The Need for Better Integration on the African Continent - The Nigeria South Africa Example

SEEING VALUE WHERE OTHERS SEE CHALLENGES – THE STORY OF SOUTH AFRICAN BUSINESSES IN NIGERIA
By Bolaji Okusaga
1. THE PARADOX OF HAVING A HUGE ECONOMY WITH WEAK INFRASTRUCTURE AND UN-CORDINATED POLICIES
With a population of 170 million people out of Africa’s 903 million total headcount, which represents one-fifth of the continent’s population, Nigeria is a huge paradox for global investors looking for opportunities in Africa.
When Nigeria’s huge potential is juxtaposed with unsavoury conditions which are detrimental to investment, such as corruption, excessive bureaucratic bottlenecks and infrastructure challenges, an investor is likely to face a huge dilemma. For instance, the World Bank’s 2013 “Doing Business" survey puts Nigeria at 185th out of the 189 countries it surveyed on ease of getting electricity. In addition to shortfalls in power generation, transmission and distribution, transportation systems and other critical support infrastructure are also relatively under-developed. This, coupled with the endemic corruption and the bureaucratic bottleneck make doing business in Nigeria tougher than in other climes.
Beyond these challenges, however, Nigeria offers a basket of opportunities for the intrepid. Nigeria is currently rated as the biggest economy in Africa, accounting for 26% of the economic output in sub-Saharan Africa and over 70% of the economic output in the ECOWAS region. Except for the year 2015, which has seen a reduction in growth projections because of falling oil prices and the anticipated crisis from the general elections, Nigeria has maintained an average year on year economic growth of 6% in the last 10 years. Other macro-economic variables have also remained relatively stable over this period.

Despite these positive indices, business in Nigeria is admittedly tricky, hence the departure of a lot of European and American trans-national corporations and the refusal of others to operate in Nigeria. Aside core investors in commodity and extractive industries - and a couple of players in manufacturing, who had been operating in Nigeria before its independence from Great Britain in 1960, a lot of European and American Technology and Consumer Goods businesses do not dare to take the plunge.

It is therefore no surprise that the likes of Starbucks, McDonald's, and a host of other companies involved in retail and distributive trade are missing the huge opportunities presented by Africa's biggest and most populous economy. To these companies, the risks outweigh the possible benefits- a clear case of seeing the cup as half empty.

The loss of these European and American companies is the gain of South African companies. Operating in Nigeria despite the huge challenges, they are reaping huge returns on their investment. From the foregoing, it is glaring that navigating Nigeria’s interesting investment paradox, borders on differences in perspective.

While the West is seeing the glass as half empty, Chinese and South African companies are seeing the glass as half full and are therefore coming to the party with enthusiasm and a "can-do" spirit. This positive perspective informed MTN's huge investment in the Nigerian Telecommunications Industry in 2001 - at a time when Nigeria was perceived as one of the low value ends of the frontier markets.

Given that the MTN investment was a Greenfield investment in a newly liberalized industry, the huge risk which MTN took at its market entry into Nigeria was such that the company's share price initially plummeted on the Johannesburg Stock Exchange. However, as if it knew what others did not know, MTN was undeterred and continued to inject the liquidity needed to shore up its Nigeria operations. The investment paid off and as the cliché goes, the rest is history.

2. BEYOND HALF-FULL: HOW HAVE SOUTH AFRICAN INVESTMENTS FARED IN NIGERIA?
Despite the infrastructure challenges, bureaucratic bottlenecks and corruption often cited as the bane of investing in Nigeria, South African businesses appear better suited to the Nigerian business environment than their Western counterparts.

From the retail end, with players such as Shoprite and Game, to Hotel and Hospitality with the Protea Hotel chain (which was recently acquired by Marriot, the American Hotel chain), onto Media and Cinema with companies like MultiChoice and Nu-Metro, banking and financial services - Stanbic IBTC Bank, First Rand Bank, Old Mutual and Nedbank (which recently acquired a sizable stake in Ecobank, the Nigeria led Pan- Africa Banking Franchise), and other mid-sized businesses dotting the Nigerian business landscape, South Africa today stands as one of the major players in the Nigerian economy.
Following the restoration of democracy in Nigeria in 1999 and the adoption of the New Partnership for Africa Development (NEPAD) statute in the early 2000's, South Africans were quick to identify opportunities in Nigeria and were bold in their market entry. First to make a statement with its entry was MultiChoice, which had arrived well before the return of democratic governance and adoption of the NEPAD Agreement, and its entry re-invented the media, cable and pay-TV industry in Nigeria.

