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Africa’s richest man has a built-in advantage with Nigeria’s government
Feyi Fawehinmi
October 11, 2017quartz africa
Africa's richest man, Aliko Dangote (L), Nigeria's vice president Yemi Osinbajo (C) and Lagos' governor Akinwunmi Ambode on tour of the Dangote oil refinery site, June 2016. (Reuters/Akintunde Akinleye)
To start to understand how Aliko Dangote, Africa’s richest man, came to have such influence over the Nigerian government, it is useful to go back in time to 2003. Before then, he was a Nigerian billionaire just like any other.
But in the run up to the 2003 election campaign, president Olusegun Obasanjo had a famous falling out with his vice president, Atiku Abubakar, over the latter’s attempt to succeed him as president after only one term. Obasanjo had also been operating on the understanding that Atiku, as the People Democratic Party’s (PDP) money man, would fund his re-election campaign.
But Atiku told him that all the money had been spent during Obasanjo’s turbulent first term, notably on lobbying the national assembly not to impeach him on two different occasions. Without access to the party’s old fundraising machine, Obasanjo was left with no choice but to find his own new donors.
In his 2013 book, The Accidental Public Servant, the current governor of Kaduna state and former minister under Obasanjo, Nasir El-Rufai, describes how this episode presented Dangote with an opportunity he has maximized to his great benefit. He writes:
Obasanjo had to resort to raising money from other sources and that was how Aliko Dangote came into prominence in the government. From 1999 to 2003, nobody had heard of Dangote having anything to do with the federal government in any significant way. – El-Rufai, Nasir. The Accidental Public Servant (p. 170)
Dangote Stays Winning
By the time president Goodluck Jonathan came to office, the PDP-led government had become very closely and publicly aligned with Dangote. During a presidential media chat in 2011, the president told his interlocutors that Nigeria was to begin exporting cement that year because “Dangote himself, because he is the number one producer, told me” [pdf, page 64].
This Dangote promise of cement exports is repeated nearly every year, Nigeria is desperate to be seen to be diversifying exports beyond oil. Most recently at this week’s FT Africa Summit where Dangote announced—to vice president Yemi Osinbajo’s hearing—that the date for cement exports from Nigeria will now be 2018.
Nigeria’s former president Goodluck Jonathan (L) with Aliko Dangote in 2012 (Reuters/Akintunde Akinleye)
A few people have raised concerns about the relationship between Dangote and the government and its impact on policy decisions. But if they thought things would change under president Buhari’s new All Progressive Congress (APC) government, which came into office in May 2015, they were mistaken. Barely three months after being sworn in, the vice president was leading a government delegation to Zambia to commission a Dangote Cement plant.
Since then, the vice president, with several ministers in tow, have also visited the Dangote refinery for an “inspection” even though it was mainly sand filling of the site going at the time. Early last year, in a separate visit to the Dangote refinery construction site, the Central Bank governor, Godwin Emefiele, said “more Nigerians need to think like Dangote” and pledged to support him as much as possible.
Perhaps unsurprising then that a Reuters investigation in June last year found Dangote’s companies had been receiving preferential foreign currency allocations from the Central Bank at a time when the Nigerian economy had been almost crippled by a dollar shortage.
Cementing his status
While Dangote is involved in many industries, his wealth—over 90% of his net worth—has come from his cement business. Dangote Cement’s 65% share of the Nigerian market means that it also sets the prices for the commodity in the country. And it has used this advantage to generate large profits—the gross margin on its cement was as high as 70% a few years ago and has slowly come down to just under 50% in 2016. A Bloomberg Intelligence report showed average global cement profit (EBITDA) margins were 17.2% in 2015, but Dangote Cement reported a margin of 42.3% in the same year.
Nigerians have almost come to accept paying over the odds for cement as a sacrifice worth making to have cement produced in the country. In 2013, an analysis of the world’s top 15 cement producers revealed that while Dangote Cement’s revenues of $2.4 billion represented 2% of the cohort, its profits of $1.2 billion represented 13% of all net profits in the group. In that year, its net profit margin was 52% with the next most profitable producer—China’s Anhui Conch—managing a 17.8% margin.
