SEEING
VALUE WHERE OTHERS SEE CHALLENGES – THE STORY OF SOUTH AFRICAN BUSINESSES
IN NIGERIA
By Bolaji Okusaga
1. THE PARADOX OF
HAVING A HUGE ECONOMY WITH WEAK INFRASTRUCTURE AND UN-CORDINATED POLICIES
With a population of 170 million people out of Africa’s 903
million total headcount, which represents one-fifth of the continent’s
population, Nigeria is a huge paradox for global investors looking for
opportunities in Africa.
When Nigeria’s huge potential is juxtaposed with unsavoury
conditions which are detrimental to investment, such as corruption, excessive
bureaucratic bottlenecks and infrastructure challenges, an investor is likely
to face a huge dilemma. For instance, the World Bank’s 2013 “Doing Business"
survey puts Nigeria at 185th out of the 189 countries it surveyed on ease of
getting electricity. In addition to shortfalls in power generation, transmission
and distribution, transportation systems and other critical support infrastructure
are also relatively under-developed. This, coupled with the endemic corruption and
the bureaucratic red-tape make doing business in Nigeria tougher than in other
climes.
Beyond these challenges, however, Nigeria offers a basket of
opportunities for the intrepid. Nigeria
is currently rated as the biggest economy in Africa, accounting for 26% of the
economic output in sub-Saharan Africa and over 70% of the economic output in
the ECOWAS region. Except for the year
2015, which has seen a reduction in growth projections because of falling oil
prices and the anticipated crisis from the general elections, Nigeria has
maintained an average year on year economic growth of 6% in the last 10 years.
Other macro-economic variables have also remained relatively stable over this
period. Despite these positive indices, business in Nigeria is admittedly tricky, hence the departure of a lot of European and American trans-national corporations and the refusal of others to operate in Nigeria. Aside core investors in commodity and extractive industries - and a couple of players in manufacturing, who had been operating in Nigeria before its independence from Great Britain in 1960, a lot of European and American Technology and Consumer Goods businesses do not dare to take the plunge.
It is therefore no surprise that the likes of Starbucks, McDonald's, and a host of other companies involved in retail and distributive trade are missing the huge opportunities presented by Africa's biggest and most populous economy. To these companies, the risks outweigh the possible benefits- a clear case of seeing the cup as half empty.
The loss of these European and American companies is the gain of South African companies. Operating in Nigeria despite the huge challenges, they are reaping huge returns on their investment. From the foregoing, it is glaring that navigating Nigeria’s interesting investment paradox, borders on differences in perspective.
2. BEYOND HALF-FULL: HOW
HAVE SOUTH AFRICAN INVESTMENTS FARED IN NIGERIA?
Despite the infrastructure challenges, bureaucratic bottlenecks
and corruption often cited as the bane of investing in Nigeria, South African
businesses appear better suited to the Nigerian business environment than their
Western counterparts. From the retail end, with players such as Shoprite and Game, to Hotel and Hospitality with the Protea Hotel chain (which was recently acquired by Marriot, the American Hotel chain), onto Media and Cinema with companies like MultiChoice and Nu-Metro, banking and financial services - Stanbic IBTC Bank, First Rand Bank, Old Mutual and Nedbank (which recently acquired a sizable stake in Ecobank, the Nigeria led Pan- Africa Banking Franchise), and other mid-sized businesses dotting the Nigerian business landscape, South Africa today stands as one of the major players in the Nigerian economy.
Following the restoration of democracy in Nigeria in 1999 and
the adoption of the New Partnership for Africa Development (NEPAD) statute in
the early 2000's, South Africans were quick to identify opportunities in
Nigeria and were bold in their market entry. First to make a statement with its
entry was MultiChoice, which had arrived well before the return of democratic
governance and adoption of the NEPAD Agreement, and its entry re-invented the
media, cable and pay-TV industry in Nigeria.
