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Shoprite exit reflects need for structural change in Nigeria
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Business Day6 August 2020 In 2005, former Shoprite CEO Whitey Basson said he was not expecting any competition in Nigeria any time soon, after it took him several years to get the first store up and running in Lagos. And he was right. The first real competition emerged a few years later. The tough battle to establish a retail presence in one of Africa’s most challenging markets set the tone for Shoprite’s 15-year journey in Nigeria. The business environment has never been easy, but Shoprite adapted and made good money for a long time despite the challenges. Basson had a passion for the continent that made him determined Shoprite would get the best out of these markets. He famously asserted in 2013 that there could eventually be room for up to 800 Shoprite stores in Nigeria, the only constraint being the slow development of modern shopping malls in which to house them. In 2012, Shoprite reported that sales in its supermarkets in the rest of Africa grew 28% compared with 9.8% at home. At the time it had 47 new African stores in the pipeline, most of them earmarked for Nigeria and Angola. Yet by 2020 it had just 25 stores, and the Nigerian business is up for grabs. The company announced this week that it will sell all of, or a majority stake in, Retail Supermarkets Nigeria, Shoprite’s Nigerian subsidiary. Of all the SA retailers that entered African markets, Shoprite was the one most expected to last the distance. It fine-tuned its country models along the way, shortened supply chains where possible, and set up centralised warehousing, which enabled it to manage the long port delays in Lagos, for example. Local sourcing of products was a focus of the business, and in Nigeria up to 80% of stock was eventually locally sourced, made possible by the growth of manufacturing in the country as a result of a government-imposed import ban on more than 30 products in 2003, to drive import substitution. But the ban was also one of the reasons for the slow development of malls. It included a prohibition on finished clothing, which precluded the entry of fashion retailers, which would later make up a sizeable portion of tenants in the new developments. It was finally lifted after eight years, unlocking the growth of formal retail in Nigeria. Demographics has been a driver of investment into Nigeria. Size matters for consumer-facing industries. Nigeria’s population, now estimated to be about 200-million people, is bigger than SA’s, Ghana’s and Kenya’s combined. But the much-vaunted middle class, celebrated in the early part of the decade, has retreated in the wake of economic hardships. The main problem with Nigeria is deep seated and structural — its dependence on oil for revenues and foreign exchange. This doesn’t mean the economy is not diversifying; it means it is not diversifying exports. This has long dogged real progress in Nigeria. A previous wave of formal retail in the country was swept away by the oil price crash of the 1980s. Local department store chains such as UAC’s Kingsway Stores, Chellarams, UTC and Leventis Stores, some of which had been in the market since the 1950s, were forced to diversify to survive. The retail market then developed into the channels most evident today — sprawling markets, tabletop sellers and mini plazas, with formal retail growing only in recent years. The knock-on effect of oil crises into the broader economy is huge, offsetting the benefits the sector provides in generating wealth, jobs and opportunity. The oil price crash of 2014 precipitated a deep recession in Nigeria in 2015/2016. Inflation spiked, manufacturing slowed as foreign exchange dried up, companies battled to repatriate profits and dividends, jobs were lost and consumers tightened their belts. Not long after Nigeria exited the recession, the Covid-19 pandemic swept across the world and drove the oil price to record lows, with the attendant problems for Nigeria and other oil producers. The rollercoaster ride has been tough for companies, and this makes it even more important to have a business model that can roll with the punches. Many of the SA companies that have disinvested have blamed the tough operating environment rather than their own business models and strategies for their pain. Tiger Brands, which bought Flour Mills from Nigeria’s premier entrepreneur Aliko Dangote, failed to get to grips with the complexity of the business environment and culture. Telkom spent a fortune buying into the wrong technology and walked away several billion rand poorer. Nando’s chose a partner (UAC) that was in effect also its competitor in the fast-food franchise market. Woolworths failed to market itself well and had no brand familiarity in the market. Nor did it find a niche. Most of the clothing retailers ended up somewhere between high income shoppers, who preferred buying abroad, and middle-income earners who couldn’t easily see the value in the SA offerings compared to stock in local markets. The retailers also entered the market a time when there was no critical mass of modern malls to help to build an appetite for formal retail. Shoprite still believes there is value in the Nigerian market and room for many more stores in strip malls around the country, hence its stated preference to keep a stake in the business. But it also believes local capital is a better fit for the model as cross-border trade gets ever more complex and costly. Shoprite’s new CEO, Pieter Engelbrecht, has told analysts Shoprite remains committed to the continent — but not at any cost. All eyes are now on who is lining up to take Shoprite’s offering. It’s a potential game-changer for local empowerment. But the supermarket chain’s exit, as such a prominent investor in the country, sends a strong signal that Nigeria is a tough place to do business, which the authorities need to take seriously for local companies as much as for foreign investors. There has been incremental progress in improving the business environment. Nigeria rose 15 places on the World Bank’s 2020 Doing Business Index, but it came off a low base and is still ranked 131 out of 190 countries, with an even lower ranking when it comes to trading across borders. A retreat to safety in the time of Covid-19, given not just the regional but the global ramifications, is an understandable strategy even for a company with a strong risk profile such as Shoprite. But this is not the strategy envisaged for the success of the African Continental Free Trade Area, which aims to increase cross-border trade and investment and deepen regionalism. The Covid-19 disruption provides an opportunity for change in Nigeria, as it does elsewhere in Africa. The investment case, although damaged, remains compelling. But it does need work. It would be a pity if Nigeria emerged on the other side of this crisis without significant structural change and new models of efficiency and discipline to take the country into a new era.]]>
gamesdianna@gmail.com (Dianna Games)
Africa Analysis
Wed, 28 Jul 2021 10:19:21 +0200
Political promises on SA-Nigeria relations must be backed by action
