Olayinka Omolere, MBA Student, Haas Business School
Subjects of Interest
- Fiscal Policy
- Private Sector Development
Tasking the Presidential Enabling Business Environment Council 20 Mar 2017
The Federal Government attributes Nigeria’s worst economic downturn in two-and-half decades to external factors – essentially the drop in the price of crude oil – and domestic factors of the depleted reserves it inherited from the previous administration as well as systemic corruption. Any suggestions that the foreign exchange policy of the Central Bank of Nigeria is culpable for making a bad situation even worse are rebuffed by government officials with remarkable persistence.
Nigerians have been told that the government is broke, and we must be patient while the government works hard to root out corruption, recover looted funds and reboot the economy. President Muhammadu Buhari and members of his team travel around the world to invite foreign investors and assure them of Nigeria’s openness to investment and the commitment to an enabling environment for businesses to thrive.
Despite the fall in oil prices, Nigeria still offers attractive fundamentals for investors. However, the climate for doing business in the country is something that requires urgent attention and commitment. And it has little to do with the exchange rate. Although the government has been making the right statements about enacting reforms to improve the business climate, the World Bank’s 2017 Doing Business report records for Nigeria only two meaningful improvements in the 12-month period ended June 2016.
As a tool to objectively assess actual regulatory reforms, the World Bank’s annual Doing Business (DB) Index provides a glimpse into the challenges that companies, especially small and medium enterprises (SMEs), face in the course of carrying out normal business activities. Its methodology does not involve the tracking of macroeconomic conditions, financial systems, unemployment or corruption. Therefore, we cannot reasonably attribute Nigeria’s poor performance on the index to these factors. The ten sets of DB indicators capture crucial dimensions of an economy’s regulatory environment, or according to Programme Manager of the Doing Business project, Rita Ramalho, they serve to “inform economies of where some of the (regulatory) bottlenecks are.” The DB report shows areas where there are opportunities for national governments to improve or streamline existing regulations, making it easier for the private sector to blossom.
Viewed in this light, Nigeria’s DB ranking at 169th out of 190 countries reveals that we have multiple bottlenecks to contend with and resolve. If Nigeria is determined and serious about improving its overall business climate, the index provides a useful guide on the areas to start with and focus on for maximum impact. Local businesses will surely gain from improvements in starting a business, getting electricity, registering property, getting credit, protecting minority investors, and paying taxes, among other areas covered by the index. As for foreign investors, which the government rightly seeks to woo, one imagines they are not naive. They are likely to be far more attracted by deliberate regulatory improvements than mere words and roadshows inviting them to a country that stifles its own companies.
Nigeria is among the top performers in Sub-Saharan Africa in two of the ten areas, namely protecting minority investors and getting credit. But while Nigeria may have made regulatory improvements in the area of getting credit, local businesses in the real sectors, notably agriculture, still grapple with onerous requirements for accessing credit, apart from high interest rates that are charged by lenders.
The World Bank DB index evaluates the strength of the legal framework governing loans and collaterals, and the depth of credit information collected on individuals and businesses by private credit bureaus and public credit registries. On that measure, Nigeria performed comparatively well and can be applauded. An important disclaimer is that the DB report does not evaluate the likelihood of businesses obtaining credit or the hurdles they must overcome – only the supporting framework.
Of the remaining eight indicators of the DB report, it is arguably easiest to implement reforms in “starting a business,” where Nigeria is ranked 138th, globally. Any regulatory improvement here will quickly be noticed by entrepreneurs and lend credence to the government’s plans to support the economy. It is perplexing it takes 25 days to incorporate a limited liability business in Nigeria, compared to five days in Rwanda and only four in Burundi, both fellow African countries. There are even instances of company incorporation processes that last months.
The Presidential Enabling Business Environment Council, (PEBEC) inaugurated by Buhari last year has adopted a 60-day Action Plan aimed at pushing ease of doing business reforms in the country. Part of the Plan, announced last month, involved the upgrade of the Corporate Affairs Commission's (CAC) online portal to improve document upload capabilities and making it possible for new businesses to be registered online from start to finish without having to visit the CAC office. The CAC online portal previously had the reputation of going down for hours and becoming inaccessible. The PEBEC reforms are expected to also help improve Nigeria’s rankings in the World Bank DB index for 2018.
