Oguche Agudah, Regional Director, Nigeria, OurCrowd
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Subjects of Interest
- Development Finance
- Finance and Investment
- Fiscal Policy
- International Trade
Regulators should be part of industry solutions, not its problems 13 Jan 2016
Operating in emerging markets, including Nigeria, can be tough. Often times, companies have to provide their own soft and hard infrastructure. They generate their own power due to perennial public supply outages; they sometimes fix the roads leading up to their premises, and train their staff to make up for the poor educational system. Throw in dealing with regulatory agencies that often make the environment more hostile, and what you get is an environment that drives up business costs and increases the risk premium of operating in Nigeria.
Nigeria's unique selling proposition to foreign investors and multinational companies to invest in the country has always included high returns on investment, a huge market with the largest population in Africa, a growing middle class, and access to the West African sub-region, among others. But if these benefits are weighed against the increasing cost of doing business in the country, then potential investors would have a rethink.
Using the recent fine of $5.2 billion imposed on MTN – which has been reduced to $3.9 billion – as a point of reference, we can dissect pertinent regulatory issues, especially with regard to:
a. the increased enthusiasm of regulators and government agencies in dealing with industry operators and developing the industry in general and,
b. the strategies multinationals adopt in dealing with regulatory and government agencies in emerging markets.
Regulatory agencies
I'll give two instances from my dealing with investors and business people who have had first-hand experiences with Nigerian regulatory agencies. One has to do with a local business person, while the other has to do with a foreign entity.
A young lady was trying to set up a fashion business. She tried to get some government intervention funding but didn't succeed. She got friends and family to rally around her and they helped her raise funds to rent a shop, stock up the shop and buy a generating set to make up for lack of power supply from the national grid at the area where she set up her shop. After a few weeks of operations, she was shocked when she got a notice from one regulatory agency asking her to pay emissions tax on her generator.
An Indian foreign investor that I met in India lamented that he had flown to Nigeria more than 100 times in a two-year period, just trying to secure a permit from a particular regulatory agency to enable him operate in the country. His company is a top-rated Indian company with lots of money to invest.
The truth is that a number of regulatory agencies in Nigeria see their functions as revenue generators and profit centres not as enablers and neutral arbiters that they are meant to be. Added to this, is that there are many inter-regulatory overlap functions that often leave business operators in a dilemma.
Recently, the Lagos Chamber of Commerce and Industry (LCCI) issued a study tagged, “Regulatory infractions on Nigeria's industrial sector”. The study notes that “most of the regulatory anomalies were evident in high rate of human interface, arbitrary charges, fees and fines, overlap of functions and fight for supremacy among the agencies as well as high frequency of factory visits, among others.” The study further notes that “officials of regulatory agencies collect samples of all the products they meet in the production line or store on each occasion they visit the companies. Stocks of products are collected excessively under the guise of 'test samples' in cartons rolls and dozens. Edibles, home use and easy sale products suffer most from regular collection of huge amount of samples!”
Interestingly, these actions by regulatory agencies breed unhealthy practices among operators having triggered a vicious cycle. As the report found out, some firms that do not want to pass through the bureaucracy simply induce agency officials. This is mostly fuelled by the need or quick approval of papers/permits to meet certain commercial deadlines or to circumvent inherent/artificial bottlenecks in the system. Sometimes, company representatives go out of their way to 'tip' regulatory officials in order to save their jobs.
Given such a damming report by the LCCI, the bitter truth is that many of these regulatory agencies don't have the moral authority to punish operators because they themselves are known to fail to deliver on their mandates.
Recently, two regulatory agencies were battling in the pages of newspapers, debating whose right it was to fine and regulate a particular company in the aviation space. The question to ask here is: whose right is really being protected here – is it the consumers' or the agencies'?
Businesses operating in Nigeria have complained of multiplicity of taxes and regulation. A number of them advocate one single agency or institution to deal with as opposed to multiple agencies.
The LCCI report offers solutions which the authorities need to urgently implement if they want to gain the trust and confidence of business operators and engender a competitive operating environment. Some recommendations include;
1. Enhanced collaboration between agencies and a possible merger of some overlapping agencies
2. Steady communication and enlightenment of the business community on the trends of regulatory provisions (a partnership between regulators and operators)
3. Reduction of human interface for registration and obtaining permits – A move towards online processes for registration would be ideal and cheaper
4. Defined, transparent and institutional processes for obtaining waivers, permits etc.
5. Defined timelines for obtaining permits to enable planning by operators and institutionalise standards
6. A framework for the oversight and control of regulatory institutions in order to curb excesses
7. Better funding of these agencies to reduce extortion.
The verdict is not to do away with regulation. Regulation is required to offer a level-playing
ground, improve an industry and protect consumers and operators alike. But if agencies in charge of an industry do not view themselves in this light, then there is a need for a rethink. Regulatory institutions should be given targets and goals that relate to the growth of an industry, the number of new entrants, the health of firms in that industry and the number of jobs that industry supports and the satisfaction of consumers. This will align their activities with the growth agenda and avoid actions that would negatively impact or kill an industry.
For instance, of what use is the imposition of a humongous fine, if it will run an operator out of business, lead to job losses and reduce investments. The world over, regulators are rethinking their use of fines, by looking at appropriate measures to engender compliance and ways to support growth without high-handed enforcement of rules.
Multinational operators
Some industries traditionally are highly regulated. These are financial services, pharmaceuticals, food and beverage as well as oil and gas industries. However, we've seen that with the financial crises, the contagion effect and reduced revenue for government, regulatory risk has to be one key risk for multinationals especially those operating in emerging markets. These companies need to rethink their practice of engaging with regulators and governments of these countries. Clearly, the engagement needs to be more strategic and long-term as opposed to being tactical and short-term in nature. These corporations must look to develop the economies and ecosystem that support them. Oftentimes, regulators are light years behind these corporations and this breeds issues of misunderstanding mistrust and ultimately fines.
Some multinationals have been implicated in trying to install or topple governments, gain unfair advantages by bribing officials or putting them on their payrolls. While this gives them short-term advantage, it backfires in the long run. I understand the resentment that arises from dealing with governments or agencies that receive taxes and levies, but do not use it to develop the economies or the industry.
But rather than have individual companies lobbying for their benefit, what would serve a greater and longer-term benefit would be for multinationals to come together in a sort of ”cooperative competition” to sign up to principles that demand better, fairer and standardized regulation.
If industries are better regulated, everyone profits, conflicts are less and economies prosper faster. It's a win-win situation.
There is a role to play by governments and agencies in developing economies and industries. There is also a role for multinationals who bring their expertise, experience and investment. They should come together to ensure a better ecosystem for themselves and the economies they operate in.