Change Nigeria Project

MANUFACTURING/FINANCING INDUSTRIAL DEVELOPMENT

PAPER PRESENTED

BY

 ALHAJI BASHIR M. BORODO, MFR, PRESIDENT, MANUFACTURERS ASSOCIATION OF NIGERIA  (MAN)

 AT A CONFERENCE ON STATE OF THE NIGERIAN ECONOMY: 

STRATEGIC OPTIONS FOR BUILDING AND SUSTAINING A VIBRANT ECONOMY

 ORGANIZED BY

 CHANGE NIGERIA PROJECT, INC. IN COLLABORATION WITH NIGERIA INVESTMENT PROMOTION COMMISSION AT :

THE COMMONWEALTH CLUB

LONDON, ENGLAND

SATURDAY JANUARY 30, 2010

Protocols

Introduction

I feel highly honoured to be invited as one of the keynote speakers at the Conference on “State of the Nigerian Economy Strategic Options for building and sustaining a vibrant economy”.

 Let me therefore first express my personal appreciation to Change Nigeria Project, Inc and Nigerian Investment Promotion Commission the organizers of this program for giving me the opportunity to address you on a fascinating theme, “Manufacturing/Financing Industrial Development”.

 I urge you to continue to sustain this spirit in organizing programmes/conferences that will leapfrog Nigeria to meet the desired challenges in the midst of the global economy.

 One of the goals of macroeconomic policy in all countries is growth and development of which industrial development and manufacturing are important components.  This is because the benefits of industrial development are enormous.

 Industrialization is a major plank of economic advancement, transformation and the enhancement of the standard of living of the citizens.  It enables a country to utilize fully its factor endowments and tends to depend less on the external sector for its growth and sustenance.

  2.0        Historical Development of the Nigerian Manufacturing Sector

Before independence in 1960, the Nigerian economy was mainly agrarian, both in production for domestic consumption and exports.  Industrialization was not part of the colonial economic policy, which was anchored on making the colonies producers of primary raw materials for foreign industries and importers of manufactured goods.  Nigeria was running a ‘trade and commerce economy’.   As a result of this, the economy was dominated by the large European trading companies like  UAC, CFAO, John Holt, etc whose primary interests were to import into Nigeria products manufactured in their home countries and in the process  make maximum profits without much value addition to our Gross Domestic Product.

 Consequently, manufacturing was not given the required attention nor was there any concrete encouragement to develop indigenous entrepreneurship.  As a result, the nation’s leaders since the attainment of independence have been committed to industrial development.  This was to ensure that the sector appropriates the benefits of a large local market and the large stock of natural resources.  This is evident from the first National development Plan 1962-1968, through the other plans (1970-1974; 1975-1980; 1981-1985).

 From independence in 1960, Nigeria adopted an import substitution policy that made her heavily dependent on imported raw materials, with the objective of conserving foreign exchange, maintaining healthy balance of payment and promoting industrialization.

 With the emergence of oil boom in 1970’s, foreign exchange was made available for the importation of industrial products.  The manufacturing GDP rose significantly from 4.8% at independence to 8.1% in 1970.

 The high import dependence of the manufacturing sector became a serious liability to the nation as over 80% of raw materials were imported while machinery and spare parts importation was 100%.

 Import licensing as well as high interest rate and exchange controls were introduced and these resulted in acute shortages of industrial inputs with adverse consequences on industrial production.

 Changes in planning strategies and the adoption of the Structural Adjustment Programme (SAP) in July 1986 and the National Rolling Plans are yet to move the country to the Eldora do of industrial development.

 3.0        The Manufacturing Sector as a catalyst for sustainable development

 The manufacturing sector in any economy is reputed to be the engine of growth and the ultimate pillar for sustainable growth and development.  It is the catalyst for the transformation of an underdeveloped economy to an economy of sustenance.

 Historical evidence from experiences of developed countries e.g. USA, UK and some emerging nations like China, India etc shows that the manufacturing sector played a critical role in the structural transformation of the economy from a subsistence, low production and low income state to one that is dynamic, sustained and diverse.

 Nigeria’s laudable medium term strategy document (National Economic and Empowerment Strategy – NEEDS I) affirmed that the manufacturing sector has enormous potentials for employment generation, wealth creation as well as poverty alleviation.  These indicators are very significant in measuring the performance of the manufacturing sector.

 However, a critical review of these indicators showed that the Nigerian manufacturing sector is in a state of comatose as its capability to generate employment, create wealth, reduce poverty and contribute to GDP has been declining over the years.

