CONTROLLING THE MARKET, CONTROLLING THE PEOPLE:

C O N F I D E N T I A L ASMARA 000553 SIPDIS SIPDIS LONDON FOR AFRICA WATCHER PARIS FOR AFRICA WATCHER E.O. 12958: DECL: 6/27/2006 TAGS: PGOV ECON EIND PINR ER SUBJECT: CONTROLLING THE MARKET, CONTROLLING THE PEOPLE: HIDRI TRUST TAKES ALL CLASSIFIED BY: AMB Scott H. DeLisi, for reasons 1.4 (b) and (d). Reftel: A) 2004 Asmara 193; B) 2005 Asmara 165 ¶1. (C) Summary: Taking its ideological cue from the centralized economies it so admires, the GSE, acting through the Peoples Front for Democracy and Justice, established the Hidri Trust in 1994 with the intent of helping society. Hidri, meaning a promise or pact, is, however, an entity shrouded in mystery here. The Trust serves as a corporate umbrella for numerous party-owned businesses, such as Red Sea Trading Corporation, Housing and Commerce Bank, Red Sea Bottlers(Coca Cola),Segun Construction, and Asmara Wine and Liquor Factory. Conveniently, the President and other government leaders, who are also top party officials and reportedly Hidri trustees, are able to encourage and orchestrate GSE policies to severely restrict those private businesses that compete with Hidri-owned entities. In fact, government actions over the past few years have essentially sidelined the private sector and virtually all the nation's commercial operations are consolidated under the PFDJ's Hidri Trust. ¶2. (C) Government officials thus have a cozy deal, able to ensure both that GSE contracts go to Trust businesses and that Trust resources are available for off-the-books activities that may include weapons procurement and advancing GSE objectives, some of which may be contrary to USG interests, in the region. Moreover, given that so few in Eritrea know what the Trust does and fewer still have even a rudimentary understanding of its workings, it seems an elite few who wear government, party and Hidri Trust hats interchangeably, have little or no accountability to the masses they purport to serve. End Summary. WHO IS THE HIDRI TRUST? -------------- ¶3. (C) Owning nearly every significant business in Eritrea and being a major shareholder of others, the PFDJ, through the Hidri Trust effectively controls all of Eritrea's markets. Through Trust subsidiaries they own the Red Sea Trading Corporation, the only entity permitted to engage in significant imports of construction supplies and basic food supplies. The Trust also owns the beer factory and the liquor factory, the Coca Cola plant, the major large scale construction firms, the largest book publisher, the Intercontinental Hotel, a significant percentage of the largest technology service provider and the Housing and Commercial bank, the only bank in Eritrea not officially government-owned. (Note: Post also suspects that the Eritrean Naval Forces private sector arm, Harat, is similarly owned by the PFDJ.) Further, given that the PFDJ and the GSE are merely different faces of the same entity, and given that the President and other GSE officials are also believed to be Hidri Trustees, the incestuous nature of the relationships is striking. Equally striking, at least to outsiders, is the inappropriateness of Hidri companies, which are in essence government entities, "competing" for, and invariably winning, government tenders. ¶4. (C) In addition to these companies dominating the competition for government contracts, including major infrastructure projects, they are also able to use their advantages to control inflows to the market significantly enough to affect market prices. For example, if the price of coffee, an Eritrean staple, becomes too high for the government's (or party's) liking, the Red Sea Trading Corporation can increase market supply and thus bring down the consumer price. Given the large volume of business done by the Hidri Trust companies, they are able to operate on an economy of scale that makes it nearly impossible for any other business to compete. THE EPLF ROOTS OF THE HIDRI TRUST -------------- ¶5. (C) The Hidri Trust was initially founded with the assets of the Eritrean People's Liberation Front, and the funds it raised overseas during the struggle. According to the infamous letter of the G-15 submitted to party leadership in the summer of 2001 the PFDJ established the trust to administer PFDJ businesses at the third and fourth sessions of the Central Council of the PFDJ in August 1994 and 1995. During these sessions, the council determined that PFDJ and government assets should be separated and that PFDJ businesses would "aim toward helping the disadvantaged in society and strictly obey trade laws and the laws of the market." In conversations with Berhane Hiwet Ghebre, General Manager of the Housing and Commerce Bank (strictly protect),the PFDJ established the Hidri Trust in order to generate revenue to support the families of the martyrs of the struggle. According to Berhane, Hagos Ghebrehewit, the Chief Economic Advisor of the PFDJ oversees the Hidri Trust. ¶6. (C) Given that Hidri-owned entities dominate or have monopolies in so many sectors of the economy (including construction, one of the few expanding sectors) most observers believe that these businesses have to be extremely profitable. Yet, Berhane told Poloff, to the best of his knowledge none of these large scale businesses, including the Housing and Commerce Bank, ever paid dividends to the Hidri Trust or declared a profit. Nor, Berhane added, has the Hidri Trust to his knowledge ever made payments to the families of the martyrs. CONSTRUCTING A PROFIT -------------- ¶7. (C) No