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  • By Eshetu Dub 

    The role of Micro and Small Scale Enterprises (MSEs) is one of the major issues that grab the attention of politicians and economists. The dominant position often held by these two groups has arguably obscured the understanding of MSEs, even though they deserve credit for putting the issue at the top of public policy agenda.

  • By Abiy Getachew 

    A few days before the thought of writing this article came to my mind, I and my friends visited a Sun Optics shop close to our office. In the middle of trying and testing a variety of models, the lady in the shop gave us one fancy glass with one company brand on it (a company which is a global leader in production of environmentally friendly products). I was the first to try it and it fitted me well. My friends also liked itThen came the price deal with the lady.After she complimented that the glass looked nice on me, she quoted a very inflated price for it. I was surprised because I have never imagined I would pay that amount for a solar eyeglass.

  • By Zekrie Negatu 

    Odious debt, also known as illegitimate debt, arises when  a country’s government misappropriates money  it has borrowed from other countries. A nation’s debt is considered odious  debt when  government leaders use borrowed funds in ways that do not benefit their citizens,  and to the contrary, use the resources so obtained to oppress their people. Some legal scholars argue that, for moral reasons, these debts should  not have to be repaid, writes Zekrie Negatu.

     

  • By Brook Abdu

    A local consulting company, HST Consulting Plc, has won a bid to develop a Human Resource Strategy document for the Ethiopian Reinsurance Company S.C. for around 2.1 million birr.

    The strategy will assist Ethiopian Re get a comprehensive Human Resource Strategy and Human Resource Management Manual in accordance to its vision.

    “We place a great value in creating relationship with Ethiopian Reinsurance S.C. and are committed to delivering excellence and value as we serve Ethiopian Re. We also appreciate the importance of this project and its role in supporting to successfully implementing the Company’s overall strategy and objectives,” said HST’s managing director Solomon Gizaw in an email reply given to The Reporter.

    The strategy will be developed benchmarking best practices of other insurance companies abroad and the implementation will take three to five years.

    The bid was announced for the “review and development of comprehensive human resource strategy and human resource management.” The bid document which was sold for a 100 birr and 50,000 birr bid bond attracted KPMG and HST.

    HST will complete the strategy in January or February 2019.

    According to Solomon, while the company was a partner of Deloitte, it had engaged in similar endeavors including the same project for Ethiopian Insurance Corporation and Bank of Abyssinia.

    Yewondwossen Eteffa, the CEO of Ethiopian Re, told The Reporter that the company will begin its tasks on August 27, during which it will first develop the schedule and the deliverables.

    “We have a strategic plan for 2027 during which we want to be the leading reinsurance company in Africa,” Yewondwossen stated. “As a company that plans to do business at a continental level as well as in the middle and far eastern countries; we need human resources that fits both in terms of number and development.”

    He added that the terms of reference for the bid were prepared accordingly. Mentioning the absence of actuaries [professionals who deal with the measurement and management of risk and uncertainty] in the country, the strategy will come up with a concrete plan to continue hiring from abroad or to train in-house experts.

    “It will be far seeing including forecasts of government regulations regarding the industry,” he said.

    Ethiopian Reinsurance Company was established as the first reinsurance company in the country and commenced operations in July 2016. Its registered capital is a billion birr while its paid-up capital amounts to half of that.

    The shareholders of the company are insurance companies in the country, banks, and others. It has seven Banks, seventeen insurance companies, eighty individuals coming from different walks of life and one trade union as its shareholders.

    Article From Reporter 

  • HST Consulting Plc, which recently broke its ties with one of the leading global consultancy firms, Deloitte Leadership, has acquired the local firm Encore Employment, Training & Consultancy Services Plc as of October 1, 2017.

    "The acquisition came as a bold move to strengthen our advisory and centre of excellence," reads a press release from HST.

    Founded in 2006 by Zekrie Negatu, Getachew Zewdie and Hailu Zeleke, professionals from teaching, training and consulting in management, accounting, finance and development areas, Encore was sold to HST after a two-month long negotiation between the two. The management of both companies declined to disclose the transaction amount.

