Nigeria

Investment Climate Assessment

June 2008

World Bank

Regional Program for Enterprise Development (RPED)

Africa Finance and Private Sector (AFTFP)

and

African Development Bank


TABLE OF CONTENTS

Listing of Figures and Tables iv

Executive Summary x

Acknowledgements xviii

1. Introduction and Macro Background 19

1.1 Introduction 19

1.2 Macro Background 20

1.3 Recent Economic Developments 22

1.4 The Impact of theOilSector and Investments in the Economy 24

1.5 Macroeconomic Policy 25

1.6 Poor Growth in Nigeria – Is it Due to Dutch Disease? 27

2. Firm Productivity in Nigeria 29

2.1 Sample composition 29

2.2 Labor Productivity 31

2.3 International comparison of Value Added per Worker 34

2.4 Labor Costs and Unit Labor Costs 36

2.5 Total Factor Productivity 37

2.6 Total Factor Productivity and Employment 39

2.7 Linking Productive Efficiency to Allocative Efficiency 40

3. The business environment in Nigeria 42

3.1 Perceived Constraints 42

3.2 Indirect Costs of Doing Business in Nigeria 46

3.3 Electricity 47

3.4 Transportation and Customs 48

3.5 Taxes 51

3.6 Access to Land 52

3.7 Corruption and Crime 53

4. Comparing the Investment Climate across Nigerian States 60

4.1 Investment Climate Index 61

4.2 Analysis of Investment Climate in 11 Nigerian states 64

4.3 Impact of Reforms 66

5. Access to Finance 70

5.1 Access to credit in Nigeria 70

5.2 Nigerian banking practices 75

5.3 How Nigeria’s states differ in access to finance 83

6. Labor markets and human capital 87

6.1 Worker Skills 87

6.2 Labor Regulation 91

6.3 Cross-Country Comparison 93

6.4 Comparisons across firms in Nigeria 95

7. Entrepreneurship and Managerial Capacity in Nigeria Firms 98

7.1 Defining Entrepreneurship 98

7.2 Developing the Management Questionnaire for Nigeria 99

7.3 Management Practices Across Firms 100

7.4 Management Practices and Investment Climate constraints 102

7.5 Implications for Productivity, Firm Performance and Investment Climate 103

8. Micro firms 106

8.1 Constraints to Business 106

8.2 Comparison between formal sector and micro firms 113

9. Women entrepreneurs in Nigeria 117

9.1 Introduction 117

9.2 Male and women entrepreneurs in Nigeria 118

9.3 Gender differences in investment climate constraints 125

9.4 Gender differences in productivity 135

9.5 Conclusions 136

10. Conclusions – Framing a Policy Response 138

Reference 142

Appendix 144

Appendix 1: Enterprise Survey in Nigeria 144

Appendix 2 Tests for omitted variable bias 151

Appendix 3: State Level Analysis 155

A: State level comparison of Business Environment 155

B: How Nigeria’s states differ in access to finance 161

C: Micro Firms: State level analysis 167

Appendix 4: Methodology for ICI 173

Appendix 5: Labor Markets and Human Capital 177

Appendix 6: Entrepreneurship and Managerial Capacity in Nigeria Firms 182

Appendix 7: Women Entrepreneurs In Nigeria 189

Listing of Figures and Tables

FIGURES

Figure 1: Nigeria - low labor productivity and high unit labor costs xi

Figure 2: Value Added per worker by managerial performance xi

Figure 3: Marginal impact of better management by state productivity xii

Figure 4: Indirect costs as percentage of total sales – International Comparison xiii

Figure 5: Share of firms ranking it one of the top three constraints xiii

Figure 6: Access to Finance xiv

Figure 7: Typical charge for a 40-foot export and import container (US$) xv

Figure 8: Investment Climate Index in 11 Nigerian states xvi

Figure 11– GDP by Sector in 2006 (percentage) 21

Figure 12- Nigeria – Real GDP Growth, Inflation, Oil Prices and Exchange Rate 23

Figure 21 – Value Added per Worker by Firm Size 33

Figure 22 – Value Added per Worker by Sectors 33

Figure 23 – Value Added per Worker by State 34

Figure 24 – Value Added per worker by country and size 35

Figure 25 – Capacity Utilization in Selected Countries (%) 35

Figure 26 –Labor Cost (LC) for Skilled and Unskilled Workers 36

Figure 27 - Ratios of Wages to Value Added by Country 37

Figure 28 - Covariance between LP and market's share 41

Figure 29 - Covariance between VA/L and Market Share 41

Figure 31 - Percentage of Firms Reporting Major or Very Severe Constraints (Top 9 Constraints) – All Formal Sectors 43

Figure 32 - Percentage of Firms Reporting Major or Very Severe Constraints – Top Constraints in Nigeria – International Comparison 45