matter what Trust-owned entities' books say, it requires a considerable stretch of imagination to believe that these companies are not profitable. The operations of the Segun Construction Company are a case in point. Segun is almost certainly the largest construction company in Eritrea, constructing many government infrastructure projects, government buildings, and private homes in Asmara. In Asmara, Segun sells private homes it has constructed to the diaspora community at prices beginning at over 120,000 USD and going as high at nearly 500,000 USD. Diasporan buyers of these homes must pay in hard currency. Nearly all of the construction supplies must be imported, and given the volume of business done by Segun they have: the ability, the government ties, the links to other Hidri-owned importers, and a sufficient company infrastructure to manage the importation of supplies at prices far lower than those encountered by private sector competitors. Combined with the access to hard currency and the labor provided by national service workers at nearly zero cost, Segun Construction projects' expenditures are significantly lower compared to the few private construction companies left in business. ¶8. (C) These advantages have, in turn, allowed Segun to dominate the market and force out any significant private competition while setting the retail price of these homes at whatever level it wishes. One Eritrean contact who constructed a home two years ago, before the increase in market control and the closure of imports, told Poloff Segun's prices seem out of line with what true market price might be and are nearly double what he paid for the construction of his home. It is hard to see how Segun can be anything but profitable. The question is instead, how are the profits handled and where do they go? A question that might be asked of many of the Hidri companies. FOLLOW THE MONEY: THE SHELL GAME OF ERITREAN BUSINESS -------------- -------------- ¶9. (U) Another classic example of the shell games being played by the PFDJ and the GSE is the National Insurance Corporation of Eritrea (NICE,) which may or may not be a Hidri-owned entity but which fits within the model. In theory, NICE has been declared by the GSE to have been converted into a private share company with over 5 million shares. Yet in its published audit statement of 2005, the shareholders are the Ministry of Finance (61.25%),the Ministry of Labor & Human Welfare (30.02%), a sole individual (3.26%) and others 5.47%. Moreover, it appears that in 2005 NICE earned gross profits of nearly 58 million nakfa (3.8 million USD) and paid nearly 40% of those gross profits to the GSE as taxes in 2005. The GSE wins twice; both with the taxes collected and with government ministries, as the majority shareholders, benefiting from NICE's profits. Who regulates the insurance industry? Requires companies or individuals to purchase various forms of insurance? The GSE. Who governs NICE operations? The GSE. Who then determines what happens to the more than 2 million USD equivalent left of NICE profits after taxes? No one can answer. PERCEPTION ECHOS THE REALITY -------------- ¶10. (C) When attempting to learn more about the Trust, Poloff encountered various versions of the "truth," all shared in hushed tones. The common thread, however, was the theme of government control. One private business owner cautiously relayed her understanding of the Hidri Trust as a market intervener, serving to provide subsidized food to the people. She noted that the GSE- run food distribution sites are called Hidri and suggested that the Trust is also a tool for marketing, and making profits on, items that the GSE compels businesses to buy through regulatory mechanisms. A law professor who has a background in finance law, perhaps came closer to a de facto if not de jure explanation when he maintained that the Hidri Trust was "solely owned" by the government. He seems to have hit the target even more precisely when he concluded "they control the economy." That sentiment was shared as well by a young Eritrean who explained to Poloff, "people believe the Hidri Trust, as run by the party and thus the government, own everything, including the women who braid hair" (considered to be one of the most menial jobs in Eritrean society). The secrecy surrounding the Trust adds to the mystery and confusion but the fact that the Trust is a force to be reckoned with seems crystal clear. COMMENT -------------- ¶11. (C) Comment: With the lack of clear boundaries between the PFDJ and the GSE, given that President Isaias is the head of the government, head of the party and apparently a senior (some claim sole) Hidri Trustee, it is hard to view the Hidri Trust as anything but a parastatal operation. And, with its unquestioned control over much if not most of the economy, Hidri and the select few who run it, wield enormous power and influence. As long as the Hidri Trust benefits from government proclamations that restrict the private sector, has special access to hard currency to support trade this elite group will continue to do so. And, with no public review or oversight, these individuals have a ready source of funding for any off-the- books activities they want to pursue, from weapons procurement to support for insurgent groups in Ethiopia, Somalia, and elsewhere. Funding for any such activity potentially could be passed through, and effectively buried in, the Hidri Trust. It is clearly a potent and potentially dangerous tool in the wrong hands. End Comment. DeLisi