The Role of Corporate Champions in furthering Africa’s Socio-economic and Industrial Development

Brief History of Companies

Prior to the nineteenth century, commercial activities were undertaken by individuals in their personal capacity (either as sole traders or in partnerships) which attracted unlimited personal liability. Over time, the risks associated with unlimited personal liability proved to be a disincentive to further risk-taking and larger commercial activities.

The industrial revolution sparked a period of significant economic growth and entrepreneurial activity. Consequently, there was a need for large sums of money and resources to be pooled towards an economically beneficial purpose. In response to this need, the corporate structure, which provides limited liability to its promoter and investors, was established, and has proved to be an effective tool for fostering risk taking, attracting funding into commercial endeavours and powering global industrial and economic growth.

Since the emergence of the corporate structure, there have been several academic, social and political debates on the optimal purpose of companies. A historically widely held view is that companies should operate based on the pre-eminence of shareholder value maximisation (over and above other purposes) as a reward for shareholders’ investment and risk taking.

In recent times, however, this dominant shareholder value maximisation paradigm has been challenged by proponents of stakeholder capitalism. Proponents of Stakeholders’ governance reject the view that the maximisation of shareholder returns is the sole raison d’être of companies. Instead, they take a more holistic perspective and require companies to weigh the impact of their decisions and actions on the welfare of several corporate stakeholders (not just shareholders), including host countries and local communities where they have business operations, employees, customers and suppliers.

History of companies in Africa – dominance of international multinational companies

Most of the earliest companies in Africa were incorporated by the European countries involved in the Africa colonisation project to, amongst other things, promote their colonisation aspirations, establish commodities extraction empires and trading monopolies.

Such companies include the Royal Niger Company, a mercantile company chartered by the British government in the nineteenth century to represent Britain’s commercial interest in West Africa and serve as a conduit for imposing British colonial rule upon Nigeria. In January 1900, the Royal Niger Company transferred its territories, which comprised areas known as modern day Nigeria, to the British Government for the sum of £865,000 (approximately). Subsequently, the Royal Niger Company’s royal charter was revoked; it was renamed the “Niger Company Ltd” and became a purely trading concern.

The confluence of the end of the second world war (including its damage to most of the European economies) and the rise of African nationalism resulted in the wave of independence across Africa from the late 1950s. At the time of independence, major European and US multinationals had assumed a dominant position in most African countries and continue to play a key role till date.  For example, the Niger Company Ltd, successor company to the Royal Niger Company, was acquired by Unilever, the Anglo Dutch multinational company, in the early 20^th century. Unilever continues to have significant operations in Nigeria till date.

The impact of international multinational companies on Africa’s socio-economic development

Whilst international multinationals have offered undeniable value to Africa over the decades (including, through royalty and tax payments, and production of goods and services), the majority have prioritised their shareholder value maximisation objectives over and above the interest of a wider stakeholder group, particularly African countries.

On balance, these international companies, have in most cases, either (a) viewed Africa as a source of raw commodities and thereby focusing on the exploration, extraction and commercialisation of natural resources and/or (b) viewed Africa as a market for the export of their manufactured products, both of which are highly profitable for the international companies but have a limited positive impact on the long-term and sustainable socio-economic development of Africa.

For example, whilst international multinationals have developed and invested in infrastructure, most of these were developed for the sole purpose of extracting and export commodities. The operating practices of some multinational companies in Africa, particularly in the commodities extraction sectors, have also caused grave humanitarian, environmental and ecological damage to the host communities.

Similarly, there have been instances, where multinationals have engaged in tax avoidance and other aggressive forms of tax structuring that artificially shift profits and reduce taxable income (e.g., through transfer pricing and thin capitalisation arrangements) thereby significantly reducing their tax obligations and increasing their profitability. The Organisation for Economic Co-operation and Development (OECD) estimates that tax base erosion and profit shifting practices cost developing countries USD 100-240 billion in lost revenue annually.

