I write to you as someone with a lot of frustrations about the way Nigeria works (or doesnt) for the vast majority of its citizens. I tend to concern myself mostly with economic matters as I believe that economic freedom comes pre-loaded with many other benefits for a country and its people.
First the Facts
I have spent a lot of time lately looking at the model we have chosen for our industrial development using Dangote Cement as a lightning rod. The more one looks at the numbers and the reality of the situation, the more disturbing it is.
I have put together a comparison of Dangote Cement’s profits and the world’s largest cement manufacturers spanning Asia, Latin America, North America and Europe. You can find it here on iCloud or Google Docs. The numbers, without mincing words, are frightening. A Nigerian government policy is aggressively picking the pockets of its citizens by forcefully reducing choice in the market. This has inevitably led to us having the highest cement prices in the world.
The Chinese are the most efficient cement manufacturers in the world; their profits after tax as a percentage of their revenues comes to less than 18%. Globally the average profit ratio is around 6% (brought down by lower margins in Europe). Dangote Cement has a 52% profit ratio, 3 times the most efficient manufacturers in the world. If Dangote Cement were to sell the same amount of cement as the world’s biggest manufacturer, at the current rate, it would make more profits than the top 4 makers in the world, combined.
Whereas people in Vietnam can buy cement at $67/tonne, Nigerians are condemned to paying$640/tonne for the same product. The argument that the cost of doing business in Nigeria makes things more expensive does not square with the fantastic profits that Dangote Cement is making. Both – high profits and high business costs – cannot be true at the same time.
It feels as if Nigerians are being punished for a crime that remains unclear. It gets worse – only 5% of Dangote Cement is owned by Nigerians so the level of participation in these fantastic profits are extremely limited. If and when a further 20 – 25% of the company is floated on the London Stock Exchange, and this forceful extraction of profits from Nigerians continues, we may well end up with a perverse situation where poor Nigerians will be enriching pensioners in the rich world via their pension funds who will undoubtedly invest in the company.
In taking out $1.2bn in profits from the Nigerian economy in 2013, Dangote Cement put back $43m into the economy via wages and salaries to its employees. Most painfully of all, it paid nothing in taxes in the last year (or the year before) due to the various government incentives it continues to benefit from as a ‘pioneer’ company. Without these incentives, it would have contributed somewhere in the region of N70bn to the Inland Revenue as taxes. My workings I linked to earlier show this starkly – the company which sells the least amount of cement, makes the most profits and pays no taxes. All of this sits beside your stated objective to boost tax revenues as a percentage of our newly rebased GDP. Will you go after ordinary Nigerians and small businesses while leaving these huge gaps in your fiscal policy?
It is one thing to allow a loss making company get a breather from the tax man while it finds its feet, it is quite another to waive taxes while a private company rakes in the profits.
How Did We Get Here?
Whatever it is this cement policy was designed to achieve, it is hard to believe it was designed to impoverish Nigerians in this way. The reality has so far deviated from the intention that it will be difficult for you to justify keeping the status quo.
How do we square having the highest cement prices in the world with having a housing deficit of 17 million homes? This cement policy will undermine whatever you do elsewhere, especially the recently launched NMRC. It goes without saying that cement is a vital input with its real benefits in what it is used to achieve. If Dangote Cement employs 20,000 workers, then we can be certain that cheaper cement will create this number of jobs in housebuilding alone in a matter of days. By making cement the beneficiary of such lavish treatment, you are essentially driving the economy with the handbrake on.
I know people who are building their own homes at the moment and it is a painful stop-start affair because of the sky-high costs involved. While cement is not the only obstacle to building your own home (land use laws also lie in wait), is there any reason why government should so blatantly be adding to the problems in this way?
Policy Change – Catherine The Great’s Example
Often times, policy makers openly commit themselves to a policy in a way that makes a u-turn politically expensive even when the results of that policy clearly show it to be counter productive. This is made worse when the policies are ‘popular’ when first proposed. Not many would have argued with a policy that encouraged local production of cement with all the benefits that come with it, at the time it was proposed.
But when we find ourselves in a situation where we are producing cement for cement’s sake, what to do?
I am reminded of a story about Catherine The Great when she ruled Russia in the 18th Century. Early in her reign, Catherine had strongly and publicly supported the banning of Jews from being allowed to immigrate into Russia and confining them to what was then known as the ‘Pale of Settlement‘. Given how Jews have always been discriminated against, this was undoubtedly a popular policy position at the time. Not only were they considered as weirdos (on account of their religion which non-Jews didn’t understand), they were also middlemen minorities with a habit of rising above any discrimination to gain a stronghold on the local economy.
Alas, as time went on, the cost of this policy became evident because Jews played an important commercial role in the places they had been banned from. Even people who hated them had been happy to do business with them. At a time when technology was not this available, people were the most important asset in an economy.
