How a Billionaire Changed Corrupt Government: Dangote vs. Mugabe

Did a Nigerian CEO single-handedly wipe out source of Zimbabwean ‘indigenisation’ corruption?

The Zimbabwean economy has been struggling hard under the regime of President Robert Mugabe for years, having contracted as much as 40-50% and suffering from galloping inflation rates of over 79 billion % (so-called hyper-inflation, which is exceedingly rare today).  This has, in turn, led to tremendous human suffering, including famine, a significant exodus from the country, a decline in life expectancy, etc.

One of the oft-cited culprits hindering foreign direct investment (FDI) into Zimbabwe has been the official policy of “indigenisation.”  Andreas Stargard, an advisor on African competition and fraud issues and a Primerio director, comments:

“After the 1979 Lancaster House Agreement set in motion the ultimate Land Reforms and other measures that would allow the new majority rule to eradicate the remnants of the British Empire’s colonisation of the former Rhodesia, the Zanu-PF policy of requiring all FDI to cede 51% or more of the investment’s equity interest to native Zimbabweans, foreign interest in the country has dropped significantly.  The indigenisation policy has sent investors running — well above and beyond their already extant currency worries and the spectre of government-sanctioned expropriation.”

Indigenisation and its effects

The indigenisation rule applies to “any person who before the 18th of April 1980 was disadvantaged by unfair discrimination on the grounds of his or her race, and any descendant of such person.”  This law, the so-called ‘Indigenisation and Economic Empowerment Bill of 2008‘ (IEEB), has not only hindered DFI, but also led to an exacerbation of corruption within the Zimbabwean business and government circles, as it acting as the Zimbabwean majority front-man has become a lucrative calling for otherwise unqualified government officials or their family members.

The Economist has noted, just prior to the 2008 enactment of the Zimbabwean law, that the vagueness of its provisions could be a harbinger of confusion (and, correspondingly, corruption):

Zimbabwe’s bill contains a lot of ambiguity, and gives a lot of loosely-defined discretion to the government. It is unclear whether the transfer would apply only to future mergers, demergers, restructurings and transfers, or to all existing companies. Moreover, the minister for indigenisation and empowerment would have to approve all ownership transfers and would have the power to impose alternative local partners if he disapproves of those involved in the proposed transactions. He would also have the authority to exempt selected companies from the ownership requirements for a certain period.

Dangote to the rescue

The man who has now called into question — and apparently successfully so — the Zimbabwean indigenisation rules is none other than one of  Africa’s foremost Black billionaire businessmen, Aliko Dangote.  He is the CEO of his eponymous company, Dangote Group, which has expanded from being once a mere concrete business to an conglomerate empire of significant proportions and well over $3 billion in annual revenues — enough to make Mr. Mugabe’s ministers now consider reforming (if only silently and unwillingly) the existing policy’s hurdles to FDI.

Although the Zimbabwean Vice President, Mr. Emmerson Mnangagwa, has denied any connection with the suddenly ongoing reforms to indigenisation rules and the Dangote Group’s recent promise to invest up to $400 million of sorely-needed hard, foreign currency into government coffers and domestic commercial banks, this seems to have been precisely the case, in AAF’s view.  Bloomberg has reported that not only Dangote, but also the (decidedly non-Black, despite its name) BlackRhino private-equity infrastructure fund, which is a Blackstone subsidiary, would consider concomitant investing into Zimbabwean power generation.  Other media outlets likewise reported the dramatic change in demeanour over the past two weeks, since Mr. Dangote’s initial visit to the country and his subsequent threat to withdraw his investment promise, if needed reforms were not undertaken swiftly:

When Nigerian billionaire Aliko Dangote arrived in Zimbabwe last month, the red carpet was rolled out for Africa’s richest man.

He was showered with exclusive hospitality and access to ruling elites, including meetings with the two Vice Presidents Emmerson Mnangagwa and Phelekezela Mphoko before seeing President Robert Mugabe.

Since then, after Mr. Dangote strategically “forgot” to mention Zimbabwe as one of his target countries, thereby prompting deservedly worried Zanu-PF reactions, the ruling party has apparently gotten the memo from the mega-CEO: it recently released an official Presidential memorandum announcing reforms to “improve the easy of doing business” in Zimbabwe.  Says Stargard:

“See, under the existing IEEB rules, it’s not enough to be Black in Zim by the Zanu-PF’s standards for doing business — one must also be Zimbabwean by birth (or at least as of the country’s independence day in 1980).  So Mr. Dangote does not qualify for preferential treatment, and therefore would have to cede over half of his local investment value to domestic ‘business interests,’ AKA a vast array of potentially corrupt shell entities or individuals waiting to benefit from the Dangote/BlackRhino investment slush fund.”

A local Harare attorney, Obert Gutu (Twitter), told a Financial Gazette reporter that in his view, the ambiguities and resulting counter-productive effects outweighed the upsides of the law: “The contradictory statements that are being made by different ZANU-PF cabinet ministers are symptomatic of policy incoherence and institutionalised confusion.”