Offering unparalleled
value within the local market, MultiChoice quickly became a monopoly,
dominating the Nigerian market and making it difficult for the local players to
compete in this capital intensive industry. Following the MultiChoice example,
MTN also rolled out its services as the second player within the newly
liberalized Nigerian Telecommunications market, immediately asserting its
leadership of the industry, rolling out
critical infrastructure across Nigeria and making huge investments in brand
building. Unsurprisingly, MTN became the market leader in less than one year of
its operations. While MTN was growing value in the Telecommunications sphere, the Protea Hotel chain was also planting its presence in Nigeria's major cities. Today Protea is the largest hotel chain in Nigeria, operating through a unique franchise model which seeks out Nigerian hotel and hospitality Investors as partners, while bringing in its own brand franchise and management expertise.
Furthermore, South Africa also registered its presence in the Nigerian Financial Market with the entry of Stanbic Bank, a wholly-owned local subsidiary of South Africa's Standard Bank. Seeing the need to grow its presence in Nigeria, it soon acquired a mid-sized local Universal Bank with a huge Investment Banking franchise - the IBTC Chartered Bank. It is on record that the deal is the first ever tender offer in Nigeria and with it came a 525 million dollar Foreign Direct Investment, the biggest single investment in Nigeria’s financial industry till date.
Through this investment, South Africa was able to make inroads into the Nigerian stock exchange given the fact that IBTC Chartered Bank was then the largest equity trader by volume and value on the Nigeria exchange as well as the largest portfolio manager and is represented on the council of the Nigerian Stock Exchange. Furthermore, this strategic acquisition also brought South Africa into Nigerian government bond management because the acquired Bank is the sole broker for the Federal Government of Nigeria and was picked by the government to be the settlement bank for the electronic warehouse receipt system introduced by the Nigerian Commodity Exchange.
Aside from the Stanbic IBTC success story in the Banking sector, South Africa is also deepening its participation in the Nigerian manufacturing and consumer goods sector. Tiger Brands, a South African company, recently bought a majority stake in UAC Foods and Dangote Foods. This strategic acquisition comes as a move to shore up the earnings of Tiger Brands, which has flattened at home, given Nigeria’s huge consumer market.
Aside from all of the businesses mentioned above, there other
new entrants into the Nigerian economy from South Africa, and these includes, Nedbank,
FirstRand, Old Mutual, Sanlam and MMI Holdings.
3. INITIAL POLICY
OBSTACLES AND SOUTH AFRICA’S ENTRY IN THE ERA OF LIBERALISATION
The curious though unspoken question on the lips of
international venture capitalists and investors, is how come the South Africans
seem to be succeeding where others are failing? This question comes against the
background of the noted challenges in the Nigerian environment which are
compounded by the absence of a stable policy environment.
The history of international investments in Nigeria before
the return of democracy was not particularly savoury, what with the
indigenization decree of the 1970's under the Military governments of Murtala
Mohammed and General Olusegun Obasanjo, which saw a lot of foreign business
interests in Nigeria ceding their stakes to Nigerian shareholders in a push for
the localization of multi-national businesses in Nigeria. This move saw the
exit of Shell Petroleum and British Petroleum from the down-stream sector of
Nigeria's lucrative Oil and Gas market. As if the set-backs of the 1970's were not enough, the structural imbalance of the 1980’s also saw the plummeting of industrial capacity in Nigeria. This situation arose largely from the rationing of foreign exchange under a corrupt and highly politicized import licence order. Given this scenario, there were frantic calls for structural reforms. These reforms were soon ripe and ready, following the huge debts which Nigeria incurred from the London and Paris club of Creditors.
Initial reforms were thus undertaken in the late 80’s to
early 90’s, tailored towards budgetary
tightening and fiscal discipline with a view to raising industrial capacity in
order to reduce dependence on imported finished goods. Prodded further by the
Breton Woods Institutions, to undertake more reforms, given its huge sovereign
debt, the Nigerian Military government under General Ibrahim Babangida, announced
more fiscal reforms; starting with the Second-tier Foreign Exchange Market,
which saw the devaluation of the naira, and the Structural Adjustment Programme
which engendered a high-level of fiscal tightening in a bid to refocus the
economy.
