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? This is where comes Ibeto.
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.
angote 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.
AI