Mr. Dangote would seem to agree with Mr. Gutu’s views, expressed more than a year ago in the Gazette’s aptly titled article “Indigenisation Act Continues To Create Confusion“:

“It is a populist indigenisation policy that is benchmarked on emotive utterances that do not resonate with the reality that is presently obtaining within the global macro-economic architecture.  For as long as the ZANU-PF government trumpets this populist indigenisation policy, Zimbabwe will not attract any meaningful foreign direct investment. Our national economy will remain fragmented, perilous and fragile.”

We conclude by (1) hoping that Mr. Dangote’s influence (or at least that of his U.S. dollar-denominated chequebook) bears fruit and stamps out a good part of the extant corruption in Zimbabwean politics; and we (2) note that Zimbabwean indigenisation stands not alone in Africa — other countries, notably South Africa with its Black Economic Empowerment rules in effect since the early 2000s, have similar (although perhaps less draconian) measures in place to level the playing field in the former European colonies.  The Zanu-PF version of Black economic empowerment is, however, apparently too counter-productive even for Africa’s most influential Black businessman, as we are now beginning to learn…

To be continued

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Buhari to the rescue: Tackling corruption in Africa’s largest economy

“The wind of change is blowing through this continent…”

Perhaps reminiscent of the “Winds of Change” (the speech delivered in 1960 by British Prime Minister Harold Macmillan to the Parliament of South Africa in Cape Town), the recent address given by new Nigerian President Muhammadu Buhari at the United Nations represents a political milestone in seeking to eradicate corruption in Africa.

The omnipresent malaise of corruption: Buhari to the rescue?

Were $150 billion ‘stolen’ under aegis of President Jonathan?  Having previously attacked his predecessor’s regime from 2010-15, claiming it embezzled this staggering amount from the Nigerian state coffers and the private sector, Buhari already had made his anti-corruption stance a key component of his campaign against Jonathan.  For instance, back in 2011, he “urged President Jonathan to focus on tackling corruption in government instead of removing fuel subsidies.”

During his 2014 campaign, he lamented in his so-called “2015 Manifesto” that “[a]s a nation, we are paralyzed by … endemic institutionalised corruption,” speaks of “hyper-corruption,” and proposes as its solution that: “I, Muhammadu Buhari have now come to the rescue. This is success by design. It will overcome our failure by design matrix.”  Moreover, his 4th campaign promise has been to “Prevent the abuse and misuse of Executive, Legislative and Public offices, through greater accountability, transparency, strict, and implementable anti-corruption laws, through strengthening and sanitising the EFCC and ICPC as independent entities.”

More recently, the President had a slightly more sober message to deliver to the General Assembly in New York City, yet still zeroing in on the same target, namely corruption:

“Let me reaffirm the Nigerian government’s unwavering commitment to fight corruption and illicit financial flows. By any consideration, corruption and cross-border financial crimes are impediments to development, economic growth, and the realisation of the well-being of citizens across the globe.

“Nigeria is ready and willing to partner with international agencies and individual countries on a bilateral basis to confront crimes and corruption.”

Winds of Change?

Buhari took office only in June 2015, but is far from new to politics in Africa’s largest economy — he was Nigeria’s military ruler in the 1980s, was a former Minister for the key portfolio of Petroleum & Natural Resources, and has concomitantly extensive political and strategic leadership experience under his belt.  For him to have chosen the fight against corruption in Nigeria as a key topic in his U.N. speech foreshadows a major initiative, we believe.

Pr1merio co-founding partner, Andreas Stargard, likewise perceives President Buhari’s message to be an important one, especially for international businesses with Nigerian ties:

“Several African, and in particular West African, countries have historically been seen as far too lax on effectively countering corruption and bribery.  This can often have one of two results for international businesses, neither of which is good for the affected African economies, coincidentally: (1) either the foreign corporation weighs the risks and chooses to avoid Africa for fear of involvement in bribery and resulting liability risk, or (2) it actually decides to participate in the corrupt conduct and seeks to benefit from it, paying scant attention to local anti-corruption legislation, and risking FCPA-like prosecutions in its home country.”

Whether or not Buhari’s pronouncements in international diplomacy will have an actual and measurable impact in the short or even medium term remains to be seen.  Bayo Adaralegbe, also a Primerio advisor, agrees that President Buhari’s speech at the U.N. does heralds potential key turn-around point in West-African anti-corruption efforts.  Adaralegbe notes that, unlike his predecessor Goodluck Jonathan, President Buhari is intent on fulfilling his election promises.  Buhari added in his address to the United Nations that:

“In particular, I call upon the global community to urgently redouble efforts towards strengthening the mechanisms for dismantling safe havens for proceeds of corruption and ensuring the return of stolen funds and assets to their countries of origin.”

As recently reported by AAF (e.g., “Just a math issue”: Anti-Corruption Efforts in Kenya take Center-Stage for Obama), many recent African administrations have attempted to bolster — or at least undertake public-relations efforts on behalf of — their enforcement efforts, particularly in recovering funds stolen by previous administrations.  Buhari’s statements are not different in this regard.  

