LAGOS CHAMBER OF COMMERCE AND INDUSTRY
2012 FIRST QUARTER BUSINESS ENVIRONMENT REPORT

LAGOS CHAMBER OF COMMERCE AND INDUSTRY

2012 FIRST QUARTER BUSINESS ENVIRONMENT REPORT

In pursuance of its public policy advocacy mandate and the monitoring of the business environment, the Lagos Chamber of Commerce and Industry (LCCI) instituted the periodic evidence based Business Environment Report. The purpose is to periodically assessthe investment climate and highlight the implications for government policy.

The report is the outcome of feedback frommembers of the Chamber and the wider business community in Lagos on investment climate issues. A couple of the issues cut across all sectors with economy-wide implications and impact; others are sector specific. The report provides a basis for policy reviews and reforms in the context of national economic management. Lagos being the commercial nerve centre of the country, the outcome of this study would,large extent, reflect the experience in other parts of the country.

CROSS CUTTING ISSUES

Four major issues emerged from the study as cutting across sectors of the economy:

  1. Power supply constraint and resultant high energy cost;
  2. Security situation and its implications for business confidence and investors’ perception.
  3. Weak consumer demand reflecting in general declines in sales.
  4. Fuel subsidy removal, resultant protests, impact on operating costs and disruptions in the economy.

Power Supply

There was an evident deterioration in power supply in the first quarter which took its toll on businesses in the Lagos area and other parts of the country. The partial removal of subsidy made the impact more severe, especially for SMEs that use smaller capacity electricity generators. The summary of the implications for business were as follows:

  1. Sharp increase in operating cost due to high cost of diesel and PMS.
  2. Competitive disadvantage for local producers and manufacturers
  3. Erosion of profit margins
  4. Sub-optimal capacity utilization
  5. Business sustainability challenges.

Security Situation

The security situation in the country assumed disturbing dimensions impacting on the investment environment in the following ways:

  1. Declining investors’ confidence across the broad spectrum of domestic, foreign and prospective investors in the economy.
  2. Negative impact on image and perception of the country in the global community;
  3. Escalation of risk of doing business in some parts;
  4. Relocation of businesses away from the troubled spots in the country;
  5. Some organisations reviewed their security budgets upwards in the light of developments in the country.
  6. Significant setback for the tourism sector in the country.

Fuel Subsidy Removal

The partial removal of subsidy on petrol had implications for businesses in the first quarter as follows:

  1. The January protests paralysed the economy with huge losses to business and the economy;
  2. Cost of fuelling operational vehicles by firms increased by about 40%. This has implications for profit margin.
  3. Other product segments suffered drops in sales as firms and households spend more on fuel.
  4. Many organisations were compelled to review transport allowances for their workforce which meant additional operational cost with implications for bottom-line;
  5. Petrol retail outlets experienced an average of 20% drop in sales;
  6. Inflationary impact across the economy, especially on consumer goods.

SECTOR SPECIFIC ISSUES

Construction Industry

Key challenges identified by operators were as follows:

  1. Dearth of skilled work force. The few availablewere highly priced. Many technically skilled labour have taken up the job of commercial motorcyclists which apparently was relatively more financially rewarding;
  2. Depressed property markethad a negative impact on the construction industry;
  3. Lack of continuity in government projects leading to abandonment of projects; this is often associated with changes in political leadership or the headship of government institutions and agencies;
  4. Late passage and signing of the Appropriate bill;
  5. High cost of building materials, especially cement and iron rods.
  6. Late payment for work done and duly certified.

The policy implication is that there is need for more government investment in vocational and technical education. There should also be a deliberate policy to reduce cost of building materials. Governments at all levels should as well promptly pay contractors after due certification.

Agricultural Sector

Investors in the sector commend the passion and drive of the current Minister of Agriculture. However, there are concerns in the following areas:

  1. Land acquisition and perfection of land titles;
  2. Access to credit;
  3. Weak agricultural insurance scheme.
  4. Access to incentives is difficult and sometimes fraught with corruption.

Maritime Sector

Operators in the freight forwarding business identified the following challenges:

  1. Rampant and Arbitrary Valuation of Cargo by the Nigeria Customs Service, sometimes disregarding all supporting documents. This result in indiscriminate issuance of debit notes to importers and extortion.
  2. Excessive focus of the customs on revenue generation to the detriment of trade facilitation;
  3. Many terminal operators have capacity problems leading to non-provision of adequate plants at the port terminals in Lagos. Most often, importers make private arrangements to position their cargo for examination and loading;
  4. Collection of Wharf Landing fees on the roads create traffic problem around the ports;
  5. High demurrage charges by shipping companies
  6. Access to the ports could be a nightmare because of the traffic situation on the Oshodi-Apapa Expressway, especially the indiscriminate parking of trucks on the highway.

