pproach for industrial revolution in Nigeria: The Nigeria Industrial Revolution Plan (NIRP) MONDAY, 04 MARCH 2013 11:13 P RODUCED BY: MCKINSEY & COMPANY We are again obliged with all sense of responsibility to reproduce another part of this vital and exciting document that clearly outlines the critical steps to Nigeria’s industrial revolution. This is in the best interest of all well-meaning and discerning Nigerians and, in fact, the international business community. We are aware that these are exciting times for investment in Africa and Nigeria in particular. The iron is hot right now and the international investors are prepared to look at all opportunities. Nigeria is on the investor Radar Screen and this is the best time to rise to the occasion to take advantage of the potentially huge foreign inflows, especially through Foreign Direct Investment. This is the time to blow Nigeria’s trumpet and get Nigerians to begin to think ‘industrial revolution’. Nigeria must rise and take its rightful place. Such a critical document cannot be kept under wraps. Let those who care know what is in the offing for a buy-in. We thank the Ministry of Trade and Investment under the leadership of Olusegun Aganga for this brilliant initiative and Mckinsey & Company for being directly associated with the production. We look forward to a successful implementation of this noble plan. Please read on: NIRP constitutes the nation’s first strategic, comprehensive, and integrated roadmap to industrialization. The plan focuses on developing sectors, where Nigeria has a natural comparative advantage, and creating an enabling environment through reducing the current major barriers to development. The sectors identified as priority are agribusiness, solid minerals, and oil & gas sectors, and the enablers targeted by NIRP are financing, skills development, innovation, infrastructure, business environment, enforcement of adherence to standards, and increased local patronage. The completed first phase of NIRP has focused on delivering an actionable plan specifically for six sub-sectors within the priority sectors: palm oil, textiles, basic metals, automotive, base petrochemicals, and plastics & rubber subsectors. Furthermore, a deep dive has been completed on financing and skills development as priority enablers. Nigeria has undergone several strategic initiatives aimed at accelerating industrial development in the past. What makes the NIRP different from previous efforts is that it constitutes the first targeted effort to develop an industrialisation roadmap that is simultaneously strategic, comprehensive and integrated in nature: ■ Strategic: Prioritizing the sectors that deliver the greatest positive impact in terms of employment, GDP and import displacement in the short term. ■ Comprehensive: Using a coherent framework for Nigeria’s critical industrial sectors that includes enablers and barriers to growth. ■ Integrated: Taking into account links to relevant subsectors, including capturing benefits from backward and forward integration. The NIRP’s objective is twofold: a) to increase industry’s contribution to GDP, job creation and the trade balance, and b) to create a competitive advantage for the country. The plan will support Nigeria’s industrial growth and competitiveness by focusing on sectors where Nigeria has a comparative advantage, and providing solutions focused at removing the major barriers to industrial development through a set of critical enablers (Exhibit 5). Sectors with comparative advantage for Nigeria The plan proposes to develop three key sectors that already possess a clear comparative advantage, e.g., rich natural resources, existing skills and a competitive cost base. These strategic sectors are also ripe for rapid ramp-up and involve high-value additive ecosystems that supply and feed from productive output. These sectors are agribusiness, solid minerals, oil and gas. Agribusiness: ■ Nigeria’s rich agricultural ecosystem offers significant potential to increase production and growth. The aim here is to maximise the benefits from the country’ agricultural resources sustainably, build an end-to-end integrated value chain, and boost local production to meet local demand and reduce the country’s reliance on imports. ■ Solid minerals: Massive untapped raw reserves, notably iron ore, can enhance industrial output. The NIRP proposes to create a strong mining sector focusing on iron ore, build a competitive strategy around local industrial value add to consumer products (e.g., automotive), and create an enabling environment for investments to institutionalise world-class production standards. ■ Oil and gas: Significant reserves provide the foundation for a competitive value-add product platform. Specifically, Nigeria could use its cheap gas to revitalise industry, encourage high value-add downstream investments, and build institutional strengths to attract chemical-related clusters and advanced skills. Critical enablers for industrial development The NIRP