Several foreign investors in Ethiopia whose assets were nationalised by the Mengistu regime are still waiting for their compensation claims to be honoured. Unless a resolution is arrived at quickly, Ethiopia's bid to attract investors is likely to fail. Caroline Lambert reports.

The Papassinos family has been waiting for 25 years. In 1975, the Marxist regime headed by Colonel Mengistu nationalised all the family's assets, consisting mostly of a private residence and a commercial building in the centre of Addis Ababa, still known as the Papassinos building.

The family has neither been compensated for their losses nor allowed to reclaim their assets despite the current government's commitment to do so.

And the Papassinos family is not on its own. Many other foreign nationals are still fighting for compensation and are desperate to highlight their cause. While the government stands at the nation's doors beckoning new foreign investors with one hand, the other hand is shoving the older, beaten investors into a darkened corner. European governments and the World Bank seem to be only able to stand back and watch this doorman they pay for.

The Papassinos family's bank accounts, although not formally nationalised, also became inaccessible. Although a claim was filed with the Ethiopian Compensation Commission shortly after the confiscation, it did not translate into any tangible result.

The demise of the military regime in 1991 and the following redirection of economic policy towards a market-based economy brought renewed hope to the family. Fresh approaches were made, but the government maintains that the claims have not been properly filed, although ample documentation, including ownership titles, have repeatedly been provided. The government has so far failed to specify what additional documentation is actually required.

The Papassinos case is not an isolated one. Although compensation claims involving mostly American and Italian investors were settled in the late 1970s and early 1980s through bilateral agreements, cases involving British, Greek, German and French nationals are still pending.

According to international law and World Bank guidelines, expropriation should be compensated in a freely convertible currency on the basis of fair market value at the time of expropriation, and, where there is a delay in compensation, interest should be paid. Given the 25-year delay for the Papassinos, interest payment would now constitute a substantial portion of a payment calculated according to these guidelines.

Although pending cases stand at various stages, most investors agree that Ethiopia's attitude towards their claims is highly disreputable.

According to most claimants, the current government's attitude is not much different from its predecessor's. Although it has officially revived bodies supposed to deal with compensation, little has happened since then.

The legacy of the Mengistu era is a heavy burden for the present government. With a GNP per capita of $100 in 1998, Ethiopia is one of the poorest countries in the world. It also has one of the highest military budgets as a percentage of GDP. External public debt stands at almost 150% of GDP.

Bearing this in mind Prime Minister Meles Zenawi's attitude does not give claimants hope for optimism. In an interview last year he said that the lack of adequate compensation is "an academic issue", as expropriations were committed by the Mengistu regime. "We have a host of issues to deal with and we have to prioritise," he added.

In view of Ethiopia's limited financial resources, some claimants would be willing to forgo compensation if their properties were only returned to them. Despite their willingness to compromise, however, the authorities seem less willing to do so.

The fact that some of the assets which are being claimed have been, or are about to be, privatised, adds to the claimants' frustration. No portion of privatisation proceeds appears to have been allocated to compensate previous owners. "They stole our properties and are now selling them without even offering us an adequate compensation," says a discouraged claimant.

Another's lawyer is further outraged by the fact that the World Bank is providing technical assistance to facilitate the privatisation of some of these assets.

While the international community, including many of the claimants' own governments, is sensitive to Ethiopia's large financing requirements, it also seems to have turned a blind eye to uncompensated expropriations. Ethiopia has been receiving significant economic assistance from Germany, Sweden, the European Union, Italy and the United States over the past few years. Ethiopia may also receive debt relief under the Initiative for Heavily Indebted Countries, contingent on a successful track record of implementation of reforms under the programme.

Should new lending be included ($669m last fiscal year), the country is the largest African recipient of loans from the World Bank's International Development Agency. The bank is mindful of the problem of expropriation compensation. Its policy allows lending to be suspended in case of expropriation disputes if the government is either not making reasonable efforts to settle or if the issue is harming the country's international credit standing. Both reasons are decided by the bank alone.

In view of the considerable amount of foreign assistance Ethiopia is receiving, one could hardly support the argument that the country's credit standing has been harmed.

Ironically the Multilateral Investment Guarantee Agency (MIGA), which is also part of the World Bank Group and provides political risk insurance covering foreign private investments, has suspended its programme in Ethiopia. MIGA is required by its convention to restrict eligibility for its guarantee programme to countries that meet international law standards of fair and equitable treatment and due legal protection to foreign investors.

In view of Ethiopia's handling of the issue to date, the agency had to conclude that these standards were not met. At the same time, MIGA, which was approached by claimants a few years ago, has been using its good offices to mediate and has been following 15 cases involving European investors still seeking compensation.

The country's economic achievements and structural reforms could provide a favourable environment for future foreign investment. Ethiopia's annual growth rate has increased from an average of less than 2% in the 1970s and 1980s to more than 6% over the past few years and inflation has decreased dramatically. In addition to a stabilised macroeconomic environment, the extensive system of price control has been dismantled, the foreign exchange system liberalised and some restrictions on private investment have been removed. Foreign investors now benefit from specific tax incentives and lighter administrative procedures.

The 1996 Ethiopian Investment Code states that in case of expropriation justified on legal grounds or national interest, "the government guarantees to provide adequate compensation corresponding to the prevailing market value of the property and such payment shall be effected promptly".

In reality, nothing of the sort happens. Foreign investors must take a hard look at the country. Unless a satisfactory solution is finally found to settle pending claims from expropriated foreign investors, the seriousness of Ethiopia's credibility is open to question.

Additionally, foreign investors will have to watch what they invest into. Should they take part in a privatisation that is founded on expropriation, they may find themselves open to claims for damages in their own domestic courts.