Summary
·
The last
thing that cement consumers need is a firm that controls close to 70 percent of
sales
The proposed acquisition of Tanga Cement by the parent firm of
Twiga Cement has sparked controversy in Tanzania, with conflicting opinions from various stakeholders. On one side, the government, led by the Fair Competition Commission (FCC), supports the merger. On the other side, you have the Fair Competition Tribunal (FCT), many MPs, and others opposing it. This begs the question: what lies behind this contentious issue?In October 2021, Scancem, the parent
company of Twiga Cement, reached an agreement to acquire a 68 percent stake in
Tanga Cement for 137bn. The motivation behind this acquisition was Tanga
Cement’s mounting liabilities of over 230bn, which necessitated finding a way out
of potential bankruptcy.
When the proposal was sent to FCC,
the commission approved the acquisition. However, FCT annulled this decision in
September 2022 following challenges from Chalinze Cement and the Tanzania
Consumer Advocacy Society (TCAS). Strangely, the acquisition bid resurfaced
with renewed approval from FCC a few months later, claiming that the
circumstances had changed. Once again, FCT intervened, in a bid to determine
whether its previous stop order was invalidated.
Several intriguing sub-plots emerge
from this story. For instance, who is behind Chalinze Cement and, as one lawyer
argued, how did FCC manage to review all the arguments against the takeover bid
and provide a Merger Certification Certificate on the same day? However, what
is central to this discussion is whether the proposed merger violates the
principles outlined in Tanzania’s Fair Competition Act or not.
The law says that “a person has a
dominant position if, acting alone, the person can profitably and materially
restrain or reduce competition, and the person’s share of the relevant market
exceeds 35 percent”. While this sounds so simple, the question is how market
share is defined, and which definition applies in this case.
There are several ways market share
can be defined: using turnover, volume of production, installed capacity, and
geographical coverage. For instance, while the combined market share between
Twiga Cement and Tanga Cement is currently over 65 percent, the combined
installed capacity is less than 30 percent. Therefore, the installed capacity
metrics can be employed to question the dominant market share definition even
though combined sales are way above the 35 percent threshold.
To evaluate this situation, we must
remember that the Fair Competition Act was written to protect consumers, not
competitors. To understand how consumers fare in this market, it is good to
review the market dynamics.
Over the past decade, the
construction industry has experienced remarkable growth. In that period, cement
demand has more than tripled. The government’s investments in large
infrastructure projects such as the SGR and Nyerere Dam have contributed a lot
to that increase. Nonetheless, per capita cement consumption remains
disappointingly low for a developing country. By 2020, this stood at 50kg per
year, compared with 91kg and 521kg for sub-Saharan Africa and the world,
respectively.
One of the reasons is that cement
prices are generally high. According to one source, years ago, when the
production cost for a 50kg bag of cement was Sh6,000, street prices were as
high as Sh18,000 in some parts of Dar. Consequently, the existence of cartels
is often hinted at. In 2020, amidst galloping cement prices, FCC started an
inquiry into this issue. But, as we know, government inquiries are only meant
to create the illusion of action being taken, nothing more.
Given this reality, the last thing
that cement consumers need is a firm that controls close to 70 percent of
sales. If consumers are already at a significant disadvantage even without a
monopoly, it is reasonable to presume that the proposed merger would have
serious deleterious effects on them.
Recently, the Minister of Finance,
Dr. Mwigulu Nchemba, justified the merger in Parliament by citing Tanga
Cement’s financial liabilities. While it is evident that the firm requires
intervention, the minister failed to provide a compelling reason why Twiga
Cement’s parent firm must be the sole candidate for this acquisition. Are there
no other investors capable of rescuing Tanga Cement without jeopardising
consumers’ interests? If there is a controversy about definitions, the
definition that protects consumers’ interests should prevail.
In addition to that, we must
carefully consider the implications of the FCC’s actions. While the context may
indeed have changed by the time the second bid was made, I think FCC’s conduct
leaves a very bitter taste in the mouth. The haste to launch and approve
another bid, while knowing that a higher authority has stopped the proceedings,
highlights significant imprudence. If judicial decisions can be disregarded at
will merely because the government is dissatisfied with them, that sends a
threatening message to potential investors.
Not surprisingly, all experts who
have weighed in on this issue, including a retired judge, ex-TIC and PCCB
bosses, have advised the government to respect the tribunal’s decision.
Probably if FCC had been an independent agency, with full regulatory autonomy,
it would have seen the issue differently.
Are there other interests in this
matter? We need, at the very least, put the government’s interest in this
matter under the spotlight. Given that Tanga Cement has assets of Sh435 billion
(2019) and controlling markets in regions such as Tanga, Kilimanjaro, and
Arusha, it is evident that a Sh137 billion investment is not insurmountable for
such a business. So, why is the government so determined to push this merger
through?
Frankly, I have no answer to that
question.
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