will support the growth of these priority sub-sectors by establishing an attractive investment environment and reducing the major barriers to industrial development. To do this, the plan identifies seven enablers that cut across the value chain for the selected sectors. Each of these enablers are focused on clearly defined goals: 1. Financing: Offer affordable, long-term loans 2. Infrastructure: Accelerate critical initiatives to improve infrastructure 3. Skills: Fill skills gap to drive growth by targeting solution providers (e.g., ITF) 4. Enabling business environment: Decrease the cost of doing business 5. Innovation: Improve efficiency by encouraging R&D spend in each subsector 6. Reinforced standards: Enforce legal duties and quality standards 7. Local patronage: Support demand for local by creating awareness and ensuring that the government uses local suppliers LAUNCHING THE REVOLUTION Two-year plan The NIRP journey starts immediately and will be rolled out over a two-year time frame. The first phase, which will be complete by the end of Q1 2013, focuses on deep-dives into priority subsectors and adjacent enablers that will undergird Nigeria’s industrial growth. The priority interventions and initiatives are planned to be launched during 2013 to incite industrial activity. The third phase, to be carried out during 2014, will be centred on rigorous monitoring and further interventions to overcome bottlenecks as they appear (Exhibit 6). Six priority subsectors In the initial phase, the NIRP will focus on revitalising the entire value chain from production to distribution of the first six priority subsectors: palm oil, textiles and apparel, basic metals, automotive assembly, base petrochemicals, and plastics and rubber, which will be further complemented by second priority subsectors during phase 2. ■ Palm oil: The palm oil sector is an important component of Nigeria’s agribusiness sector. Historically, Nigeria has been one of the top producers of palm oil globally, and even today it ranks No. 3 in terms of acreage of oil palm cultivation. The industry has declined over the last 50 years in tandem with yields, but palm oil still has the potential to be a valuable and profitable contributor to Nigeria’s economy and the foundation for industrialising the agribusiness. The country possesses large tracts of arable land that can be converted for production and processing; low yields can be increased with limited investment; and both the domestic and regional markets offer significant room for growth. ■ Textiles and apparel: The legacy textiles and apparels industry in Nigeria is a strategic sector that generates a high employment multiplier ranging from cotton growers, across to fabric and garment production to marketing and sales. However Nigeria’s formerly vibrant textiles and apparels sector has experienced a steady decline since 2000 and now represents less than 1 per cent of GDP but retains hopeful potential for resuscitation due to its natural cotton endowments, large market size (domestic and regional), and legacy sector knowledge. Basic metals: The steel industry is an important part of the basic metals sector and integral to the industrialisation landscape of Nigeria. Currently the industry is largely focused on low levels of downstream transformation to basic steel products. Per capita demand for steel products at 12kg per annum is over 15X lower than world average suggesting massive scope for growth over the next decade. Nigeria has the potential to build a globally competitive steel industry based on a fully integrated steel value chain and the 12th largest reserve of iron ore globally. Automotive assembly: Historically, Nigeria boasted a strong automotive assembly industry, producing 70,000 vehicles in the 1980s. However, the industry declined rapidly by the 1990s, and has been steadily diminishing with production levels at 2,000 or less vehicles per year. The case for a competitive auto assembly industry however is strong. Nigeria has a large population base with significant latent demand and a growing middle class. Regional markets like Ghana, Benin and Togo also offer significant room for growth. ■ Base petrochemicals: The petrochemical subsector, grounded on Nigeria’s large gas endowment, is an increasingly significant part of Nigeria’s oil and gas sector. For years, the petrochemical industry underperformed as the majority of petrochemicals were produced by NNPC in their Eleme plant. Prior to its 2006 privatisation, the plant was plagued by production issues and did not achieve over 23 per cent capacity utilization in the final three years of NNPC ownership. In 2006, the Indorama Group acquired Eleme and became its chief investor. The ownership change led to a remarkable turnaround and the plant currently operates at close to full capacity, accounting for the majority of local petrochemical production. There is further scope for sector development as demand for core petrochemical products such as polyethylene and polypropylene