Dangote has used the sentiment of “national pride” very cleverly to his advantage. The government and indeed many Nigerians have almost come to accept that paying over the odds for cement is a sacrifice worth making in the name of having cement produced in the country.
The Nigerian press also helps to propagate the story of Nigeria’s cement “self-sufficiency”. This self-sufficiency argument is never challenged with the simple point that it is easy to make that claim when the product is priced beyond the reach of the vast majority of Nigerians. If prices came down to global averages, would Dangote Cement be able to meet demand with its current production levels?
Dangote also regularly inundates Nigerians with stories of how he has put all his eggs in the Nigerian basket and how he is always betting on the country by investing more than any other foreign investor. Every now and again, he announces large investments in an industry (usually one favored by the government of the day) sometimes running into billions of dollars. The stories and announcements (which may, or may not, come to fruition) help to reinforce the narrative Dangote is always investing in Nigeria even when no one else is doing so.
The cost to Nigerians
The nature of cement as a product that is too heavy and costly to transport and too tricky to smuggle has allowed the Nigerian market to be a captive one for Dangote.
In June 2016, the World Bank published a report examining the impact and costs of lack of competition in a number of industries in Africa. They found that African cement prices averaged $9.57 per 50kg bag compared with $3.25 globally. Put another way, Africans paid 183% more than people around the world for the same product.
A World Bank report showed Dangote has 90-year mining licenses for materials like limestone even though its cement plants have a 50-year life span. The report also highlights how the Nigerian government had been phasing out import licenses for cement beginning in 2012 when Dangote ramped up cement production in Nigeria as well as the Central Bank of Nigeria banning the use of foreign exchange for cement imports. The World Bank report [page 54] also showed how Dangote had exclusive mining licenses for limestone and other additive materials for cement estimated to last for 90 years even though its cement plants have an estimated life of 50 years.
If Dangote’s relationship with the government allows it to make healthy profits at the expense of Nigerians, perhaps this can be mitigated by the taxes it pays to the government?
No chance.
Between 2010 and 2015 when Dangote cement earned around 1 trillion naira ($6 billion) in profits, it paid only 12 billion naira ($72 million) in taxes—a tax rate of just over 1%. It has done this through a particularly aggressive interpretation of a Nigerian investment incentive known as ‘Pioneer Status’.
The idea behind the pioneer status was to encourage investment in industries which the Nigerian government deemed in need of support. In return for investments in those industries, companies were exempt from paying taxes on profits from those investments for a maximum of five years.
However, the law was described as “most abused in certain quarters“, by Deloitte. No one has taken greater advantage than Dangote Cement. It has claimed pioneer status multiple times on the same plants by applying for a new exemption each time it extends the plant. The illustration below, taken from a recent presentation by the company [pdf, page 27] shows how it has done this.
A page from Dangote Cement’s 2016 annual report showing the Nigerian pioneer tax schedule.
Dangote Cement has claimed the pioneer status ten times across three plants by carefully scheduling a new one to start as an old one is ending. This puts Dangote’s interests at cross purposes with that of the country—Nigeria wants investments as quickly as possible but Dangote’s incentives are to spread out its investments as much as possible to avoid paying any taxes.
Recently, the government announced some “reforms” to the pioneer status law ostensibly to plug the gaps that had left it open to abuse. It changed the definition of pioneer industries from new ones to “immature” ones. It also announced that cement i.e. Dangote would be ‘phased out’ of the scheme.
But if any Nigerian thinks that this means Dangote will soon start paying taxes in the country, they ought to think again. Most recently, the government announced the extension of an order that allows companies to offset the full costs, plus an additional 30%, of the cost of providing infrastructure to the public. This original order was signed by president Jonathan in 2012 to run until April 2017. Given that this exemption comes with a built-in profit element, if the past is any guide to the future, Dangote will take advantage of it and not pay any taxes at least for the next five years.
The question as to why a businessman who has benefitted immensely from Nigeria—making him the world’s richest black man in the bargain—continues to expend so much time and effort to avoid paying taxes remains an interesting one.