The rise of African Corporate Champions

Certain African companies are widely viewed as “African Corporate Champions”. This is a term used to describe companies with aligned objectives of profitability and commitment to contribute to the industrial and socio-economic development of the (African) countries where they operate and the African continent at large.

In Botswana, the Debswana Diamond Company, a joint venture between the Government of the Republic of Botswana and De Beers Group, one of the world’s leading diamond producers has played a central role in Botswana’s socio-economic transition from one of the world’s poorest countries (at independence in 1966) to becoming an upper middle-income country with the fourth highest gross national income per capita in purchasing power in Africa and above the global average. In September 2011, the Debswana shareholders, DeBeers and the Government of Botswana, agreed contractual terms that will make Botswana a leading diamond trading and manufacturing hub, including through De Beers transferring its London-based rough diamond sales activity (including diamond aggregation, sales and marketing activities) to Botswana, which was implemented in 2012. The Debswana joint venture serves as a useful reference point for how African countries and private sector participants can develop successful and mutually beneficial public/private partnerships.

In Nigeria, the Dangote Group, a Nigerian multinational industrial conglomerate and the largest conglomerate in West Africa, is developing an integrated refinery, fertilizer plant and petrochemical project with a capacity to process up to 650,000 barrels of oil per day and 3 million tonnes of fertiliser per annum (the “Dangote Refinery Project”). The Dangote Refinery Project has an estimated development cost in excess of USD 15 billion and is expected to be the largest industrial complex project in Nigeria and Africa’s largest oil refinery. This project will have a significant impact on Nigeria’s economy, critical infrastructure delivery capabilities and industrial capacity. For example, Nigeria has the second largest oil reserves in Africa, but remains dependent on imported refined fuel products. This has resulted in a sustained balance of payment deficits and consequential diminution of Nigeria’s foreign reserves to fund its import of refined petroleum products. The Dangote Refinery Project will transform Nigeria from a net importer of refined petroleum products to a net exporter of petroleum products.

As seen with the case studies above, African corporate champions are uniquely placed to proffer tailored solutions to Africa’s unique challenges, catalyse international funding, enter into contractual arrangements with technical partners and obtain host government support for successful project development and delivery. There is demonstrable need for African host governments and policy makers to develop an ecosystem conducive to support and promote more African corporate champions to emerge in the decades to come.

Developing a pipeline of future African Corporate Champions and the need for long-term strategic collaboration

There is a need for African countries to increase their industrial output, invest in critical infrastructure and assume a greater level of involvement across the entire value chain for the commercialisation of their natural resources. To achieve these key developmental milestones, there is a need for African countries to dismantle of old practices, collaborate with the private sector and implement regulatory reform and structural transformation.

African corporate champions have a critical role to play in achieving the above-mentioned development milestones, which require a long-term and mutually beneficial collaboration with host governments, policy makers, international investors and multilateral development partners.

The scope for collaboration and required action to help Africa achieve its industrial and socio-economic development objectives, are significant and include:

1. African companies being willing to assume the challenge to not just be profitable, but to also play a leading role in helping to develop and implement tailored solutions to Africa’s most critical industrial and socio-economic challenges;

 

2. African governments providing regulatory and political stability that will help to attract foreign investment, simplify transaction structures, and reduce risk perception of doing business and investing in African countries;

 

3. African governments demonstrating the political will, long-term commitment (notwithstanding short-term political cycles) and efficient execution capabilities to deliver the requisite regulatory change and structure transformation; and

 

4. In tandem with the achievement of tangible and sustained reduction in political and regulatory risk associated with investing or transacting in Africa, there is a need for international funders and investors, credit rating agencies and insurance providers to acknowledge the progress made and reduce or remove (as applicable) the so-called “Africa risk premium” that is routinely included in (i) the cost of funds for debt to African borrowers, (ii) the international rate of return expectations for equity investments into Africa and (iii) Africa-related insurance premium rates, which often times do not exist in comparative emerging market countries or regions.

The views expressed in this article are those of the author alone and not the Future Africa Forum.