 For instance:

1. Employment generation by the sector over the past few years has declined sharply from 2,841,083 employees in 2020 to 1,026,305 employees in 2008.
2.  Wealth creation has been on the decline also.  Wealth can only be created when the prospective investors find the business environment conducive and profitable to do business.  In Nigeria, the operating environment is very harsh and un-conducive from no power supply to insecurity of lives and property as is presently seen in the Niger Delta and the Northern part of the country.
3. Poverty alleviation:  The poverty level in Nigeria has been on the increase in recent times due to deteriorating quality of work life especially in the area of reduction of job opportunities, high costs of living, poor infrastructure and bad living conditions.  According to UNDP report on Nigeria in 2007, the level of poverty increased from 46% in 1992 to 70.9% in 2006.
4. Manufacturing contribution to GDP after independence that was 8.1% in 1970 fell to 4.13% in 2008.
5. Capacity Utilization:  The state of the manufacturing sector can be appreciated by a scrutiny of the capacity utilization that has been on the decline from 70% in 1975 to 48% in 2008. 
6. Export Promotion: The Nigerian Export Promotion Council is charged with the responsibility of promoting non-oil exports.
7. Several incentives, including Export Expansion Grant (EEG) are in place. The value of non-oil exports is still below 10% of total exports but growing. The main market is West and Central Africa. High quality leather is exported to Europe and China. There is still room for increasing the quantum and value of non-oil exports through incentives and removal of export bottlenecks.

 4.0        Causes of poor performance of the Nigerian Manufacturing Sector

The failure of the Nigerian manufacturing sector can be traced to a number of socio-economic – political factors.

1. Inconsistency in government policies
2. Infrastructural decay particularly in the area of lack of steady power supply
3. Scarcity/incessant increase in the price of petroleum products e.g. gas, diesel, LPFO etc.
4. Unavailability/inaccessibility of long term funds/high cost of funds
5. Multiplicity of taxes/levies from the three tiers of government
6. Poor administration/management of the ports/congestion.
7. Insecurity of lives and property
8. Uncompetitive ness of local products
9. Unbalanced trade agreement. WTO\ECOWAS
10. Smuggling\ Dumping\Fake and Adulterated Products

 5.0        Financing the Manufacturing Sector

 It is interesting to note that the issues of funding the manufacturing sector have been an important plan of the government’s industrial policies dating to the period of the first national development plan.  This was borne out of the realization that if the country was to establish a firm foundation in general and manufacturing in particular, an institution was required for the purpose.  This realization led to the setting up of the investment company of Nigeria (ICON) in 1959 charged with the objective of financing industrial, commercial and agricultural enterprises in Nigeria.  It operated until 1964 when there was the need for an institution, which had full backing of all governments of Nigeria without being under their direct control and commanded and enjoyed full confidence of local and foreign investments.  It was envisaged that the institution would be insulated from political and other influences and would promote Nigeria’s industrial development.

 Thus in January 1964, the Nigerian Industrial Development Bank (NIDB) was established.  The bank was to support different types of businesses but with primary aim of developing the medium and large-scale manufacturing enterprises. The bank however collapsed in the 1990s due to general economic and policy instability arising from political turbulence of the period.

  The Nigerian Bank for Commerce and Industry (NBCI) was established in 1973 with the primary objective of financing small and medium scale enterprises through providing equity capital and funds to indigenous enterprises.  It equally failed due to political/policy instability in the country.

 Sectoral allocation of credit was introduced by the Central Bank of Nigeria in 1970 in order to encourage manufacturing, but this also failed due to policy somersault.

 The government also established the National Economic Reconstruction Fund (NERFUND) through promulgation of Decree No 2 of 9 January 1991.  NERFUND was to correct the inadequacies in the provision of medium to long-term finance to SMEs especially agro-allied and manufacturing ones by providing medium to long term loans to participating banks for on-lending to SMEs.

 This scheme also failed, as beneficiaries were unable to service their loans due to instability in the macroeconomic framework, mismanagement by the beneficiaries as well as political instability.

 The Small & Medium Enterprise Equity Investment Scheme (SMEEIS) came in 2001, but still could not service the needs of the sector due to policy inconsistency.

 The Bank of Industry (BoI) was established in 2001 because of strong advocacy of the Manufacturers Association of Nigeria (MAN) to alleviate the funding problems of its members.  To date the bank has not been able to meet the needs of the industry because of poor capital base.  This is also caused by inconsistency in policy, as capital promised to the bank by the government has not been released till date.

 The failure of these institutions/policies made manufacturers to turn to profit orientated/motivated commercial banks that lend on short-term basis.

 From the above scenario, it would be seen that the Nigerian manufacturing sector is greatly handicapped by acute funding problems.

 Adequate funding is a major requirement for running a successful business and it is certainly one of the major reasons for the poor performance of most companies in the Nigerian manufacturing sector.