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SA and Nigeria are open for business, President Cyril Ramaphosa said at the business forum that took place on the sidelines of the state visit by his counterpart Muhammadu Buhari last week. This remark, platitudinous under most circumstances, had resonance at the event last week in Gauteng, given the hostility and condemnation of SA in the lead-up to Buhari’s visit, after the recent attacks on Africans from other countries, including Nigeria, by some South Africans. As Ramaphosa said in his new weekly newsletter, some people had expected the visit to be “tense and difficult” after the attacks. But, he said, it turned out to be an extremely successful visit, cementing the relationship between the two countries and finding that “we are of one mind” on how the continent’s two largest economies can play a role in building intra-African trade and leading continental initiatives. Though deemed by many to be essential for the growth of Africa, the political relationship between the two big powers has drifted over the past decade, leaving a vacuum in continental leadership. Political statements during the visit suggested the current presidents are keen to reoccupy that space not just through greater collaboration, but by tackling issues that have seen increasing turbulence in a once close relationship. Key among these is the ad hoc but regular attacks on Nigerians and other Africans resident in SA. This is a tough one, given the complex array of factors that play into this violence. But there is a new effort to implement the “early warning” mechanism first mooted after similar violence in 2017, which failed to gain political traction. The intention is to share information, co-ordinate efforts and prevent a recurrence of the recent attacks. The latest plan may fare better, given the circumstances in which it was forged. Visas, always on the agenda of bilateral meetings, are still high on the list of issues raised by citizens of both countries, who, with some exceptions, are mostly still getting three-month visas to travel to each other’s countries, despite proclamations of the strategic nature of the relationship.Another initiative announced last week was the establishment of a joint ministerial advisory council on industry, trade and investment. This new structure, which is to be launched early in 2020, will enable the facilitation of bilateral business and, where necessary, address problems. Again, the idea is not new. Several high-level business councils have been announced during state visits in the past but have also not been activated, running adrift on minor issues and lacking champions between presidential engagements. The reality that business is the real driver of SA’s African engagement, and the first in the line of fire when things go wrong has given greater impetus to this initiative. Bilateral trade in 2018 reached R50bn and Nigeria accounts for 64% of SA’s trade with West Africa. The country is SA’s 10th biggest export destination in Africa. There are more than 100 companies, including some of SA’s biggest listed enterprises, invested in Nigeria, and many more are trading with the country and engaged in other types of business. SA also imports 26% of its oil from Nigeria, highlighting Abuja’s strategic importance to Pretoria. The profile the other way around is very different, characterised by people-to-people relations rather than investment. There is only one large investment from Nigeria — Sephaku Cement, a company owned by Nigerian billionaire Aliko Dangote — and one Nigerian company listed on the JSE, oil and gas conglomerate Oando. Some up-and-coming ICT businesses have a presence here as well, but most Nigerian companies in SA are small enterprises owned by Nigerian residents and citizens based in SA rather than investors from the West African country. The dearth of large Nigerian investments in SA is a complex issue that speaks in part to a trust deficit — Nigerians don’t want to take their money where they don’t feel welcome. Many believe SA is highly regulated and difficult to operate in and there is little low-hanging fruit. Other African countries, particularly those in West Africa, offer much greater market advantage and a more familiar business environment. Nigeria itself, a market of 200-million people, is the biggest market of all, soaking up almost everything on offer from inside the country. But the unequal business relationship has become a political hot potato that SA is keen to address. It is not just issues of security and crime that need to be at the forefront of efforts to attract money from Nigeria and other African countries. The issue is also about addressing perceptions that SA is closed for business when it comes to other African countries in terms of entry requirements, not just for people, but for African products. The SA-Nigeria relationship is stuck, and it needs all hands on deck to change; to introduce a more positive narrative and to find new ways of working together. It needs an acknowledgment by South Africans that crime is about criminals, not about nationalities.The recent hostilities appear to have created the space for a change. Discussions in and around last week’s business event were frank and open between businesses from both countries. The adage, “never waste a good crisis”, became a mantra of the engagement. Ramaphosa was upbeat when he arrived at the business forum in Midrand, giving assurances that the two governments were in a strategic relationship with commitment at the highest levels to manage any future crises in a co-operative and collaborative manner. He urged the several hundred people present to “turn contacts into contracts”, saying roadblocks to trade and investment will be identified and tackled. Many of the statements and promises sound familiar. State visits are designed to showcase the best intentions of participants to deal with long-standing issues. But this might be the best chance there has been in a long time to take this strategic, albeit challenging, relationship forward. • Games, an African business analyst, is a director of the SA-Nigeria Business Chamber but writes in her personal capacityIllustration: Karen Moolman]]>
gamesdianna@gmail.com (Dianna Games)
Africa Analysis
Thu, 10 Oct 2019 10:06:04 +0200
Holding Their Own? – China-Africa Relations Mature
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Asia GlobalOnline – The rapid expansion of China-Africa economic ties led to questions about a new colonialist dependency. While concerns about debt and oversight persist, the relationship has evolved. Johannesburg-based African business expert Dianna Games argues that it is up to African countries to build the capacity to deal effectively with Beijing. There is no narrative about Africa in this century that has not included a discourse about China. The Asian giant has played a critical role in African development over the past 20 years, creating a new dynamic in both state and private sector-led growth. Although China and the continent have had a long relationship in the political sphere, with the Chinese supporting African countries’ struggle for liberation against colonialism, the economic relationship only came later. It began as a trickle in the late 1990s, becoming a flood less than a decade later. Trade and investment continue to spiral, and China has become Africa’s main trading partner, displacing the US and European nations. The increase in trade between Africa and China has been nothing short of meteoric. It stood at US$10.5 billion in 2000, jumping to US$40 billion in 2005, US$166 billion in 2011 and more than US$200 billion in 2018. Air traffic between China and Africa has jumped 630 percent in the past decade. In terms of diversified exports, the trade is not balanced. China exports manufactured goods to Africa while absorbing the continent’s unprocessed commodities, a fact that has led critics to accuse China of replicating the colonial patterns of the past. African