will grow. Government commitment to this sector is underpinned by plans to develop gas parks to ensure availability and reliability of input gas to drive industrial growth ■ Plastics and rubber: Plastics and rubber subsectors are emerging industries with potential to play key roles in Nigeria’s manufacturing growth. The plastic manufacturing subsector is currently fragmented with numerous small players creating a wide variety of plastics ranging all the way from PET bottles, cans to storage drums. Plastic manufacturers rely on the upstream petrochemical sector, primarily Eleme, and imports to provide them with the resin raw inputs. In regards to rubber, Nigeria once had a strong local tire production base but the exit of Michelin and Dunlop (in 2006 and 2009 respectively) have left a void in the market that has resulted in the importation of large volumes of tyres to satisfy growing local demand. These six subsectors were selected after filtering against several criteria including potential in Nigeria for job creation, GDP impact and import substitution. The final list was then refocused towards subsectors that had relatively less consolidated policy to drive change. Financing and skills enablers were selected for the initial phase due to their catalytic impact and absolute immediacy to making clear progress across the 6 sectors (Exhibit 7). By 2015, we expect to already see considerable momentum across the impacted sectors. In terms of targeted concrete deliverables: ■ Palm Oil: – 2-3 new large-scale plantations underway with integrated processing sites for CPO, – Yields improving towards 10 tonnes/ha benchmark with comprehensive support from the Nigerian Institute for Oil Palm Research (NIFOR) ■ Textiles: – Revived textile production to historically high levels (e.g., reopening of 10-20 facilities) through accessibility corridors to power and greater access to financing – Have brought in at least one world-class textiles player into market ■ Basic metals: – Meeting the current (2012) steel goods demand level by ramping up production of iron ore at Itakpe mine in Kogi state to 5mMTpa – Operationalised value chain with capacity for beneficiation and processing of finished steel ■ Automotive assembly: – 1-2 OEMs have started construction of assembly plants in Nigeria to reach a target production capacity of 300,000 units by 2018 – Operationalized supplier parks adjacent to the assembly plants ■ Basic petrochemicals: – Eleme to have expanded petchem product spectrum to supply more resins locally (e.g., 350 kmtpa of PET, PP, PE) – Industrial park on-track for a major petchem player to commence operations by 2016 ■ Plastics and rubber: – Have experienced $100 million reduction of plastics products imports, relative to 2011, due to increase of domestic plastic players – 1 major tyre player plant to have reopened operations Initial GDP estimates show the positive potential impact of the NIRP across the initially selected subsectors. With disciplined execution, Nigeria could see a $9-11 billion annual uplift in industrial GDP contribution by 2017. This increase, when accompanied by the established sectors (e.g., cement and sugar) and an equally strong uptick for the Phase 2 subsectors would see Nigeria’s industrial GDP contribution reach the targeted 10 per cent within 5 years (Exhibit 8). Priority sectors identified in Phase 1 1. Agribusiness Two sectors have been prioritised as offering highest potential within Nigeria’s agribusiness: palm oil and textiles and apparel. PALM OIL The palm oil sector is an important element of Nigeria’s agribusiness sector. The country has a large domestic market (which local production is unable to satisfy) and it provides opportunities for both small-scale subsistence players and large scale, more mechanised players. In the 1960s, palm oil was a booming industry and Nigeria exported over 300,000 tons. Today the situation has reversed dramatically, with Nigeria importing 30-35 per cent of its domestic palm oil needs, and this gap looks set to widen even further. There are several reasons for the sector’s declining performance: low quality and quantity of raw materials; poor infrastructure and financing; inefficient processing systems. However, palm oil still has the potential to be a valuable and profitable crop for Nigeria. The country possesses large tracts of arable land that can be converted for production and processing; low yields can be increased with limited investment; and both the domestic and regional markets offer significant room for growth. By introducing a targeted set of supportive and financial incentives along the whole value chain from production to distribution, the NIRP aspires to boost palm oil production by 18 per cent per annum to 2020, and make the industry self-sufficient through end-to-end integration. If successful, this would ensure that local production fulfils 100 per cent of domestic demand, with surplus to export to other markets. Current status The oil palm tree is the most