Bulls n Bears Entrepreneurship Zone :: Manufacturing in Nigeria: Status, challenges and opportunities

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According to the National Bureau of Statistics (NBS), the Nigerian
manufacturing sector is dominated by the production of food, beverages and
tobacco, with sugar and bread products generating the greatest value of
output. To encourage more output in these and other sectors, the government
has been making it cheaper for consumers to purchase locally manufactured
goods by making the smuggled foreign alternatives prohibitively expensive or
totally unavailable through prohibitions.

Most recently, the Central Bank of Nigeria (CBN) announced plans to
facilitate the issuance of single-digit interest rate loans to firms
operating in the agriculture and manufacturing sectors. Port reforms and
other ease of doing business initiatives by the government are also helping
to make the manufacture of goods easier in the country; relatively, at
least. Owing to reforms, Nigeria’s ease of doing business ranking moved to
145th place in 2017 from 169th in 2016, for instance.



The Nigerian manufacturing sector has been performing well in recent years.
While year-on-year growth for each of the quarters in 2015-16 was negative,
there was only one such instance in 2017; in the third quarter. Incentives
by the government are also beginning to encourage greater interest.
According to official data, at 9.3% of GDP, the Nigerian manufacturing
sector grew by 3.4% year-on-year in the first quarter of 2018, an
improvement from 0.1% y/y in Q4 2017 and -2.9% y/y in Q3 2017. The last time
there was something close to such growth in the period since Q1 2016, was in
Q1 2017 when the sector grew by 1.4% y/y. For the whole of 2016 till then,
the sector recorded negative growth. Other growth figures for the Nigerian
manufacturing sector and its sub-sectors are in the following table.

Nigerian manufacturing sector (growth, % y/y)


SECTOR/SUB-SECTOR

Q1 2018

Q4 2017

Q3 2017


Manufacturing

3.4

0.1

-2.9


Oil refining

7.1

-46.2

-45.4


Cement

5.3

-1.9

-4.6


Food, beverages & tobacco

5.5

2.2

0.6


Textile, apparel & footwear

1.9

1.7

0.2


Wood & wood products

1.5

0.4

1.2


Pulp, paper & paper products

3.4

2.7

-1.8


Chemical & pharmaceutical products

1.4

4.8

0.2


Non-metallic products

-4.9

3.3

1.8


Plastic & rubber products

0.4

3.4

0.7


Electrical & electronics

10.1

0.7

0.8


Basic metal and iron & steel

0.9

1.5

-0.4


Motor vehicle and assembly

2.3

0.2

-21.3


Other manufacturing

-0.6

2.8

-9.7


Source: National Bureau of Statistics (NBS)


Opportunities


The government’s industrialisation focus is on small and medium scale
enterprises and is one of the five key execution priorities of its four-year
Economic Recovery and Growth Plan (ERGP). Other stated priorities are the
stabilisation of the macroeconomic environment, energy sufficiency,
improvement of transportation infrastructure, and the achievement of food
security. To ensure optimal execution of the ERGP, the Nigerian government
resolved in August 2017 to conduct sector or focus labs “designed to tackle
complex challenges by bringing together all stakeholders to identify the
root causes of the challenges [within a sector] and [generate] ideas and
resources to solve them”.

For manufacturing and processing, phase one of the ERGP focus labs sought
to unlock investment commitments in the food manufacturing, textile,
garments and leather industry, mining and downstream activities,
petrochemical industry, general manufacturing, and industrial parks. These
should also be the focus of potential investors interested in the Nigerian
industrial sectors. A participation in future phases of the focus labs is
also recommended.

In phase one, for instance, the focus labs “expedited the access of a
mining company to the Solid Minerals Development Fund (SMDF)”, and brought
to the attention of the mining minister the troubles of a bitumen mining
company seeking to renew its exploration licences. Additionally, the focus
lab aided a metal manufacturing and aluminium company, which “required
additional funding” and had held several funding syndications with
multilaterals and commercial banks, in getting an agency of the World Bank
to conduct a review of their projects within the lab. Consequently, the two
companies have been long-listed for screening. In other words, the focus lab
facilitated access to funding for the firms.

Other opportunities emanate from the imported manufactured products
currently prohibited by the Nigeria Customs Service. Foreign investors would
easily get a listening ear from the government if they chose to invest in
manufacturing the goods listed in the table below domestically. As a few
examples will show, this is a well-tested approach.