 There is also associated problem of huge cost of funds.  The interest rate on over drafts or loans is currently about 20% when all ancillary charges are added.  It is a Herculean task to borrow at this rate, overcome the various bottlenecks listed above and at the same time make profit.

 Most of the banks in Nigeria are looking for funds placement instead of attending to financial requirements of industries such as working capital, project-financing capital for expansion as well as start up capital to hold a new concern.  This makes manufacturing very unattractive and even people with funds will prefer to place them on fixed deposits and earn interest without the headaches of manufacturing.

 Sad enough, the evolving scenario at least before the crash in the capital market is that the banks and other lenders prefer to advance credit facilities to clients to enable them invest in securities market.

 6.0        The dilemma faced by Nigerian Financial Institutions

 Currently, financial institutions are entrusted with the efficient allocation of financial resources to various investment opportunities in the economy for optimal economic growth and development.  The resources are accumulated from government, firms and households willing to save, for the time being, whatever they do not need to spend immediately.  Logically, the real sector is most deserving of support by the financial institutions.

 Unfortunately, in Nigeria, the financial institutions always claim not to have available funds to meet the needs of the real sector.

 If this is true, therefore it implies that financial institutions cannot give what they do not have.  They have to match the tenor of funds in their custody to the tenor of transactions in order to minimize interest rate and exchange rate risks in order to return something to shareholders, who expect dividend as well as be able to give depositors what they saved with them on demand.

 The real sector faces other constraints that tend to make them technically unattractive for commercial banks lending.  These are:

1. Inability to meet stern credit conditions for borrowing.
2. Lack of collateral security. And tendency to divert bank loans

7.0        Way Forward

 The role of government in supporting development has not been uniform in the global economy.  For instance, in Indonesia, government intervention in the financial market has been through state-owned banks, which operated using credit ceilings and selective credit allocation to specific sectors of the economy.  These banks channel the bulk of their credit to long-term needs of the manufacturing sector.

 In the Philippines on the other hand, a small number of large crony firms enjoyed the bulk of the credit allocation from the financial system.

 In Korea and China, the practice is different as the government has been directly involved in resource allocation, and this has manifested positively in the economic development of these countries.

 The lesson is that each country needs to address its peculiar circumstances in its policies towards the funding of a critical sector such as manufacturing.

 However, Nigeria with its peculiar problems of poor governance and inconsistent policies should take a bold step to provide the necessary funding assistance to the manufacturing sector to enable it perform its primary duty of employment generation, wealth creation and poverty alleviation in the following ways.

1. Government Direct Intervention

 Government should not shy away from direct intervention in the funding of manufacturing. Specifically, government should set up an SME bank as done in other developing countries such as India, Thailand, and Indonesia etc with funds available at reasonable rates of interest.

  The bank should have with time-bound funds to service the needs of industry with subsidized loans.

1. Recapitalizing Bank of Industry

 On the other hand, the Bank of Industry (BoI) should be recapitalized to the tune of not less of N135billion.  The BoI should be made to address the needs of industries squarely and not be carried away by the pro-market syndrome pervading the Nigerian environment.  The plan to privatize the BoI should be reviewed critically.

1. Funding support for Manufacturers with largest employment of Labour

Government should provide funding support for the largest manufacturers employing up to 5,000 workers through either a specialized fund or guarantees for bank loans.

1. Introduce Phased Incentives

 Government should introduce phased incentives geared towards the development of local raw materials, failure of which it will be withdrawn as done in China (Taipei).  This implies that if the objective to which the incentive is targeted is achieved, it will in the long-term reduce the financial pressure on the enterprise.  The experience is that companies, which were set up in the 1960s, are still importing raw materials thereby exacerbating the financial crisis.

1. Inflow of Foreign Direct Investment (FDI)

 Positive government and socio-political economic stability are needed to inspire confidence to Nigerians both at home and in Diasporas and even non-Nigerians about the future of this country.   Such an environment would motivate them to repatriate many of the capital funds stashed away in foreign lands and curb future capital flight to promote domestic capital accumulation.

 The financial break through of Asian countries today is the massive inflow of FDI into many of these countries.  The advantages of FDI over other forms of external finances are that it comes in the form of a package – finance, technology and managerial expertise.  The dearth of infrastructure, unstable policy environment, insecurity of lives and property are all factors that have contributed to the lackluster inflow of

  FDI into Nigeria.  The Federal Government of Nigeria and the Nigerian Investment Promotion Commission (NIPC) need to do more work to attract FDI.  This will constitute one good avenue through which long-term funding of the industrial sector can be addressed.