commodity producers have quickly become dependent on Chinese business and as a result, China’s fortunes have a significant impact on the continent. Like any other relationship, China-Africa ties have gone through phases. In the early 2000s, they were close. African governments welcomed a partner that did not carry the historical baggage of the Western development finance institutions and multilateral organizations, and that was not constrained by onerous lending processes and conditions, especially relating to governance and human rights. The historical underpinning of political support led some governments to believe that China’s more recent interest in Africa was altruistic. This impression was bolstered by the easy money Beijing offered for unproductive vanity projects such as sports stadiums in the early days. As a result, China’s engagement escaped proper scrutiny from Africans themselves. China knows what it wants and how to get it. It will be up to African countries themselves to make sure this growing engagement becomes more of a relationship of equals. In time, a more critical tone emerged in the relationship. There was pushback from Africans who felt the Chinese in their businesses were cutting corners in the areas of workplace safety and environmental issues, and they objected to Chinese companies importing labor rather than building skills locally. There was also unhappiness about the flood of cheap Chinese imports that undermined domestic industry and sucked up limited disposable incomes. A further complaint was China’s “no conditions” aid and loans to African governments, which undermined demands by citizens for better governance. Africa was urged by Western commentators to set its own agenda with China and develop an equal partnership to end a growing sense of exploitation as the initial euphoria about China’s easy money faded. The relationship then moved to a more open era of real collaboration forged by lessons learned in past engagement and a more assertive tone adopted by African governments. The discourse shifted from one of exploitation to shared value. This change was also a result of new, and mostly younger, leaders who sought a change in the way things were done in Africa. They started shifting the focus of continental organizations such as the African Union from politics and conflict to economic issues. Political bureaucrats began engaging in discussion about disruption and entrepreneurship and seeking ways to make the continent more financially self-sufficient. China’s engagement also shifted. While its state-owned enterprises have cornered the lion’s share of infrastructure projects in Africa, there is more private investment coming to Africa and many smaller Chinese companies have invested in the continent, putting down roots. Large Chinese investments are flowing into mushrooming industrial parks and zones across the continent, boosting Africa’s attempts to industrialize and providing much-needed jobs. But concerns persist in Africa about how this deepening engagement will play out. Doubts about China’s goodwill towards the continent linger. The earlier notion of China’s business with Africa being a helping hand rather than a hard-nosed quest for its own development and advantage has now faded. China’s ambitious Belt and Road Initiative (BRI), despite its potential to transform economies, has raised concerns about growing debt in Africa related to Chinese-funded infrastructure projects, already an issue for many countries that have borrowed heavily on international markets to fund economic projects. The concerns were given impetus by the case of Sri Lanka, which according to some reports had to cede its Chinese-built, Beijing-funded Hambantota port to China after the government was unable to meet its debt commitments for the project. [There are differing views on the situation in Hambantota and on Sri Lanka’s debt – readers may find a selection here, here, and here.] There has been speculation that Kenya, one of the African countries most exposed to Chinese loans, may be a victim of the same debt trap. The country has been borrowing from China for infrastructure projects since 2008, accumulating debt of nearly US$10 billion between 2006 and 2017. The most controversial project is the US$3.2 billion standard gauge railway (SGR) from Mombasa port to Nairobi, which was funded by the Export-Import Bank of China on condition that China Road and Bridge Corporation handled construction. Kenyans criticised the deal for not having proper scrutiny or oversight. The president defended the deal, saying it was a government-to-government affair, which allowed normal procurement processes to be bypassed. But at US$5.6 million per kilometer for the track alone, Kenya’s line cost close to three times the international standard and four times the original estimate. The government says repayment of the debt is on schedule. But Kenya used the assets of the Port of Mombasa, a lifeline for the country’s economy, as collateral for the initial funding deal. Because they are not protected by sovereign immunity, the concern is that Chinese lenders could lawfully seize them if the debt is not repaid. The details of Chinese financing are generally opaque but one estimate by Johns Hopkins University’s China-Africa Research Initiative puts Chinese loans to Africa between 2000 and 2017 at US$143 billion. This lending was largely subject to easier terms than those required by the World Bank and other Western donors but without the oversight those lenders typically demand. Africa citizens are concerned that, although everyone gets to benefit from the infrastructure this money is buying, future generations will have to deal with this debt legacy long after the current crop of leaders who are negotiating them are gone. There is no doubting China’s seriousness in its engagement with Africa. Pledges of aid and financing coming out of the Forum for China-Africa Cooperation (FOCAC), a special vehicle established in China to meet every three years to forge and enable a more effective and coherent foreign policy with Africa and to build African capacity to deal with the Chinese, have been formidable. President Xi Jinping pledged US$60 billion in 2015, recommitting this amount last year. The FOCAC meetings have been routinely high level, dazzling affairs that are better attended by governments than many African Union meetings. China has certainly been a key enabler of African development and an important partner, despite some areas of concern. This is not just in terms of hard infrastructure but also engagement in many other areas such as skills development, funding for education, technology transfer and others. It has provided Africa with welcome alternatives to meet its development objectives and opportunities. China knows what it wants and how to get it. As the China-Africa relationship matures, it will be up to African countries themselves to make sure this ever-growing engagement becomes more of a relationship between equals than one that still carries more than a whiff of exploitation.]]>
gamesdianna@gmail.com (Dianna Games)
Africa Analysis
Thu, 08 Aug 2019 10:16:26 +0200
South Africa’s Economic Engagement in Sub-Saharan Africa: Drivers, Constraints and Future Prospects
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REPORT: South Africa’s Economic Engagement in Sub-Saharan Africa: Drivers, Constraints and Future ProspectsDianna Games Chatham House, November 2017]]>
gamesdianna@gmail.com (Dianna Games)
Africa Research
Thu, 02 Nov 2017 00:00:00 +0200
Can Nigeria’s CFTA move undo the negative legacy of protectionism?
