Tolaram Group: The good, the bad, the ugly by Joseph Edgar

We have received the news of the Tolaram Group takeover of Diageo’s majority stake in Guinness with mixed feelings. More like with a huge sigh of relief.

The Diageo Group, citing obvious reasons, has exited the brewery business, taking with it its expansive spirits business.

This marked the end of an epoch. Seventy-five years of doing business in Nigeria culminated in the iconic “Udeme is a great guy” campaign, which resonated widely.

For the last 20 years, and I must say immediately after the robust OBJ administration, which instituted reforms that pushed business and minimized government intervention, multinationals have gradually pulled out of the Nigerian economic space.

It started as a trickle during Jonathan’s administration and has escalated to a worrying speed under the Tinubu administration.

The reasons are not far-fetched: global economic shifts, insecurity, incompetent and inconsistent government policies, weak corporate governance, and rampant corruption all contribute to this exodus.

However, as the Western-backed multinationals exit, something else is happening.

The Asians and Chinese are moving in, with this Tolaram infusion being the most high-profile example.

The Asians, Indians, and Lebanese have been in Nigeria for hundreds of years but have mostly stayed on the periphery of mainstream economic activities, engaging in trades, services, logistics, small-scale manufacturing, and hospitality.

They run very profitable businesses and control these markets firmly. The reason is simple: these businesses do not require stringent corporate governance, are mostly cash-based (which fits well in a corrupt system), have no real need for forex, and do not need to extract profits urgently.

This is why you see large Lebanese and Indian communities spread all over the country. They have nationalized because the margins are huge, there are little or no taxes, and active connivance with authorities to bend the rules, and it creates a business utopia that’s hard to believe.

Multinationals, on the other hand, with home government-backed corporate governance enforcement and ethics, get frustrated out of the very lucrative market space and are replaced by those who know how to do business the Nigerian way.

So, what does the Asian and Chinese influx portend for the Nigerian economic space? It comes with the good, the bad, and the ugly.

The good: It immediately fills the gaps left by the receding multinationals. The inflow of funds and maintenance of positions will save jobs, keep goods and services running, and generally attempt to stabilize things.

There will be no immediate need to repatriate profits, as they reinvest and take on stakes in Nigerian projects, easing pressure on the Naira by reducing the demand for forex.

However, the bad will quickly emerge. Unregulated inflows will enter the mainstream economy, corporate governance will erode, and job security and work conditions will deteriorate.

The ugly: They will connive with corrupt government officials, further skewing the system. As a result, long-term economic prospects will remain dim with no real growth.

So, what can be done? The government must recognize this phase as a temporary stopgap measure to stabilize things while implementing adequate policies to fight corruption and better prepare the economy for serious investment.

Notably, Foreign Portfolio Investments (FPIs) are beginning to come in, a symptom of ‘distress investment.’ This occurs when investors jump into an environment of hyperinflation, loose government rules, and huge short-term margins, only to exit quickly.

All these factors are tied to the corruption index. As the corruption index grows, FPIs and similar investors will invade, typically targeting high cash turnover areas like hospitality, tourism, food and beverages, and other low-entry, high-profitability sectors.

It all depends on how one views this situation. One thing is certain: with continued government insincerity, lack of policy cohesion, and inability to fight corruption, the situation will worsen, potentially leading to a ‘taken state.’

I will explain that in another series.

Thanks,

Duke of Shomolu