Nigeria is ranked 139th on the “enforcing contracts” indicator. Compared to starting a business, enforcing contracts is a more complicated and intricate area to reform. This area is concerned with how judicial processes affect the enforcement of legal contracts. According to the World Bank’s data, it would take about 447 days (1.2 years) in Lagos and 720 days (1.9 years) in Kano to resolve a commercial dispute over N1 million. The time it takes for resolving such a case in Lagos is considerably faster than the average time it takes in Sub-Saharan Africa (655 days) and even in high-income OECD countries (553 days). Kano underperforms by far in this regard and could learn a bit from Lagos.
In the end, it would cost 58% of the amount under dispute (N1 million) to pay for legal fees, the highest component of that going for attorney fees at 45%. Such a high cost is infeasible for many small businesses. Larger companies might find it more prudent to write-off the claim of N1 million as a loss than pursue redress in the courts. But neither of those two outcomes builds confidence in our legal system. Our objectives should be to provide automated court services at all levels, utilise better case management principles, and find ways to reduce the cost of legal representation.
The first and second steps require the Federal Government to collaborate with the judiciary to improve the latter’s operations. But given recent tensions with the judiciary, and the Federal Government’s tendencies to ignore court orders, it could take considerable efforts to record progress in this regard. Finally, reducing the cost of legal representation so that justice becomes more accessible, especially for small businesses, is likely to defy easy solutions. But the potential rewards are enormous. Specifically, if we reduce legal costs to 25% of dispute value, or less, deploy court automation and improve even marginally on case management, we can match the performance of Mauritius, the top African performer in “enforcing contracts” or greatly narrow the gap from where Nigeria currently is at 23rd on the continent.
Two of the areas in which Nigeria performs lowest on the Doing Business Index are trading across borders (international trade), and paying taxes. Here Nigeria is ranked 181st and 182nd, respectively, out of 190 countries. First, on international trade; it takes far too long to export or import goods and the cost is prohibitive in both cases. Nigeria comes well below the continental average for every single metric under this area. At a time when the government seeks to promote non-oil exports as a way to boost foreign exchange earnings, the cost of complying with customs regulations, mandatory inspections and related procedures is over five times higher in Nigeria than advanced economies. This is unfortunate and illogical. If the Federal Government genuinely means to promote exports, then it must stop its agencies from charging rates that discourage exportation, and exporters should be able to perform required procedures in a more time-efficient manner. The Federal Government must decide whether it is more interested in maximum revenue extraction at the ports or cost-effective service that will support economic diversification and lead to greater tax revenues as the economy broadens. On its part, the 60-day Action Plan of the PEBEC involves streamlining the number of agencies operating at the nation’s ports to just six. There is also a proposed Single Window Initiative for the ports, expected to become operational by Q4 2017.
Regarding tax payments, the challenges that companies and individuals face in paying taxes are noted and well-documented. While the official total tax rate was found by the DB report to be competitive both regionally and worldwide, it could take a Nigerian business triple the time to pay taxes as it would take an average business in other African countries to perform the same task. This time is approximately 1000 hours and compares unfavourably to the regional average which is about 300 hours. A much longer time to pay taxes naturally means that firms spend extra money handling taxes, money that could otherwise have been invested in expanding their businesses and generating employment. Coincidentally, Nigeria also struggles with low rates of tax compliance. This is not surprising: if the government makes it too difficult to pay taxes, people have less incentive to bother paying at all.
Other areas also considered by the DB index include resolving insolvency, dealing with construction permits, and getting electricity. In each case, the solutions are well within reach. The incentives for the various arms of government to work together and overhaul the regulatory environment have never been greater. Such reforms would lessen the burdens that companies face and make it easier for them to survive.
As Acting President Yemi Osinbajo and the team of the PEBEC embark on improving the Nigerian business environment, we hope that the results will be efficient and cost-effective regulation in multiple areas that positively affect businesses and confer credibility on the government’s economic plans among Nigerian businesses and foreign investors.