The Tanga Cement saga: To merge or not to merge?

The Tanga cement factory - one of the few surviving vibrant plants in the Indian Ocean coastal city which in the distant past was one of the country’s top industrial hubs.PHOTO | FILE

What you need to know:

  • 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.