The two companies were sued by a major hide supplier, Sisay Reta, who claimed 24 million Br (US$1.26 million) and 15 million Br (US$787,000) in unpaid arrears in late December. Pittards say that the figures reported in the Ethiopian media relating to them are inaccurate.

The Federal High Court bench presided by Judge Hussein Yimer, passed a ruling on December 19, 2013, freezing the accounts of the two foreign companies.

Frustration from the two companies reached the government corridors in Ethiopia. The fact that both Britain and China have strong presence in Ethiopia raised the sensitivity of the matter.

An intervention from high-ranking federal officials at the Ministry of Industry (MoI) resulted in a deal, which led to Pittards settling the claim. With Ethiopia’s relationship with the two major donors at stake, the government secured the release of the accounts, sources close to the issue disclosed to Fortune.

“The news of the court ruling sparked shock among government circles,” said Tadesse Haile, State Minister for Industry.

Excluding the 24 million Br (US$1.26 million), Pittards has taken credit of around 13 million Br (US$682,000), which it is expected to pay within the coming month, according to Sisay Reta. The payment should have been paid before the end of the last Ethiopian fiscal year, on June 30, 2013 whereas it was not included in the court case since Pittards agreed to pay it back within two months in July, according to Sisay. Pittards dispute the payment terms quoted in the article.

“Working with credit is not something new, but freezing company accounts is like halting the export performance of the country,” said Tadesse.

The Chinese company (Friendship) has also been accused of exporting semi-finished leather (wet-blue) over the past five years despite restrictions.

The justice system has to go in line with the market economy, Tadesse claims. “We will continue to intervene whenever similar incidents arise”, he said. “The issue of export is a matter of life and death for the government.”

Pittards invested in the Ethiopian market after the government hired it to manage the Ethiopia Tannery (Ethiopia Tannery Share Company), whose factory is located in Ejersa, near Mojo in the Oromia Regional State – 90km east of Addis Ababa – on a five-year contract.

The Government says it is determined to transform the country’s tanning industry from the export of semi-processed hides/skins (wet-blue) to crust and finished leather products. The latter, the Administration claims, are vehicles to upscale the leather industry to become internationally competitive.

With an export-led trade policy, which is also connected to addressing the shortage of foreign currency, the government is keen to promote the export so that it can provide foreign companies with a number of incentives, including providing land at low cost. In turn, the companies are expected to export at least 80% of their products.

Taking the Ethiopian Tannery, which has been operating for over two decades, Pittards began the export of leather gloves, producing close to 1,000 units a day, which 80% was for export whereas the Friendship Tannery has the capacity to produce 5,000 units a day.

Sisay Reta, an experienced local trader in the export of hides and skin, is also accused of hording stock in a bid to lift prices.

This led parliament in December to pass an act regulating the supply line. (Ethiopia passes hide and skin marketing law)

Officials at the Ministry of Industry are currently writing a directive to enforce the act, one of which makes collectors’ supply direct to the factories and aims to eliminate middlemen from the supply chain.

Reg Hankey, CEO, Pittards issued the following statement to ILM in response to the Fortune article: “This incident was very unfortunate and turned out to be a storm in a tea cup. Sisay Reta has been one of the largest skin traders for the past decade or so in Ethiopia and Pittards have been the largest buyer of skins over that period. Consequently we have had a very long and good relationship with Sisay and have successfully traded many hundreds of millions of birr of skins with him.

In 2010 the average price of sheepskins was about 34 birr (US$1.8) per skin while in 2012-13 the price peaked at around 98 birr (US$5.1) per skin. 

The government of Ethiopia has a very clear and well publicised Growth and Transformation Plan which embraces the strong economic development of the country as it’s direct route out of its historic poverty.

The leather and leather products sector is extremely important to the GTP as it is allied to the agricultural economic base, it employs many people with basic manufacturing skills and it brings much needed added value export revenue to the country. Pittards as a major foreign investor and with its long association with the country is very goal aligned with the GTP and currently employs 1200 people in Ethiopia with a plan to employ 6000 people focused heavily on export led production.

The dramatic rise in skin prices was threatening the rate of delivery of the GTP as most of the skins were being exported part processed rather than as added value finished leather or products. Hence the government introduced the crust tariff regime in late 2011.

It was also suspected however that some of the ‘false market’ pricing was perhaps due to market speculation within the supply chain. In order to bring more transparency to this supply chain the Ethiopian government undertook a study and has very recently passed new legislation to license the raw material suppliers such that only primary suppliers can supply tanneries. 

These new rules are very likely to challenge the way Sisay Reta is able to run his business and unless he adapts his business model dramatically it is very possible that he would be unable to supply skins in the future.

In my opinion, this frightened Sisay such that he felt if he cannot be a future supplier then perhaps his current customers would not pay him. Although I cannot speak for his other customers, in Pittards case we have always honoured our commitments and will continue to do so. He therefore did not have any real extra risk, only a perceived one. We had bought a lot of material from him this year and paid him a lot of money in the normal way. We always pay him with agreed payment terms but suddenly he wanted to claim all of his money immediately and ignore the previous arrangements.

Once we got together to work matters out the way forward was solved quite quickly.

The Ministry of Industry helped tremendously with the process and the GTP remains on track, which is a clear signal about the seriousness and determination of the Ethiopian government to continue to deliver strong economic growth for the benefit of its people. 

We understand Sisay’s anxiety but believe he panicked too quickly. Based on our long trading relationship we wish him well for the future.”

ILM has also contacted Friendship Tannery for a comment but so far they have not responded.