Offering unparalleled value within the local market, MultiChoice quickly became a monopoly, dominating the Nigerian market and making it difficult for the local players to compete in this capital intensive industry. Following the MultiChoice example, MTN also rolled out its services as the second player within the newly liberalized Nigerian Telecommunications market, immediately asserting its leadership of the industry, rolling out critical infrastructure across Nigeria and making huge investments in brand building. Unsurprisingly, MTN became the market leader in less than one year of its operations.

While MTN was growing value in the Telecommunications sphere, the Protea Hotel chain was also planting its presence in Nigeria's major cities. Today Protea is the largest hotel chain in Nigeria, operating through a unique franchise model which seeks out Nigerian hotel and hospitality Investors as partners, while bringing in its own brand franchise and management expertise.

Furthermore, South Africa also registered its presence in the Nigerian Financial Market with the entry of Stanbic Bank, a wholly-owned local subsidiary of South Africa's Standard Bank. Seeing the need to grow its presence in Nigeria, it soon acquired a mid-sized local Universal Bank with a huge Investment Banking franchise - the IBTC Chartered Bank. It is on record that the deal is the first ever tender offer in Nigeria and with it came a 525 million dollar Foreign Direct Investment, the biggest single investment in Nigeria’s financial industry till date.

Through this investment, South Africa was able to make inroads into the Nigerian stock exchange given the fact that IBTC Chartered Bank was then the largest equity trader by volume and value on the Nigeria exchange as well as the largest portfolio manager and is represented on the council of the Nigerian Stock Exchange. Furthermore, this strategic acquisition also brought South Africa into Nigerian government bond management because the acquired Bank is the sole broker for the Federal Government of Nigeria and was picked by the government to be the settlement bank for the electronic warehouse receipt system introduced by the Nigerian Commodity Exchange.

Aside from the Stanbic IBTC success story in the Banking sector, South Africa is also deepening its participation in the Nigerian manufacturing and consumer goods sector. Tiger Brands, a South African company, recently bought a majority stake in UAC Foods and Dangote Foods. This strategic acquisition comes as a move to shore up the earnings of Tiger Brands, which has flattened at home, given Nigeria’s huge consumer market.

Furthermore, Shoprite, another South African firm, is making huge forays into the Nigerian retail sector, with retail presence in key Nigerian cities of Lagos, Ibadan, Enugu, Ilorin and a host of others. The fast expansion of the Shoprite franchise is driven by a retail boom in Nigeria. The retail sector in Nigeria has continued to expand, with value sales increasing strongly in 2013 and 2014, faster than GDP growth.

This development is propelled by an expansion in Nigeria’s urban and middle class population and an increase in disposable income. Away from retail, South Africa has also entered Nigeria’s lucrative beer market with SABMiller. SABMiller recently built a state-of-the-art brewery in Onitsha, in the South-East of Nigeria, and is gradually growing its distributive capacity pan-Nigeria.
Aside from all of the businesses mentioned above, there other new entrants into the Nigerian economy from South Africa, and these includes, Nedbank, FirstRand, Old Mutual, Sanlam and MMI Holdings.
3. INITIAL POLICY OBSTACLES AND SOUTH AFRICA’S ENTRY IN THE ERA OF LIBERALISATION
The curious though unspoken question on the lips of international venture capitalists and investors, is how come the South Africans seem to be succeeding where others are failing? This question comes against the background of the noted challenges in the Nigerian environment which are compounded by the absence of a stable policy environment.

The history of international investments in Nigeria before the return of democracy was not particularly savoury, what with the indigenization decree of the 1970's under the Military governments of Murtala Mohammed and General Olusegun Obasanjo, which saw a lot of foreign business interests in Nigeria ceding their stakes to Nigerian shareholders in a push for the localization of multi-national businesses in Nigeria. This move saw the exit of Shell Petroleum and British Petroleum from the down-stream sector of Nigeria's lucrative Oil and Gas market.

As if the set-backs of the 1970's were not enough, the structural imbalance of the 1980’s also saw the plummeting of industrial capacity in Nigeria. This situation arose largely from the rationing of foreign exchange under a corrupt and highly politicized import licence order. Given this scenario, there were frantic calls for structural reforms. These reforms were soon ripe and ready, following the huge debts which Nigeria incurred from the London and Paris club of Creditors.

