Africa Merchants And Migrants Aliko Dangote: Cementing InFact

Weaving its way back injobs in Madagascar with AGOA’s adoption, strongman politics in Antananarivo eliminated those jobs just as fast.In early January and February 2009 President Marc Ravalomanana—an entrepreneur who had risen from selling yogurt from a cart to building a national dairy empire and being elected president twice—was under political fire. Corruption allegationsswirled through the capital, followed by bloody protests that saw tens of thousandstake to the streets and a government-led massacre of about 50 protestors. The militarystaged a coup in mid-March and transferred the presidency to Andry Rajoelina, a former disc jockey who was then mayor of Antananarivo.The coup brought an immediate and biting backlash to Madagascar. The international community united against the non-democratic transfer of power and cut offforeign aid, slashing 40% of Madagascar’s government budget. In December 2009,the US suspended Madagascar from the AGOA programme, forcing any entrepreneurshoping to sell their products in the United States to cope with high tariffs. In effect, thisbarred Malagasy textiles from entering American markets.Source: World BankThe suspension was devastating. The island’s textile industry had grown intoa 600m-a-year behemoth by 2008, according to the Integrated Regional InformationNetworks, a UN humanitarian news service. Right before the coup, roughly half of allMalagasy textile production, 278.8m worth, was bound for the United States, according to the Madagascar Export Processing Zone Association, a public-private partnership. Annual GDP growth in 2008 before the coup was 7.1% but post-coup it plummeted to -4.1% in 2009 and grew to an anaemic 0.5% in 2010. Today, nine out of ten ofthe island’s 22m people subsist on less than 2 per day.Washington’s decision to suspend Madagascar from AGOA effectively eliminated 50,000 jobs directly, and prompted a further 100,000 layoffs indirectly, accordingAfrica in Fact Issue 23 June 2014 www.gga.org 7

Weaving its way back into a January 2013 report by Chatham House, a London-based think-tank. Most of theisland’s factories supplied American stores such as Wal-Mart and Bloomingdale’s, orsports brands like Puma and Adidas. But by early 2010 those companies needed toseek new suppliers and Madagascar’s entrepreneurs needed to seek new markets.Madagascar’s AGOA suspension had knock-on effects in the region, affectingraw materials providers to Malagasy factories. In particular, regional suppliers such asLesotho, Mauritius, South Africa and Swaziland suddenly lost an important market andsaw their profits plunge. This is often theprice of government takeovers in Africa.The US government and internationalcommunity adopted a seemingly admirablestance: coup governments will not be rewarded with aid and preferential trade deals.However, the human cost for those alreadystruggling to make ends meet in Madagascar was severe.For five long years, stagnation has dominated Antananarivo’s markets underthe shadow of international isolation. Mr Rajoelina’s transitional regime scheduled,re-scheduled, and cancelled elections repeatedly between 2009 and December 2013,when they finally took place.Today, in the wake of elections that transferred power to a new president,Hery Rajaonarimampianina, the international community is slowly threading Madagascar back into its fold. Many donors, notably the IMF and World Bank, have announced that they are once again disbursing aid.Yet Madagascar’s suspension from AGOA persists. It may continue for sometime, as an annual review of AGOA eligibility typically takes place in December eachyear. Its return to AGOA membership will depend on Madagascar’s success with reinstating the rule of law and securing post-election national reconciliation, according topress reports quoting Samantha Power, America’s ambassador to the UN. She reassured Mr Rajaonarimampianina that readmission would be considered this year.If Madagascar is swiftly reinstated into AGOA, the Malagasy entrepreneurialspirit will be ready to pick up the pieces; and that persistent baby car seat vendor willat least have the choice to sell his goods in the aisles of Wal-Mart instead of wanderingthe streets of Antananarivo.Madagascar’s last five years teach a simultaneously uplifting and sobering lesson about the role of sub-Saharan African entrepreneurs in international markets. Onthe one hand, avid entrepreneurs and workers throughout the continent are eager andready to work hard, produce quality goods and lift their economies to high levels ofgrowth. On the other hand, a simple rule change in Washington can collapse an entireindustry a world away, devastating hundreds of thousands of entrepreneurs with justa signature.8 Africa in Fact Issue 23 June 2014 www.gga.org