 If the operating business environment were put in order, foreign direct investors and multilateral institutions would be inspired to take greater interest in making lives of credit and equity investment available to the country’s private sector.

f)      Sound Monetary Policy

 The policies of the CBN should be geared towards making financial resources available to private sector organizations.  The banks should be encouraged to provide incentives that will attract greater savings.  This combined with positive real interest rates will enable the banking sector to mobilize savings that can be channeled to the industrial sector.

1. Reform of Government Fiscal Policies

 The government must take a position that recognizes that some of its expenditures and fiscal activities have negative impacts on the economy.  The recent government active drive on internally generated revenue where a manufacturer/business concern is made to pay over 61 different taxes/levies per annum from the three tiers of government has a negative impact.

 Government expenditure in the provision of infrastructure such as power/energy, roads, water, etc will relieve the current burden of the manufacturing sector and release funds for other necessary expenditure.

 Discipline is imperative to deter deficit financing and government reckless spending which in no small measure contributes to the volatility of the financial market.  Perhaps, the best incentive for industrial and economic growth is macro economic stability, low inflation, and stable and consistent price level. Any serious deviation from this could have negative and devastating impact on industrialization and growth. Government should avoid this scenario.

1. Promotion of an enabling business environment

 Government must promote the enabling environment from infrastructure and public utilities to investment and tax laws, in favour of the real sector.

 Financial institutions deserve incentives bold enough to equalize their yield and minimize their opportunity cost on real sector lending, in contrast to what obtains at present.

1. Boost Domestic Savings

 The government must vigorously pursue policies that increase disposable income and therefore savings and investment.  Such policies include increase in income, high interest rates on time deposits etc.  This would change in favour of greater saving engineered by appropriate policies that would grow the economy.

1. High Cost of Funds

 The prevailing high cost of fund in the country need to be addressed.  A situation where a manufacturer is made to pay over 20% interest on borrowed fund makes borrowing unattractive and planning difficult.  Single digit interest rate is therefore recommended to aid planning and investment.

 In addition, the Central Bank of Nigeria should discourage banks from adding ancillary charges over and above the agreed interest rate, which is already high.

1. The Capital Market

 This is one of the institutions that have the capacity to provide long-term funding for manufacturing activities.  Opportunities therefore exist for manufacturing industries to raise their capital from the capital market.

 Unfortunately, with the collapse of the stock market, where people lost millions/billions of naira, confidence in the capital market has been lost. The government need to ensure that confidence in this sector is restored.

1. Buy Made-in-Nigeria Goods
 This slogan should be restored and imbibed by all Nigerians.  We have no need importing what could be locally produced.  Unfortunately, Nigeria’s import dependency has increased with time.   Nigeria is a country where table water, toothpicks, etc to mention but a few are imported.  This attitude needs to change for the country to move forward.

 A mindset attitude to buy and use local products is key to economic growth-as demonstrated by the Indian experience

1. Un-utilized Small and Medium Scale Enterprise Equity Investment Scheme (SMEEIS)

 As at 30 June 2009, the total amount of unused SMEEIS fund stood at N13billion. In order to improve the funding requirement of industries, we advocate that this amount be channeled to the Bank of Industry for disbursement to industries.

 In addition, government should revive the SMEEIS fund; take away the management/disbursement of the fund from banks to specialized development banks. More specialized development banks should be created to cater for needs that are more sectoral.

1. Promotion of indigenous capitalist

 We need to nurture, mentor and recognize our indigenous capitalist class regardless of their tribe or creed. The burden of development is on this class. Regrettably, they have been turned in political toys battered and bastardized by each new incoming political class. Their critical position seem to be occupied by political entrepreneurs who influence government economic policy to suit their immediate need, and in the process destroy the hard work of the  indigenous capitalist class.

8.0    Conclusion

 A country cannot be termed developed if its industrial sector, especially manufacturing is not performing.  The capacity of a country to produce its manufactures makes it not only developed, but also less dependent on other countries.  Nigeria’s manufacturing sector has not been performing well, due to a myriad of reasons earlier mentioned including inadequate funding.

  The government is therefore obligated to spearhead and contribute towards the reduction of the cost of doing business in Nigeria by addressing the previously highlighted issues of operating environment and capacity building for smaller businesses.

  Let me conclude with a quotation from a Lebanese Poet:

“I PITY A COUNTRY THAT EATS WHAT IT DOES NOT GROW

   I PITY A COUNTRY THAT WEARS WHAT IT DOES NOT WEAVE

   I PITY A COUNTRY THAT DRINKS WHAT IT DOES NOT BREW”

  Once again, I wish to express my appreciation to the organizers for extending this invitation to me.

Fellow Nigerians and all participants, thank you for listening.

Alhaji Bashir M. Borodo, MFR

President, MAN