The policy implicationsare as follows:

  1. Terminal operators should be closely monitored to ensure delivery on their mandates as concessionaires. The BPE has a vital responsibility in this regard;
  2. Exercise of discretionary powers by valuation officers of the Customs should be checked. Role of Nigerian Customs Service as a facilitator of trade should be duly recognised;
  3. Area Controllers of Custom should be adequately empowered to exercise full authority on activities in their command.

Doing Business with Government

Doing business with government and its agencies could be a real nightmare for the private sector. The key areas of concern are as follows:

  1. Corruption and extortion still prevalent in government contracts and procurement processes.
  2. Bureaucracy and the inherent challenges;
  3. Lack of project continuity
  4. Late payment for work done. In some cases payments are not even made at all;
  5. Document certification and approvals, including the processing of investment incentives are often characterised by extortion.

Manufacturing Sector

The manufacturing sector is one of the most vulnerable in the Nigerian economy because of competitiveness issues. Its contribution to GDP remains very low, at less than 5%. The usual challenges of the sector persisted:

  1. High energy cost remain top on the list of the challenges facing manufacturing;
  2. Market access is now an even bigger challenge for most manufacturing firms. The influx of Asian goods into the Nigerian market poses a major risk to the survival of many manufacturing enterprises;
  3. Rampant cases of faking, counterfeiting, and dumping of substandard products.
  4. Credit access and cost remains an issue with many investors in the sector.
  5. Fuel subsidy removal increased operating cost.

Credit Issues in the Economy

  1. Many businesses lamented the increasing difficulty of access to credit and high cost of fund. Rates are between 16-25%. Thisgives clear advantage to offshore investors;
  2. Many banks demand high collateral cover, which is sometimes as high as 150%;
  3. Credit conditions by banks are too strict for many SMEs;
  4. High cost of government borrowing, as reflected in the yield on treasury bills and FG bonds,worsened the creditcrisis through the crowding out effects on the private sector and erosion of liquidity in the banks.

Supermarket Stores

Major concerns expressed by players in this sector are as follows:

  1. Frequent failure of the POS is a major problem, especially in the light of the cashlite policy of the CBN;
  2. Prevalence of fake products in the market;
  3. High transportation cost arising from the subsidy removal;
  4. Drop in salesdue to inflation and weak consumer demand;
  5. Increase in transport allowances of staff as result of the increased transportation cost;

Property Market

Property market is yet to recover, especially the top end of the market. The key issues were identified as follows:

  1. Liquidity squeeze in the financial system.
  2. Global economic conditions as reflected in the decline in demand for accommodation for expatriates and other offshore demands for property;
  3. Sack of bank staff affected demand for medium density properties in some locations;
  4. Weak manufacturing sector depressed the demand for warehouses.

Regulatory Agencies

An economy needs a measure of regulation for good performance. However, too many regulatory agenciescould be counterproductive. The key issues identified by private sector players in the economy were as follows:

  1. Too many regulatory agencies in the economy, some with overlapping functions;
  2. The agencies are often more interested in revenue generation than on the real regulatory mandate;
  3. Charges of many of the agencies are prohibitive;

Government should adequately fund the agencies to reduce the burden on the private sector. Businesses should not be saddled with the responsibility of funding these agencies.

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Banking Sector Issues

Banking sector operators identified a number of constraints to credit delivery as follows:

  1. Tight monetary policy affecting liquidity and delivery of credit. They argued that Cash Reserve Ratio (CRR) of 8%; Liquidity Ratio (LR) of 40%; and Monetary Policy Rate (MPR) of 12.5% are major constraints to liquidity and consequently delivery of affordable credit to the economy.
  2. High operating cost affecting profit margins;
  3. State of the economy and infrastructure condition affected the quality of loan assets;
  4. Prescribed provisioning levelfor loans too high and affecting lending by banks;
  5. Loss of deposits to FG Bonds and Treasury Bills because of the relatively better returns;
  6. Compliance with IFRS prescribes increasesin provisioning levels for loans and threshold for collateral cover thus reducing liquidity andrestraining lending.

Policy implication is that the CBN may have to relax the tight monetary policy stance to encourage banks to boost credit delivery to the economy.

MUDA YUSUF

DIRECTOR GENERAL

LAGOS CHAMBER OF COMMERCE AND INDUSTRY

14TH MAY 2012

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