It is of course difficult to gauge whether the messages above will result in substantial enforcement action.  That said, for many doing business in the region it is noteworthy that the message in fact comes from the top, i.e. the sitting President of Africa’s single-largest economy…

“Apartheid stole the past, corruption steals our future” – South Africa protests graft

Wake-up call for Zuma government?  Unlikely as ANC battles crises on many fronts

On September 30, 2015, several major South African cities saw a significant turnout of the Republic’s denizens taking to the streets, protesting rampant perceived corruption in their country: demonstrations took place, inter alia, in Pretoria, Cape Town, Polokwane, and Durban.  They numbered in the tens of thousands, signifying for the first time in years a substantive expression of unhappiness with the ruling African National Congress‘s politics and handling of graft.

Of note here is not merely the protest against problems of purely domestic or otherwise internal corruption (case in point, President Zuma’s infamous $22m+ renovation of his personal Nkandla country homestead), but the broader picture of governmental fraud, waste and abuse — notably including those involving foreign entities.

As The Economist poignantly observed in its current edition, “[t]housands marched in South Africa against corruption. The protest coincidentally took place soon after Hitachi, a Japanese engineering firm, agreed to pay $19m to settle charges brought by American regulators over payments made to the African National Congress, South Africa’s ruling party, in connection with contracts to build power stations.

The Hitachi investigation, spearheaded by the U.S. Securities and Exchange Commission (not the Department of Justice in this instance), is a fascinating one, and hits South Africans in a particularly hurtful spot: electricity has been scarce for years, and its availability has reached a new nadir in 2015.  For this particular industry to be affected by proven corruption is (if that is possible) “worse” for South Africans than the run-of-the-mill scandal: virtually every citizen has experienced dark nights, marred by rolling black-outs, which have necessitated the need for expensive household generators.

A “success fee” to the “Chancellor”…

The SEC’s settlement and complaint (read here) allege truly scandalous, yet entirely classic, corrupt conduct.  They read, in relevant part:

In 2005, Hitachi created a subsidiary in South Africa for the purpose of establishing a local presence in that country to pursue lucrative public and private contracts, including government contracts to build two new major power stations.

Hitachi sold 25% of the stock in the newly created subsidiary to Chancellor House Holdings (Pty) Ltd. (“Chancellor”), a local South African company that was a front for the African National Congress (“ANC”), South Africa’s ruling political party. Hitachi’s arrangement gave Chancellor- and by proxy the ANC- the ability to share in the profits from any power station contracts secured by Hitachi. Hitachi also entered into an undisclosed “success fee” arrangement with Chancellor, wherein Chancellor would be entitled to “success fees” in the event that the contract awards were “substantially as a result” of Chancellor’s efforts.

During the bidding process, Hitachi was aware that Chancellor was a funding vehicle for the ANC. Hitachi nevertheless continued to partner with Chancellor and encourage Chancellor’s use of its political influence to help obtain the government contracts.

As a result, Hitachi was awarded power station contracts in South Africa worth approximately $5.6 billion. In April and July 2008, Hitachi paid the ANC- through Chancellor- “success fees” totaling approximately $1 million.

Hitachi’s South African subsidiary inaccurately recorded its “success fee” payments to Chancellor as “consulting fees” in its books and records for the year ended December 31, 2008. The inaccurate books and records of Hitachi’s subsidiary were consolidated into Hitachi’s financial statements for the fiscal year ended March 31, 2009, which were filed with the Commission.

In 2010, Hitachi’s South African subsidiary also inaccurately recorded a dividend worth over a million dollars to be paid to Chancellor, its 25% shareholder. The journal entry recorded this dividend as “Dividends Declared” in the subsidiary’s books and records for the year ended December 31, 2010. The books and records did not reflect that the dividend was, in fact, an amount due for payment to a foreign political party in exchange for its political influence in assisting Hitachi land two government contracts. The subsidiary’s inaccurate books and records were consolidated into Hitachi’s financial statements for the fiscal year ended March 31, 2011, which were filed with the Commission.

Andreas Stargard, an attorney with Africa-based consultancy firm Pr1merio, observes that:

“Hitachi’s corporate tag line reads ‘inspire the next…’ — one can only hope that the inspiration resulting from this particular corruption scandal, is not one of imitation by others, but rather avoidance of the same mistakes.  On the local South African (government) front, we view it as  unlikely that these protests, well-intentioned as they may be, will have much of an impact on actual politics in Pretoria.  President Zuma is battling too many fires to focus on this particular issue in any different manner than what he has done thus far, which is simply firing those responsible for, and competent at, uncovering graft.”

Nota bene, the Hitachi electricity-generating scandal is not all that has rocked South African corruption news lately — just over a week ago, the opposition party Democratic Alliance launched corruption allegations over Danny Jordaan’s involvement with the FIFA mega-scandal (he was the head of the country’s 2010 football World Cup).

Stay tuned for more…