    "The demand from the economy pushed us to associate with HST," said Getachew, co-founder of Encore. "The economy is demanding diversified and advanced advisory services, which cannot be fulfilled as Encore."

    The total asset of Encore will be transferred to HST, according to Teshome Bekele, lecturer of International Marketing at Addis Abeba University College of Business & Economics. But the transfer is not mandatory for the human resource as it will be done based on the agreement of the two parties.

    The directors of Encore will take similar positions within HST, leading in their specialised service areas. Zekrie will be the director of HST's Corporate Finance Function, Getachew will be the director of Strategy & Innovation Function, and Hailu will be director of Research & Industries Development Function.

  • by Malcom Gladwell 

    with little modification by Abiy Getachew.

    Who do you think know you best? A close friend or a total stranger with a very minimal clue? A psychologist Samuel Gosling has proofed the effectiveness of thin slicing by using the cases of judging peoples’ personality.

    A personality workup on a group of 80 college students is conducted using the big five inventories (a very specialized multi-item questionnaire that measures personality across five categories). 1. Extraversion: are you social or retiring 2. Agreeableness: are you sociable or retiring 3. Conscientious: are you organized or disorganized 4. Emotional stability: are you worried or calm 5. Openness to new experience: are you imaginative or down to earth.

    In one group Gosling has made close friends of those 80 students to fill the questioner.  Gosling wanted to know how closely they come to reality. Not surprisingly, our friends describe us accurately. They have a thick slice of who we are that translate into our real being. Gosling repeat the same process but this time with total strangers who have never met the students they are judging. Gosling gave them a clipboard and told them they have fifteen minutes to look at their dorm rooms and answer a serious of questions about the occupants of the room. On a scale of 1 to 5 does the inhabitants of the room talkative? Tend to find fault with others? Does a thorough job? Is original? Is reserved? Is helpful and unselfish with others and so on. Gosling is careful not to tell the subjects what to do. He is just trying to study every impression. With that regard he tells his subject “here is your questionnaire. Go into the room and drink it in”. He is just trying to investigate intuitive judgment process.

    And the result? the dorm room observants are not nearly as good as friends in measuring extraversion. This makes sense. If you want to know whether someone is animated, talkative and outgoing you need to meet him or her in person. The friends also did better in accurately predicting agreeableness. This also makes sense according to Malcom Gladwell. However, on the other 3 of the five measures, dorm room observants stand out on the top. They were more accurate at measuring a student’s conscientious. And they are even more accurate at measuring both a student’s emotional stability and openness to new experience. On overall then the strangers are doing better.

    This suggest that it is quite possible for strangers who have never met us but only spent 20 min thinking about us to come to know us much better than people who spend years with us. Hence, Malcom argues to forget the endless getting to know meetings and lunches. If you want to get a good idea of whether I would make a good employee, drop by one day in my house and look around.

    blinkTwo Examples of thin slicing at work 

    Example two

    Around 1980's the market share of Coca Cola is diminishing while Pepsi is gaining more of it and Coca Cola and Pepsi are in fierce competition. during this time Pepsi open a program known as a "Pepsi Challenge" in which people are blindfolded and given two cups, one filled with Pepsi and another with Coca Cola. Surprisingly, most people who takes a sip from both cups chooses Pepsi be their favorite (56% to 44%). After repeating the same experiment themselves, Coke people believe that Pepsi beat Coke in product quality. Hence Coke laboratory experts go back to the root product composition and flicker it a bit to make it sweeter and lighter. However, after Coke release the new product, called "New coke”, people all over north America protest and go on riots. After spending huge amount of money on the new product, Coca Cola is forced to switch back to its original product. What is wrong here? Is thin slicing at failure in this case? Not at all! The trick here is that thin slicing works in the right context. Having a sip test is very different from the whole can drink test. as Malcom Gladwell succinctly put it "When we put something in our mouth and in that blink of an eye decide whether it taste good or not, we are reacting not only to the evidence from our taste buds and salivary glands but also to the evidence of our eye and memories and imagination an, and it is foolish of a company to service one dimension and ignore the other".

    Malcom Gladwell

    Source: Blink: the power of thinking without thinking by Malcom Gladwell with little modification by Abiy Getachew.