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African Business Magazine – Joining the African Continental Free Trade Area may be Nigeria’s first step towards realising the potential of its business sector as a force in Africa, argues Dianna Games. When Nigeria failed to occupy a seat at the African Continental Free Trade Area (CFTA) launch in Kigali last year, many asked why a country that has long considered itself a leader in African affairs would not be grabbing the mantle of leadership in a project of this scope and importance. After all, the country has some form when it comes to regional integration, having been a leader in the establishment of the Economic Community of West African States (Ecowas) in 1975. But nearly 25 years later, Nigeria was one of the last countries to sign the CFTA, alongside its tiny neighbour Benin and ahead of Eritrea. As Africa’s biggest economy stalled at the starting gates of the initiative, questions were asked about its reticence. The country has been a key promoter of the initiative since its launch in 2012. Nigeria continued to be closely integrated with the process leading up to the May 2018 Kigali launch and the Federal Executive Council, presided over by the vice-president, Yemi Osinbajo, had agreed that Nigeria’s signature would be on the agreement at the event. However, it fell at the final hurdle when lobbying by policymakers, trade unions and local companies led President Muhammadu Buhari and his team to cancel the flight to Kigali, in response to accusations that the government had failed to consult widely enough on the potential impact on the economy. After further consultations and on the advice of local experts, Buhari signed it in July. Nigeria’s central concern is that its market will be flooded by goods from other African countries, which will undermine local manufacturing and agricultural enterprises, many of which are performing well below their potential and may not survive competition. Countries such as South Africa and Kenya as well as North African states are specific challengers given their relatively high levels of industrialisation and efficient supply chains. Not much to show for protectionism The CFTA has highlighted the soft underbelly of Nigeria’s protectionist trade policy, which it has employed for decades – without much to show for it. Although the economy has made significant strides in some areas, particularly in services, the successes are few compared to the opportunities the policy has provided. The share of manufacturing as a percentage of GDP, for example, has lingered at around 10%, rising slightly to 13% in 2018. Economists say that under the right conditions, Nigeria should be able to increase this to over 40% by 2030. It is not yet clear whether the free trade agreement will help or hinder Nigeria’s ability to reach this target. Meanwhile, the services sector has overtaken agriculture and industry to become the biggest sector in the economy, representing nearly 58% in 2017. Import restrictions have been a trade policy instrument since the 1970s, when they replaced tariffs as an enabler of growth and a counter to the competition posed by imports to local producers. The restrictions included outright prohibitions and import licensing. In 1978, there were already 76 broad groups of import items on a prohibition list. In the 1980s, about 40% of agricultural and industrial products by tariff lines were covered by these prohibitions. The line items have come and gone over the years but when items were removed from the prohibition list, they often quickly attracted high duties and tariffs to serve the same end. Smugglers enjoyed significant benefits, quickly moving into market gaps created by the restrictions, as Nigerians’ tastes for imports refused to be quelled by government fiat. There is no doubt there have been legitimate beneficiaries as well, including Africa’s richest man, Aliko Dangote, who built an empire on the back of import restrictions and bans. However, once thriving sectors such as textiles and leather, which were intended to be key beneficiaries, have been crippled by not only the country’s shift in focus to the lucrative oil sector in the 1970s, but also by the high cost of doing business in Nigeria. Unresolved problems This highlights the key weakness in the trade policy – the fact that governments, in imposing protectionist policies, have failed simultaneously to address the embedded dysfunction in the operating environment that has left so many companies unable to compete with imports or even meet local demand. Companies battle against a host of challenges in manufacturing including expensive power, the high cost of money, an onerous regulatory environment, poor infrastructure, a volatile currency and inefficient ports. In acceding to the free trade agreement, there are bound to be many positive outcomes for resilient Nigerian companies. But the country may also end up paying the price of years of relying on restrictive trade policies, rather than investing in productive capacity, to grow the economy. History shows the damage that was done to many companies across Africa during the liberalisation of African markets in the 1980s and 90s after years of surviving behind high tariff walls. Signing the free trade agreement may be painful for Nigeria for a while but it also may be the first step forward in realising the enormous potential of its business sector as a competitive force in Africa. Nigeria’s best chance of building a consumer class is not by making it difficult to get imports but by enabling the growth of a critical mass of efficient and sustainable companies. Dianna Games is CEO of advisory company Africa @ Work ]]>
gamesdianna@gmail.com (Dianna Games)
Africa Analysis
Fri, 16 Aug 2019 00:00:00 +0200
Ethiopia gambles on cheap labour