Initial reforms were thus undertaken in the late 80’s to early 90’s, tailored towards budgetary tightening and fiscal discipline with a view to raising industrial capacity in order to reduce dependence on imported finished goods. Prodded further by the Breton Woods Institutions, to undertake more reforms, given its huge sovereign debt, the Nigerian Military government under General Ibrahim Babangida, announced more fiscal reforms; starting with the Second-tier Foreign Exchange Market, which saw the devaluation of the naira, and the Structural Adjustment Programme which engendered a high-level of fiscal tightening in a bid to refocus the economy.

As all these reforms were going on, the Nigerian economy was still largely perceived as unattractive to Foreign Investors in Europe and America who only saw opportunities in the commodities and extractive industries and were uninterested in deepening their involvement in the Nigerian manufacturing and retail sectors having been scarred by the indigenisation decree promulgated by the Murtala/Obansanjo Military regime. The conventional wisdom at the time was therefore to stay aloof to the reforms and the liberalisation of critical sectors of the Nigerian economy that followed thereafter.

Therefore, while the Nigerian government devalued its currency and made it attractive for smart foreign investors to take advantage of its economic liberalisation policy, investors watched from afar, wary of the policy-somersault. It was this confused and highly volatile environment that South Africa was soon to profit from, following the return of democracy in 1999 and a renewed push for foreign direct investment by the new democratically elected government.
4. BOOSTING INTRA-AFRICA TRADE: THE NIGERIA / SOUTH AFRICA EXAMPLE
Aside from the existence of South African companies in Nigeria, Nigerian businesses are also gradually making in-roads into South Africa, thereby helping to boost the intra-Africa trade that was very low before the advent of the New Partnership for Africa Development (NEPAD). Nigerian energy firm, Oando, for example, is listed on the Johannesburg Stock Exchange, while Dangote Group has also invested over $378 million in South Africa's cement industry. In addition to these two companies, there are also a couple of other Nigerian businesses in South Africa such as Arik Air, First Bank and Union Bank which have representative offices in South Africa.

Between 2007 and 2008, trade volumes between both countries stood at approximately $2.1 billion. By 2012 this figure had increased to $3.6 billion. It must be noted that 83% of this trade figures came from South Africa’s purchase of crude oil from Nigeria. Between 2002 and 2012, South African imports from Nigeria increased by about 750%, with crude oil sales accounting for a greater chunk of this figure. This scenario points to the fact that, outside of trade in crude oil and commodities, trade volumes between both countries are still relatively low.
5. THE DOWN-SIDE OF SOUTH AFRICA’S INVOLVEMENT IN THE NIGERIAN ECONOMY
The South Africans may have cashed in on the opportunities availed by the liberal regime bought on by the new democratic order in Nigeria and are making a kill where the west did not initially see any prospects, but there are a couple of things South Africa is also not getting right.

One of these is the tendency of South African firms to only trade among themselves rather than patronize local options in Nigeria. It is usually alleged that MTN Nigeria, in giving out its banking and collection mandate, will prioritize Stanbic IBTC Bank, a bank with South African interest, above local Nigerian Banks. The same is said of the other South African businesses. This situation has tended to increase the mistrust between Nigerian local businesses and their South African counterparts. Given this situation, the prevailing feeling within the Nigerian business community is that the South Africans are not returning the friendly gesture of Nigerian businesses and consumers towards South African interests and are therefore not displaying ‘brotherly’ love towards Nigerian businesses.

