The week ahead – Two roads diverged in a yellow wood

14th June 2024

Diageo, the foreign majority shareholder in Guinness Nigeria Plc, agreed on 11 June 2024 to sell its 58.02 percent controlling stake to Tolaram, a multinational company based in Singapore. Under the terms of the deal, Tolaram will enter into long-term licence and royalty agreements to continue producing the Guinness brand and other Diageo beverages locally. Tolaram will also make a mandatory tender offer to minority shareholders, potentially increasing its controlling stake in Guinness Nigeria. In a regulatory filing with the Nigerian Exchange, the board of Guinness Nigeria stated that it expects the transaction to be completed in 2025, pending necessary regulatory approvals in Nigeria.

At first glance, the sale appears to be at a premium—Guinness shares traded at ₦50 on the Nigerian Stock Exchange, while the deal paid nearly ₦81 per share. It is crucial to understand the context of this momentous decision. One of the oldest companies is shifting from its traditional manufacturing focus to concentrate solely on its import and trading operations. Macro-level factors such as a shrinking middle class, foreign exchange challenges, and rising production costs form one side of the equation. On the other side, changing consumer preferences, particularly among the younger demographic favouring spirits over beer, are driving this strategic pivot. Diageo’s exit from the beer business underscores this shift towards spirits. The divestment of its controlling stake in Guinness Nigeria is part of a broader trend among Western conglomerates reevaluating their business models in Nigeria. Manufacturing in Nigeria presents numerous obstacles, including FX access, power supply, evolving consumer preferences, and decreasing disposable incomes. These challenges continue to drive up costs, making it difficult to maintain profit margins. Many Western investors are opting to shift towards trading by importing finished products or licensing local production (contract manufacturing). Moreover, companies have various strategies for marketing their products, either by themselves or through local partners and distributors. Several Asian conglomerates with extensive experience and success in Nigeria have emerged as key local partners for these foreign firms, facilitating their adaptation to the Nigerian market and business environment. Tolaram, renowned for its efficient distribution network and manufacturing prowess, has taken on the significant challenge of revitalising an industry facing declining trends amidst challenging macroeconomic conditions. Time will tell if they can successfully navigate these headwinds and revive growth.

In January 2024, Nigerian government agencies, including the Federal Inland Revenue Service, Nigerian Upstream Petroleum Regulatory Commission and Nigeria Customs Service, received ₦78.3 billion as cost-of-collection, surpassing any state’s gross allocation. FIRS alone received ₦43.35 billion. According to a report by Agora Policy, this amount is nearly double what Delta State, the highest earner, received. Additionally, Central Bank of Nigeria data shows that external debt service payments reached $854 million in May 2024, the highest in four years. From January to May 2024, total debt servicing was $2.19 billion, with monthly payments of $560 million, $283 million, $276 million, $215 million, and $854 million, respectively.

The cost of collection serves two purposes. First, it funds the budgets of these agencies. Secondly, it acts as an incentive for revenue collection agencies. In Nigeria’s case, some agencies see these revenue targets as a motive for using unorthodox methods to raise revenue or as a justification for harassing and frustrating taxpayers and businesses. A situation where agencies receive more funds as the cost of collection compared to states with social responsibilities calls for serious dialogue. It may be worthwhile to consider making a considerable investment in revenue collection technology to improve the efficiency of these agencies, thereby reducing their cost of collection. Improving the collection efficiency of these agencies is crucial, given that Nigeria’s debt repayment takes up a huge chunk of government revenue, accounting for 67% between January and September 2023. Every time reformers of Nigeria’s tax revenue regime discuss how taxation can be more efficient and effective in Nigeria and how to increase the tax-to-GDP ratio, it almost always boils down to increasing the amount of tax collected and/or the rate of certain taxes. However, they hardly address the elephant in the room: the cost of collection, which is largely opaque and constitutes unappropriated spending that doesn’t go through the National Assembly. Nigerian revenue agencies are fond of creating these opaque ways of extracting expenses—the NNPC also declared under-recovery amounting to hundreds of billions. This is why the government cannot create the trust surplus it needs to convince Nigerians to agree to pay more taxes. To many, the Nigerian government and its agencies have refused to judiciously utilise the current tax collected. Nigeria ranks as one of the worst countries globally regarding tax collection. There is a lack of willingness among citizens to pay taxes and a lack of political will to enforce them. Over time, governments at different levels have resorted to using agents to collect taxes, and these agents resort to harassment and other shady practices to meet their targets. The issue is that the tax net has failed to broaden, and the 20% of Nigerians who pay formal taxes are the target of all collection efforts. This needs to change.