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African Business Magazine – Low wages are Ethiopia’s main drawcard in attracting international investment for its manufacturing industry. Dianna Games examines the dilemma many African countries face in deciding whether to prioritise creating jobs or promoting higher wages. Even as much of the world moves into high-tech mode, old-fashioned industrialisation is still an aspiration for most African countries. Increasingly, the big differentiator is cheap labour. As wage packages rise in low-cost manufacturing destinations in Asia and elsewhere, international investors are looking for new countries where they can produce competitively for global markets. One of the nations that has put its head above the parapet in this regard is Ethiopia. This fast-growing and rapidly liberalising nation has been courting international producers to realise its ambition as a manufacturing hub in Africa. The reformist government of prime minister Abiy Ahmed sees manufacturing as another way to attract FDI as it opens up previously closed sectors of the economy. China is well represented in the numerous industrial parks that have opened over the past few years, and aims to increase its presence in the country as more such parks, which are a key part of Ethiopia’s future industrial planning, open their doors. Ethiopia, like China before it, has focused on the garment sector with a view to positioning itself as a top sourcing and manufacturing destination for apparel. The government has admitted that this is a risky sector to choose to kick-start its industrial ambitions, given high levels of competition, but maintains that producing for export markets is a viable way to build industrial capacity. It plans to boost clothing exports to $30bn a year from the current $145m. And the response to Ethiopia’s offerings has been positive, with many large Chinese enterprises investing in the sector and garments being produced for some of the world’s biggest fashion brands such as Calvin Klein, H&M and Tommy Hilfiger. Competitive advantage The country has many advantages in its quest for developing value chains internally. In its industrial arsenal it has duty-free imports of capital equipment, tax exemptions, cheap electricity, a thriving local airline with a large international footprint and duty-free access to the US market through the African Growth and Opportunity Act. The main drawcard is cheap labour, which is not only a key competitive advantage but a counter to low levels of skills and productivity. However, critics have hit out at the level of minimum wages on offer, saying they will barely lift workers out of poverty. Attrition rates at the clothing factories in Ethiopia are high as semi-trained workers seek higher wages elsewhere after a stint in the workplace. This is pushing up training costs for companies operating there. Among the critics is New York University’s Stern Center for Business and Human Rights, which details its concerns in a recent report. Made in Ethiopia: Challenges in the Garment Industry’s New Frontier puts Ethiopia at the bottom of a list of countries in the textile and garment sector with an average wage of $26 a month. Next on the list are Myanmar and Bangladesh at $95, Laos at $128, Lesotho at $146 and Vietnam at $180. South Africa comes in at ninth with $244 and China 13th at $326. The report, which looked at factories in Ethiopia’s Hawassa Industrial Park, the country’s biggest, says international brands are benefiting from the misery of workers who cannot afford to live on these wages but want jobs. Ethiopia’s case flags up the broader dilemma for African countries looking to industrialise – whether to prioritise jobs at any cost or develop more slowly with higher wages. But wages are not the only issue affecting competitiveness in Africa. It is also undermined by a lack of political will to address impediments in the operating environment that make Africa, as a region, one of the most expensive manufacturing regions globally. Ethiopia is not exempt, suffering from infrastructure and logistics challenges. The United Nations reckons that while the labour costs of making a T-shirt in Ethiopia may be a third of those in China, export costs means Ethiopian-made shirts will sell for the same in international markets as those made in China. These are some of the reasons that manufacturing continues to play a relatively small role in African economies. Although manufacturing has increased, its share of Africa’s GDP has remained at around 10% over the last decade, according to the World Economic Forum. Huge deficits in hard and soft infrastructure are a major part of the problem. Education and skills development are well below average, while African countries also lag their Asian counterparts in terms of technology, spending less than other regions on research and development. Low wages are undoubtedly a positive factor for investors, but on their own they are far from adequate. African economies require structural change in order to build sustainable value chains that will deliver more quality jobs and higher wages over time. Contentious issue The wage issue is contentious because of Africa’s large and growing labour surplus. It is tempting to believe that any job is better than no job. And building the labour-intensive industries that Africa needs in order to absorb labour is getting harder in a world where technology is already disrupting traditional, low skilled, jobs. Ethiopia believes its low labour costs are vital to remaining competitive while it builds a more competitive supply chain and develops vertically integrated manufacturing hubs – a hopefully short-term trade-off between wages and employment.The government believes it has no option but to start somewhere in a country facing the challenge of youth unemployment estimated at more than 50% and with 150,000 graduates coming into the market every year. As Ethiopia’s former leader Hailemariam Desalegn said when asked about Ethiopia’s chosen path to industrialisation in an interview with the Brenthurst Foundation last year: “There is no silver bullet.” Dianna Games is CEO of Africa @ Work, an advisory company focusing on African business]]>
gamesdianna@gmail.com (Dianna Games)
Africa Analysis
Fri, 12 Jul 2019 00:00:00 +0200
The View: African governments must widen the tax base
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African Business Magazine – Revenue generation is an ongoing headache for African governments, but attempts to plug holes in the fiscus often amount to ad hoc measures that have unintended consequences. Tax is a crucial revenue stream that governments must battle to get right. Many African countries have a small tax base because of the informal nature of their economies. But rather than putting in place sustainable, broad-based systems that deliver predictable revenues, governments often resort to ad hoc taxes on specific goods and services or disproportionately burden multinational companies. A 2018 report from the International Monetary Fund (IMF) argued that African countries could increase their tax revenues by an average of 5% annually if comprehensive tax reforms were carried out. In many countries, such action seems unlikely. In cash-strapped Zimbabwe, a deeply unpopular 2% tax on electronic transactions was introduced in 2018 in a bid to address tax shortfalls created by a shrinking formal economy. After