Nigeria: Manufactures in import prohibition list


Refined vegetable oils and fats


Cocoa butter, powder and cakes


Spaghetti/Noodles


Fruit juice in retail packs


Waters, mineral waters, aerated waters


Bagged cement


Medicaments (e.g. Paracetamol, Multivitamins, etc)


Waste pharmaceuticals


Soaps and detergents


Mosquito repellant coils


Rethreaded and used pneumatic tyres


Corrugated paper and paper boards


Telephone recharge cards and vouchers


Carpets and other textile floor coverings


All types of footwears, bags and suitcases


Hollow glass bottles of a capacity exceeding 150mls


Ball point pens and parts including refills


Tomato paste or concentrate


Source: Nigeria Customs Service

According to Nairametrics, a business intelligence firm, five local
vegetable oil brands currently dominate the Nigerian market due to the
government’s import ban. They are Sunola Oil, Grand Oil, Power Oil, Mamador
and Devon King’s. To increase patronage and accessibility to their products,
local vegetable oil producers have been implementing bulk-breaking
strategies, adding sachet packs to their array of packaging.

There is not a similar success with the cocoa processing sector, however,
which is currently burdened by debt and utilises less than 20% of its
installed capacity. As Nigeria is the fourth-largest exporter of cocoa, this
is probably an opportunity for financially buoyant foreign investors. There
is certainly at least 80% of the industry’s 150,000MT capacity that could be
filled momentarily. This could be done by either taking over existing firms
or setting up greenfield operations. Incidentally, even at full capacity
utilisation, there is much more cocoa processing that could be done for
export and thus rival neighbouring Ghana and Ivory Coast, which have been
coordinating their efforts lately. Besides, the authorities’ import ban of
cocoa butter, powder and cakes ensures almost guaranteed domestic custom for
the output of the existing processing capacity.

For spaghetti manufacturing, the government’s import ban has not been as
effective as would be desired. Foreign spaghetti brands occupy as much
shelve space as local ones. Local noodle manufacturing has been a huge
success, however. At about 1.8 billion servings annually, Nigeria is now the
12th-largest instant noodle market globally. Owing largely to the
government’s import ban on instant noodles, almost all of the noodles
consumed in the country are locally produced. In fact, the success of the
policy in the instant noodles manufacturing sector is believed to be one of
the reasons why the Nigerian government has been hesitant to sign the
African Continental Free Trade Area agreement (AfCFTA).

Fruit juice production is another venture of interest that could be worth
the while of interested investors. According to the Raw Materials and
Research Development Council (RMRDC), local firms currently meet less than
25% of the 550 million litre local fruit juice demand. With imported
concentrates accounting for most of the current meagre local production, a
noted preference by consumers for naturally produced fruit juice should be a
boon for manufacturers with local resources and capacities across the entire
value chain.

Local cement production is perhaps the best example of how the authorities’
import ban policies have benefited local industry and entrepreneurship.
Africa’s richest man,
<https://www.howwemadeitinafrica.com/tag/aliko-dangote/> Aliko Dangote, owes
his stupendous wealth to cement manufacturing in Nigeria. Dangote Cement
accounts for more than 60% of the estimated 33 million metric tonnes (MMT)
of local cement demand in Nigeria, with margins as high as 70% when the
cement import ban was first instituted; albeit they are now below 50%. With
local producers now churning more cement than is needed, Dangote Cement, in
addition to exporting its excess cement to neighbouring countries, has since
broadened its horizons further afield, with operations in numerous African
countries.

Government efforts to encourage local tomato paste production has not met
with similar success. As Nigeria imports at least 400,000 tonnes of tomato
paste annually, there is a huge opportunity for the manufacturer that can
get it right. Incidentally, Dangote Industries is making an attempt at local
tomato paste production. It set up a plant in northern Nigeria in March 2016
and entered into suppliers’ agreements with 5,000 farmers to guarantee
supply of tomatoes.  Shockingly, even as it agreed to pay above the market
price, the local farmers could not deliver the goods.  In one season, for
example, the produce was destroyed by a pest. And that is beside the fact
that half of the output tends to get spoilt en route to factories from farms
due to bad roads. The Dangote experience in this regard is not an isolated
one. Its example is, however, significant because if there is one local
conglomerate that can make a success of tomato processing, or any other
local manufacturing venture for that matter, it is the Dangote Group.


Challenges


Manufacturing in Nigeria is beset with quite a few challenges; chief among
them is power supply. Most firms rely on “emergency” power generators to run
seamless operations, adding to costs. There are also regulatory issues, a
multiplicity of taxes, and trade facilitation issues, among others. The
country’s infrastructural deficiencies are also a major constraint. Export
processing zones and special economic zones are the government’s workaround
towards removing or mitigating this constraint. The challenges faced by
manufacturers are probably best put by Frank Jacobs, president of the
Manufacturers’ Association of Nigeria, in remarks to the media in April
2018: “A situation where you generate your own power for production does not
make you competitive, because whatever is produced in this country is
produced at a higher cost when compared to other parts of the world. The
same goes for the transportation system as we still move our goods via
roads, even the heavy duty goods. Such goods which should go by rail, lack
enough rail lines to carry them. There is a need to develop the
transportation sector to the point where it can support the manufacturing
sector and also support the economy.”

