Reform then Competition is Needed to Realize MetEC’s Engineering Potential

(By Abdulmenan Mohammed) In recent years, no other Ethiopian state-owned enterprise has been subjected to as much criticism as the Metals and Engineering Corporation, a military-industrial conglomerate. It has been blamed for obtaining contracts without bids, supplying sub-standard products, delaying mega projects, and multiple other inefficiencies. Corruption allegations swirl around the group.

Yet the recent decision of the ruling party to privatize or partially privatize public enterprises seems to have spared MetEC. If we are to understand this privileged role for the company in the Ethiopian economy, we must look at the background and justification for its creation.

The contested 2005 election compelled the ruling party to shift its focus to the economic sphere. To derive legitimacy through economic achievements, the developmental state model, which required huge state intervention, was promulgated as the guiding ideology of the ruling coalition. As a result, agricultural-led development was superseded by industrialisation.

The tenacity with which development policies were pursued resulted in aggressive top-down planning, strengthened the muscles of the federal government, and caused a proliferation of state-owned enterprises (SOEs).

One area where the government intervened was in the production of metal, assembly of heavy machinery, and construction of large buildings. The establishment of MetEC was modelled on SOEs engaged in similar industries in South Korea and other East Asian nations.

Before MetEC, there were various engineering units within the Ministry of Defence which undertook the repair and maintenance of weapons. These outfits had limitations as they were not functioning as profit-making entities and were dealing with military products only.

Engineering giant

When incorporating MeTEC in 2010, there was an assumption that by removing the weaknesses of these units, they would form the core of a new metal and engineering giant that would be assigned a wide range of tasks, included designing factories, assembling buses, and enhancing engineering capabilities.

MetEC is therefore not an entity with a specific job. Rather it is many enterprises operating in a wide range of sectors. With 15 companies, close to 100 business lines and 19,500 employees, MetEC is one of the biggest business groups in the country.

There were two main rationales for the creation of an engineering giant. Firstly, the virtuous circle created by boosting engineering capacity. Defence technologies would not develop in isolation from overall economic development, so creating a dedicated company to enhance technological capabilities was necessary. In turn, national economic development also enhances the ability to invest in defence and other technological capabilities.

Secondly, in a backwards economy there is pervasive market failure in certain areas as a result of a shortage of capital goods, and because many ventures are high risk, low profit margin and offer delayed returns. This makes the private sector reluctant to invest. State intervention is crucial in these areas where the market fails.

It is against this background we should analyse the weaknesses, achievements and prospects of MetEC. There is no doubt that if MetEC is reformed, it could make a significant contribution to the economy.

Although it is accountable to the Prime Minister’s Office, its relationship with the military is blurred. Several officers work for it without resigning and as pointed out above, military units were combined to form MetEC. As a manufacturer of products for military use it needs engineers who have knowhow of military technology. But MetEC could achieve such knowledge transfer by cooperating with the military without compromising its civilian status. Over time, it can enhance its capability by learning and innovation so it doesn’t need to rely on defence engineers.

Privileged status

Protecting its autonomy from political interference is also crucial. Allowing it to be managed by professional and capable people with clearly set responsibilities, targets and rewards will improve MetEC’s performance—parliament heard last week that at least 9 billion birr has been wasted on malfunctioning products—and reduce the stench of corruption.

When MetEC is given jobs, there should be clear contractual terms. MetEC has been preferentially treated and obtained massive sugar projects without bids and at times even without signing contracts. This burdened it with a large number of jobs that it could not handle to schedule. Consequently, projects have been delayed and their costs have gone up, sub-standard products have been supplied and contract enforcement has become troublesome. For example, repeated extension of a project completion date for a fertilizer factory has led cost escalation, which threatens the viability of the scheme.

Its work for the Sugar Corporation has been an even bigger failure and it has been stripped of most contracts, some of which it was paid for despite not completing work. In the absence of legally binding contracts, it is hard to inculcate accountability. Competitive bidding should be established when awarding contracts so resources are efficiently utilized.

In its eight years existence, the achievements in areas of learning, innovation and enhancing technological capabilities are not notable. If it was not for the privileged treatment, MetEC would have had serious trouble remaining competitive. Instead, it has grown complacent. Clear performance standards for its quality, process development, delivery and financial performance would alleviate that complacency. And at a certain point in the future, the protected status should be ended and MetEC should have to abide by the rules of the open market.

The opinions in Ethiopia Observer’s comment section are those of the author and are no reflection of the views of the website or its owners. However, Ethiopia Observer is responsible for any factual errors.

(Main image: MetEC officials at the House of People’s Representatives in November 2017. Photo: The Reporter.)