MTN and markets-supporting institutions
MTN has been fined $5.2 billion by Nigerian Communication Commission (NCC) for its alleged failure to disconnect unregistered SIM cards. MTN, of course, is the king of the telecoms sector in Nigeria with over 60 million customers, more than 40 per cent market share, and also remains a major cash cow for its South African parent company, accounting for roughly a third of the Group’s revenue. The fine has had a tectonic business impact, with MTN unsurprisingly shedding a quarter of its market value within a week. In spite of the fine, the NCC has renewed MTN’s licence for another five years.
On Thursday, October 29, 2015, this writer was privileged to be on CNBC Africa where the Programme focused on the regulatory actions against MTN and Stanbic IBTC. Stanbic IBTC, a subsidiary of Standard Bank of South Africa, has also recently been taken to the laundry by the Financial Reporting Council. The response from the South African end has reflected this, with one commentator on Bloomberg stating that the fine raises “the high level of risk of doing business in Africa” and slapping such a large fine on one of the most successful foreign-owned enterprises would likely deter inward investment.”
The fear was slightly assuaged by the fact that the Nigerian authorities had also fined First Bank of Nigeria and UBA for flouting the Treasury Single Account directive. And the same government has been undertaking institutional reforms in respect of the NNPC. Finally, throw into this pot is Oando’s financial reporting debacle, which may still invite more scrutiny from the Security and Exchange Commission and the Nigerian Stock Exchange, as well as shareholders.
The merits and demerits of the individual cases, including regulatory overreach and capture, will no doubt be discussed at length by financial analysts and legal luminaries. But why is it that when regulators in Nigeria and other African countries try to shed their guises of being toothless bulldogs, it suddenly constitutes a risk of doing business? On the other hand, when regulators in advanced countries clamp down on corporate malfeasance, they are viewed as protecting investors and consumers.
These financial proselytizers hardly remember that Exxon was slammed with $1 billion in criminal fines and civil damages in addition to spending over $2 billion to clean up the Alaskan Oil Spill in 1990; that BP reached a $9.2 billion deal and disclosed in June 2015 that it would pay $18 billion over 18 years for damages relating to its Gulf of Mexico Oil Spill. They also quickly forget that earlier this year a $5.7 billion fine was imposed on Barclays, Royal Bank of Scotland, Citibank, JP Morgan, and UBS for “breathtaking flagrancy” in the rigging of the foreign exchange market and the Libor fixing scandal. The list goes on: Volkswagen, Enron, WorldCom, Tyco, AIG, and Lehman Brothers!
There is no doubt that markets are essential to a modern economy. To paraphrase Winston Churchill, a free market is the worst form of economic system, except all others. It is no gain saying that markets provide incentives for a dynamic and creative economy via gainful exchange. As Princeton University professor of economics Dani Rodrick, however reminds us, “Markets are not self creating, self-regulating, self-stabilizing, nor self-legitimizing. Markets need institutions & infrastructure that reduce transaction costs for all participants.”
Markets rest on institutions and the New Institutional Economics (NIE) provides an interface between law and economics. It is no coincidence that the University of Chicago, the bastion of free market economics, has also contributed immensely to NIE. The late Ronald Coase won the 1991 Nobel Prize in Economics “for his discovery and classification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy.”
In its review of the book, Chicagonomics: The Evolution of Chicago Free Market Economics, The Economist of London notes that, “By the 1940s, the use of redistribution to ensure that everyone had a basic standard of living was accepted by most Chicago economists. For instance, Henry Simons, set out how redistribution, by diffusing economic power in a society, was necessary in a free society. Even Hayek, in his libertarian polemic of 1944, “The Road to Serfdom”, supported the use of environmental regulation and state-run social insurance systems.”
There are several attributes of NIE that are relevant to ensuring institutional effectiveness. First, there is the need for market-creating institutions that support well defined transparent and predictable property rights, incentives, and finally, the rule of law needed to enhance productive efficiency, ensuring that investors can retain their investment returns.
Second, market-regulating institutions help in ensuring that the interests of key stakeholders – government, citizens, investors, and companies are well-balanced. They address and enforce standards bearing on anti-trust, safety and health to protect consumers, workers and investors. They also deal with co-ordination failures with industrial policies.
Third, market-stabilising institutions such as the Central Bank serve to promote exchange rate, price and financial stability. In the recent past, we have witnessed how without effective and prudent regulations, excessive risk-taking can impose severe costs and lately, how exchange rate uncertainty can wreak havoc on even the most astute business plan. Central Banks should exist to attain the public good of promoting the economic welfare of the citizens.
Fourth, market-legitimizing institutions seek to ensure inclusion, equity, and participation of the citizens in the market process and in sharing the spoils of market outcomes. Market imperfections in our clime have contributed to unfair income and wealth opportunities, with less than 1% of the population controlling more than a third of the nation’s wealth.
Three areas stand out for ensuring that ordinary citizens share in the fruits of the economy. They must have a voice in who governs them through effective participation in the democratic process. They must be able to contribute productively in growing the economy by having access to productive networks and assets. Where social welfare programmes are needed, they must be targeted as closely as possible to the intended beneficiaries.
Fifth, markets need efficient infrastructure networks –transport system, communication, and power grids – that connect consumers to producers. Private investment in infrastructure would help with bringing market dynamism to the sector. However, the huge gap in socio-economic and physical infrastructure investments will likely be filled and catalysed by the public sector.
The past few weeks have witnessed a raft of regulatory enforcements against companies in the commanding heights of Nigeria’s economy – telecoms, banking, and oil and gas. The emerging picture tells us that it is no longer business as usual.
Once companies such as MTN understand this message, they will pursue amicable negotiations with regulatory authorities to resolve their alleged infractions as quickly as possible. After all, global companies including JP Morgan, Citibank, Barclays, BP, and Exxon understand this game and do not joke with regulators in their jurisdictions.
• Dr. Temitope Oshikoya, an economist and CEO of Nextnomics Advisory, writes from Lagos.