How Gov't policies frustrate businesses in Africa: Dangote Cement’s experience in Tanzania

A recent squabble over energy supply between Dangote Cement, Mtwara and Tanzanian officials is a case of how change in government stifles Africa’s economic development. The former administration, towards attracting foreign investments, offered incentives to investors which Dangote Group took advantage of to invest $600 million in a new cement plant in Mtwara, southern Tanzania.

The Nigerian company had claimed the government was reneging on promises made by the previous administration of President Jakaya Kikwete, who left office thirteen months ago.

Background

According to African Quartz, the cement plant was launched last year and had been flourishing until John Magufuli became president. In the last 12 months, new regulatory challenges undermined operations to such a degree that the company suspended production last month. It caused an uproar in Tanzania. President Magufuli had to get directly involved and eventually struck a last-minute deal with Dangote to keep the factory in the country and save thousands of jobs that were at risk if it had closed.

The dispute, instead, had likely troubling implications for watching investors who might have been thinking of coming to Tanzania or deepening existing investments there. Analysts say it has already noticeably hurt the country’s reputation as an investment destination. They think it looks like east Africa’s second largest economy is not only a difficult environment for the private sector, but that the new administration is hostile to business.

“In the long-run, the fact that we got to this point, paints an unfavorable and unpredictable outlook for investors looking at the Tanzanian market,” says Ahmed Salim, an analyst at Teneo Intelligence.

In May, the American energy company Symbion threatened to sue the Tanzanian government for breach of contract, after the state-owned electricity supplier abruptly terminated an agreement with the firm.

A month later, the finance minister introduced a bill that President Magufuli later signed, compelling mobile phone companies to list 25% of their businesses on the Dar es Salaam Stock Exchange (DSE), despite concerns that the market was not mature enough to meet the liquidity demands of such an offering.

Last month, investors threatened to withdraw their investments from the country citing a strict new tax regime.

Currently, there is a power struggle in government between the Tanzania Investment Centre (TIC), an agency tasked with incentivizing the private sector, and the Revenue Authority which is ramping up revenue collection and winning.

“If you’re told one day, out of the blue, that you’re no longer exempt from VAT, not only does it throw a spanner in your current business, it also affects your confidence about your future investment decisions,” Anna Rabin, a senior analyst at consulting firm africapractice, said.

Business in Tanzania

As it is, Tanzania currently ranks 132 out of 190 when it comes to ease of doing business. Its obsession with raising revenue at the expense of business environment will not improve this position, analysts say.

As a former socialist state, where deep suspicion of private enterprise still lingers, Tanzania worked hard in the last decade to attract investors, such as Dangote, to come do business in east Africa’s second largest economy. But there are now fears that the work done to open things up will be set back.

The Kikwete years saw the reality of a difficult business environment mitigated by government support and incentives to the private sector. This is no longer the case with President Magufuli, analysts say. While the tough investment climate remains, those incentives have now disappeared.

“Investors feel that the want for upfront revenue collection is to the detriment of the potential to secure future investments,” Rabin said.

By over-taxing business, the government risks suffocating the economy, starving it of liquidity, with dire implications for jobs and future revenues for the country.

The Dangote situation is a case in point. If the government continued to push the plant to pay more taxes without any incentives and the plant had shut down, the consequences would have been dire. Since the company halted production, the price of cement has gone up, increasing costs in the construction sector. If operations failed to resume, close to 10,000 jobs would’ve been affected, according to some estimates.

President Magufuli, nicknamed “the Bulldozer”, has garnered pan-African praise (paywall) for clamping down on corruption and holding the private sector accountable. But in taking on Dangote, a rare homegrown African multinational, which creates thousands of jobs wherever it goes, the Magufuli administration may have shot itself in the foot.

The Dangote deal

The Dangote plant validated former president Kikwete’s use of incentives?such as tax breaks and cheap energy costs,?to attract high level investment to the country. This tactic had made Tanzania one of the most attractive destinations for foreign direct investment in East Africa.

Fault-lines between the company and the government began to appear soon after the Magufuli administration was ushered in, in November 2015. The Kikwete government’s promise of low-cost gas to power the plant did not materialize. This was a blow to Dangote, which had placed its operations in Mtwara, specifically, to access cheap natural gas mined in the region.

“Before President Kikwete left office, the gas issue hadn’t been resolved but there were promises made that Dangote would get gas at a cheaper price,” a person familiar with the company’s business in Tanzania said.

As a result, Dangote decided to import coal from South Africa to fuel the plant. But President Magufuli’s government demanded import duty on the coal, and eventually banned coal imports, forcing the company to use more expensive, low quality local coal.

Yet, the ministry was unbowed. “We don’t want to hear that the price of imported coal from South Africa is cheaper than the price of coal from Mchuchuma to Mtwara,” Medard Kalemani, deputy minister for energy and minerals, said.

This forced Dangote to rely on generators which sent operational costs soaring to $2.5 million a month since August, the source told Quartz.

This was the last straw for Dangote, making the plant stop operations in November for what the CEO said were technical issues.

President Magufuli’s personal intervention has created some optimism that it may signal a new phase in the government’s engagement with investors and the private sector in general.

The lesson

The president cannot interfere with every business negotiation. Reforms are needed to create conditions that are both favorable to the private sector and Tanzanians as a whole.

“Instead of fixing the laws, people are trying to run a new, modern economy with outdated, flawed laws,” the person familiar with Dangote’s Tanzanian business said. Things will only improve if President Magufuli demonstrates the political will to partner investors such as Dangote to grow the economy.

With the continuous reforms and the need for massive private investments to grow Africa’s economy, deliberate efforts ought to be made in engaging with a wide range of private sector representatives.

Dangote Tanzania’s story offers an invaluable lesson for Ghana and other African governments who need such investments to grow their economies and create jobs for the large number of unemployed youth.