The most damning of all
A monopoly or market dominant firm might be tolerable if it is “contestable”. That is, the monopolist’s position is made possible by low prices. In many areas, this is the case with Amazon—anyone is free to compete with them but it is quite difficult to match them on low prices as Amazon’s wafer-thin profit margins show it prioritizes gaining market share over profits. This was the case with many of America’s so called “robber barons”—as they expanded their market share, they consistently cut prices and improved services, none more so than John D. Rockefeller and his Standard Oil.
This is the most damning case against Dangote. For all the effective license to print money that Dangote Cement has become, the company’s track record for innovation is practically non-existent. Its 2016 report does not mention any specific research the company is funding to bring down the cost of its products or even housing in general. It simply sells cement in the same form as it has been made since the time of the Romans who invented the stuff and demands the highest possible price for it.
An episode in 2014 illustrates this point. I spent some time investigating and writing about the issue at the time and the World Bank also highlighted it in its report quoted above. In a brazen move, Dangote Cement and the Standards Organization of Nigeria (SON) tried to eliminate the 32.5 grade of cement from the Nigerian market to replace it with 42.5 grade, produced by Dangote cement.
This campaign was supposedly led by concerned members of the public but when I investigated, I found it was a faceless organization fronted by a non-existent person. The plan nearly succeeded but for the other cement producers lobbying hard and taking SON to court. The Nigerian Society of Engineers also came out strongly against the proposed ban arguing, correctly, that cement grades were not about inferiority but usage.
The 42.5 Grade cement Dangote Cement claimed it was introducing into the market was supposedly a better product than what previously existed in the market. Yet it did not try to introduce the product with a publicity campaign or aggressive pricing. Instead it sought to first eliminate the competition before undoubtedly introducing the more expensive product.
Has Nigeria as a whole benefitted from Dangote Cement? This is a surprisingly difficult question to answer in the affirmative.
There is no obvious infrastructure boom, it has not collected any taxes. When it comes to jobs, the company reported 16,272 employees across the 10 African countries in which it operates for 2016. Around 10,000 of those are in Nigeria—a tiny drop in the ocean for a country of 190 million with a major employment problem.
Nigerian Exceptionalism
The nature of the cement business across the world is that it tends towards oligopolies and uncompetitive practices. It is expensive to start a new cement plant and as previously stated, it is difficult and expensive to transport across long distances which means most cement is consumed close to where it is produced. Yet it is a vital product for construction and infrastructure development. As such, regulators across the world tend to watch over the industry very closely.
Nigeria’s government is the chief enabler of Dangote Cement ensuring it can extract fat profits from the market by subsidizing it with tax breaks In 2014, the UK Competition Commission forced existing firms to sell some of their plants to create a new market entrant as a way of boosting competition. Last year in India, the Competition Commission, fined ten cement manufacturers a total of $1 billion for forming a cartel. In January 2016, South Korea’s Fair Trade Commission fined 6 cement producers a total of $168 million for price fixing. Spain’s National Commission for Markets and Competition handed down €29 million in fines to 23 cement companies in September 2016 after finding that they had been involved in a cartel where they shared price information via WhatsApp.
It is worth noting that in all the examples above, the countries in question have far more competitive cement markets and markedly lower profit margins than Nigeria and Dangote Cement. Yet the work of keeping these firms who produce a vital commodity on the straight and narrow never stops.
Nigeria is the complete opposite. The government is the chief enabler of Dangote Cement and ensures it can extract fat profits from the Nigerian market by subsidizing its operations with tax breaks and preferential foreign exchange allocations.
The government has bet everything on Dangote and looks set to do so again with the 650,000 barrels per day Dangote Refinery scheduled to come on stream in 2019. Its hopes of ending importation of petroleum products rest entirely on Dangote as several government officials and the oil minister have said publicly. Yet the economics of the refining business suggests the Nigerian government will once again pull out all stops to ensure Dangote’s refinery is profitable and this may even be at the expense of ordinary Nigerians. Such has been the corrosive relationship between the Nigerian state and the continent’s richest man.
It is not exactly surprising when companies collude to get customers to pay more than they should. “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices” said Adam Smith more than two centuries ago.
But to watch a government align so closely with a businessman with the attendant effect of denying its own citizens the many benefits of an important commodity is particularly painful to watch.