productive vegetable oil crop in the world. It continuously produces fruit with a high oil content for more than 25 years, and at four tons per hectare, it yields between 6 and 10 times more than other crops, such as rapeseed or sunflower (Exhibit 9). Nigeria is the world’s third-largest cultivator and producer of palm oil after Malaysia and Indonesia, yet it has one of the lowest yields (Exhibit 10) Nigeria currently produces 2.13 million tons of palm oil. Food-related uses (cooking oil, shortening, margarine) account for 80 per cent of consumption and are largely covered by domestic production. Industry (soap, washing powder, lubricant manufacturing) accounts for the remaining 20 per cent and most of the crude palm oil (CPO) is imported into the country to meet this demand. Over the last 50 years, Nigeria has gone from being a net exporter to a net importer of 30-35 per cent of its palm oil needs. While domestic consumption rose 4 per cent from 1965 to 2010, production only grew by 2 per cent, forcing the country to increase its imports by 17 per cent (Exhibit 11) and at current rates, this situation looks set to worsen. There are several reasons for this decline, chief among which are poor infrastructure, financing, skills, and raw materials (Exhibit 12). Poor infrastructure makes harvesting and transportation difficult and drives up production costs. Under the current land tenure system, plantations are split between large estates owned by a few private companies and state governments (2 per cent), smallholders (15 per cent) and wild groves with unclear ownership (83 per cent). This division inhibits access to land, making it difficult for the industry to expand or create new plantations. Similarly, a shortage of efficient and integrated production sites and poor water and electricity supply to factories make processing difficult. Finally, poor transport systems drive up distribution costs. Lack of financing is also a major issue. The cost of raw materials to the farmer is high, and neither smallholders nor large plantation owners have access to affordable funding required to expand their operations or improve their ageing estates. Skills are low and there is little or no investment in research and development to improve techniques and processes. Smallholders also lack effective associations/clusters to help them optimize for operational and processing efficiency. On top of these issues, processing is highly fragmented and inefficient. Tens of thousands of small processors receive crops from wild grove harvesters and process them using traditional techniques (feet or mortar and pestle). These crude techniques have low extraction rates and the volume and output tend to be unsuitable for further refining to CPO, as delays in processing produce oil with a high fatty acid content. The large processors are more efficient, but less than 30 per cent of the available mills and refineries are actually functioning. The overall result is an inferior quality of oil that drives consumers to seek high-grade CPO from neighbouring countries. At 35 per cent, CPO import duty is among the highest in the region and consequently smuggling is rife. All of these factors add up to make the sector highly uncompetitive on a global level. Sector potential However, despite this seemingly bleak picture, Nigeria’s palm oil industry has considerable room for growth in terms of production and market. At least 50 per cent of Nigeria’s states are already involved in the industry and the country is blessed with rich, widespread oil palm resources. In addition, the country has large areas of arable land that can be converted into more plantations or integrated production/processing sites to boost the existing infrastructure. These natural resources make Nigeria an attractive destination for potential investors. Nigeria’s low yields (2,600 kg/hectare) are 87 per cent below those of Indonesia, indicating that it has a lot of room to increase output with marginal investments. Nigeria also has a large and untapped market for its palm oil. Its own population of over 160 million offers a natural market for domestic and industrial use, and it can boost exports to the region by taking advantage of beneficial trade agreements, such as the Economic Community of West African States (ECOWAS) Trade Liberalisation Scheme, and to select developed markets (e.g., the United States via AGOA tariff regime). The palm oil industry is also important because it has multiple current and future end-uses as an input into other industrial uses such as manufacture of specialty chemicals, paper and pulp, furniture, etc. (Exhibit 13). Aspirations and next steps Nigeria’s Vision 2020 outlines a bold revitalisation plan for the palm oil industry that aims to boost production and make it self-sufficient through end-to-end integration. If successful, this would ensure that local production could meet 100 per cent of domestic demand. The aspiration is to increase production by 18 per cent per annum from 1.35 