1) The expiry of the life of the enterprise as xed in its establishment regulations;

2) Completion of the venture for which the enterprise was established;

3) Failure of the purpose or impossibility of performance;

4) Loss of 75% of the paid up capital of the enterprise;

5) A decision of the Council of Ministers a ecting the existence of the enterprises;

6) Decision of the court declaring the enterprise bankrupt.

40. Bankruptcy and Winding-up.
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview
368
1) The provisions of Book V of the Commercial Code shall apply mutatis mutandis to the winding-
up of an enterprise declared bankrupt.

2) Notwithstanding the provisions of Article 1166 (1) and (2) of the Commercial Code, the court may
decide that bankruptcy proceedings of an enterprise be conducted by way of summary procedure.

41. Appointment, Duties and Powers of Liquidators.

1) In cases referred to under Article 39 (1-5) of this Proclamation, the supervising authority, shall
appoint one or more liquidators that could satisfy the criteria set by the Auditor General and who
are
not employees of the enterprise. The supervising authority may dismiss the liquidators and replace
them with other liquidators for good cause.
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 369
2) The liquidators shall take possession of the books and accounts of the enterprise under liquidation.

3) Unless the supervising authority decides otherwise, the liquidators shall take possession of the
property of the enterprise and shall assume the powers and duties of the board and the general
manager under this Proclamation; provided, however, that the liquidators may not undertake new
business unless required for the execution of contracts still running or where the interests of the
winding-up so require.

4) The board shall prepare a report for the liquidators on the a airs of the enterprise covering the
period from the end of the last nancial year to the date of the opening of the winding-up.

5) The liquidators and the board shall jointly prepare and sign a statement of a airs summarizing the
rights and obligations of the enterprise.

6) Unless the supervising authority decides otherwise, the board and the general manager shall
assist the liquidators in carrying out their duties.

42. Calling on Creditors.

1) The liquidators shall inform creditors of the proposed dissolution of the enterprise and require
them to le their claims with supporting documents.

2) Creditors appearing in the books of the enterprise or who are otherwise known shall be noti ed by
registered letter. Other creditors shall be noti ed by notice published in three successive weekly
issues of a newspaper of general circulation. Creditors shall be required to submit their claims within
90 days from the date of receipt of the letter or from the date of the last issue of the notice in the
newspaper, as the case may be.

3) The liquidators shall then prepare and submit to the supervising authority a nancial statement of
the enterprise together with their recommendations and a list of creditors and priorities, if any,
according to which such payments are to be made.

4) The supervising authority shall, on the basis of the nancial statement prepared by the liquidators
and after taking into consideration their recommendations:

a) authorize the payment of creditors who have led their claims with the necessary proof;

b) where the cash balances of the enterprises are not su cient to cover the debts due to the creditors,
authorize the liquidators to sell assets of the enterprise by using methods approved by him without
a ecting the rights of third parties.

5) Where the total assets of the enterprise are not su cient to pay o its debts and the authorized
capital is not fully paid up, the liquidators shall ask the supervising authority for the full payment of
the capital.

43. Protection of Creditors.

1) Where known creditors have failed to le their claims within the time limit speci ed in Article
42(2) of this Proclamation, the amounts due to them shall be deposited with a bank in the names of
the creditors.

2) Sums shall be set aside to meet claims n respect of undertakings of the enterprise which are not
 The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 370
completed or disputed claims where the creditors have not been guaranteed until
the dispute is settled.

3) After the enterprise ceased to exist under Article 44(2), creditors not appearing in the
books of the enterprises may claim from the surplus assets collected by the Government,
provided their failure to claim within the time limit speci ed in Article 42(2) was due to
force majeure. Creditors may claim against the liquidators, where they have not been
paid owing to the liquidators’ negligence.

44. Final Balance Sheet and Publication of Notice of Dissolution.

1) After the creditors have been paid or sums have been set aside to meet potential
claims pursuant to Article 43(1) and (2), the liquidators shall prepare a nal balance sheet
showing surplus assets, if any, and submit the same to the supervising authority with a
copy to the Ministry of Finance and Auditor General. The Auditor General shall
promptly forward his comments, if any, to the Ministry of nance and the supervising
authority. The supervising authority shall notify the Council of Ministers of the
nalization of the liquidation process as soon as he approves the nal balance sheet, and
obtains the concurrence of the Ministry of Finance.

2) The Council of Ministers shall then repeal the establishment regulations of the
enterprise. The enterprise shall cease to exist as of the date of repeal of its establishment
regulations.

3) The books of the dissolved enterprise shall be deposited with the supervising
authority where they shall be kept for 10 years. Any interested person may inspect such
books after payment of the prescribed fee.

45. Assets Due to the Government.

Any surplus assets of an enterprise dissolved and liquidated shall devolve to the Government What is
privatization?

Privatization is a very intricate subject on which varying opinions were held by analysts.

Nevertheless, it is possible to provide a workable definition of privatization.

Privatization refers to a process of transferring ownership of business from public

sector/government/ to the private sector/business. In broader sense, it refers to transfer of

government functions to the private sector including revenue collection and law

enforcement experience (of some countries) has it that it is not necessarily ownership right

over the property that can be privatized as some countries are experimenting with ways of
The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview
371
transferring management without transferring ownership through managements contracts

and leases. Privatization is a value laden concept based on the private public dichotomy. It

is a predominantly – conception rooted in the laissez faire theory whereby government

assumes a marginal role in market regulation/economy and the private sector takes he lion

share in the production and service sector.