Figure 33 -Indirect Costs – Manufacturing Sector - Comparison across Countries 47

Figure 34 - Customs – Manufacturing Sector - Comparison across Countries 49

Figure 35 - Trading across Borders – International Comparison 50

Figure 36 - Typical charge for a 40-foot export and import container (US$) 50

Figure 37 - Composition of taxes – International Comparison 52

Figure 38 - Percentage of Firms Asked for Informal Payments when Making Requests – Reticent Interviewees - All Formal Sectors 56

Figure 39 – Evolution over time of the CPI for Nigeria 58

Figure 310 – Evolution over time of Nigeria’s percentile rank for rule of law and control of corruption 58

Figure 41 - Variation Across States of the Percentage of Firms Reporting Major or Very Severe Constraints (Top 9 Constraints) – All Formal Sectors 60

Figure 42 - Doing Business ranking and ICI ranking in 11 Nigerian states 63

Figure 43 Managers' perception of state ranking of business climate 63

Figure 44 - Managers' ranking of worst states and ICI 63

Figure 45 - Investment Climate Index in 11 Nigerian states 64

Figure 46 Contribution of Infrastructure, Inputs and Institutions sub-indices to ICI, 65

Figure 47 - Impact on ICI of reforming the bottom 3 indicators in each state 66

Figure 48 - Impact on ICI of reforming the middle 3 indicators in each state 66

Figure 49 - Average impact on ICI of the same 1 or the same 3 67

Figure 410 - Combined effect of 1 federal reform 69

Figure 51- Access and cost of finance in Nigeria 70

Figure 52 - Firms’ perceptions of the financial sector: International Comparison 71

Figure 53 - Nigerian Business are largely funded from retained earnings 72

Figure 54 - Nigeria's Private Sector is Starved of Credit 74

Figure 55 - Nigeria's Financial Sector Dominated by Banks 76

Figure 56 – Nigerian Banks are well capitalized 77

Figure 57 - Access to credit in the formal sector by industry grouping 79

Figure 61: Manufacturing Firms in Nigeria are at the bottom of the pack with regards to inadequate skills in the labor force. 88

Figure 62: Percent of firms providing training/percent workers trained. 90

Figure 63: Manufacturing firms in Nigeria are at the bottom of the pack with respect to labor regulations. 92

Figure 64: Labor regulation is not burdensome in Nigeria. 93

Figure 65: Median monthly wages for production workers are just a shade higher in Nigeria than in India, but lower than China and other African comparators. 94

Figure 66: Median Monthly Wages in the Food and Garments Sectors 95

Figure 67: Unionization rates in Nigeria are moderate. 96

Figure 71- Frequency Distribution of Nigerian Firm Management Scores 100

Figure 72: Entrepreneurship Management Practice Indicator (EMPI) Results by State 101

Figure 73 - Value Added per worker vs. managerial performance 104

Figure 74 - Marginal impact of better management by state productivity 105

Figure 81 - Percentage of Firms Reporting Major or Very Severe Constraints (Top 6 Constraints for Formal Sector) – Formal Sector versus Micro Firms 113

Figure 82 - Indirect Costs – Formal Sector versus Micro Firms 114

Figure 91 - Share of female-owned enterprises in selected African countries 119

Figure 92 – Motivations to be in business, by industrial sector and gender of the business owner 125

Figure 93 – Percentage of entrepreneurs who declare that a specific constraint is ‘major’ or ‘very severe’ 126

Figure 94 – Difference in the predicted probability for men and women business owners of perceiving a constraint as ‘major’ or ‘very severe’ (percentage points) 128

Figure 95 – Reasons for not applying for a loan, by sector and gender of the business owner 134

Figure 96 – Male-owned to female-owned enterprise ratio of value added per worker, by industrial sector 135


TABLES

Table 1: Three most important state reforms to improve the ICI xvii

Table 11: Macroeconomic Indicators 1989-2007 24

Table 21 - Distribution of Nigerian firms by Sector and State 30

Table 22: Population by sector and location (number of establishments) 31

Table 23 Value Added per Worker (VA/L - US $) and Ratio of Wages to Value Added (Unit Labor Costs) of Nigerian Firms 32

Table 24 - International Comparison of Value Added Per Worker (US$‘000) 34

Table 25 - Ratios of Wages-to-Value Added (Unit Labor Cost) and Labor Cost (LC) in manufacturing in Nigeria and Comparator Countries 37

Table 26 - Estimated Conditional Labor Demand 39

Table 31 - Percentage of firms reporting major or very severe constraints – all formal sectors 42

Table 32 - Share of firms considering this to be one of the top three constraints 43

Table 33 Percentage of Firms Reporting Major or Very Severe Constraints – Manufacturing Sector 44

Table 34 -Percentage of Firms Reporting Major or Very Severe Constraints – Comparison across Countries 45