years of economic hardship, severe cash shortages have led to a spike in electronic transactions, putting most people in the catchment of the new levy. It has hit everyone hard, but particularly small traders operating on tight margins. In July 2018 the government of Uganda imposed a tax on social media and a 1% levy on all mobile money transactions, which affected some 5m people. The move may bring more money into government coffers, but it has had other consequences. The Uganda Communications Commission says that internet subscriptions declined substantially and the value of mobile money transactions fell by $1.2m in the three months following the imposition of the tax. Multinational companies are easy targets because of their obligation to stay on the right side of the law. The African Union and others have accused foreign companies of avoiding tax through transfer pricing and other complicated measures, but they remain the biggest taxpayers in most countries. In 2015, Rwanda reported that 70% of its tax base came from multinational entities. In Nigeria, it was 88%. In Burundi, one foreign company contributed nearly 20% of the country’s total tax collection. This disproportionate reliance on multinationals means that tax avoidance has an equally disproportionate impact on national revenues. Base erosion and profit shifting by multinational companies – defined as tax avoidance strategies to exploit gaps and mismatches in tax rules in order to artificially shift profits to low or no-tax locations – are often the outcome. Failure to invest The Organisation for Economic Cooperation and Development (OECD) is working with 100 countries to develop a country-by-country reporting initiative that aims to address this problem. It will require multinationals with consolidated revenues to provide information relating to their activities in each country in which they operate rather than accounting as a single entity. This will include information about revenue, profits, employee numbers, tax paid and tax payable in each jurisdiction. But many of the problems with taxation in Africa are about something much simpler – the failure of governments to invest in institutions, skills and capacity to increase the size of the formal sector. Nigeria, which has the biggest economy in Africa, also has the lowest tax-to-GDP ratio – just 5.9%, according to the International Monetary Fund. The informal structure of the economy allows people to do business under the radar, often with the collusion of officials who turn a blind eye. President Muhammadu Buhari has moved to change the situation with a targeted campaign against defaulters, which included a tax amnesty. By mid-2018 this had brought in $84m. But in Nigeria, as in many other countries, officials have been overzealous in their attempts to remedy years of poor tax compliance. Companies have complained about regular harassment, saying government is targeting those who are already compliant. At issue is not just the principle of paying tax but related issues such as weak institutions and skills shortages, the ambiguity of tax legislation and the ad hoc and sometimes retrospective application of tax laws. In Nigeria, as in most African countries, the public also resists paying tax because of a view that public money is either squandered on projects that offer little value to citizens, or misused by public officials. Another issue is the cost of maintaining bloated public service wage bills and dysfunctional or bankrupt state-owned enterprises. In Zimbabwe, the public sector swallows up a massive 90% of the national budget, leaving almost nothing for healthcare, education, infrastructure and other sectors. In Kenya, public servants account for less than 10% of the population but their wage bill takes more than 50% of tax revenues. But the solution is not only in tax reform but in improving the business climate to enable companies to grow. It also requires building stronger institutions to ensure more accountability and transparency in government spending. Greater trust may remove the need to use heavy handed measures to enforce tax compliance. Dianna Games is CEO of Africa @ Work, an advisory company focusing on African business]]>
gamesdianna@gmail.com (Dianna Games)
Africa Analysis
Mon, 01 Apr 2019 00:00:00 +0200
Egypt's dynamic reforms propel it to Africa's top investment destination
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Business Day (SA) As Egypt storms ahead with its ambitious and bold economic reform programme, it is attracting considerable investor interest. Africa’s third-largest economy and, with 95-million people it is most populated after Nigeria and Ethiopia, Egypt is a compelling consumer play. Some of the world’s biggest multinational companies have deep roots there and plan to invest heavily in new products and manufacturing capacity in the next few years. Mega projects in infrastructure, urban development and other sectors are driving new investment, both domestic and foreign. The government is targeting $10bn of investment in its fast-growing energy sector alone. This week, Uber launched its bus service in Cairo, with plans to spend $100m in Egypt in the next few years. President Abdel Fattah el-Sisi is a man in a hurry. He began a wide-ranging reform process in 2014 and in late 2016 the IMF came on board with a $12bn loan agreement designed to deepen the programme and keep it on track. The reforms are tough and the president has asked Egyptians to roll with the punches as he tries to stabilise the country and set it on a more sustainable growth path. He says the process is necessary to address entrenched practices that made Egypt inefficient, expensive and uncompetitive. The IMF drove a hard bargain. Its conditions included the phased withdrawal of electricity and fuel subsidies as well as the floating of the currency. The Egyptian pound was in effect devalued by 50% overnight, while the subsidy withdrawals saw prices double. In mid-2017 inflation hit a record high of 33.4% and interest rates went sky high as the authorities tried to moderate inflationary pressures. Consumers have pulled back their spending and companies have had to adjust their operating models and consumer offerings and cut margins to survive rocketing prices. But the weaker currency has given impetus to the country’s ambition to become a manufacturing hub for the Middle East and Africa. Tourism, a critical sector for jobs and revenue, is also rebounding on the back of a weaker pound. The government has introduced laws to make the operating environment easier and to attract new investment. Social safety nets and other