Nigeria: banks and other barriers to businessHigh interest rates are strangling small businesses in Africa’s largest economyby Adeyeye JosephThe elation in Nigeria at the news, released last April, that the country hadovertaken South Africa as the continent’s largest economy, was largely confined togovernment circles.Many Nigerians have refused to get caught up in the excitement. Abiodun Ayinde, 69, who owns a small waste management company in Lagos, Nigeria’s largestcity and economic capital, is one.Mr Ayinde does not care about the rivalry between Nigeria and South Africa.Topmost in his mind is the quest that has given him sleepless nights in the last fiveyears: Mr Ayinde’s clientele is growing and his expanding business urgently requiresmore staff and one more mobile waste compactor.“Business is not doing badly at all,” he says. “But the problem I have is that I amunable to raise funds to further expand the business. I need to buy a compactor and Ialso want to employ more hands.”On paper, there are several funding options available to a Nigerian businessperson who wants to set up a new business or expand an existing one. The countryhas 21 commercial and two specialised government banks setCommercial banks’ lending rates for businessesup to fund large-scale industryprojects, as well as 871 microf-PrimeMaximum30%inance firms authorised to lendAccess Bank14%to small-scale businesses and en-Citibank Nigeria16%21%trepreneurs.Ecobank Nigeria15%33%Enterprise Bank Ltd25%29%easy for small companies to se-Fidelity Bank17%24%cure loans. Mr Ayinde’s effortsGuaranty Trust Bank7%25%to raise a 2m naira ( 12,500)Standard Chartered13%16%bank loan to buy a used wasteSterling Bank24%29%compactor and hire new staffUnited Bank for Africa24%24%have been unsuccessful. His is aUnity Bank24%32%typical story.Source: Central Bank of NigeriaBut in practice it is notMost Nigerian entrepreneurs and small-scale businessmen do not start companies by borrowing from a bank.Official numbers on bank borrowing are lacking, but from years of talking to small business owners, this writer has learned that most Nigerian entrepreneurs turn to banksonly when they need funds to expand an already successful business.Africa in Fact Issue 23 June 2014 www.gga.org 9

A matter of interestThis is because banks and microfinance institutions charge prohibitively highinterest rates and attach onerous requirements to loans.Funding challenges are spanners in the works of many small businesses in Nigeria, according to Femi Egbesola, the president of the Association of Small BusinessOwners of Nigeria, a trade group. “Most of the financial institutions are requesting forconditions that are difficult for small companies to meet, [especially] collateral,” he toldLeadership, a Nigerian daily, last April. “The banks charge about 27% interest rate peryear and everybody is complaining that it is on the high side.”Some Nigerians question why interest rates have remained high despite a recentfall in the country’s inflation. A bank “must be a commercially viable enterprise, butwhy must they charge 20%?” asked Ngozi Okonjo-Iweala, Nigeria’s finance minister.Inflation in the first eight months of 2013 diminished from 12% in January to 8.7%in August, she added, “meaning interest rates can also go down”. As of March 2014,Nigeria’s inflation rate was 7.8%, according to the national statistics bureau.Commercial banks borrow from the Central Bank of Nigeria (CBN), which offersmoney to banks at a rate called the monetary policy rate (MPR). The CBN considers thecountry’s prevalent inflation rate while setting the MPR. The idea is to help banks lendto businesses at non-prohibitive rates. Figures from www.cbrates.com, a website thatcompiles world interest rates, show that Nigeria’s interest rate is one of the highest ofAfrica’s large economies. Nigeria’s current MPR of 12% is higher than the prevailingrates of 3% in Morocco, 4.5% in Tunisia, 5.5% in South Africa, 8.25% in Egypt and9.25% in Angola.Source: www.cbrates.comTrade groups, such as the Lagos-based Manufacturers Association of Nigeria(MAN), have campaigned for lower rates for decades. The organisation’s 2013 reportclaimed that some Nigerian banks are charging borrowers as much as 35% on loans, arate so high that businesses cannot survive. “In the last ten years, interest rates chargedMAN members by banks have been at an average of 19.9% for most of the manufacturing sub-sectors,” according to the report.These high rates are just one facet of Nigeria’s crippling commercial environment. The World Bank’s 2014 “Ease of Doing Business” index places Nigeria at a lowly10 Africa in Fact Issue 23 June 2014 www.gga.org