Feyi Fawehinmi
October 11, 2017quartz africa
Africa's richest man, Aliko Dangote (L), Nigeria's vice president Yemi Osinbajo (C) and Lagos' governor Akinwunmi Ambode on tour of the Dangote oil refinery site, June 2016. (Reuters/Akintunde Akinleye)
To start to understand how Aliko Dangote, Africa’s richest man, came to have such influence over the Nigerian government, it is useful to go back in time to 2003. Before then, he was a Nigerian billionaire just like any other.
But in the run up to the 2003 election campaign, president Olusegun Obasanjo had a famous falling out with his vice president, Atiku Abubakar, over the latter’s attempt to succeed him as president after only one term. Obasanjo had also been operating on the understanding that Atiku, as the People Democratic Party’s (PDP) money man, would fund his re-election campaign.
But Atiku told him that all the money had been spent during Obasanjo’s turbulent first term, notably on lobbying the national assembly not to impeach him on two different occasions. Without access to the party’s old fundraising machine, Obasanjo was left with no choice but to find his own new donors.
In his 2013 book, The Accidental Public Servant, the current governor of Kaduna state and former minister under Obasanjo, Nasir El-Rufai, describes how this episode presented Dangote with an opportunity he has maximized to his great benefit. He writes:
Obasanjo had to resort to raising money from other sources and that was how Aliko Dangote came into prominence in the government. From 1999 to 2003, nobody had heard of Dangote having anything to do with the federal government in any significant way. – El-Rufai, Nasir. The Accidental Public Servant (p. 170)
Dangote Stays Winning
By the time president Goodluck Jonathan came to office, the PDP-led government had become very closely and publicly aligned with Dangote. During a presidential media chat in 2011, the president told his interlocutors that Nigeria was to begin exporting cement that year because “Dangote himself, because he is the number one producer, told me” [pdf, page 64].
This Dangote promise of cement exports is repeated nearly every year, Nigeria is desperate to be seen to be diversifying exports beyond oil. Most recently at this week’s FT Africa Summit where Dangote announced—to vice president Yemi Osinbajo’s hearing—that the date for cement exports from Nigeria will now be 2018.
Nigeria’s former president Goodluck Jonathan (L) with Aliko Dangote in 2012 (Reuters/Akintunde Akinleye)
A few people have raised concerns about the relationship between Dangote and the government and its impact on policy decisions. But if they thought things would change under president Buhari’s new All Progressive Congress (APC) government, which came into office in May 2015, they were mistaken. Barely three months after being sworn in, the vice president was leading a government delegation to Zambia to commission a Dangote Cement plant.
Since then, the vice president, with several ministers in tow, have also visited the Dangote refinery for an “inspection” even though it was mainly sand filling of the site going at the time. Early last year, in a separate visit to the Dangote refinery construction site, the Central Bank governor, Godwin Emefiele, said “more Nigerians need to think like Dangote” and pledged to support him as much as possible.
Perhaps unsurprising then that a Reuters investigation in June last year found Dangote’s companies had been receiving preferential foreign currency allocations from the Central Bank at a time when the Nigerian economy had been almost crippled by a dollar shortage.
Cementing his status
While Dangote is involved in many industries, his wealth—over 90% of his net worth—has come from his cement business. Dangote Cement’s 65% share of the Nigerian market means that it also sets the prices for the commodity in the country. And it has used this advantage to generate large profits—the gross margin on its cement was as high as 70% a few years ago and has slowly come down to just under 50% in 2016. A Bloomberg Intelligence report showed average global cement profit (EBITDA) margins were 17.2% in 2015, but Dangote Cement reported a margin of 42.3% in the same year.
Nigerians have almost come to accept paying over the odds for cement as a sacrifice worth making to have cement produced in the country. In 2013, an analysis of the world’s top 15 cement producers revealed that while Dangote Cement’s revenues of $2.4 billion represented 2% of the cohort, its profits of $1.2 billion represented 13% of all net profits in the group. In that year, its net profit margin was 52% with the next most profitable producer—China’s Anhui Conch—managing a 17.8% margin.