Catherine was then faced with the dilemma of having to reverse a counter productive policy while continuing to appear as a strong, decisive and popular leader. So she came up with a plan communicated in a famous letter she sent by courier to George Browne, the Governor General of the Province of Riga at the time:
That was not all. Being bilingual, she added the following words, in German, at the end of her letter:
If you don’t understand me, it will not be my fault. The President of the Guardianship Chancellery wrote this letter himself, keep this all secret.
In summary – Catherine The Great banned Jews from Russia. Catherine The Great also created a loophole that allowed her to break the very law she had passed and continued to ‘support’ in public, going as far as writing in German just in case the letter somehow leaked to the public.
Just as she cleverly avoided mentioning the word ‘Jew’ in her letter (she used ‘some merchant people’ instead) so did her immigration officials ‘scrupulously avoid any reference to Jewishness or Judaism’ when handing out passports.
Long before Bill Clinton came up with Don’t Ask Don’t Tell (another policy workaround) as a way of allowing gays to serve in the American military, Catherine The Great had done it.
I share this story to illustrate a simple point – policy makers are never short of options no matter how difficult the situation is and no matter how ‘publicly’ committed they are to the status quo. Indeed Deng Xiaoping famously moved China away from Communism to a market economy by cleverly declaring that – “it doesnt matter whether a cat is black or white, as long as it catches mice“.
Whatever you do, this policy of restricting imports while handing Nigerians over to Dangote Cement (and Lafarge) to be stripped of their little wealth cannot be allowed to continue. Yes, it is a key part of our Industrial Revolution Plan and the government is clearly proud of what Dangote Cement has achieved. But enough is enough.
A Simple Recommendation
So how can the government eat this policy cake and continue to have it? You will undoubtedly have your own ideas if you wish to change course or ‘adjust’ the policy.
But my concern here is for the average Nigerian to ensure that our cement prices trend towards the global average. Even halving prices will do wonders for construction and create the jobs we desperately need. Here they are in a few simple steps:
1. Resist the temptation to award licences for anyone to import cement. This will merely transfer wealth from one set of people to another at the expense of Nigerians. Given that cement is an input, the goal is to get the commodity into the hands of Nigerians as directly as possible. Whatever is built with the cement will remain in Nigeria, it cannot be taken out of the country.
2. You set some rules or standards on the exact type of cement we want in the country to boost housebuilding. For example, we can say we want only 32.5 and 42.5 grade given that these are the ones used to build residential homes. Thus the policy change will allow Portland Type xxx Cement in Grades 32.5 and 42.5 into the country. You can also restrict the brands allowed to, say, the top 15 – 20 manufacturers in the world.
3. You do not have to set a volume of imports. Instead have a target price in mind. Given that prices are currently $640/tonne, we should realistically be aiming for at least $200/tonne (N640 per 50kg bag). This will still be very expensive compared to other parts of the world but it will be major boost to our economy in terms of jobs. The NBS has shown itself to be capable of price monitoring in the last few years. You can enlist them to do this job.
4. There are several ways to do this next step but here’s my idea. A shipping container carries roughly 3 tonnes of cargo. Set this as the minimum or ‘unit’. Now, anybody who wants to buy cement will simply go on a website (you will set this up pretty easily) and apply for a minimum of 1 unit and a maximum of 2 units i.e. 3 to 6 tonnes. The ‘anybody’ in this case is very important because you have to ensure the benefits, as much as possible, accrue to those who want to use the cement to build houses as opposed to middlemen. In fact, you can exclude extant manufacturers from this explicitly, with the threat of sanctions if they try to game the system.
5. You can either review each application individually or simply use a lottery system to determine who gets the ‘permit’ (I truly hate this word but I don’t have any other one to use). One application per person in a year, multiple applications not allowed etc. People can be encouraged to club their orders together to make up the minimum amount.
6. Once an application has been approved, the person can then be issued a ‘permit’ allowing them to import their allocation within a 3 month time period after which it will lapse if not used. You can ask for information on what brand they are planning to import as well as what country they are importing from beforehand. When prices hit the level you desire, you simply stop handing out the ‘permits’. If they start to rise again, you hand out some more. Ultimately, you will have the whip hand in the market.
It isn’t more complicated than what I have written above, at least to my mind. The whole point is to force down prices so we can create jobs and disperse the benefits as widely as possible. I stress the point – forcing down prices in this manner does NOT mean that Dangote Cement will lose its investments in the Nigerian market. The huge profits it is currently making suggest there is plenty of room for price cutting. It will simply make fewer profits not none at all.
You say you want inclusive growth? You say you want to reduce poverty? You say you want to reduce the cost of building a 3 bed house in Nigeria from $50,000 to the $26,000 it costs in India?
Well, this cement policy is directly standing in the way of these things that you want to achieve. There are many other self-inflicted policy wounds throttling the economy. But beat this one – the Big Kahuna as the Americans say – and the rest looks easy.
Your move, Honourable Ministers.