A matter of interest147 of 183 countries.Many of the problems stem from Nigeria’s broken infrastructure. Entrepreneurshave to generate electricity from private generators, dig industrial boreholes to ensurea reliable water supply, and must also pay private security companies to secure premises and assets.*The US-based Omidyar Network, a philanthropic investment firm started byeBay founder Pierre Omidyar, released a study in 2013 on entrepreneurship in sixAfrican countries: Ethiopia, Ghana, Kenya, Nigeria, South Africa and Tanzania. Nigerian entrepreneurs lament that “inconsistent infrastructure electricity supply across thecountry has resulted in backup generators forming a key part of any business’s assets,albeit at a significant additional operational expense,” the report noted. “Nigerian respondents cited access to finance as a key challenge for starting and growing smallbusinesses. In particular, the requirements for obtaining capital are prohibitive.”Collateral of up to 120% is often required for debt financing, according to theinterviews with the Nigerian participants in the Omidyar study. Collateral is high because banks fear that borrowers may default. As a result, 67% of respondents believethat bank lending policies for newer companies are more challenging than for wellestablished firms.Bank executives, however, argue that high interest rates are forced on themby Nigeria’s challenging business environment. “I also want a lower rate,” said PhilipsOduoza, the managing director of one of Nigeria’s biggest lenders, the United Bank forAfrica (UBA), at a meeting with newspaper editors last January. “But when you look atit, you find that banks are an integral part of the economy. One of the reasons why [the]interest rate is very high in Nigeria is because of the infrastructure challenge,” he said.Banks, like other businesses in Nigeria, pay a high price for the country’s infrastructure deficiencies, he added. For example, UBA has to generate the electricity thatit uses at its headquarters and in its branches, Mr Oduoza explained. “UBA has aboutfour generators at its head office that run simultaneously. It’s a mini-power station.Diesel consumption alone is extremely high. This is one of the reasons [the] interest rateAfrica in Fact Issue 23 June 2014 www.gga.org 11

A matter of interestis very high.”The way forward, according to Mr Oduoza, is for government to fix Nigeria’sinfrastructure problems. “If you compare the financials of the Nigerian banks with thoseof other emerging and frontier markets, the cost-to-income ratio [a rough guide to howgood a bank is at reining in costs] of Nigerian banks is in the 60s,” he said. “Someextreme ones are in the 70s. In all the other emerging markets like Turkey, Malaysia,India, etc, their cost-to-income ratios are in the 40s. So if we are able to deal with allthese cost elements, I can tell you that the interest rate can come down to a single digit.”Sources: OECD; central banksNigeria’s suspended central bank chief, Lamido Sanusi, agrees that the businessenvironment and the country’s high interest rate are linked. Mr Sanusi, however, looksat the same problem from a different angle.“It is not about moving the interest rate down or up. Most of the small- andmedium-scale enterprises (SMEs) that do not have access to credit do not have accessto credit because the environment does not allow businesses to thrive,” Mr Sanusi saidduring a public session with federal legislators in July 2013.“How low do you have to bring down interest rates for banks to lend to amanufacturer that does not have power, or for a bank to lend to a company that operatesin an environment that does not have security, or where there is no infrastructure?” heasked. “At what rate of interest would a bank loan to a tomato farmer who is going tolose 50% of his output between the farm and the market because there is no investmentin storage facilities or cold rooms? These problems are infrastructure.”Is there any government plan to fix infrastructure in Nigeria? Yes, a grand plan:the Nigerian Infrastructure Master Plan, projected to cost 2.9 trillion and last 20 years.But many Nigerians, such as Mr Ayinde, are not hopeful that it will yield immediate benefits. The country’s infrastructure has fallen into disrepair, he complains,because successive governments rarely keep promises to overhaul the system.12 Africa in Fact Issue 23 June 2014 www.gga.org

