Ontex Hygienic Disposables Plc, a renowned manufacturer of Canbebe diapers, finds itself embroiled in a protracted dispute with federal tax authorities, a conflict that has recently escalated with the seizure of the company's assets. This marks a significant setback for the diaper producer operating within the Hawassa Industrial Park for over five years.

The dispute goes back to Ontex's initial entry in 2017.

Under the managment of Argentinian executive Charles Bouaziz, the company invested 25 million Br with ambitions to tap into the regional diaper market. Operating from two expansive sheds in the Industrial Park, Ontex quickly made a name for itself with a production capacity that could churn out half a million diapers every four hours. This rapid scale-up was backed by the promise of duty-free privileges, granted on the condition that Ontex would export its products.

However, Ontex's journey was fraught with troubles from the onset. The company struggled to find international buyers for its products, particularly its flagship Canbebe Diapers. According to Girum Haileleul, Ontex's supply chain manager, the high cost of production, compounded by logistical complexities, caused Ontex's products less competitive in the global market. The situation was exacerbated by what Girum described as a lack of support from the Ethiopian Customs Commission (ECC) officials.

"They drove us out of business," he told Fortune.

Ontex inability to meet export requirements became increasingly apparent, leading to non-compliance and, hence, the watchful eyes of customs officials. They took over Ontex's plant in the Park, which had been inactive for over two years. The climax of the events was the seizure of the company's assets a month ago, a dramatic turn of events for the once-thriving manufacturer, despite some reduction in the levied taxes through ministerial intervention.

Although factories within industrial parks are expected to export all their merchandise, Ontex's initial venture into the manufacturing sector involved agreements with the Ethiopian Investment Commission (EIC) and the Ministry of Industry. It was allowed up to 40pc of its output to be sold in the domestic market. The plan did not materialise, aside from a few containers being shipped to Eritrea as the border opened in 2018. Ontex's failure to comply led to the eventual closure of its operation.

Belay Hailemichael, a branch manager at the Commission, noted that Ontex's failure to export was initially overlooked due to its dominance in the domestic market and contributions to import substitution. Canbebe diapers were initially imported by Tracon Trading Plc, which stopped diaper imports four months ago due to foreign currency shortages, and 14 other importers. In the first month of 2020 alone, Ethiopia imported over  294,000 dollars of diapers, mainly from China.

However, patience wore thin as Ontex continued to fall short of its export commitments, said Belay.

The company's troubles were further compounded by a post-clearance audit conducted by the Park's ECC branch. The audit revealed discrepancies in input-output reconciliation and alleged abuse of duty-free privileges, leading to claims by federal tax authorities of approximately 400 million Br in tax receivables. According to Gedana Tsegaye, deputy head of the Customs Branch at the Park, Ontex disputed these findings, setting off appeals and prolonged legal litigations.

The dispute reached a pressing juncture when the company was instructed to vacate the premises of the Industrial Park at the end of 2020, following repeated warnings to begin exporting. It came against a backdrop of broader turmoil the manufacturing sector faced. A World Bank report disclosed the lack of effective coordination between public institutions as a main obstacle to encouraging a thriving investor class.

Ontex's senior managers, including General Manager Gabriella Moreno and CFO Fasil Issac, Timothy Muhnaji, the plant manager and Girum say they have struggled to address these issues, but claim their efforts were met with diminishing support from the Ethiopian authorities.