Table 35 - Indirect Costs – Manufacturing Sector 46

Table 36 - Indirect Costs – All Formal Sectors 46

Table 37 - Infrastructure Indicators – All Formal Sectors 48

Table 38 Infrastructure Indicators – Comparison across Countries 48

Table 39 -Time (hours) required to fill in tax forms – All Formal Sectors 51

Table 310 -Reasons for Perceiving Access to Land for Expansion/Relocation to be a Major or Very Severe Constraint – All Formal Sectors 52

Table 311 - Perception of Government and Regulations – All Formal Sectors 53

Table 312 - Percentage of Reticent Interviewees – All Formal Sectors 54

Table 313 - Perceptions of Government and Regulations – Reticent Interviewees – All Formal Sectors 54

Table 314 - Percentage of Firms Asked for Informal Payments when Making Requests 55

Table 315 - Court System – All Formal Sectors 56

Table 316 -Corruption Perceptions Index – 2007 57

Table 317 Security Services and Security Expenditure–All Formal Sectors 59

Table 318 - Security Services and Security Expenditure – Comparison across Countries – All Formal Sectors 59

Table 41 - Variables used in the construction of the composite Investment Climate 62

Table 42 - Three most important state reforms to improve the ICI 68

Table 51 : Sources of Short-term finance in the formal sector 72

Table 52: Sources of long-term finance in the formal sector 73

Table 53: Sources of Finance - formal Sector versus Micro Firms 73

Table 54 - Sources of Short term Financing in Formal Sector - International Comparison 75

Table 55: Sources of Long-term Finance in the Formal Sector - International Comparison 75

Table 56: Access to credit - International Comparison* 77

Table 57: Access to credit in the formal sector 78

Table 58: Collateral - Formal Sector versus Micro Firms 80

Table 59: Cost of Debt and Duration – International Comparison 81

Table 510: Reason for not applying for loans - Formal Sector 81

Table 511: Loan Application/Rejection 82

Table 512: Regional Grouping of states 83

Table 513: Sources of short-term finance in the Formal Sector (by regional performance) 83

Table 514: Sources of short-term finance in the Formal Sector - Nigeria (by state) 84

Table 515: Sources of Short-term finance – Micro Firms, Nigeria (by state) 85

Table 516 : Sources of finance (by regional performance) - Micro Sector 85

Table 517 Access to credit in the formal sector - Nigeria (by state) 86

Table 518: Reason for not applying for loans - Formal Sector (by state) 86

Table 61: Do reports of skill constraints vary by training or employment growth 88

Table 62: Percent of firms saying that the average worker in the firm has completed different levels of schooling 89

Table 63: Firm-based training: prevalence and percent of workers trained 91

Table 64: Median Monthly Wages by Occupation in 2005 US Dollars 96

Table 71 - Building the Entrepreneurial Management Practice Index (EMPI) 99

Table 72 - Share of firms ranking this to be one of the top three constraints by Managerial Performance Level (%) 103

Table 81 - Establishment’s Location – Micro Firms 106

Table 82 - Major or Very Severe Constraints as Reported by Micro Firms 107

Table 83 - Share of firms considering this to be top constraints 107

Table 84 - Major or Very Severe Constraints as Reported by Micro Firms – States 108

Table 85 - Indirect Costs – Micro Firms 109

Table 86 - Infrastructure Indicators – Micro Firms 109

Table 87 - Use of own transport – Micro Firms 110

Table 88 - Perception of Government and Regulations – Micro Firms 110

Table 89 - Perception of Government and Regulations – Micro Firms 111

Table 810 - Perceptions of Government and Regulations – Reticent Interviewees 111

Table 811 - Percentage of Firms Asked for Informal Payments when Making Requests 112

Table 812 - Court System – Micro Firms 112

Table 813: Security Services and Security Expenditure – Micro Firms 113

Table 814 - Infrastructure Perceptions – Formal Sector versus Micro Firms 114

Table 815 - Regulatory Burden – Micro Firms 115

Table 816 - Perception of Government and Regulations – Formal Sector versus Micro Firms 115

Table 817 - Percentage of Firms Reporting Major or Very Severe Obstacles to Registering a Business – Micro Firms 116

Table 91 – Percentage of firms owned by women, by state and sector 120

Table 92 – Distribution of male- and female-owners across industrial sectors, and percentage of enterprises owned by women within each industrial sector 122

Table 93 – Percentage of female entrepreneurs by state and selected sub-sectors (micro sector excluded) 122

Table 94 – Education level of the business owner, by industrial sector 123

Table 95 – Channels of enterprise acquisition, by sector and gender of the business owner 124

Table 96 – Access to electricity, several indicators, by sector 130

Table 97 – Production lost (% of 2006 sales) as a consequence of power outages, by industrial sector and gender of the business owner 130

Table 98 – Composition of working capital, by sector and gender of the business owner 131