Nigeria: Africa’s richest man bets on the continent’s prospectsPlaying politics has helped Aliko Dangote build his business empireby Simon AllisonAt age 57, Aliko Dangote is Africa’s richest man, and by quite some margin.Forbes estimates his net worth to be 20.8 billion; the wealth of his nearest competitor,South Africa’s Johann Rupert, is valued at 7.9 billion. Mr Dangote is known as a softly-spoken workaholic, with all the trappings of wealth, including the luxury yacht andthe private plane.But it is not the size of his fortune that matters. More important is how he madeit—not through resource extraction or milking state coffers, but by gambling repeatedly on the future of both Nigeria and Africa. The risk has paid off, spectacularly, makingMr Dangote a living embodiment of the “Africa rising” narrative, and his company oneof the key drivers of Africa’s economic development.It all started in 1977, when 21-year-old Mr Dangote—fresh from a business degree from Egypt’s Al-Azhar University—begged his uncle for a 500,000 Nigerian nairaloan (then worth about 325,000). Mr Dangote’s family were wealthy Muslims fromnorthern Nigeria. His father Mohammed was a prosperous commodities trader, but thereal money was made by his maternal grandfather,Alhaji Sanusi Dantata, whose groundnut empiremade him the wealthiest man in west Africa. MrDantata’s son, Abdulkadir, was the uncle who gaveMr Dangote his first start in business—and, beforehis death in 2012, was also one of the richest menin Nigeria.Mr Dangote could have gone into businesswith either his father or his uncle. Instead, he choseto strike out on his own, using the loan to start ageneral trading company, importing bulk commodities like sugar and rice. Business was good,but he soon discovered a gap in the market: whywas Nigeria importing sugar when it could be producing its own? Why was the country bringing WEF 1in expensive cement when it sits atop one of theworld’s largest lime deposits?Africa’s cement czarThe answers to these questions—conflict, corruption, incapacity, uncertainty—lie at the heart of Africa’s decades of stunted development. Mr Dangote, however, wasundeterred and resolved to move into manufacturing: first salt, then flour and sugarand then cement, which turned out to be the really big money-spinner.Africa in Fact Issue 23 June 2014 www.gga.org 13

Cementing Africa’s futureMr Dangote’s philosophy is known as “backward integration”. Backward integration is when a company acquires its own raw materials or component suppliers. InNigeria it means import substitution: it encourages Nigerians to make their own materials instead of using foreign supplies and equipment. This stimulates the economythrough more employment and investment, keeping Nigerian money in Nigeria.Thanks largely to Mr Dangote’s success in the cement sector, backwardintegration has become official government policy, included as a central plank ofPresident Goodluck Jonathan’s Nigeria Industrial Revolution Plan, which was introducedlast February.At the same time, Mr Dangote is politically astute: he has carefully navigated hisway through changing governments and regulations, emerging unscathed and withbigger profits, every time. His political connections proved crucial to the scale of his success, especially his relationship with former Nigerian President Olusegun Obasanjo. MrDangote funded Mr Obasanjo’s 1999 and 2003 election campaigns and Mr Obasanjoreturned the favour by introducing restrictions on imported cement in 2001, amongother items.“Dangote is counted among President Obasanjo’s inner circle of business advisors,” observed Brian Browne, former US consul-general in Lagos, in a 2007 diplomaticcable released by Wikileaks in 2010. “It is no coincidence that many products on Nigeria’s import prohibition lists are items in which Dangote has major interests.” Besidescement, sugar and rice receive protection from external competition—and the Dangotebusiness has significant interests in both.In fact, the Dangote Group has substantial shares in just about every majorsector of the Nigerian economy. It makes salt, sugar, rice, pasta, flour and fruit juices;it supplies steel, cement and packaging; it buys and sells property, and holds a 3Gtelecommunications licence; it manages ports; it operates a 5,000-truck-strong haulagefleet. If you can think of it, the Dangote Group is probably doing it, and making plentyof money in the process.Last year, the Dangote Group claimed that its annual turnover was in excessof 3 billion, or about 30% of the Nigerian stock exchange. It is, by some distance,Nigeria’s biggest company, and ambitious expansion plans mean that it is only goingto get bigger. “Dangote is going to go haywire now,” observed Lyal White, director ofthe Johannesburg-based Centre for Dynamic Markets, an economics think-tank. TheDangote Group has almost no debt, giving it the perfect foundation for the plannedexpansion, Mr White added.Another crucial factor in the Dangote Group’s success has been the steadygrowth of the Nigerian economy, which has expanded an average 7% every year forthe last decade. This growth is often dismissed as a resource bubble, fuelled by Nigeria’s vast oil reserves. But driving these impressive figures are other factors: increasedagricultural output, significant enlargement of the manufacturing sector (7.7% in 2013according to the World Bank) and booming retail and construction sectors. This growthhas benefited Mr Dangote’s businesses.14 Africa in Fact Issue 23 June 2014 www.gga.org

by Brian Klaas Madagascar's capital, Antananarivo, is teeming with entrepreneurs. The official market stalls are overcrowded and hand-painted rickety wooden stalls spill into the streets. Even in off-limits areas around government buildings, vendors still hawk their goods aggressively. On a recent trip, a man approached me while I was walking.