Multinationals, franchise fees and other ‘irritants’

Dangote Group has recently inaugurated a massive cement plant in Tanzania. Entailing an investment of USD600 million, the 3-million-metric-tonne-per-annum capacity cement plant is reputed to be the largest in all of East and Central Africa. Registered in Tanzania as Dangote Industries, the plant will primarily serve the domestic market.

Tanzania’s annual GDP growth of about 7 percent has impacted considerably on its real estate sector and this is reflected in strong demand for cement. It is that need, among others, that Dangote Industries will help to meet in Tanzania, supplying the life-blood of the real estate resurgence in the country, cement. In so doing, Dangote will be providing a livelihood for tens of thousands of Tanzanians both directly as employees and indirectly as trade distributors, resellers and sundry other partners. It will also provide considerable taxation and other revenue to government. Even though its origin is Nigeria, Dangote will be oiling the wheels of economic growth and development of Tanzania.

Tanzania is just one of several destinations across Africa outside Nigeria where Dangote has since established a presence. Currently, it has major manufacturing concerns in such countries as South Africa, Cameroon, Senegal, Ghana, Liberia, Cote d’Ivoire, Ethiopia, and even Nepal in Asia.

The multinational corporation, to a large extent, epitomizes the nexus between risk, profit and opportunity in a capitalist world. Having reasoned that a certain country somewhere might portend an opportunity, it does the requisite diligence and where it determines that the odds are reasonably in its favour, proceeds to commit resources – capital, manpower, time – towards investing in such a country. It invests in the country in the expectation of reward, namely, profit. This is a legitimate expectation and indeed across the world, many countries offer incentives to willing investors. They appreciate that even though there is a profit motive, and that a multinational will expect to make good returns on the risk and investment it has undertaken, the multinational corporation plays a catalytic and empowering role in the economy.

The concept of economic growth driver becomes even more empirically valid, for instance, when one examines recent media reports that indicate that MTN, which is primarily a provider of cellular telecommunication services, has become Nigeria’s biggest distributor of music. While this is no doubt a big plus for the liberalization and efficient regulation of the telecom industry, it speaks to the sundry economic spin-offs that the South Africa-headquartered MTN continues to unleash in Nigeria.

Indeed over the years, Nigerian leaders have, at every auspicious opportunity, stridently canvassed for more foreign investment in the country, including the establishment of subsidiaries of multinational corporations on our soil. Ironically, it would seem that once these multinational corporations have confronted the risks that one must face in investing in Nigeria and thereafter made the requisite investment, the country appears to seek every means by which to deprive them, as much as possible, of the profits that are the legitimate reward for investment.

One widespread approach is spurious and multiple taxation, where different levels of government – federal, state and local – seek the payment of the same taxes from a single multinational corporation. One example is Right of Way, which is supposed to be under the purview of the Federal Government but which state governments and even the occasional local government have been known to demand payment for. In a most notorious situation, the Federal Inland Waterways Authority has demanded Right of Way payment to the tune of hundreds of millions of naira from telecommunication companies for laying fibre optic cables on bridges on federal highways. Next time you visit many states in Nigeria, do not be surprised to hear of such taxes as “pest/vector control”, “fumigation tax” and sundry other spurious taxes and levies that specifically target multinational corporations in the short-term quest for revenues by government at different levels.

The recent case of Stanbic IBTC Bank is yet another manifestation of short-term thinking on the part of government functionaries charged with making and implementing policy. Sequel to the banking consolidation process of yesteryears, what used to be IBTC, Chartered Bank and Regent Bank had merged to form a new entity, IBTC Chartered. Thereafter, a bigger multinational bank, South Africa-headquartered Standard Bank, came calling. It apparently offered the then local bank the advantage of an opportunity to play in the big league, with access to a bigger chunk of international capital. Then it backed this up with capital injection. News reports at the time indicated that Standard Bank may have injected more than USD500m into the country in the process of acquiring majority shareholding in the firm which now came to be known as Stanbic IBTC.

Accordingly, the erstwhile local bank assumes a new identity and gradually consolidates its presence locally. In addition, using its expanded international connections, courtesy of its new multinational status, it taps into sundry big-dollar deals in different sectors of the economy. It also begins to play big in the retail banking space, among others.   

Then the moment of reckoning comes. It needs to pay “franchise fees” to its parent company for the use of the collective resources, both tangible and intangible, of the entire multinational organization. Lo and behold, government functionaries in Nigeria say it cannot do that. What right does it have to pay foreigners for a service, banking, that Nigerians can provide? our enraged government functionaries ask.

The shocking turn of events again brings to the fore the question of whether key functionaries in government, including those who bear responsibility to draw up and implement key economic policies, are in tune with the overall big picture and purpose of government. Franchise fees are standard practice among multinationals. There is no doubt that Dangote Industries in Tanzania will have to remit franchise fees or management fees to the Dangote Group back home in Nigeria, in due course. I would be ashamed on Tanzania’s behalf if in a few years’ time I read news reports of altercations between Tanzania’s government functionaries and Dangote Industries, Tanzania, on account of unwillingness by Tanzania to allow the local subsidiary pay its parent the requisite franchise fees. This would sign-post short-term thinking and a poor understanding by Tanzania’s government operatives of the dynamics of economic growth and development. For, franchise fees will obviously pale to insignificance when compared with the economic multiplier which Dangote Industries is stimulating in Tanzania.

In an increasingly connected world, organizations are realizing that to play in the big league, it is imperative to go beyond the home front and explore the international space. There is an urgent imperative for government operatives to look beyond the short term and instead employ a more holistic approach in their assessment of relationships between multinationals and their local subsidiaries. Extracting long-term value, ensuring that the relationships impact optimally on the economic value chain should be the ultimate objective of government.

Government functionaries, therefore, need to better understand and appreciate the profit imperative, especially as it pertains to widespread economic growth and development. Doing this should mean that a lot of the artificial roadblocks that are put in the way of multinational corporations operating in Nigeria will be dismantled.

Benson Ajibola