How MTN is profiting from Nigeria’s informal economy

Robert Neuwirth, author of Stealth of Nations: The Global Rise of the Informal Economy, examines how mobile operator MTN is using hawkers and street vendors as distribution agents.

This is Ladipo Market in Lagos, Nigeria – part of a $10 trillion worldwide economy known as System D.

You probably have never heard of System D. Neither had I until I started visiting street markets and unlicensed bazaars around the globe.

System D is a slang phrase pirated from French-speaking Africa and the Caribbean. The French have a word that they often use to describe particularly effective and motivated people. They call themdébrouillards. To say a man (or woman) is a débrouillard(e) is to tell people how resourceful and ingenious he or she is. The former French colonies have sculpted this word to their own social and economic reality. They say that inventive, self- starting, entrepreneurial merchants who are doing business on their own, without registering or being regulated by the bureaucracy and, for the most part, without paying taxes, are part of “l’economie de la débrouillardise”. Or, sweetened for street use, “Systeme D”. This essentially translates as the ingenuity economy, the economy of improvisation and self-reliance, the do-it-yourself, or DIY, economy. A number of well-known chefs have also appropriated the term to describe the skill and sheer joy necessary to improvise a gourmet meal using only the mismatched ingredients that happen to be at hand in a kitchen.

There is another economy out there. Its edges are diffuse and it disappears the moment you try to catch it. It stands beyond the law, yet is deeply entwined with the legally recognised business world. It is based on small sales and tiny increments of profit, yet it produces, cumulatively, a huge amount of wealth. It is massive yet disparaged, open yet feared, microscopic yet global. It is how much of the world survives, and how many people thrive, yet it is ignored and sometimes disparaged by most economists, business leaders, and politicians. At the same time, many major corporations make their money through System D.

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Perhaps the most strikingly visible way in which formal businesses make use of System D is in the mobile phone industry. Along every road in many African and Asian countries – on median strips, on the side streets and main drags, in the middle of highways, at almost every intersection – you can find small plastic tables with umbrellas overhead.

They’re called umbrella stands and they are the phone booths of the developing world. In the sparse shade offered by those umbrellas, the formal economy meets System D in an extremely direct way.

Nigeria provides a perfect case study. It’s the largest country in Africa, with a mobile phone market that seems to have nothing but upside, and a variety of telecom firms are battling for market share.

MTN, a massive multinational based in South Africa and active in twenty one countries through Africa and the Middle East, had spent years looking for a way to gain a share of the Nigerian market. With a population of close to a hundred and sixty million, Nigeria is Africa’s most populous country, and one in six Africans is a Nigerian.

The Nigerian market was worth a lot of money. MTN made its first move on Nigeria in 2001. “We tried to replicate the car and phone market of the United Kingdom,” Akinwale Goodluck, the general manager of regulatory issues for the company’s Nigerian operations, told me.

“We wanted all dealers to be registered. They had to get a licence from the Nigeria Corporate Affairs Commission. They had to have a business name, to be a registered company.” MTN determined that it would sell airtime in three denominations: fifteen hundred naira, three thousand naira, and six thousand naira – $10, $20, and $40 – which would be sold only through stores that had the MTN brand.

The result: the plan crashed and burned. Goodluck put it in gentler terms: “It became very glaring that such a ‘Rolls-Royce’ type of distribution network would not be feasible.”

So MTN wrote off the loss and rethought its approach. It concluded that in Nigeria, where even scavengers at the garbage dump have mobile phones, the bulk of its income – perhaps as much as 90 per cent – would come from selling pay-as-you-go airtime rather than selling costly monthly plans. And that meant that service had to be cheap and readily available.

So MTN came back with a new plan based on umbrella stands. Almost all of its products would be sold by hawkers and street vendors. The cheapest airtime would be offered at a bargain basement price – a hundred naira, or less than $1 – and it would be available all over town. The company dropped its vision of selling phones with the MTN label. It dropped the price of SIM cards to less than $3. And it has ridden this low-priced model to a better than 40 per cent share of the Nigerian mobile phone market.

