By Bongo Adi,
With Dangote’s dominance of critical sectors of our economy, it is just a matter of time before every aspect of the economy comes under its looming shadow. The implications of such a colossal monopolistic economic structure for a developing economy with weak regulatory infrastructure as well as weak institutions will challenge students of political economy.
Days after Aliko Dangote, Africa’s richest man and Nigeria’s shining star on the business horizon, clocked 60, the encomiums trailing that event are far from dissipating for all the good reasons. From Sokoto to Senegal and from Cameroun to Zambia, the ovations keep pouring in for Nigeria’s greatest business ambassador. The trail of ovations and media hypes warrants the conclusion that Africa seems to have heaved its hopes for redemption from its dismal fortune on this one man. Whether these outpouring of ovations arise out of the usual vainglorious, sycophantic hogwash that Nigerians and their media have perfected in massaging the egos of the rich and powerful as a ploy to curry favour or are the results of genuine appreciation, the dizzying reality is that the rise and rise of Dangote is marching on with a tsunamic intensity, swallowing everything standing along its path and forcing him into global reckoning. His seemingly inexorable ascent has sent the chills up the spines of competitors. His adroitness in taming the African government monkey is legendary.
Understanding the rapacious greed and irrational appetite for inordinate self-gratification of power mongers in Africa, he has devised a trick that seems to work magic: He doesn’t negotiate with any government politburo and doesn’t partner with them; he simply feeds their greed and kicks them out of the way – the way you feed a monkey banana. Perhaps, he has learnt from experience. He also plays the domino strategy – because he understands the power of increasing returns to scale, scope and size. He is a recipient of the Grand Commander of the Order of the Federal Republic. But in a few years’ time, Dangote would certainly become, unlike Idi Amin who comically self-titled himself the conqueror of the British Empire, a true Conqueror of the Order of the Federal Republic. Welcome to Dangote Republic.
This is not the first time Dangote’s colossal business empire is coming into focus and obviously wouldn’t be the last. To his admirers, Dangote represents the next thing after sliced bread. But his detractors constantly take swipes at his raw, machiavellian, capitalist tactics that let nothing out. Wikileaks in 2013 referred to his extreme predatory tactics as a “beggar-thy-countrymen” business strategy, whereby he exploits his government connections to swing the terrain to his advantage and to the detriment of the competition. Whether this depiction is real or imagined, the fact remains that Dangote’s supremacy is inevitable, given his ambitions, the leverage his rapidly expanding business empire lends him and of course, the increasing returns to scale inherent in the sectors in which he is invested, owing to huge entry barriers. Given where he is currently positioned, the only way possible is that of absolute monopoly.
As he rang the closing gong on the floors of the Nigeria Stock Exchange several days ago in commemoration of his birthday, Dangote himself declared: “What we are building today is more than 100 times bigger than where we are. That is the trajectory that we are seeing in the next 10 years.” To come to full grips with the import of this declaration, it is necessary to first grasp where Dangote is at moment.
According to Bloomberg, Dangote Industries Limited operates as a holding company. The Company, through its subsidiaries, operates in areas of real estate, telecommunication, steel, oil and gas, poly products, ports, food and beverages, cement, haulage, and packaging. Dangote industries serve customers worldwide. Dangote invests in areas that seem to have huge entry barriers – take cement for instance. Some analysts estimate that Dangote group controls more than half of Nigeria’s commodity market. The group’s stranglehold is on cement, flour, pasta, salt and sugar markets. The 650 thousand bpd refinery in Ibeju-Lekki, with its accompanying petrochemical plant, fertiliser plant, and a subsea pipeline project, will cement his dominance of the oil and gas market as well. Just the other day, the president of African Development Bank (AfDB), Akinwumi Adesina said that Dangote may become the largest exporter of rice in the world by 2021. Dangote Cement is already the biggest quoted company in West Africa and the only Nigerian company on Forbes Global 2000 Companies. Its stock is almost half of the value of the NSE. Given that Dangote has averaged a growth rate of over 20 percent in the past few years, if we use the Rule of 70, which states that a variable growing at x rate would double every 70/x years, this means that Dangote’s stock value may double in less than four years. In other words, his stock is set to eclipse the Nigerian stock exchange four years from now.