     Contributed by  Malcom Gladwell 

     

  • Summarized by Abiy Getachew.

    From time to time, you have probably looked at your job description and thought “that is fine, but it is not what I do”. The traditional job description has failed to change along with the work place, nature of job and recent trends of corporate hierarchies.

  • By Adam Grant (prof.)

    In the 1980s, when Steve Jobs was trying to lure John Sculley away from Pepsi to join Apple, he clinched the deal with a single question: “Do you want to sell sugar water for the rest of your life or do you want to come with me and change the world?”

  • By Arianna Huffington.

    In the course of my Thrive book tour, one question has come up over and over again. It goes something like this: it’s all fine and good for people who have already succeeded to care for their well-being, but shouldn’t young people pursue their dreams by burning the candle at both ends? Surely getting by on less sleep and constant-multi-tasking are an express elevator to the top, right?

  • By Abiy Getachew  HST Consulting Plc,

    “How much debt is right for a company?” This is a question my friend asked me the other day when we had coffee together. Even though at that spot I answered him “it depends on the situation (industry, profitability, competitive position and sales volatility) the firm is in”, later that day this very brief conversation brings me back to the corporate finance class which I took some years before. What does an optimal capital structure look like? Is debt better than equity? What is the relationship between capital structure and firm value? How to make a wise investment decision? These were some of the questions which filled my mind right after that conversation. In a way to answer these and other questions I did some research about capital structure which becomes the foundation of this article.The relative proportion of equity (E), debt (D) and other securities that a firm has outstanding constitutes its capital structure (an equity represents ownership interest of shareholders of a company whereas debt represent money borrowed by the company that must be repaid). When a corporation want to raise funds from outside investors, the most common choices are financing through equity alone or financing through a combination of equity and debt. However, some earlier research reveal that the total value of a firm, its share price and its cost of capital is independent of its choice of capital structure. This means, in a perfect capital markets (no taxes and transaction costs), capital structure merely allocates cash flows between debt and equity without affecting the total cash flows to the firm. But capital markets are not perfect in real world, so what is the significance of the (research) result? This is a very common question raised by many people. A brief response may be that all scientific theory begun with a set of idealized assumptions. It is only after we know this that we can measure how much closely the assumptions hold and consider consequence of any major deviations.

    In a real world, the assertion that capital structure will not affect firm value is at odds when we observe that a lot of companies invest significant amount of time both in terms of managerial time and effort and investment banking fees to manage their capital structure. In fact, the choice of leverage is of critical importance to firms’ value and future success in many cases. For instance, in 2018 Awash, Abyssinia, Wegagen, United, Dashen, Oromia COPB and Addis Int bank (all Ethiopian’s banks) have different D to E ratio, though the variation is not as pronounced as firms in different industry (see the Figure 1 below).