Dangote has used the sentiment of “national pride” very cleverly to his advantage. The government and indeed many Nigerians have almost come to accept that paying over the odds for cement is a sacrifice worth making in the name of having cement produced in the country.
The Nigerian press also helps to propagate the story of Nigeria’s cement “self-sufficiency”. This self-sufficiency argument is never challenged with the simple point that it is easy to make that claim when the product is priced beyond the reach of the vast majority of Nigerians. If prices came down to global averages, would Dangote Cement be able to meet demand with its current production levels?
Dangote also regularly inundates Nigerians with stories of how he has put all his eggs in the Nigerian basket and how he is always betting on the country by investing more than any other foreign investor. Every now and again, he announces large investments in an industry (usually one favored by the government of the day) sometimes running into billions of dollars. The stories and announcements (which may, or may not, come to fruition) help to reinforce the narrative Dangote is always investing in Nigeria even when no one else is doing so.
The cost to Nigerians
The nature of cement as a product that is too heavy and costly to transport and too tricky to smuggle has allowed the Nigerian market to be a captive one for Dangote.
In June 2016, the World Bank published a report examining the impact and costs of lack of competition in a number of industries in Africa. They found that African cement prices averaged $9.57 per 50kg bag compared with $3.25 globally. Put another way, Africans paid 183% more than people around the world for the same product.
A World Bank report showed Dangote has 90-year mining licenses for materials like limestone even though its cement plants have a 50-year life span. The report also highlights how the Nigerian government had been phasing out import licenses for cement beginning in 2012 when Dangote ramped up cement production in Nigeria as well as the Central Bank of Nigeria banning the use of foreign exchange for cement imports. The World Bank report [page 54] also showed how Dangote had exclusive mining licenses for limestone and other additive materials for cement estimated to last for 90 years even though its cement plants have an estimated life of 50 years.
If Dangote’s relationship with the government allows it to make healthy profits at the expense of Nigerians, perhaps this can be mitigated by the taxes it pays to the government?
No chance.
Between 2010 and 2015 when Dangote cement earned around 1 trillion naira ($6 billion) in profits, it paid only 12 billion naira ($72 million) in taxes—a tax rate of just over 1%. It has done this through a particularly aggressive interpretation of a Nigerian investment incentive known as ‘Pioneer Status’.
The idea behind the pioneer status was to encourage investment in industries which the Nigerian government deemed in need of support. In return for investments in those industries, companies were exempt from paying taxes on profits from those investments for a maximum of five years.
However, the law was described as “most abused in certain quarters“, by Deloitte. No one has taken greater advantage than Dangote Cement. It has claimed pioneer status multiple times on the same plants by applying for a new exemption each time it extends the plant. The illustration below, taken from a recent presentation by the company [pdf, page 27] shows how it has done this.
A page from Dangote Cement’s 2016 annual report showing the Nigerian pioneer tax schedule.
Dangote Cement has claimed the pioneer status ten times across three plants by carefully scheduling a new one to start as an old one is ending. This puts Dangote’s interests at cross purposes with that of the country—Nigeria wants investments as quickly as possible but Dangote’s incentives are to spread out its investments as much as possible to avoid paying any taxes.
Recently, the government announced some “reforms” to the pioneer status law ostensibly to plug the gaps that had left it open to abuse. It changed the definition of pioneer industries from new ones to “immature” ones. It also announced that cement i.e. Dangote would be ‘phased out’ of the scheme.
But if any Nigerian thinks that this means Dangote will soon start paying taxes in the country, they ought to think again. Most recently, the government announced the extension of an order that allows companies to offset the full costs, plus an additional 30%, of the cost of providing infrastructure to the public. This original order was signed by president Jonathan in 2012 to run until April 2017. Given that this exemption comes with a built-in profit element, if the past is any guide to the future, Dangote will take advantage of it and not pay any taxes at least for the next five years.
The question as to why a businessman who has benefitted immensely from Nigeria—making him the world’s richest black man in the bargain—continues to expend so much time and effort to avoid paying taxes remains an interesting one.
