05 Sep 2012

Africa's powerhouses can reap many mutual benefits

Written by  Dawn Nagar and Mark Paterson

No. 224: Africa's powerhouses can reap many mutual benefits / Dawn Nagar and Mark Paterson / Business Day
5 September 2012

There are mutual benefits to be derived from a relationship that combines SA's capital with Nigeria's economy of 140-million consumers, argue Dawn Nagar and Mark Paterson

As Africa's two largest economies, Nigeria and SA could substantially enhance the continent's development prospects — particularly if they work together more closely. SA, with a gross domestic product (GDP) last year of about $368bn, is Africa's biggest economy, despite growth that is forecast to slow to less than 3% this year.

Meanwhile, the continent's most populous nation, oil-rich Nigeria, overtook Egypt last year to become Africa's second-biggest economy by GDP, recording $232bn. It has been envisaged that, with a growth rate of 7%, Nigeria could overtake SA by 2015.

Clearly, mutual benefits could accrue from a relationship that combines South African capital and know-how in creating business models for African marketplaces and within African institutional contexts, with access to Nigeria's burgeoning economy of 140-million consumers — the single largest market in Africa and three times the size of SA's. A recent policy seminar organised in Lagos by the Centre for Conflict Resolution, and involving key diplomats and business people from SA and Nigeria, sought to explore these benefits and to strengthen ties between both countries.

South African and Nigerian business people have recognised the synergies. Trade between the two countries has grown 10-fold since 1999 and they are each other's largest trading partners in Africa. The value of bilateral trade, which totalled only $16.5m in 1999, increased to more than $3.6bn by last year. Nigeria now represents a long-term destination for South African investments and is home to many of its recent business ventures. MTN led the way, posting greater profits from its West African operation than it did in SA within only four years of entering the Nigerian market in 1999.

Other notable South African businesses in Nigeria include Standard Bank; Rand Merchant Bank; Chicken Licken and Debonairs Pizza; SABMiller; and retailer Shoprite Checkers. Media house Avusa has opened Nu Metro cinemas and multimedia stores, and DVD and CD manufacturing plants. Multichoice has 700,000 Nigerian customers and has spent $100m developing local content.

Two airlines fly seven times a week between the two countries. Many South Africans now live in Nigeria, while an increasing number of Nigerians live in SA. In addition, further large-scale South African entries into the Nigerian market are planned. Retailers Massmart and Woolworths, insurance company Old Mutual, and beverage company Distell are looking to invest.

Notwithstanding the new partnerships, Nigerians have often accused South African companies of insensitivity in their bilateral economic relations. South African business people are sometimes described as "arrogant". The perception is that many South African businesses operate according to the belief that all of Africa beyond SA's borders is one homogenous entity amenable to the same business models.

Business schools in both countries can help to address this issue and the challenges posed by the need to adapt to a wide range of African commercial cultures.

In addition, South African companies have been learning from their mistakes. For example, MTN Nigeria made great efforts after it entered the Nigerian market in 2001 to adapt to new employment and cultural demands by recruiting talented Nigerians; training South Africans and Nigerians together; empowering black South African managers; providing cultural sensitivity training to staff; and ending apartheid-style practices in the workplace.

However, South African companies have been criticised on not only a cultural, but also a structural, basis. Their approach to business has often been characterised as predatory and mercantilist. Although the partnerships that are sought by SA's businesses with their Nigerian counterparts are regarded as less tokenistic and more genuine than in the past, they still often take the form of joint-venture acquisitions or controlling equity ownership rather than investment for growth.

Critics have also charged that South African investors often approach Nigeria as a destination for products rather than as an opportunity to invest to add value along the manufacturing chain. In defence of the value of SA's economic contribution, the direct employment benefits of its investments continue to outweigh those brought by Nigeria's main contribution to the South African economy, which is oil. The oil trade accounts for more than 95% of Nigerian exports to SA, and this may rise as the US-led embargo on Iranian oil bites.

Other benefits brought by South African companies to Nigeria include their introduction of new business models that benefit all consumers — such as prepaid telephone airtime in the 1990s and, more recently, innovative and highly successful online-and cellphone-based services that have brought banking to the previously unbanked. Nigerian companies could learn important lessons from such South African ways of doing business that can often straddle the formal and informal economies.

Of course, the success stories have not occurred in isolation. The co-operation of the Nigerian and South African governments has proved vital to the welfare of larger-scale business ventures — MTN Nigeria has acknowledged the debt it owes to the government in Abuja for its success in Nigeria.

In turn, big private-sector companies and parastatals can provide the important developmental benefits that governments often seek. SA has the ability to provide technical competence and finance that are needed to develop Nigeria's transport, power, iron and steel, agriculture, and information and communication technologies sectors.

South African businesses could usefully explore the opportunities that can flow from joining one of Nigeria's 20 free-trade zones, or even establish a new one, in order to ease access to the country's high-growth economy, and service its major infrastructural deficit on favourable terms. Given the context of high tariff and nontariff barriers that can inhibit intra-African trade — estimated at less than 10% of the continent's total imports and exports — the idea of a Nigeria-SA free-trade area, which was proposed by the Nigeria-SA Bi-National Commission in March 2002, could be worth reviving.

However, the investment opportunities that may flow from Nigeria's infrastructural deficit are inhibited by the relatively poor institutional governance ratings that, to a large extent, helped to create the deficit in the first place.

The bigger picture is that, in spite of its relatively impressive growth rates over the past decade, Africa still only accounts for 3% of global trade. About 70% of Nigerians live on less than a dollar a day, despite the $400bn in oil revenues that have been generated in the past 50 years. SA remains the most unequal society in the world.

Strong trade and economic growth can only be realised alongside African leadership that is committed to tackling corruption and building state capacity to provide proper education opportunities, safeguard national health, tackle unemployment and pursue inclusive economic policies that raise people out of poverty. The governments in Nigeria and SA, as much as their business sectors, need to play their part to help to realise the full benefits of Africa's potentially most strategic bilateral relationship.

Nagar is a researcher and Paterson a senior project officer at the Centre for Conflict Resolution.

Seminar report from Lagos meeting »

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