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Section 3: Infrastructure in Ethiopia

Fitch Solutions Logistics Risk Index

  • Ethiopia is placed in third position out of 11 East Africa states and in 141st position out of 201 states globally in Fitch Solutions’ Logistics Risk Index.
  • Ethiopia’s Logistics Risk Index score significantly outperforms the East Africa average, across all components of the index: transport network, trade procedures and governance, and utilities network.
Chart: Logistics Risk, 2019
Chart: Logistics Risk, 2019

Logistics Risk Index: Methodology and Components

  • 100 = Lowest risk; 0 = Highest risk
  • The Logistics Risk component is calculated using the average of the Transport Network, Trade Procedures and Governance and Utilities Network scores.
  • Transport Network: this indicator assesses the extent and quality of road, rail, air and waterway transport networks within a country, which indicate capacity and ability to transport raw materials and finished goods around a country.
  • Trade Procedures and Governance: this indicator assesses the time and cost required to import and export goods by container. In addition, a country's air freight volumes and connectivity to shipping networks is used to gauge its potential as a shipping or freight hub. An ideal market would have strong freight connections and low levels of trade bureaucracy.
  • Utilities Network: this indicator assesses the quality and availability of electricity and fuel, and their costs, and considers the availability of water, industrial usage, and evaluates the quality and extent of the telecommunications networks and internet penetration. A well-developed utilities sector enables the smooth running of supply chains.

Electricity Supply & Costs

Ethiopia has almost unmatched hydropower potential underlying its ambitions to become East Africa's electricity export hub. Ethiopia is pushing to increase its hydropower production, as part of its GTP, which will improve energy availability, keep costs low and boost electrification rates, with urban areas such as Addis Ababa set to gain the most. The 6,450 MW Grand Ethiopian Renaissance Dam (GERD) is the flagship project under development.

Electricity costs are the lowest in the SSA region and among the lowest in the world, reducing costs for businesses operating in the country. This is likely to continue given the government’s focus on developing hydropower projects, which usually require minimal maintenance and have low operational costs once the initial sunk costs have been amortised. Abundant and low-cost electricity supply will be particularly important in ensuring that Ethiopia’s expanding manufacturing sector remains cost-competitive regionally.

That said, Ethiopia’s heavy reliance on hydropower means its power supply is exposed to fluctuations in rainfall patterns, droughts and declining water reservoir levels. Furthermore, businesses face power disruptions due to the poor transmission and distribution infrastructure, necessitating the installation of costly backup power generation facilities to mitigate productivity losses. This could change if Ethiopia were to utilise its vast geothermal, solar and wind resources, as well as invest heavily in the domestic grid network.

Chart: Electricity Cost and Electrification Rate
Chart: Electricity Cost and Electrification Rate

Fuel Costs

Ethiopia has modest proven oil and gas reserves, but no crude oil refining capacity, and therefore must import all refined petroleum products. The cost of fuel is relatively low on a regional basis, given that 80% of its fuel from Sudan, where it is domestically produced. That said, import reliance raises risks of supply chain disruptions. Therefore, despite low fuel prices available to businesses in Ethiopia, fluctuation is likely and the actual cost of fuel may be far higher than the official price suggests, particularly during periods of scarcity.

In view of rising fuel consumption and increasing fuel supply volatility, Ethiopian Petroleum Supply Enterprise (EPSE) is expanding the network of fuel depots and shipment infrastructure with four oil depots currently in construction and/or planned across the country under the Depot Construction Master Development Programme. These will help to increase the fuel reserve and security for the local market.

Transport Network

Many of the planned or recently constructed transport infrastructure projects in East Africa are destined to benefit Ethiopia, by strengthening the country’s supply chains, reducing trading costs and boosting access to global markets.

For example, the 752 km railway connecting the capitals of Ethiopia and Djibouti opened in early 2016 and has helped relieve pressure on congested roads and cut the transportation time for goods from two days to 10 hours. Land-based transport infrastructure development is also planned to strengthen Ethiopia’s connections to Djibouti, including a new railway from Ethiopia’s potassium producing area near Mekele to the potash export facility at Djibouti’s Port of Tadjourah. In addition, progress is likely on cross-border road and rail links between Ethiopia and Eritrea as part of efforts to improve bilateral relations and economic ties. The Italian government has recently funded a feasibility study for a railway from the Port of Massawa in Eritrea to Addis Ababa, with a number of road upgrades connecting the two countries also planned. The development of the Lamu Port South Sudan Ethiopia Transport Corridor (LAPSSET) portends significant improvements in regional interconnectivity in the long term, and more Ethiopian goods will likely move via Kenya's ports.

Despite investment into rail transport, Ethiopia still relies heavily on road transport. Even though the quality of Ethiopia's roads has vastly improved over the past decade and continued investment in transport infrastructure will reduce the risk of delays and accidents in the medium term, many roads remain unpaved, making journeys longer and more prone to disruptions. Various road projects are under way in Addis Ababa as part of a road expansion and maintenance programme proposed by the Addis Ababa City Roads Authority.

China will continue to play an active role in developing transport infrastructure in Ethiopia. China has already financed the new railway between Addis Ababa and Djibouti, as well as a toll road in Ethiopia to the border of Djibouti and facilities at the Port of Doraleh, in which China Merchants Ports Holdings has a 15.7% stake.

Supply Chain Logistics

As a landlocked country, Ethiopia has no seaports and relies mainly on the Port of Djibouti for almost 95% of its trade. Ethiopia does not have any major river ports as most rivers are non-navigable, except for Bardo, which is only navigable during certain periods, depending on water levels. Djibouti's access to the Red Sea and the Gulf of Aden makes it a strategic trade hub for the region and Ethiopia's main export-import route. Ethiopia is currently exposed to high risks associated with its dependence on the Port of Djibouti, including delays due to congestion and strikes, as well as high costs in customs and trade bureaucracy owing to the lack of competition. However, the country has taken steps to diversify its options for trade, with plans to use the Mombasa Port in Kenya, Berbera Port in Somaliland and Port of Sudan in the pipeline, and potentially the Port of Massawa in Eritrea if diplomatic relations improve.

An overdependence on the road network for both goods and passengers and years of underinvestment in the national transport infrastructure underlie major downside risks for supply chains in the country. Lengthy lead times increase the costs of importing and exporting, which are higher in Ethiopia than regional averages.

That said, lead times and costs are likely to be reduced in the medium-to-long term as further rail and road improvements are implemented across Ethiopia and the wider region, connecting major trade arteries with special economic zones and key economic hubs.

Chart: Time to Export and Import, 2017
Chart: Time to Export and Import, 2017

Tariffs & Trade Regulations

Trade flows are further hindered by relatively high applied tariff rates, averaging 12.1%. This is significantly higher than the regional average of 8.9% or that of Burundi and neighbouring Eritrea (both 5.4%). The high tariffs are set by the government to generate revenue and to protect certain local industries, such as textiles and leather.

 

Manufacturing in East Africa: Ethiopia

Section 1: Industrial Manufacturing Focus
Section 2: Labour & Land Resources
Section 3: Infrastructure
Section 4: Regulations & Tax Incentives
Appendix: Relevant Government Bodies

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Content provided by Picture: Fitch Solutions – BMI Research
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