As all these reforms were going on, the Nigerian economy was
still largely perceived as unattractive to Foreign Investors in Europe and
America who only saw opportunities in the commodities and extractive industries
and were uninterested in deepening their involvement in the Nigerian manufacturing
and retail sectors having been scarred by the indigenization decree promulgated
by the Murtala/Obansanjo Military regime. The conventional wisdom at the time was
therefore to stay aloof to the reforms and the liberalisation of critical
sectors of the Nigerian economy that followed thereafter.
4. BOOSTING INTRA-AFRICA
TRADE: THE NIGERIA / SOUTH AFRICA EXAMPLE
Aside from
the existence of South African companies in Nigeria, Nigerian businesses are
also gradually making in-roads into South Africa, thereby helping to boost the
intra-Africa trade that was very low before the advent of the New Partnership
for Africa Development (NEPAD). Nigerian
energy firm, Oando, for example, is listed on the Johannesburg Stock Exchange,
while Dangote Group has also invested over $378 million in South Africa's
cement industry. In addition to these two companies, there are also a couple of
other Nigerian businesses in South Africa such as Arik Air, First Bank and
Union Bank which have representative offices in South Africa.
5. THE DOWN-SIDE OF
SOUTH AFRICA’S INVOLVEMENT IN THE NIGERIAN ECONOMY
The South Africans may have cashed in on the opportunities availed
by the liberal regime bought on by the new democratic order in Nigeria and are making
a kill where the west did not initially see any prospects, but there are a couple of things South Africa is also not
getting right.
One of these is the tendency of South African firms to only
trade among themselves rather than patronize local options in Nigeria. It is usually alleged that MTN Nigeria, in
giving out its banking and collection mandate, will prioritize Stanbic IBTC
Bank, a bank with South African interest, above local Nigerian Banks. The same
is said of the other South African businesses. This situation has tended to
increase the mistrust between Nigerian local businesses and their South African
counterparts. Given this situation, the prevailing feeling within the Nigerian
business community is that the South Africans are not returning the friendly gesture
of Nigerian businesses and consumers towards South African interests and are
therefore not displaying ‘brotherly’ love towards Nigerian businesses.
Aside from this, there is also the issue of the monopolistic
tendency of South African firms which creates industrial tensions, especially
in the Telecoms and pay- TV segments of the Nigerian economy where South
African behemoths like MTN and MultiChoice are dominant. Accusations are rife
about the deployment of arm-twisting tactics in the bid by these players to
retain their dominant positions. Beyond this, there are also the allegations of
over-pricing of services in Nigeria, in comparison to the prices these firms
charge in South Africa.
Furthermore, there is also the issue of the non-reciprocation
of Nigeria’s open door policy in South Africa. The poser often raised by cynical Nigerian business analysts
is, ‘which major Nigerian company has made any inroads worth mentioning in
South Africa even though South Africans are making a huge kill in Nigeria?’ Skeptics
also cite the exit of Thisday newspaper from South Africa under a very curious
circumstance, as proof of hostility of South Africa to Nigerian businesses.
Complaints about the non-reciprocity of the open door policy
to Nigerian businesses in South Africa often creates inter-government friction,
to the extent that bi-lateral relations
between the two countries was nearly damaged in 2012 when 125 Nigerian business
travelers to South Africa were denied entry into South Africa for not having
valid Yellow Fever certificates. The Nigeria government, in retaliation, also expelled
56 South Africans. This situation led to huge tensions which were later
resolved with the easing of travel restrictions
6. BEYOND THE
OPPORTUNITIES AND THE CHALLENGES, WHAT DOES THE FUTURE HOLD FOR NIGERIA- SOUTH
AFRICA BUSINESS RELATIONSHIP?