What is being privatized?

There are virtually no limits on what can be privatized. This is evidenced y the number of

enterprises recently privatized. It includes the return of nationalized enterprises to their

former owners as well as management contracts, leases and sale of minority shares and

small retail outlasts. Thus, any public resource under government control can be transferred

to the private sector.

 The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 372

1.1. Why Privatize

Privatization, recognized as one of the most important economic policy reforms from the

1970s has attracted significant attention from scholar and the literature on the topic is now

vast. Yet there is little agreement on the reasons why governments ------ for privatization.

Generally, privatization is opted for three main reasons:

a) It improves the use of public resources:

Nations can privatize in an attempt to improve the use of public resources. The Finance

Minister of Mexico uses a very telling example to illustrate how privatization can improve

the use of public resources. Although only 2% of the Mexican population has even flown, the

Mexican government, in an effort to upgrade the fleet of its national airline, paid an amount

that could have covered the cost of paving over half of the nations’ unpaved load. In

addition, the accumulated losses of Mexico’s large public steel mill now exceed ten billion

dollars with a fraction which the government could have provided a potable water,

sewerage, hospitals, and education to the poor in every community in southeastern Mexico.

These examples are not unusual or in any way peculiar to Mexico as the situation is more or

less the same in almost all developing countries.

Public enterprises divert the scarce resources of public money and public management skills

from high priority uses. Privatization would free those resources for other more important

tasks such as education, health, and nutrition.

b) It improves operating efficiency

On top of its importance in enhancing allocation of pubic resources, privatization after

improves the operational efficiency of the privatized entities and thus results in more efficient

uses of resources.

An in-depth study conducted by he World Bank on the efficiency affects of privatization in

 The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview
373
Mexico, Malaysia, Chilly and Great Britain shows consistent net improvements in efficiency

in the companies studied. The causes for the increased efficiency of privatized enterprises

are rooted in competition and private property right.

 The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 374
If pubic enterprises are not unfairly supported, then the efficiency of private and public

enterprises will be the same. However, public enterprises tend to be supported unfairly as

government are reluctant to let their public enterprises go bankrupt despite the direct impact

on a national budget from losses sustained by public enterprises. Rather than sustaining

these losses, government attempt to prevent them by eliminating competition. By allowing

competition, privatization creates pressure for enterprises to perform or fail.

The existence of private property right, on the other hand, is the other root cause for

improved performance since profit-oriented owners --- their companies to perform better at

lower costs and to be more service and client-oriented. Unlike the public owner, private

owners are usually quicker to change management and faster to respond to opportunities.

The reason for this is the fact that private owners are motivated by their own state in the

company and in part to the fact that they are free of the political constraints that bind

government.

c) Privatization improves dynamic efficiency

It is quite evident that privation has almost always caused an increase in investment and

innovation. The Chilean Telephone Company, for instance, increased the number of phone

lines by 12% in three years after it was sold. The newly privatized Mexican Phone Company,

TELMEX, is laying down 8,400 miles of fiber optic cable to link Mexico’s 56 large cities.

In addition, private owners have strong incentive to recognize opportunity more readily and

seize it more aggressively than public bureaucrats. Finally, as the private sector is free from

political constraints, their dynamic efficiency is increased.

1.2. How to Privatize

The desired effects of privatization can be obtained only if proper privatization is executed.

As effective privatization is difficult to accomplish especially for institutionally weak

 The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 375
countries, due legal should be had to the ‘How’ of privatization.
 The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 376
i) Governments must create a conductive environment
As privatization is an end in itself, governments should crate conductive environment that

encourages competition. Chile is one of the most successful privatizes not just in terms of

number of enterprises sold but in terms of the efficiency efforts of privatization.

So, governments should take privatization only as part of a larger program of reforms

designed to create an environment that promotes efficiency such a program usually includes:

trade reforms encouraging competition and export; price reforms liberalizing markets;

regulatory reforms safeguarding competition by removing obstacles to private entry and

exist; and legal reforms assuring proper disclosure, enforcement or contracts, and due

process.

ii) Governments must streamline the privatization process

Needless to state that determining the value of public enterprise is very difficult as

privatizing an enterprise can be thought of as a commodity that has never been put to market

test. Expert advice plays a massive role in alleviating the difficulty by an accurate and

realistic value as a floor price.

Thus, governments of privatizing countries must assess what technical advice is necessary,

and hire a team of different kinds of advisors, including people who can held them design

regulatory and policy frameworks to maximize the benefits from privatization to the

economy as a whole.

iii) Governments must prepare the enterprise for privatization

In order for the government to attract buyers who are willing to pay a reasonable price for an

entity and to invest in improving the efficiency of the entity, governments must make the

enterprises desired for sale more attractive. This could be done by eliminating the debts of

the enterprises. In addition, as contingent liabilities such as pension funds, large severance
 The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview
377
pay agreements, or claims for environmental damages are massive deterrents to

privatization, governments should remove those liabilities, if any.

Layoff could also be another form of preparation as successful privatizations have tended to

lay- off redundant workers before sale.

The Concept and Characteristics of Public Enterprises in Ethiopia: An Overview 378