For more light on these challenges, a report on the Nigerian manufacturing
sector by the National Bureau of Statistics (NBS) in 2014 put them as
follows: inadequate and epileptic power supply, high taxes, poor
infrastructure, and supply variability of rain-dependent agricultural
inputs. There are some strengths, the NBS observes; labour is cheap,
domestic demand is buoyant, and some inputs are available and cheaper
domestically.


Government initiatives


In the ERGP, the government highlights the following policies to boost
manufacturing. It aims to “provide incentives to support industrial hubs,
review local fiscal and regulatory incentives to support the development of
industrial cities, parks and clusters, especially around existing ports and
transport corridors”. Furthermore, the government plans to “revitalise
export processing zones by reviewing local fiscal and regulatory incentives,
rationalise tariffs and waivers on the equipment and machinery imports
required for agro-industry, establish special economic zones (SEZs) to
provide dedicated infrastructure to support hub productivity and acquire
suitable premises for SEZs”. Other highlights of the ERGP specifically
targeted at the manufacturing sector around SEZs are as follows: The
authorities would ensure connection to power and water infrastructure,
facilitate technology acquisition and transfer in the SEZs by making
available research output from local research institutes, ensure connection
and access to critical ICT facilities.

The Lekki Free Trade Zone in Lagos, Nigeria’s commercial capital, is
perhaps the leading example of the efforts of the government in this regard.
In its three years of existence thus far, more than US$700m worth of
finished goods have been exported by the 18 manufacturing enterprises
situated within it. Foreign direct investment to the tune of $500m has also
been recorded by the firms operating in the FTZ. To reduce the types of
bottlenecks faced by firms at the ports, a customs processing centre is
situated within the zone. And although finished goods for export still have
to be transported to the Apapa port downtown at the moment, that would not
be necessary in a few years’ time when the Lekki Deep Sea Port in the FTZ
would have been completed. In fact, the authorities reckon the port should
berth its first ship by the first quarter of 2020.

More broadly, the authorities desire to “build adequate transportation
networks (road, rail, ports), improve access to finance, expand the
capabilities of the Bank of Industry to enable it to support manufacturing
firms through low cost lending, enhance access to the ₦250bn ($692m) CBN
MSME fund by reviewing its design and implementing enabling initiatives to
encourage on-lending”, and the provision of micro-loans to women through the
Government Enterprise and Empowerment Programme (GEEP) and Women Empowerment
Fund.

Launched in 2013, the central bank’s MSME development fund provides
long-term loans to micro, small and medium enterprises at a single-digit
interest rate of 9%. To access it, interested MSMEs apply to participating
banks. There have been reports of favouritism, secrecy and other
malpractices related to the fund, however.

For GEEP, under the aegis of the Bank of Industry, its “MarketMoni” scheme
has given out more than 350,000 micro credit loans thus far. And in
mid-August 2018, bankers and the CBN agreed to provide seven-year fixed-rate
loans of 9% (with a two-year moratorium on principal payments) to firms in
the agriculture and manufacturing sectors. There are also discriminatory
foreign exchange policies by the CBN in favour of manufacturing firms.

Furthermore, the authorities’ Nigerian Industrial Policy and
Competitiveness Advisory Council established in March 2017, with membership
including leading African industrialist Aliko Dangote, assists “the
government in formulating policies and strategies that would enhance the
performance of the industrial sector”. The Presidential Enabling Business
Environment Council established in July 2016 also monitors and assesses key
sectors of the economy to ensure doing business in the country is easier;
with tangible improvement in the country’s ranking in the World Bank Doing
Business survey.

The Nigerian government is also promoting local content by encouraging the
sourcing of raw materials and spare parts locally, leveraging public
procurement of locally manufactured goods (with targets for MSME
participation), and via a “Made in Nigeria” campaign. For the promotion of
innovation and technology-led industries, the government’s plan includes the
provision of fiscal incentives for private investment in research and
development (R&D), improvement of intellectual property enforcement
procedures, promotion of science parks and innovation hubs, encouragement of
private equity and venture capital players through an attractive fiscal and
regulatory framework, and the promotion of youth entrepreneurship and
innovation through the “You-Win-Connect” programme. Controversy recently
trailed the YouWiN Connect programme, though, with participants complaining
about not getting the funding that was promised for their businesses.


Conclusion


Clearly, manufacturing is challenging in Nigeria. But there is a clear
desire by the government to encourage more of it through import bans,
facilitation of cheaper funding, discriminatory foreign exchange policies,
and so on. The government’s ERGP focus labs are also one of the ways the
authorities are using to accelerate more investment in production.
Interested companies, whether local or foreign, would do well to key into
these government’s initiatives to ensure they get the support they are
definitely going to need to succeed. A good place to start for any firm
looking to invest in manufacturing is certainly the authorities’ imports
prohibition list. And like the case of cement manufacturing earlier
highlighted, there is clearly a strong correlation between the sector’s boom
and protection measures by the government.--Howwemadeitinafrica



 

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