Aside from this, there is also the issue of the monopolistic tendency of South African firms which creates industrial tensions, especially in the Telecoms and pay- TV segments of the Nigerian economy where South African behemoths like MTN and MultiChoice are dominant. Accusations are rife about the deployment of arm-twisting tactics in the bid by these players to retain their dominant positions. Beyond this, there are also the allegations of over-pricing of services in Nigeria, in comparison to the prices these firms charge in South Africa.
Furthermore, there is also the issue of the non-reciprocation of Nigeria’s open door policy in South Africa. The poser often raised by cynical Nigerian business analysts is, ‘which major Nigerian company has made any inroads worth mentioning in South Africa even though South Africans are making a huge kill in Nigeria?’ Skeptics also cite the exit of Thisday newspaper from South Africa under a very curious circumstance, as proof of hostility of South Africa to Nigerian businesses.
Complaints about the non-reciprocity of the open door policy to Nigerian businesses in South Africa often creates inter-government friction, to the extent that bi-lateral relations between the two countries was nearly damaged in 2012 when 125 Nigerian business travelers to South Africa were denied entry into South Africa for not having valid Yellow Fever certificates. The Nigeria government, in retaliation, also expelled 56 South Africans. This situation led to huge tensions which were later resolved with the easing of travel restrictions
6. BEYOND THE OPPORTUNITIES AND THE CHALLENGES, WHAT DOES THE FUTURE HOLD FOR NIGERIA- SOUTH AFRICA BUSINESS RELATIONSHIP?
Having x-rayed the opportunities and challenges of South African companies doing business in Nigeria, it is evident that great prospects lie ahead for this ingenuous partnership which is opening up vistas of opportunities for boosting intra-Africa trade. However, a couple of things need to be addressed on both sides:
a. Easing of Visa processing and travel restrictions
While it may be tough to have a visa free regime or a visa-on-arrival situation, there is the need to ease visa processing in order help facilitate the interchange of business between both countries.
b. The setting up of a clearing house for the resolution of business and investment disputes
Given the necessity for speedy resolution of business disputes between both countries, there is the need for the setting up of a conflict resolution mechanism outside of the traditional legal and arbitration systems provided by both countries. This will help ease investment processes and speed up transaction time while creating better value for investors seeking opportunities in both countries.
c. The need for reciprocity in the spirit of African brotherhood.
There is the need for reciprocity in term of access to opportunities between both countries. This will go a long way in strengthening relationships and lessening tension.
d. Political and fiscal risk
This is particularly important because if businesses are not sure of the political and fiscal risks that they are likely to confront, it might stifle investment and lead to value attrition. The withdrawal of the 2.3 Gega Hertz (GHz) licence initially awarded to Multilinks (the Nigerian subsidiary of Telkom), which happened under very curious circumstances, was one of the reasons for the exit of the company from Nigeria.
e. Resolving the issue of high costs of doing business
This particularly relates more to the Nigeria environment than the South African environment. Nigeria needs to bridge her infrastructure deficit in order to be able to attract more quality investments from South Africa. A situation where a company like the MTN was saddled with building its own backbone before being able to operate in Nigeria is not standard practice and will therefore not be the case in more investment friendly environments. There is the need for Nigeria to look more critically at building the necessary support infrastructure which will make doing business in Nigeria a lot cheaper and help drive foreign direct investment.
7. FACILITATING INTRA-AFRICA TRADE BY SETTING THE RIGHT EXAMPLE - THE NIGERIA/SOUTH AFRICA OPTION
The popular view that Africa stands to benefit more from trade among Africans than trading with Europe, America and Asia rings true when one considers the progress made so far in Nigeria's partnership with South Africa and the benefits that have accrued there-from. However, more effort is required to take this to the next level.

Currently, Africa's intra-regional trade stands at about 10 - 12% of Africa's entire trade. This is very small when compared with intra-regional trade within North America which is over 40% and intra-regional trade in Western Europe which is about 60%. African Countries trade more with America, China and Europe than they do among themselves. This is largely attributable to the existence of artificial barriers to trade as well as poor transport and communication infrastructure across Africa. Furthermore, the lack of a political will to affirm commitments on the lifting of cross-border restrictions on the movement of goods and services across Africa beyond mere promises represents a major hindrance to achieving the desired end-state.
Given the need for the economic integration of Africa, African leaders adopted the decision to establish a Pan- Africa Continental Free Trade Area (CFTA) by the indicative date of 2017 taken during the 18thOrdinary Session of Heads of State and Government of the African Union that was held in Addis Ababa, Ethiopia, in January 2012. But, beyond boosting intra-Africa trade by strengthening trade within regional blocs in Africa, there is the need for the big economies and fast growing economies in Africa to set the right example by removing barriers to trade among themselves. Nigeria, South Africa, Egypt and other fast growing economies in Africa such as Kenya and Angola warehouse about 45% of Africa's total economic output, and given the need to raise intra-Africa trade, Nigeria and South Africa, two of Africa's economic power-house need to take the lead.
Bolaji Okusaga is the Managing Director of The Quadrant Company, a Lagos based Public Relations Consultancy