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