The Nigeria Labour Congress’s president, Joe Ajaero, announced there will be no strike on Tuesday, 11 June, for a new national minimum wage. At the International Labour Conference (ILO) in Geneva, he said the tripartite committee proposed ₦62,000 ($41.89) from the government and employers and ₦250,000 from labour. Mr Ajaero stressed that the unions have not accepted the ₦62,000 proposal and are awaiting President Bola Tinubu’s decision for review. Ajaero criticised state governors for rejecting the ₦62,000 proposal and suggesting that the minimum wage be decentralised. Ajaero also praised Edo State Governor Godwin Obaseki for paying a ₦70,000 minimum wage.

Nigeria’s decades-long subsidy regime has come at a substantial cost to the national treasury. Since the 1970s, funds have been diverted to subsidise petrol, electricity, and foreign exchange. Consequently, the economy has become uncompetitive, productivity has stagnated, and wages have remained low. Today, despite attempts to remove these subsidies, the economy, productivity and wages continue to face significant challenges. According to an SBM study from 2021, the average state worker in Nigeria was owed six months’ salary at the previous minimum wage level. In many states, this period extended to over a year, so, unsurprisingly, state governors have taken this position. At SBM, we believe that federal government negotiations should focus on a minimum wage for federal workers and the private sector. At the state level and within the largely informal sector, the minimum wage should be agreed upon state-by-state. Decentralising the minimum wage would not be unreasonable. This approach would ensure that each state pays what it can afford, considering its cost of living and inflation rate, and attract the level of talent it can sustain. It is difficult to determine what constitutes a living wage for Nigerian workers. With the cost of living having skyrocketed in recent years, a wage review has become necessary. Nigeria’s economy remains in a dire situation, but one essential step is to increase wages to a level where workers can meet their basic needs.

The opposition National Democratic Congress (NDC) in Tema East has reportedly uncovered several individuals from Kpone Katamanso involved in an illegal voter transfer scheme, said to be orchestrated by Mr Yohane Amarh Ashitey, the New Patriotic Party (NPP) Parliamentary Candidate and the Tema Metropolitan Chief Executive. The NDC’s internal security and Constituency and Branch Executives exposed the operation. Individuals were allegedly offered GHS 200 and food packs to participate in the scheme, despite some being NDC sympathisers. Several individuals involved have been apprehended as of 6 June 2024. The NDC demands immediate action from security agencies and the Electoral Commission.

Ghana’s election this year is not just about winning the presidential race; it’s about having a controlling majority in parliament. For the first time in Ghana’s history, the 2020 presidential and parliamentary elections, which gave President Akufo-Addo his second term, also failed to give his ruling party a parliamentary majority. The 275 parliamentary seats were shared in an unprecedented manner – 137 for the ruling NPP and 137 for the opposition party, the NDC. The remaining seat was won by an aggrieved NPP Member of Parliament, who broke away to stand as an independent candidate. It took the negotiation strength of key NPP bigwigs to convince the independent candidate to join them to form a majority and, in exchange, was allowed to become the Second Deputy Speaker of Parliament. This went down in Ghana’s democratic history as the slimmest parliamentary majority, which has put spokes in the majority’s agenda due to the almost equal weight in parliament. The minority has used this advantage to press their demands and make the ruling party somewhat unpopular and powerless. With this unprecedented democratic event in mind, both parties are going into Election 2024 knowing it is possible to win the presidential elections and not a majority in parliament. You do not need to engage in legal or illegal vote transfer schemes to win presidential elections. Most of the reasons why illegal or mass vote transfer schemes are carried out are to help give a parliamentary candidate an undue advantage in the elections. In parliamentary elections, just a single vote can change the winning pattern, and in the 2020 election, there were instances where most of the parliamentary seats were won with margins as low as four votes. Both parties have earmarked these areas as battlegrounds and will do anything to win these seats. Aside from the illegal transfer of votes to targeted constituencies, both parties also take advantage of unique voter populations in universities and senior high schools to draw political capital. In the December polls, much focus will be placed on parliamentary elections, although the presidential election is also one to watch.