million to over 5 million tons, and reverse the trade deficit (Exhibit 15). To achieve this, the NIRP makes the following assumptions: ■Palm oil consumption grows at 2.5 per cent, in line with population growth. ■ Additional 10,000 hectares and 5,000 hectares plantations are cultivated in 2013 and 2014 respectively, and harvested in 2019 and 2020. ■ Yield per hectare grows by 50 per cent to 4MT/ha in 2017, and up to 10MT/ha in 2020 (which represents half of Cameroon’s yield). ■ Conversion rates grow from the current 16 per cent to 20 per cent by 2017, and to 23 per cent by 2020, in line with Indonesia and Malaysia benchmarks. The government has already shown its commitment to developing the palm oil sector through a series of targeted interventions, such as Semi Wild Grove (SWG) yield enhancement scheme, providing free seedlings for replanting and processing equipment, subsidies and VAT exemption schemes, and investment into R&D. This is a good start, but more is needed to make the quantum leap the industry needs. To achieve the aspirations for the palm oil subsector, the NIRP proposes a set of initial recommendations to improve the entire value chain, from production to distribution as follows: ■ Raw materials – Pilot a ‘land bank’ programme (pool of land from which potential investors can purchase large tracts) and attract states to participate. – Appoint a single hub (e.g., Nigeria Institute for Oil palm Research -NIFOR) for all cultivation and yield improvement research programmes/initiatives, including NGO, donor and government work. – Establish agreements in which states provide support and technical services (e.g., inputs and logistics) to smallholder aggregates. ■ Extraction and milling to refining – Establish crop processing sites/clusters to improve smallholder processing efficiency. – Grant large-scale processors special exemption to import agreed quantities of their local production at a reduced tariff for a limited period of time (similar to the proposed sugar policy). – Offer long-term tax holidays for integrated plantations/refineries on production with local sourcing to match the local production ramp-up timeframe. – Maintain zero duty on imports of equipment, e.g., trucks, milling and refining plant parts. – Provide long-term specialised equipment financing facilitated by Bank of Industry ■ Distribution and consumption – Ensure market transparency on stock levels and CPO availability to ensure effective downstream sourcing. – Revise existing export promotion schemes to prioritise local needs. – Enforce rigorous quality standards to satisfy industrial requirements by leveraging existing standards/quality assurance agencies. TEXTILES AND APPAREL Nigeria’s textiles and apparel industry spans the entire clothing value chain from fibre to garment production, although most activity focuses on fabric production. The industry has been in steep decline since 2003, with the result that Nigeria now spends over USD 2 billion on imported goods. The crisis is exacerbated by high local production costs and cheap imports from Asia. Textiles and apparel remains an important sector in terms of job creation for cotton growers (from smallholders to commercial labour) and those involved in processing and finished product sales. It also offers strategic diversification potential for the economy, as it can strengthen the manufacturing base, alleviate poverty and enhance export opportunities. Despite the current crisis, Nigeria’s large population and local demand provide a huge potential domestic market. The infrastructure and skills already exist and products can be sourced locally. The NIRP aspires to increase domestic and regional market share and boost job creation, in short to make Nigeria the No. 1 producer in Africa. Current status Nigeria’s formerly vibrant textiles and apparels sector has been in steady decline since 2000 and today it represents less than 1 percent of GDP.(Exhibit 16). Between 2004 and 2008, the number of textile factories halved and employment also collapsed; by 2008 there were less than 25,000 direct workers in the industry (Exhibit 17). Several internal factors have contributed to this decline. Low pour fuel oil (LPFO), which is crucial to production, is scarce and costly (the Kaduna refinery, the main supplier, was closed between 2005 and 2008). Implementation of the Textile Development Fund which is meant to be an intervention is delayed, meaning high interest rates and a lack of long-term financing. The incidence of smuggling and counterfeit products has soared and now accounts for up to 85 per cent of market share. The suspension of certain government policies, e.g., the Exports Expansion Grant (EEG), has taken away the incentive to produce for export, and uncontrolled imports have encouraged the dumping of highly subsidised alternatives. As with the palm oil industry, infrastructure, financing and skills are major bottlenecks (Exhibit 18). Poor road networks and high fuel costs push up the cost of transport, while