measures have been put in place to try to offset the hardships for some at the base of the pyramid and there are numerous initiatives under way to build up micro, small and medium enterprises. Critics point to the bad timing of the government’s massive spending on mega projects, particularly the $45bn new administrative capital under way outside Cairo, saying money would be better spent on less elitist projects at a time of increasing economic hardship for Egyptians. But the government counters that new urban development is an investment in the future to accommodate population growth of more than 2% annually and to decentralise development and jobs away from Cairo, already one of the world’s largest and most congested cities. There have been some quick wins. In 2017 Egypt reported its highest economic growth in a decade — 5.3%, up from 4.2% the previous year. Foreign direct investment increased by 24% in the first half of 2018 compared with the same period in 2017. Inflation has come down to about 13%, and exports are rising. Egypt was also one of the best performers on the 2018 World Bank doing business index. The political will behind the reform process is unprecedented, with ministers and officials tasked with implementing it under great pressure to deliver. Sisi’s challenge is to maintain the momentum of reform. The multipronged strategy is finely balanced and needs the will of the people to keep it on track. Analysts say this requires consumers to start feeling the gains in their pockets. There are also concerns about the government’s intolerance of political opposition, the fact that Egypt is in a dangerous neighbourhood and the possible effect of negative emerging-market sentiment on the country’s big plans. Business believes the reforms will be bedded down in two or three years and the real benefits will start to be felt. Consumer multinationals such as Mars Egypt, Unilever, Nestle and Pepsico Egypt have millions of dollars lined up for or already invested in the country. Investment in the energy sector increased by 300% in 2017 over the previous year. Sisi’s bigger plan is to position Egypt as an export-led economic powerhouse in and for Africa within five years, using its geographical advantage as a gateway to Africa from the Middle East and Europe to best effect. The rest of Africa is very much on Sisi’s radar and he has spent a good deal of time courting leaders from the continent. His election to the chair of the AU in 2019 is an opportunity to bolster Egypt’s long dormant ties with the continent. Egypt’s longstanding membership of the Common Market for Eastern and Southern Africa (Comesa) has helped it maintain economic ties with the rest of Africa. It was one of the first countries to sign up to the Continental Free Trade Area launched in 2018. In December, Sisi hosted Egypt's third annual Africa investment event, together with Comesa's Regional Investment Agency, attended by several African leaders. The rest of Africa is not new political territory for Egypt. Admittedly, the golden age of Egypt-Africa relations was a long time ago, under the rule of Abdel Nasser, a dedicated supporter of Africa’s liberation movements and Organisation of African Unity chair in 1964. However, following his death in 1970, the engagement has drifted as subsequent leaders focused more on the Arab world. Egypt was suspended from the body for a year in 2013 following the military overthrow of Mubarak’s successor, Mohamed Morsi, head of the Muslim Brotherhood party. But relations are now back on track and since 2014 Sisi has been actively building political and economic ties. Egypt is becoming a force to be reckoned with as investors consider their options in Africa. While SA and Nigeria, long viewed as essential partners in Africa’s development, are diverted by domestic issues, other centres of power are starting to develop. Politically, Sisi has been courting old foes such as Ethiopia to solve longstanding issues over the waters of the Nile, a river Egypt shares with nine other African countries. Tanzania has provided a quick win, with an Egyptian construction and energy consortium recently winning the contract to build the $2bn Rufiji hydroelectric dam. Sisi’s visit to Tanzania to lay the dam’s foundation stone was the first by an Egyptian leader since 1968. A year at the helm of the AU will allow an economically strengthening Egypt to position itself as an influential force in the rest of Africa. With a big vision, strong political leadership determined to deliver that vision and an increasingly competitive private sector, the country is set to become a key player in Africa’s near-term future. • Games is CEO of advisory company Africa@Work and has been doing research in Egypt]]>
gamesdianna@gmail.com (Dianna Games)
Africa Analysis
Tue, 11 Dec 2018 08:33:08 +0200
Nigeria’s hounding of businesses risks making it off-limits to investors
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BUSINESS DAY (SA) - The Nigerian president’s attack on international financial institution HSBC at the weekend has put his country’s investment risk scenario in the spotlight yet again — and raised questions about what his government hopes to gain from its assault on the private sector in recent weeks. HSBC is paying the price for questioning President Muhammadu Buhari’s fitness for a second term, in a recent article. The response was swift and brutal. The presidency accused the company of being a conduit for more than $100m allegedly stolen by former military ruler Sani Abacha in the 1990s. Buhari set his Economic and Financial Crimes Commission to work on the matter and that agency vowed not to rest until HSBC returns the Abacha money to Nigeria. The financial crimes unit also paid a visit to the offices of Standard Chartered Bank at the weekend, on unspecified business. This follows an accusation by Nigeria’s central bank that Standard Chartered was one of four financial institutions that helped cellular network provider MTN allegedly move $8bn out of Nigeria illegally over a 10-year period from 2007. The hand of politics has reached deep into Nigeria’s private sector in recent weeks via the actions of various arms of government and state agencies. MTN has made the headlines in this regard because of the huge amount of money being demanded of it, the fact that the latest accusation follows the company’s massive $5.2bn fine in 2015 for failing to register SIM card holders timeously and the fact that the alleged infractions go back more than a decade. MTN has become an easy target for revenue raising and point-scoring by authorities who calculate that many Nigerians