Abuse of incentives threatens Nigerian manufacturing in economic downturn
Nkem Okoro writes that as Nigeria battles the ongoing economic down turn, it should take steps to implement stiff sanctions to check violations such as the one recently exposed by the National Sugar Development Council (NSDC) that companies are taking advantage of the federal government’s concessions designed to help sugar importers transform into integrated sugar producers, without actually making tangible effort to begin to produce locally.
Nigerian leaders and managers of its economy for decades have been vocal about the need to diversify the economy and create other sources of earning foreign exchange (forex) for the country.
Unfortunately, these leaders have done almost nothing but talk about this essential step that the nation needs to take.
Also, for many years, the country has somehow escaped the severe price for building its economy around a single commodity.
However, the current spell of perpetual decline in the price of crude oil, the only commodity that supports the survival of Africa’s largest economy of over 170 million people, seems to indicate that Nigeria may, for the first time, have to face the dire consequences of failing to heed the wise counsel of exploring other means of revenue generation and forex earning.
One of the policies of government initiated to gradually help the country develop capacity and competencies in strategic segments of the economy towards the medium and long term goal of import substitution and enhanced forex earning, is the Backward Integration policy (BIP).
The BIP which was actually made popular in the Nigerian public sector by the Olusegun Obasanjo administration involves a company or country buying or internally producing major parts of its supply chain.
One of the first sectors in Nigeria to be impacted by the BIP was the fruit juice industry which witnessed massive inflow of investment immediately the government implemented an import prohibition on the product to boost local production.
Juice brands, such has Five Alive, Funman and Chivita became popular after this policy was introduced and importation was banned between 2007 and 2008.
In the case of cement and sugar, the same policy was later deployed but with a slight modification. Operators in these two sectors complained that an outright ban on importation may be counter productive since it will take some time to build local capacity to satisfy local demand for the two essential products.
So the government therefore staggered the implementation of the BIP for these two products. Companies operating in the sector were given a time frame to begin investing in local production of the commodities which they were then importing and selling.
Importation quota was also introduced by the federal government for all the companies investing in local production of these commodities and a time table was set for the gradual winding down of importation in order for locally-produced goods to feed the market totally.
Unfortunately not many of the companies that were selected by the federal government to drive local production of these products were actually interested in pursuing the government’s ultimate objective of replacing imported products with locally produced ones.
BUA group, traders in cement and sugar was one of the companies listed by the federal government at the time to engage in the transformation of the country from an import-dependent nation in terms of sugar and cement to one which produced these essential products locally.
However, recently, BUA and some other operators were accused of abusing the opportunity to transform the nation into a local integrated producer of sugar and cement apparently because of the higher profit margins obtainable from simple importation and trading in these commodities after only very minimal value addition.
The regulatory body charged by the federal government to see to the transformation of the sugar industry in the country from one dependent on massive importation to an integrated producer of the essential commodity, the National Sugar Development Council (NSDC), revealed recently that some companies including BUA had flouted the terms and conditions for obtaining a three-year low tariffs for sugar importation into the country.
The Executive Secretary of the council, Abdullatif Demola Busari, said in January 2013, that the federal government approved concessionary low tariffs of five per cent duty and five per cent levy for raw sugar imports for three companies as against the five per cent duty and 70 per cent levy contained in the National Sugar Policy.
The Executive Secretary said though the high tariffs for refined sugar import into the country was deliberately designed to discourage importation and encourage local production of sugar, the concession became necessary in order not to hike the local price of the commodity since the country has not achieved self-sufficiency in sugar production yet.
He noted Nigeria still depended on sugar importation to meet 90 per cent of local consumption, which led to the plea by stakeholders that if sugar is to be imported at that high tariff, the cost of sugar will be prohibitive.
The concession was then given to Dangote Group, BUA Group and Golden Sugar companies all of which had signed a Backward Integration Programme (BIP) commitment with the federal government in which the money saved from the concession will be invested in their cane sugar farms and integrated sugar processing.
This move was expected to slowly lead to the phasing out of the massive importation of sugar in the medium and long term and transforming the country into one that is self-sufficient in sugar production and consumption.
Overall, the target is that by the year 2018, the three of them will be capable of integrated production of 700,000 metric tonnes of sugar sourced locally from their farms.
The purpose of this plan of the federal government is obvious. By maintaining the status quo, the economic activities generated in the process of refining dirty brown-coloured raw sugar imported from Brazil and transforming it into white sugar crystals is only about five per cent of the gamut of farm jobs, out grower-farmers schemes, sugar cane suppliers and large numbers workers needed for fully integrated processing of sugar straight from sugar cane harvested locally from Nigerian farms.
The extensive value chain created from fully integrated sugar production is therefore essential for the nation’s economic growth, while the little value addition of sugar refining currently being carried out does not do the economy much good.
According to Busari, the NSDC chief executive: “One particular refiner, the BUA group, has not lived up to expectation. Just about three weeks ago, the Sugar Council had to apply a sanction. The sanction is simple. Recall the concession of five per cent levy, five per cent duty because you are expected to put the savings back to your BIP and we’ve been monitoring the BIP and nothing has happened in BUA’s investment.”
Investigations revealed that the BUA Group’s BIP site in Kwara State has nothing on ground along the line of expectations when the incentives were given to the group to show for the three years the company enjoyed concessionary low tariffs for sugar imports.
“By now, it’s supposed to have over 400 hectares of planted sugar cane on the site. It is supposed to have brought in its machineries by now. That is, by March 2015, it is supposed to have imported it’s machineries but nothing like that has happened,” Busari had explained.
Market watchers revealed that the same thing happened in the case of cement, stressing that while companies like Dangote and Lafarge were turning out three to six million tonnes per annum capacity cement plants within a couple of years, it took BUA many years to complete its around three million tonnes per annum cement plant in Obu, north of Edo State. Meanwhile it enjoyed significant concessionary tariff from cement importation which was supposed to be channeled into investing in fully integrated cement production.
“BUA preferred to continue importing cement or sugar or any other commodity into Nigeria than to get their hands dirty with actual full scale local manufacturing,” a source quipped.
The company also runs edible oil mills in the country and it has displayed exactly the same attitude to integrated production of vegetable oil as it has done in cement and sugar.
While other vegetable oil producers are investing in massive cultivation of oil palm plantations, BUA has done virtually nothing in terms of farming, instead it fully depends on importation of Crude Palm Oil (CPO) from Asia for refining in Nigeria with only very little value addition and economic activities created.
PZ Wilmar which had been earlier criticised for the same thing has been seen to have acquired nearly 50,000 hectares of oil palm plantation from the Cross River State government and Obasanjo farms and they are currently rehabilitating the palm trees in this plantation, creating jobs for thousands of local people across the country.
Unfortunately, till date, it remains to be seen if BUA with all its claims to being a foremost and major manufacturer in Nigeria, has really injected significant investment in real productive agriculture and manufacturing.
Rather, it is said to have just been a company that imports bulk of its raw materials, many of which can be produced locally, with little value addition and a lot of smile to the bank with huge margins, shipping most of the jobs and economic activities that should have been created to Asia and South America from where the significantly processed raw materials are largely imported.
Certainly, with Nigeria’s economy now the way it is, this is not the time to encourage the kind of quasi-manufacturing operation which BUA has been accused of championing. Forex supply has reduced by almost 60 per cent, revenue to the federal government has dipped by almost the same percentage and the situation is forecast to remain gloomy for a long time to come. So, for operators who are not ready to get their hands dirty in actual farming and manufacturing, Nigeria certainly is no more the ideal market for their operations.
Nkem Okoro