inadequate energy supplies to factories leave them dependent on expensive self-generation. Small companies struggle to obtain financing to improve or grow their operations. Skills exist but are not up to date and few members of the work force are qualified to use modern technologies. On top of all this, the massive influx of Asian-supplied textiles and clothing – particularly after the Multi-fibre Agreement (MFA) expired in 2005 – has undercut domestically produced goods, and weak enforcement of the import prohibition policy has allowed low-cost products to flood the market. Sector potential Nevertheless, Nigeria’s natural cotton resources, large market size and historical skill base offer large growth and investment potential in the textiles and apparel sector. There is an abundance of natural cotton endowments across the country with over 20 cotton-producing states (Exhibit 19). Turkey achieved this remarkable turn-around in three ways. First, it exploited its vast natural resources as the eight-largest cotton producer in the world, its own large domestic market and its proximity to other markets. Second, the government offered strong support in the form of financial incentives (tax breaks, free subsidies), increased import duties and capability building. Third, private companies collaborated to reduce transport costs, specialise in manufacturing products for export markets, and increase their value-add by forming associations. The result: in 2011, the textile and apparel industry contributed USD10 billion to Turkey’s trade balance and employed 2 million people (Exhibit 21) But Turkey is not the only example. Several countries have successfully boosted their textiles and apparel industry through such concerted efforts. Aspirations and next steps Nigeria’s Vision 2020 for the textiles and apparel industry is simple: to become the No. 1 producer in Africa. This means growing the local production share of the domestic market by 9 per cent a year to 2020, and the number of people directly employed in the industry by 12 per cent a year . To achieve this, we make the following assumptions: ■ The industry grows at a rate of 5 per cent (half the current rate of India and Bangladesh). ■ A world-class fully integrated textiles/apparel business enters into the industry and engages about 800 direct staff across the entire value chain. ■ The number of operational factories doubles by 2017 and requires only 70 per cent more labour thanks to the creation of processing clusters. To realise this ambition, the NIRP has compiled a list of initial recommendations to revolutionise the textiles and apparel value chain. ■ Raw materials – Offer incentive schemes to attract world-class players to cultivate the raw material (e.g., cotton and lint) for domestic and international markets. – Enforce rigorous quality assurance through dedicated agencies to increase the cotton grade level for local and international markets. ■ Production – Increase the competitiveness of existing producers by setting up processing sites and clusters for small producers and financial incentives, including VAT exemption for locally produced goods, duty free imports on raw materials and inputs that cannot be locally sourced, zero duty on equipment imports (e.g., trucks, spinning equipment), and greater access to working capital and long-term financing. – Establish incentive schemes for potential investors, such as exemptions from tariffs and prohibitions based on local production and short-term targeted incentives (e.g., tax holidays); grant the same conditions to exiting producers. – Enforce anti-smuggling laws and regulations, especially at ports and border communities. ■ Marketing and retail – Ensure government bodies procure locally produced goods (e.g., uniforms). – Aggressively promote local products to the public in strategic urban and high-density locations (‘Buy Made-in-Nigeria’ campaign). 2. Solid minerals The NIRP has identified basic metals and automotive assembly (due to its heavy involvement on metals, primarily steel and aluminium as material inputs) as priority sectors owing to their largely positive knock-on effect across the economy: both are large contributors to GDP and employment in industrialised economies. BASIC METALS Nigeria’s basic metals industry is focused on downstream light transformation; mining is still in its infancy, with limited beneficiation and rolling operations underway. Inhibited by infrastructure, low skills, lack of financing and an unfavourable regulatory environment, the sector still offers large potential. The country possesses huge natural reserves of iron ore and a large population which feeds a sizeable and rapidly increasing steel demand due to further industrialisation. Based on these critical advantages, the NIRP’s objective is to make the mining industry self-sufficient with end-to-end integration from iron ore mining to steel production, and to strengthen the steel sector’s functional linkages to the real economy. It proposes to do this by