Aliko Dangote himself has never been shy of making his grandiose intentions clear. He said: “The ultimate goal of the Dangote Group is to dominate every niche in which it operates. In order to achieve this goal, we acquired over 3000 new trucks, developed a strong distribution network and increased production capacity. Our strategy is to sell our products faster than our competitors and at uniform price.”
…it is very important to add that Dangote’s kind of monopoly is largely the product of both government failure and market failure. The inability of government to provide basic needs for the populace creates the opportunity for businesses like Dangote to fill the gap. Also, government’s monumental ineptitude leaves gaps that he exploits. Market failure can result from monopoly as is well known.
That’s not all. Dangote says he will take charge of diversifying the Nigerian economy.
This would mean that in no distant time, Dangote brand would be even more ubiquitous than it currently is.
There is no doubt that Dangote, true to his words, is working with government as a partner to “diversify the economy and to spread prosperity to Nigerians.” Especially given the current reality of government failure in almost every department of our social and economic life. The dominance of Dangote in critical sectors of the economy is partly the result of the failure of the state to provide citizens with necessities. Therefore, no one can dispute the fact that he is creating real value that would otherwise not be possible in our country. Whether it is salt, sugar, flour, or cement, his emergence has significantly cut down the import bill.
For decades now, the country has been held hostage by a cabal of fuel marketers who have exploited the government’s incompetence in operating functional refineries to fleece the nation of huge resources and sabotage the efforts at building a sustainable fuel supply system. But in no distant time, Dangote’s refinery, the largest in Africa and second largest in the world, would produce more than enough petroleum products for the local market. As Dangote himself put it: “in five years time, half of Nigeria’s crude oil will be refined and exported rather than exporting crude that creates jobs elsewhere.”
The potentials of Dangote’s business activities in building the economic infrastructure in Nigeria, as well as creating the much-needed jobs cannot be questioned. It is estimated that by 2021, Dangote could be one of the single largest employers of labour in Nigeria, after the government. This is certainly no mean feat.
While so many companies have faltered under the recent recession imposed by dwindling inflow from oil sales, as oil price collapsed, Dangote Cement declared staggering profits. While revenue grew by 9 percent from N389 billion in 2015 to N426 billion in 2016, profit after tax grew by a whopping 72 percent from N213 billion in 2015 to N368 billion in 2016. Such astronomical profit growth is dizzying and can only be possible in a monopolistic market where there is only a producer of a commodity with huge demand.
Dangote appears to play in businesses that could somehow be described as natural monopolies – sectors in which average cost of production declines with the amount of output produced. Such sectors have inherent scale effects in both size and scope. For one, there exists the possibility of increasing returns to scale arising from the decreasing cost of production as more output is produced and the fact that a unit of input employed in production may give rise to more than a unit increase in output. However, whether the monopolistic tendency is inherent in the sectors Dangote’s Industries are invested or it is artificially manipulated, there seems to be no love lost between him and some radical media who have given him the soubriquet – Alhaji Putin – because of his reputation for crushing the competition.
But it is very important to add that Dangote’s kind of monopoly is largely the product of both government failure and market failure. The inability of government to provide basic needs for the populace creates the opportunity for businesses like Dangote to fill the gap. Also, government’s monumental ineptitude leaves gaps that he exploits. Market failure can result from monopoly as is well known. But most market failures – and the type that induces Dangote’s kind of monopoly – usually refers to situations when goods aren’t appropriately priced or there is a mismatch between supply and demand. One sense in which this can happen is that something of value doesn’t have a price or there’s no incentive to produce something that people could pay for. Therefore, any business capable of innovating a solution to bridge the gap in the market is likely going to become a monopolist – at least in the short run.
There is also the other allegation that the company enjoys preferential forex treatment at the Central Bank, where for long it got N199 to the dollar, even in a time of scarcity. It therefore beggars belief that while it is literally tax-exempt, while taking a monopoly mark-up pricing on cement, the government still allows it concessional forex rate. This is just short of saying that the government is funding the business’ continental expansion!
