Published on: 17/12/2020
Earning royalties and repatriating profits can play important roles in ensuring a strong WASH marketplace
This article was written by Eline Bakker and Peter Feldman
updated and revised on 13/01/2022
In a series of posts, we will present the main challenges that businesses face when expanding their range of WASH products and services available for purchase by households in Ethiopia. After describing these challenges, we will recommend specific regulatory and policy actions to address them and to improve the overall business climate in the country. The ultimate aim is for enterprises to start up more easily, grow, and serve their communities sustainably.
This second of eight articles addresses some of the challenges experienced by WASH-related businesses in Ethiopia that have foreign owners or partners.
Currently, only nine percent of Ethiopians have access to basic sanitation services – a serious situation that affects public health, education, and many other aspects of the country's economic and social well-being (JMP, 2020). Achieving universal access to basic WASH facilities cannot be done by government or NGOs alone; it will require a strong contribution from the country's private sector. The Government of Ethiopia recognizes this and is working to strengthen private sector businesses that offer WASH products and services (including household sanitation) as a key element of its greater focus on hygiene and environmental health (FMoH, 2016). These measures are necessary because the current market only meets a small fraction of the country's enormous needs.
To gain insight into how these challenges can be addressed, and to do so in a manner that ensures the solutions are affordable to all, the USAID Transform WASH team spoke with a wide range of experts – including business owners, government officials, and technical specialists in Ethiopia and other East African countries – to get their advice and recommendations on how to develop and expand Ethiopia's WASH market. The post that follows is largely based on these experts' reflections.
To explore this topic in more depth, follow this link to the full Learning Note.
Repatriation of profit refers to the transfer of profit earned by a foreign-owned business in Ethiopia to its home country or, in certain cases, to a third country. Ensuring that profit repatriation can be processed without major obstacles is an important means of attracting foreign businesses to invest in Ethiopia (and retaining those businesses that do). Repatriation requires first that a quantity of local earnings (in Ethiopian Birr) be exchanged for "hard" currency (e.g., US dollars or euros) in Ethiopia's foreign exchange (Forex) market. Under Ethiopian law (Investment Proclamation No. 1180/2020), foreign investors have the right to repatriate profits from Ethiopia under the following conditions and reasons:
Officially, there are no restrictions on the amount of profit that can be repatriated, but in practical terms business owners expressed concerns with respect to restricted access to Forex, and the relatively low priority placed on this type of Forex allocation. Given that Forex transactions are closely scrutinized, businesses also must carefully comply with all regulations regarding registration, permitting, periodic auditing, payment of taxes, and other obligations (Ibex Frontier, 2017).
Royalties are payments made by one business to another in exchange for the right to use intellectual property (such as a copyright, trademark or patented design). Ethiopian law permits royalty payments for the use of a patent, invention, design, or a secret formula or process (Income Tax Proclamation No. 979/2016). A five percent tax is levied by the government on royalties paid by an Ethiopian entity as well as on the non-resident entity that is receiving them (Haile et. al., 2018).
Apart from the taxes levied, Ethiopian law does not seem to place any restrictions on royalty payments to foreign patent holders and allows for such payments to be made in Forex. Specifically, the National Bank of Ethiopia considers royalty fees as "invisible payments" that are allowed on demand (Directive No. FXD/46/2017). In practice, however, foreign-owned businesses are likely to experience challenges receiving royalty payments due to the chronic Forex shortage in Ethiopia and the low priority placed on allocations for 'non-essential' purposes. Businesses may wait for months, if not longer, to receive their requested Forex allocations (see the previous article in this series, which explores foreign exchange issues).
Foreign business owners, or joint ventures with foreign businesses, may experience a range of other challenges related to operations in Ethiopia. These issues include the business registration process, minimum in-country investment requirements, hiring regulations, availability of skilled labor, and accessing economic incentives for businesses that have been offered by the government. Businesses that offer WASH products and services, especially small and medium-sized enterprises, may find these challenges both time consuming and costly as these processes often seem to favor larger companies and well-established sectors rather than start-up investments in WASH or other similar sectors.
These issues are explored further in the other news items in this series, as well as in the learning note mentioned at the beginning of this article.
While there are no restrictions on repatriation of profits and payment of royalty fees to foreign patent holders, the Forex shortage and related restrictions in Ethiopia pose a major obstacle to both local and foreign-owned businesses that wish to invest in bringing more WASH products and services to market. To reduce or remove the barriers to profit repatriation and royalty payments, the main challenge is to improve access to Forex in Ethiopia. The following actions are therefore recommended (and were presented in the previous article in this series):