will support vilification of the company. Many in Nigeria, even those who willingly use MTN’s services, resent its success, holding on to a view that they are being exploited by foreigners and that their money is being repatriated to SA, a country deemed to be generally unfriendly to Nigerians. This does not reflect the real picture though. MTN has re-invested billions of dollars into its Nigerian operation and points out that it took a chance on Nigeria at a time when most investors considered the country too high an investment risk. Even as Buhari appears to seek private investment in Nigeria, such attacks on business have been a feature of his rule. Multinationals are a favoured target of overzealous tax collectors. With a huge number of entities unregistered for tax or unwilling to pay it, the Nigerian authorities tend to focus on the compliant to extract more money from them than they are already paying. There appears to be little attempt to steadily and sustainably build the tax base. It is not just foreign investors that bear the brunt of the government’s depredation. Local companies see themselves as long-term victims of a hostile regulatory and tax environment. More than 700,000 firms were targeted by a new tax unit in a crackdown during the 2015-16 recession. Tax inspectors went door to door, aggressively demanding information in an attempt to raise more revenue for the depleted national fiscus. In 2017 more than 10 Nigerian banks, such as UBA, Fidelity Bank and Access Bank, were among financial sector institutions that were fined. A similar number of banks had been fined the year before for various regulatory infractions, most of them disputed by the banks to no avail. Tax administration and collection is obviously a knotty problem in Nigeria, a country where the tax-to-GDP ratio is just 6% compared with the global average of 15% and SA’s high 27%. But its state agencies are being used in an ad hoc manner to overcome short-term shortages or bolster political agendas rather than to build fiscal stability in the macroeconomic environment. Analysts in Nigeria are still puzzled about what is driving the current bruising battles with the private sector. The issues are complex. Some say it is about the president reminding the electorate of the anticorruption drive that won him many votes in 2015 but has drifted of late, netting no high-profile public officials or big fish in the private sector. Indeed, some believe corruption has worsened under Buhari, not because of his own actions but because of a hands-off style of governance that has allowed people to exploit the system without reproach. For many observers, targeting multinational companies plays to a view that the government is protecting consumers from "rapacious" investors who are only interested in taking Nigerians’ money without offering much in return. No matter the justifications used by state agencies in acting against companies, it is clear that political manoeuvring is behind it all. The economy is a useful tool when politicians are vying for the hearts and minds of voters. But bashing business is likely to be counterproductive in the long run. The high profile status of some targets has alarmed the investment community. Nigeria might have inched out of the damaging recession of recent times but it is not out of the woods. Even the 2% growth expected in 2018 is a long way off nearly 7% in 2014 before the oil price crash. In the wake of the MTN crisis portfolio outflows have increased. An election under these circumstances is unlikely to solve many of Nigeria’s problems, as neither of the main political parties is contesting it on firm policy or ideological issues. Cynics say the only motivating factor for either of them is access to the treasury. This view is highlighted by recent floor crossings. More than 50 members of the APC party recently defected to the PDP in what some have dubbed the "political transfer window" — a reference to the annual pre-season trade in soccer players. Some of these people are serial defectors who move between parties at election time, depending on what political tickets are on offer. There’s more than a grain of truth in the view that moral posturing and development promises by floor-crossers simply cover up personal ambition. Nigeria’s politics have never been a major consideration for investors, with political risk tending to be built into the model. A huge population, significant market gaps, a hard-working populace and handsome returns on equity if you get it right have generally kept money taps open. But growing aggression towards business has raised a red flag. Reputational risk, the disproportionate size of fines and the fact that the authorities seem loath to entertain any defence from targeted companies are real causes for concern. Business is not asking for favours from the government but for fairness and consistency when it comes to issues affecting it. Credible companies are more than willing to support measures to improve the macroeconomic environment and need to be brought on-side in the effort to improve regulation and compliance. The government and its agencies would be better off focusing on that than on periodic blitzes against companies. As one Nigerian commentator pointed out, "Our ability to resolve these issues with decency will count a lot in attracting more investments. It’s not warfare." • Games is CEO of business advisory Africa @ Work and executive director of the SA-Nigeria Chamber of Commerce. She writes in her personal capacity ]]>
gamesdianna@gmail.com (Dianna Games)
Africa Analysis
Wed, 19 Sep 2018 15:27:05 +0200
Nigeria’s hounding of businesses risks making it off-limits to investors
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BUSINESS DAY - The Nigerian president’s attack on international financial institution HSBC at the weekend has put his country’s investment risk scenario in the spotlight yet again — and raised questions about what his government hopes to gain from its assault on the private sector in recent weeks. HSBC is paying the price for questioning President Muhammadu Buhari’s fitness for a second term, in a recent article. The response was swift and brutal. The presidency accused the company of being a conduit for more than $100m allegedly stolen by former military ruler Sani Abacha in the 1990s. Buhari set his Economic and Financial Crimes Commission to work on the matter and that agency vowed not to rest until HSBC returns the Abacha money to Nigeria. The financial crimes unit also paid a visit to the offices of Standard Chartered Bank at the weekend, on unspecified business. This follows a