But as Dangote’s businesses expand alongside increasing socio-economic impacts, there is no question that Nigeria’s taxation and competition policy would need to be interrogated. Already some aspects of Nigeria’s industrial policy, such as the tax holiday and pioneer status granted to innovative companies and firms situated in rural areas are seen as too plastic and manipulable, and experts are calling for its review. This tax system enables companies like Dangote Industries and others appear to pay less taxes, especially when compared with peers in other countries. As more and more companies access this corporate tax allowances, its implication for the emerging Nigerian economy surely comes into focus. Absolutely, there is a necessary trade-off that developing countries pursuing industrialisation must bear. This trade-off usually manifests in developing country contexts when government is trapped between the need to promote investment for national economic development and the challenge to raise sufficient tax revenues to provide much-needed goods and services. Providing investment promotion incentives such as tax holidays means that government must forfeit, at least in the short run, some ample revenue streams. It is a price that has to be paid since you can’t both eat your cake and have it.
According to PwC, “the pioneer holiday is granted for a period of 3 years in the first instance, after which it can be renewed up to 2 additional years. However, in some cases, the NIPC had gone ahead to issue pioneer certificates for the full 5 years all at once.” However, many are concerned that this policy and the way it is administered poke holes at government’s fiscal policy stance. A tax policy that exempts companies that generate billions of revenues cannot be considered fair enough. This raises the bigger question of the capacity of our institutions as currently configured to adequately regulate big businesses whose capabilities stretch government’s own ability.
Given the above background, it is reckoned that over the past seven years, Dangote Cement clocked over N2 trillion in revenues, of which, over N1trillion were profits. The company paid about N12 billion of that in taxes. In other words, the effective tax rate (from actual tax paid) of the company over those seven years was just 1 percent. Applying the provision of the pioneer status in Nigeria’s tax system, the company has succeeded in minimising its tax burden. But a comparison between the company and peer cement producers across the world shows that its tax burden is relatively, zero. While her 14 peers’ profits (including Anhui Conch in China, Lafarge in France, Holcim in Switzerland etc.) range between -2 and 17 percent, the cement company’s profit ratio is a whopping 52 percent! This is seen by some experts as an aberration created by the country’s tax policy that needs to be corrected. But against this position, other experts add that the company compensates for this in creating jobs and improving infrastructure in the areas of its operation – two major issues on which government has fared woefully. Besides, government hasn’t justified itself in the utilisation of the taxes it collects. On both investment promotion and tax administration, the government seems to have failed to live up to its bidding and, if anything at all, has constituted an impediment to investment and has nothing to show for the use of the taxes it collects.
There is also the other allegation that the company enjoys preferential forex treatment at the Central Bank, where for long it got N199 to the dollar, even in a time of scarcity. It therefore beggars belief that while it is literally tax-exempt, while taking a monopoly mark-up pricing on cement, the government still allows it concessional forex rate. This is just short of saying that the government is funding the business’ continental expansion! A 50 kilogramme bag of cement in Nigeria is anywhere between $10 and $11 equivalent. Contrast this with Ghana ($9), Benin Republic ($5), India ($5), South Africa ($6.5), Kenya ($5). The international median price of cement is about $5. Therefore, it seems Nigerians are paying double the international price of cement. In this, as in other spheres, government regulation has so far fallen short.
Dangote’s trucks make up a large proportion of heavy axle loads on Nigerian roads. They contribute immensely to the wear and tear of the nation’s highways, thereby shortening the lifespan of the roads and highways. His Ibese trucks have turned into highway terrorists as they seem to operate above the law – impeding traffic along major expressways without hindrance. The police and FRSC seem to look the other way. Without compensatory pigouvian tax to internalise such externality, the government is nothing but an accomplice to the rape of the state.