    (Here readers should note that I am not implying any performance comparison by stating the D to E ratio).
    If capital structure is unimportant regarding firm value, why we see consistent difference in capital structure across industries and firms? Many previous researches make it clear that capital structure is unimportant in a perfect capital market. Therefore, if capital structure matter, it must stem from market imperfections. One of the most important market imperfections that we will discuss in this text is taxes. Corporations must pay taxes on the income they earn. Because they pay taxes on their profit after interest payments are deducted, interest expense reduces the amount of corporate taxes a firm pay. This means the interest shields the tax the corporation must pay which is usually referred as the interest tax shield. This feature of the tax code creates an incentive to use more debt.
    When a firm uses debt, the interest tax shield provides corporate tax benefits. This means a corporation will pay less taxes when it has debt and pays interest for that than it has no or low debt. This conclusion can easily be illustrated with the Pizza example. No matter how you slice the pizza, it is the same amount you have (a setting in a perfect capital markets). However, assume the tax man get a slice of the pizza as a tax payment for every slice equity holder get, but when debt holders get a slice, there is no tax payment. By allocating more pizza to debt holders, more pizza will be available to investors. Even though the total amount of the pizza does not change, there is more pizza left for investors because less pizza is consumed by the tax man as taxes (in other words the tax man gets a fraction of the smaller pizza allocated to equity holders).
    All the above discussion leads us to one critical question. “Do firms prefer debt as a source of funding for capital expenditure?” Though I could not find compiled data for Ethiopian companies, evidence of US corporation may give us some insight about firms’ behavior. Data from 1975-2011 shows when US firms want to raise new capital, they do so primarily by issuing new debt. But this does not mean that all firms sell debt to raise funds. There are many firms who sell equity to raise funds, but other firms are buying or repurchasing an equal or greater amount of equity. In other words, firms are net purchaser (rather than issuer) of equity whereas they are net issuer of debt. Hence for US firm’s debt is preferred as a source of external financing. However, companies only revert to external sources (E and D) of financing when the internal sources (retained earnings) are not enough. This means retained earnings is firm’s first choice when it comes to capital expenditure. In other words, a pecking order theory holds which says a manger prefer retained earnings and only issue new equity as a last resort.
    Does this mean that firms should use more and more leverage because of the existence of tax advantages for debt financing? Not at all! Studies confirmed that companies should not use the maximum possible amount of debt in their capital structure. Companies should reserve flexibility, a substantial reserve of untapped borrowing power. This is achieved by limiting the amount of debt in capital structure to a certain level even if there is a possibility to borrow more. Excessive leverage may lead a company to financial distress: a situation where it is unable to pay its debt obligations. However, far more significant than financial distress and its attendant cost of bankruptcy is the fact that aggressive use of debt will likely limit the possibility to raise funds quickly on acceptable terms. This leads to liquidity constraints which will reduce the market value of the company. Managers fearful of incurring liquidity constraints will trim strategic expenditure and will not be aggressive in exploiting marketing and investment opportunity. Problems also arise with agency cost of monitoring loan covenants, property mortgages and performance management as the firm need guarantee proper payment of debt obligations. In fact, according to some research agency costs may become highly prohibitive especially as debt approaches 20% to 30% of the capital market value (debt as a fraction of total firm value).
    Even financial distress and bankruptcy cost which we consider to be not significant, can sometimes be so significant that each may completely offset the benefit of interest tax shield. For instance, bankruptcy is a long and complicated process which imposes both direct and indirect costs on the firm and its investors. Though the bankruptcy code is designed to provide an orderly process for settling a firm’s debt, the process is still complex, time-consuming and costly. When a firm becomes financially distress, it usually hires outside professional including legal and accounting experts, consultants, appraisers and investment bankers which are usually costly. In addition to direct legal and administrative cost, there are also several indirect costs associated with financial distress whether a firm has filed for bankruptcy. Even though these costs are mostly difficult to measure they are much larger than the direct cost of bankruptcy. An example of these costs includes loss of customers, loss of suppliers, loss of employees and loss of receivables.
    In summary, a company’s chief financial officer (CFO) need to ask a series of questions to determine the right amount of debt in the capital structure. These questions include but not limited to: how much additional money the company needs to raise in the next 3 to 5 years to carry out its strategies? Can it can be deferred without incurring large organizational and opportunity cost? What are the lending criteria of each target sources? Will the company debt policy allow a flow of funds to all strategically important programs even in the event of adversity? Will the company be competitively vulnerable if it achieves its target capital structure? This means a CFO need to weigh the tax benefit of debt against loss of flexibility and costs associated with bankruptcy and financial distress to determine the right amount of debt in the company. Nevertheless, in order to apply this core concept, it is needless to say that the existence of financial markets (capital markets) is indispensable. Unfortunately, as a nation we are new to financial markets and because of its nonexistence we lost many promising investment opportunities. On the contrary, we invest on many bad investments (sometimes) purely because of the lack of detail financial information. Hence, it is important to build awareness about financial engineering among all business stakeholders so that our industries may benefit from the resource effectiveness stemmed from the use of such value creation model.

  • HST has launched it's graduate onboarding program as part of it's corporate social responsibility initiative, for Economics and Business 2019 graduates ,free of charge. The program focuses on Banking and Insurance basics, Ethics and Professional Practices in the work place.