In 2007, MTN had revenues of 73.1 billion rand (approximately $8.78 billion) and earnings of 31.8 billion rand ($3.8 billion), and Nigeria was a big part of that, responsible for one-quarter of MTN’s one hundred million customers and 28 per cent of the company’s cash – or about $2.4 billion per year. And how does MTN earn that $2.4 billion? Almost all of it comes from System D.

Despite their importance to the bottom line, MTN keeps these System D vendors at arm’s length. “We don’t have a direct relationship with the gentleman or lady on the street,” Goodluck said. “We provide merchandise and support through the dealers.” What he means is that MTN sells its recharge cards to distributors, who in turn sell to subdealers, who sell to sub-subdealers, who sell to the folks on the street, who retail the cards to the people who use them.

Most umbrella stand operators also purchase heavily discounted contracts from MTN and other service providers.

If you want to call anywhere in Nigeria on the MTN network or any other network, for that matter – you can go to your local umbrella stand and make your call for twenty naira (thirteen cents) a minute. Most umbrella stand operators have several phones with SIM cards from different mobile services, so you can save money by making your call on the network the person you are calling uses. Many people who have their own mobiles nonetheless use the umbrella stands to make calls – because the cost per minute is cheaper.

“The umbrella market is a very, very important market now,” Goodluck told me. “No serious operator can afford to ignore the umbrella people.”

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Margaret Akiyoyamen is one such umbrella person. She ran a stand in Lagos for several years and started in the business with just five thousand naira, or about $34, of recharge cards. She knew her customers didn’t have lots of cash, so she sold denominations of between only one hundred and three hundred naira. She set up her umbrella, table, and chairs (the setup cost her two thousand naira – or about $13) on the median strip of the street where she lived, Fifth Avenue in Festac Town (in another fixed cost, she gave the local government thirteen hundred naira, or around $10, for a ticket entitling her to do business on that spot). In total, her initial working capital was just eighty-three hundred naira, or a little more than $50. It was a volume business. She got slight discounts on the cards for buying them in bulk from a large distributor, and she used a cheap handset to offer calls for twenty naira a minute.

In the first month, she reported, she recouped her initial investment. After that, Margaret pushed her business forward over the next five months. Six months in, she was buying more than three hundred thousand naira worth of cards every month – sixty times her initial load – and making a profit of forty thousand naira, or about $270 – five times the government’s minimum wage. Her story shows how much growth there is in the mobile phone industry, how profitable selling airtime can be for sidewalk vendors; we can only imagine how profitable it is for the mobile phone firms themselves.

“It provides a fair amount of gainful sustenance,” Goodluck allowed. Indeed, he suggested, the steady profits that street hawkers make from the airtime biz have encouraged people to shift from criminality to card selling, including a number of people who had been dealing drugs. “Even beggars are selling recharge cards,” he said. MTN says it is putting together a database of the sellers and their locations. But there is one thing MTN does not contemplate doing. The company refuses to invest in these merchants who are retailing its recharge cards. “It works nicely as it is,” said Goodluck, who has since been named MTN’s corporate services executive. “It would not be advisable for us to go out on the street and offer them loans and credit. It’s a very informal business. It would not be a safe investment.”

It may well be true that hawkers and roadside salespeople are not always the most reliable investments. Some have other jobs (Margaret, for instance, had a day job at an insurance company); others may be lousy at record keeping or suffer through periods of slow sales. A few are undoubtedly fly-by-night operators. This would, indeed, make it tough to invest.

But it does seem as if the company could design a programme to work with the sales force that is responsible for the bulk of its income – perhaps a college scholarship programme, or a training institute designed to augment the skills of the best roadside distributors. MTN’s involvement doesn’t have to be limited to investing in the distribution operation. Goodluck smiled uncomfortably at the notion and repeated his mantra:

“The system works well as it is.”

This article is an edited extract from Robert Neuwirth’s book Stealth of Nations: The Global Rise of the Informal Economy (Pantheon, October 2011). Buy on Amazon.

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