The company’s seeming intolerance for competition has been variously flagged by many analysts, with some alluding to some political interference. As an aside, this article was rejected by several media houses on account that they aren’t allowed to publish any material that is deemed to be damaging to Dangote’s business and interests. Of course, nothing in our article can be viewed as damaging to any business. As researchers and intellectuals, and as a free market thinker and expert on microeconomics of competition and industrial organisation, it is our responsibility to produce knowledge and information to improve the competition climate in Nigeria. This article is solely looking at the monopolistic tendencies of big businesses in an emerging economy with underdeveloped institutional and regulatory infrastructure and the consequences for long-term growth and sustainability. As such, it is not an attack on any business.
It is hard to find similar analogies in the developing world where such a colossal private monopoly straddles or have the potential to straddle the economic system like Dangote system in Nigeria. The closest we come to such a situation was in the late 19th and early 20th centuries when a French water concessionaire, Compagnie Générale des Eaux obtained a water concession contract for a century.
There is no doubt that as Dangote continues to expand his business empire, the externality consequences of his business operations will continue to grow and permeate many aspects of our social and economic life. The question that many are grappling with is government’s ability to regulate and control such a behemoth. Especially in a developing economy characterised by pervasive institutional voids and government failures, the dangers of a Frankensteinian future – where government inadvertently creates something that would eventually engulf it – are rife. Advanced economies like the US and EU haven’t had an easy time enforcing anti-trust laws, despite having the best of both human and institutional capabilities to deal with such realities.
This recalls the origin of anti-trust regulations, which in the early part of the 20th century created such a political upheaval that it took only what one may consider a random event in the death of a US president to solve. There were the fears that Trusts or large corporations would impose monopolistic prices to defraud consumers and drive small, independent companies out. By 1904, 318 trusts – including those in railroads, local transit, and banking industry – controlled two-fifths of the US’ industrial output.
One of his first notable acts as president was to deliver a 20,000-word address to Congress on December 3, 1901, asking it to curb the power of large corporations (called “trusts”) “within reasonable limits.” As president, Roosevelt worked to increase the regulatory power of the US federal government. Regulation of railroads was strengthened by the Elkins Act of 1903 and with the Hepburn Act of 1906, which curbed the monopolitistic power of the railroads, J. P. Morgan’s Northern Securities Company, a huge railroad combination, was broken up. To deal with the labour and management issues, Roosevelt established the Department of Commerce and Labour.
Such is the tortuous path of trust regulation in the United States. Although, the case against trusts in the United States have been shown by recent research to have been driven by a myth of predatory pricing – since this actually hurts the perpetrator more than it hurts other companies. But the real danger of monopolism is the inevitability of a collusion with government. In such an event, the government becomes just one of the tools in the hands of the monopolist to execute its business strategy. Once this happens, the free market dies a natural death.
It is hard to find similar analogies in the developing world where such a colossal private monopoly straddles or have the potential to straddle the economic system like Dangote system in Nigeria. The closest we come to such a situation was in the late 19th and early 20th centuries when a French water concessionaire, Compagnie Générale des Eaux obtained a water concession contract for a century. CGE grew over time to dominate the utility industry in France and her colonies around the world, eventually becoming so powerful that it started to dictate politics in France. Its revenue in 1999 was more than $30 billion. Because CGE was just in utilities, its influence pales in comparison to Dangote who straddles almost all the sectors of the economy.
With Dangote’s dominance of critical sectors of our economy, it is just a matter of time before every aspect of the economy comes under its looming shadow. The implications of such a colossal monopolistic economic structure for a developing economy with weak regulatory infrastructure as well as weak institutions will challenge students of political economy. One thing is certain however, Dangote’s emergence would reshape the contours of the economic system built on competitive markets in the developing world. However, it is pertinent to know that monopoly has never been an efficient economic structure for allocating resources. We agree that a discriminating monopolist can achieve the same system of allocation as the competitive market, but the discriminating monopolist is just a theoretical ideal, never realisable in practice. Facing the inexorable emergence of Dangote’s monopoly, the imperative of regulatory mechanisms to countervail the unavoidable economic dictatorship that would arise becomes more compelling.
Bongo Adi is an economist and faculty member at the Lagos Business School.