Having x-rayed the opportunities and challenges of South
African companies doing business in Nigeria, it is evident that great prospects
lie ahead for this ingenuous partnership which is opening up vistas of
opportunities for boosting intra-Africa trade. However, a couple of things need to be
addressed on both sides:
a.
Easing
of Visa processing and travel restrictions
While it may be tough to have a visa
free regime or a visa-on-arrival situation, there is the need to ease visa
processing in order help facilitate the interchange of business between both
countries.
b.
The
setting up of a clearing house for the resolution of business and investment
disputes
Given the necessity for speedy resolution
of business disputes between both countries, there is the need for the setting
up of a conflict resolution mechanism outside of the traditional legal and
arbitration systems provided by both countries. This will help ease investment
processes and speed up transaction time while creating better value for
investors seeking opportunities in both countries.
c.
The
need for reciprocity in the spirit of African brotherhood.
There is the need for reciprocity in
term of access to opportunities between both countries. This will go a long way
in strengthening relationships and lessening tension.
d.
Political
and fiscal risk
This is particularly important
because if businesses are not sure of the political and fiscal risks that they
are likely to confront, it might stifle investment and lead to value attrition.
The withdrawal of the 2.3 Gega Hertz (GHz) licence initially awarded to
Multilinks (the Nigerian subsidiary of Telkom), which happened under very
curious circumstances, was one of the reasons for the exit of the company from
Nigeria.
e.
Resolving
the issue of high costs of doing business
This particularly relates more to the
Nigeria environment than the South African environment. Nigeria needs to bridge her infrastructure deficit
in order to be able to attract more quality investments from South Africa. A
situation where a company like the MTN was saddled with building its own
backbone before being able to operate in Nigeria is not standard practice and will
therefore not be the case in more investment friendly environments. There is
the need for Nigeria to look more critically at building the necessary support
infrastructure which will make doing business in Nigeria a lot cheaper and help
drive foreign direct investment.
7. FACILITATING
INTRA-AFRICA TRADE BY SETTING THE RIGHT EXAMPLE - THE NIGERIA/SOUTH AFRICA
OPTION
The popular view that Africa stands to benefit more from
trade among Africans than trading with
Europe, America and Asia rings true when one considers the progress made so far
in Nigeria's partnership with South Africa
and the benefits that have accrued there-from. However, more effort is required
to take this to the next level.
Currently, Africa's intra-regional trade stands at about 10 -
12% of Africa's entire trade. This is very small when compared with
intra-regional trade within North America which is over 40% and intra-regional
trade in Western Europe which is about 60%. African Countries trade more with
America, China and Europe than they do among themselves. This is largely attributable to the existence
of artificial barriers to trade as well as poor transport and communication
infrastructure across Africa. Furthermore, the lack of a political will to affirm
commitments on the lifting of cross-border restrictions on the movement of
goods and services across Africa beyond mere promises represents a major
hindrance to achieving the desired end-state.
Given the need for the economic integration of Africa, African leaders
adopted the decision to establish a Pan- Africa Continental Free Trade Area
(CFTA) by the indicative date of
2017 taken during the 18thOrdinary Session
of Heads of State and Government of the African Union that was held in Addis
Ababa, Ethiopia, in January 2012. But, beyond boosting intra-Africa trade
by strengthening trade within regional blocs in Africa, there is the need for
the big economies and fast growing economies in Africa to set the right example
by removing barriers to trade among themselves. Nigeria, South Africa, Egypt and
other fast growing economies in Africa such as Kenya and Angola warehouse about
45% of Africa's total economic output, and given the need to raise intra-Africa
trade, Nigeria and South Africa, two of Africa's economic power-house need to take
the lead.
Bolaji Okusaga is the Managing Director of The
Quadrant Company, a Lagos based Public Relations Consultancy