  • On September 17,2019 HST and CAPITAL news paper has conducted a regional conference entitled "privatization and stock market, imperatives for Ethiopia’s Economic Development?" At the UNECA hall, the event featured 6 papers on the issues. Panelists debated on the topics, participants actively reflected on the issues and took part in the debate.
    The medias interest were also keen. HST hopes to continue entertaining an enlightened discussion. We would like to take this opportunity to thank all who had some sort of contribution to the success of the event. We would also like to receive a follow up ideas on any of the issues. 

  • A few days before the thought of writing this article came to my mind, I and my friends visited a Sun Optics shop close to our office. In the middle of trying and testing a variety of models, the lady in the shop gave us one fancy glass with one company brand on it (a company which is a global leader in production of environmentally friendly products). I was the first to try it and it fitted me well. My friends also liked itThen came the price deal with the lady.


    New York Public Relations
    New York Public Relations

    After she complimented that the glass looked nice on me, she quoted a very inflated price for it. I was surprised because I have never imagined I would pay that amount for a solar eyeglass. While I was searching for the justification of the exaggerated price, my friend made a joke on me that sparked the main idea for this article. In his own words, he says “you are an environmentalist, you have to live by what you are preaching. You should buy this brand as it is produced in an environmentally friendly way and the material is 100 percent recyclable.” Later in that day, this satire came to my mind so repeatedly that I reflected on it deeply to give it a shape. Out of this process one big question arises: “why are people not motivated to act on environmental and climate issues while the consequence of inaction seems so evident?” That’s a big why.

    People find comfort in uncomfortable situations for many reasons. To highlight some of them: first, climate change mitigation involves tradeoff between present and future benefit which is one of the hardest choices to make for consumers. At an individual level, for instance, this may involve changing the car they drive, the product they consume and the house they live in. At an organizational level, on the other hand, the act to commit to climate change mitigation may demand investing on new technology and process which aim to considerably reduce emission. On a much bigger scale, a government that tends to commit to climate change initiatives may invest on green source of energy and avoid combustible sources of energy, which may not help to win the voters’ heart in the short-termSecond, climate change is a non-linear problem which is difficult for humans to comprehend its effect (a function which increases slowly at the beginning but then accelerate). A simple analogy to this effect is to think why some people continue to smoke for a long time while they know smoking is detrimental to their health. Through time the effect of smoking builds exponentially until the individual become conscious of it and by which time it may be too late to reverse the negative health effect. Third, the effect of climate change is too distant for many people to consider it tangibly. Studies on construal theory level suggest that when things are psychologically distant (socially, in terms of time and space) people consider it at an abstract level than when things are psychologically close to them. Fourth, the future is always associated with high uncertainty than the present, thus people value the present much more than the future. What if human activity will not have dire consequence on climate as commonly believed?


    A big department store in New York of public relations in 2018/19


    Is climate crisis really distant and abstract for an individual consumer to consider it in his/her buying decision? I highly doubt it. Haven’t we witnessed recently how our weather has changed so drastically that sometimes we become confused to tell precisely which season we are in? Haven’t we witnessed drought in places where talking about it used to be a fairy-tale land? Haven’t we witnessed severe rain and flood in places where these issues were not used to be a problem? In fact, some of the evidence regarding the impact of climate change is so daunting that an average person cannot afford being inactive and ignorant about it. For instance, in its latest report the Intergovernmental Panel on Climate Change (IPCC) argues that if Greenhouse Gas (GHG) emission continues at the current rate, the atmosphere will warm up by about 2.7 OF (1.5 OC) in 2040 above the preindustrial level, which is just enough to inundate coastlines and intensify poverty and drought. If the temperature rise reaches 3.6OF (2OC) (the previous threshold for estimating climate change damage), the IPCC report predicts a disproportionately rapid evacuation of people from the tropics and in some parts of the world national borders will become irrelevant because of flood.

    Here one point should be clear. The climate issue is a systematic and interlinked problem which is very difficult to define in one single way. At the very least it encompasses society, business, government and the whole world. For instance, my purchasing decision at the optician’s shop on that day is affected by a multitude of factors including climate awareness, budget, personal values, group norms, society values, business provisions, government incentives, and local and world climate politics

    Flex Fashion

    2 February 2019

    By Contributor

    should aim to establish environmental priorities in investment approval and build a system which will recognize and incentivize environmental champions, writes Abiy Getachew.