The most damning of all
A monopoly or market dominant firm might be tolerable if it is “contestable”. That is, the monopolist’s position is made possible by low prices. In many areas, this is the case with Amazon—anyone is free to compete with them but it is quite difficult to match them on low prices as Amazon’s wafer-thin profit margins show it prioritizes gaining market share over profits. This was the case with many of America’s so called “robber barons”—as they expanded their market share, they consistently cut prices and improved services, none more so than John D. Rockefeller and his Standard Oil.
This is the most damning case against Dangote. For all the effective license to print money that Dangote Cement has become, the company’s track record for innovation is practically non-existent. Its 2016 report does not mention any specific research the company is funding to bring down the cost of its products or even housing in general. It simply sells cement in the same form as it has been made since the time of the Romans who invented the stuff and demands the highest possible price for it.
An episode in 2014 illustrates this point. I spent some time investigating and writing about the issue at the time and the World Bank also highlighted it in its report quoted above. In a brazen move, Dangote Cement and the Standards Organization of Nigeria (SON) tried to eliminate the 32.5 grade of cement from the Nigerian market to replace it with 42.5 grade, produced by Dangote cement.
This campaign was supposedly led by concerned members of the public but when I investigated, I found it was a faceless organization fronted by a non-existent person. The plan nearly succeeded but for the other cement producers lobbying hard and taking SON to court. The Nigerian Society of Engineers also came out strongly against the proposed ban arguing, correctly, that cement grades were not about inferiority but usage.
The 42.5 Grade cement Dangote Cement claimed it was introducing into the market was supposedly a better product than what previously existed in the market. Yet it did not try to introduce the product with a publicity campaign or aggressive pricing. Instead it sought to first eliminate the competition before undoubtedly introducing the more expensive product.
Has Nigeria as a whole benefitted from Dangote Cement? This is a surprisingly difficult question to answer in the affirmative.
There is no obvious infrastructure boom, it has not collected any taxes. When it comes to jobs, the company reported 16,272 employees across the 10 African countries in which it operates for 2016. Around 10,000 of those are in Nigeria—a tiny drop in the ocean for a country of 190 million with a major employment problem.
Nigerian Exceptionalism
The nature of the cement business across the world is that it tends towards oligopolies and uncompetitive practices. It is expensive to start a new cement plant and as previously stated, it is difficult and expensive to transport across long distances which means most cement is consumed close to where it is produced. Yet it is a vital product for construction and infrastructure development. As such, regulators across the world tend to watch over the industry very closely.
Nigeria’s government is the chief enabler of Dangote Cement ensuring it can extract fat profits from the market by subsidizing it with tax breaks In 2014, the UK Competition Commission forced existing firms to sell some of their plants to create a new market entrant as a way of boosting competition. Last year in India, the Competition Commission, fined ten cement manufacturers a total of $1 billion for forming a cartel. In January 2016, South Korea’s Fair Trade Commission fined 6 cement producers a total of $168 million for price fixing. Spain’s National Commission for Markets and Competition handed down €29 million in fines to 23 cement companies in September 2016 after finding that they had been involved in a cartel where they shared price information via WhatsApp.
It is worth noting that in all the examples above, the countries in question have far more competitive cement markets and markedly lower profit margins than Nigeria and Dangote Cement. Yet the work of keeping these firms who produce a vital commodity on the straight and narrow never stops.
Nigeria is the complete opposite. The government is the chief enabler of Dangote Cement and ensures it can extract fat profits from the Nigerian market by subsidizing its operations with tax breaks and preferential foreign exchange allocations.
The government has bet everything on Dangote and looks set to do so again with the 650,000 barrels per day Dangote Refinery scheduled to come on stream in 2019. Its hopes of ending importation of petroleum products rest entirely on Dangote as several government officials and the oil minister have said publicly. Yet the economics of the refining business suggests the Nigerian government will once again pull out all stops to ensure Dangote’s refinery is profitable and this may even be at the expense of ordinary Nigerians. Such has been the corrosive relationship between the Nigerian state and the continent’s richest man.
It is not exactly surprising when companies collude to get customers to pay more than they should. “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices” said Adam Smith more than two centuries ago.
But to watch a government align so closely with a businessman with the attendant effect of denying its own citizens the many benefits of an important commodity is particularly painful to watch.