    We are a friendly firm of Financial Advisors from an advertising agencywho are happy to meet with you face to face or liaise with you via the phone or email to provide a service that’s right for you. Our Services included offering advice and solutions on Mortgages, Insurance, Financial Protection, Investments and Pensions. Our aim is to leave you worry free about your finances because you know they are in safe hands!

    NY 2018/19

    The interlink between government, business and society can best be depicted by my experience in one of the Scandinavian cities. During my stay in the city, I have come to know one individual who has a cleaning company with about four employees. His company provides cleaning services for individuals and small companies. In one of our conversations, I raised a question about the city’s environmental regulation. To my surprise he told me that the government regularly has given environmental training free of charge to companies even as small as his. Moreover, the city administration also occasionally consults with him to see whether employees are working in a safe and healthy working environment. This implies that abiding by the city’s environmental regulation is not only a requirement which is nice to have, but also provides him with business opportunities. This is so because companies that do not pass the environmental criteria cannot participate in the cleaning bid (most individual consumers also demand this requirement).

    Numerous researches also highlight that part of the reason for pushing the corporate world in that direction is the ever-higher expectations from the society that business should be part of the solution in the recent global challenges. The other subtle reason is that in some instances regulatory changes leads to direct commercial benefits by creating new market that does not exist before or giving competitive advantages for those companies which are able to capitalize on the new regulations. Nevertheless, does this mean businesses go green just for the sake of good public perception even if that does mean short-term loss?  Researches on this line maintain that corporate initial statement of climate leadership is eventually degenerated into the usual business activities (through three stages). That means climate change initiatives begin with executives presenting it both internally and externally as an urgent social and strategic business issues (framing stage). But, through time (localizing stage), the climate change initiative will be upturned, and the blatant sales issues will prevail again. At this stage (normalizing stage), corporate executives, who have been committed to climate change mitigation, will try to realign climate initiatives with the basic logic of corporate shareholder value maximization. Hence, the initiative to go green ultimately boils down to the question of “does this contribute to the bottom line (profit)?” As one senior manager in an insurance company acknowledged “Look, that was all a nice thing to have in good times but now we’re in hard times. We get back to core stuff.”  Hence, in order to save our planet from climate crises, we should imagine the future that goes beyond corporate self-regulation and market forces.

    Gloria MacIntosh

    The good news is that in agreement with business leaders’ action (framing stages), company employee conversation about sustainability and climate change is also rising. Hence, businesses can use this in their advertising, social media and in their product package to directly talk to their consumers. This is exactly what I faced at the optician’s. I saw the product logo and a description of its production process, but I still acted to the contrary. I did choose a cheaper one irrespective of its relatively higher carbon footprint, a behavior which may best be explained by “the tragedy of the common goods” theory. According to this concept, an environment is a non-excludable but rival good which falls under the common resources. In this context, a rational consumer who want to act in a socially desirable way (like me) needs to bear the societal cost while the benefit of it will spread to the whole society. Marginally speaking, the cost is higher than the benefit implying that the consumer will be better off acting in his own interest, disregarding the societal benefit.

     

     

     

     

     

     

    Therefore, the most important question is, what can we (Ethiopians) learn from the world best practices? On an individual level we need to be aware of the climate crisis and be motivated to consider company’s environmental record when making purchase decision, even if that means paying slightly higher for environmentally friendly products. Policymakers on other hand should aim to establish environmental priorities in investment approval and build a system which will recognize and incentivize environmental champions. This in turn lowers the cost of production and prices for these products. Finally, businesses have to rethink their traditional investment decision criteria in order to change climate change risks (including regulatory risks) into opportunities. In other words, if businesses are able to find opportunities within those climate related risks, both the business and environment can win. Thus, it is possible to go green and still be profitable.

    Ed.’s Note: Abiy Getachew is a consultant at HST consulting PLC. The views expressed in this article do not necessarily reflect the views of The Reporter. He can be reached at   This email address is being protected from spambots. You need JavaScript enabled to view it..