creating transparency on the full extent of the county’s natural reserves, offering financial incentives, boosting skills, leveraging existing regulatory agencies, promoting backwards integration within processing, and reinforcing free trade agreements within ECOWAS. Current status At present, Nigeria has no large-scale mining operations. Upstream, it has just one 2Mtpa iron ore mine in Itakpe, where production is yet to come on-stream. The National Iron Ore mining Company expects to start recording production in 2013. Other smaller artisanal mines exist, but production is very low or non-existent. Several low production players are involved in midstream operations such as smelting, hot rolling and cold rolling whilst several leading players have exited, e.g., ALSCON. Downstream operations focus on light transformation from flat and long cold rolled steel into basic finished products, e.g., roofing sheets, nails and pipes. Nigeria currently spends over USD 4 billion on imported metal products, with steel accounting for almost 80 percent of these (USD 3.3 billion). Although Nigeria ranks twelfth in terms of iron ore reserves in the world, production is severely under-exploited. As a result, the local steel industry is undeveloped and fed largely by scrap. The main inhibitors to growth are poor infrastructure – limited transport to production sites, lack of cheap, uninterrupted power – and financing, with high capital requirements meaning that only large multinationals can afford to play. In addition, low technical and artisanal skills, obsolete equipment and the absence of modern production techniques all lower the quality of the end product. Finally – and critically – investors have few clear incentives to invest: the regulatory environment is unclear, financial incentives are unattractive and local products compete with imports of finished goods. Sector potential With 2 Mt of iron ore reserves, Nigeria is the twelfth richest country in terms of resources in the world, and the second in Africa. This volume of unexploited iron ore reserves combined with the country’s large population-driven steel demand potential present a very attractive case for investment in Nigeria’s steel industry. Nigeria’s large population fuels the current market size of USD 3.3 billion a year. Over the next decade, this looks set to reach USD 15.11 million a year on the back of increasing industrialisation, namely construction (buildings, roads, bridges), automotive assembly, refinery investments, and machinery for rubber and plastics, textiles, etc. By driving for full integration of its steel industry, Nigeria can position itself most favourably on the global hot rolled steel (HRC) cost curve. Globally, fully integrated players (from local production of Iron ore to finished steel production) in the steel industry have the cheapest cost of production, thereby boosting their productivity. Nigeria should aim to take advantage of this sectorial competitive advantage (Exhibit 26). Other countries in similar situations have developed various parts of the mining and metals industry successfully. For example, Guinea, Brazil and South Korea have all grown their mining and metals industries through targeted policies along their value chains such as investing in a detailed survey and mining code, providing business incentives to investors and enforcing standards. Aspirations and next steps The NIRP’s long-term objective is to make Nigeria self-sufficient with end-to-end integration from iron ore mining to steel production, and to strengthen the steel sector and develop functional linkages to the real economy, e.g., raw materials for automotive assembly. By 2020, it aims to increase both the amount of finished steel products from less than 1 Mtpa to over 13 Mtpa, and increase the export of these goods from zero today to up to 4 Mtpa. This scenario assumes the following: ■ Nigeria increases its per capita steel consumption from the current 12kg per year to 60kg per year in 2020 (in line with India in 2011). ■ The iron ore mining operation plans in Itakpe with NIOMCO1 are realised ■ Midstream and downstream sections of the industry (e.g., WEMPCO, Midland and Ajaokuta steel mills) develop in parallel with iron ore mining and steel demand. To achieve this, Nigeria needs to build its downstream steel transformation industry while positioning itself to attract world-class players along the full value chain: ■ Base material inputs – Develop a robust fact base on Nigeria’s reserves (debottleneck geophysical survey development). – Modernise and publicise the mining code to create transparency into mining operation terms (ownership and control of minerals, mining incentives, environmental considerations, etc.). – Review duties on capital mining equipment (e.g., zero duties on imported mining rigs). ■ Semi-finished production – Develop an institutionalised gas-to power plan for local players to guarantee affordable energy. – Identify and develop locations for steel development sites/clusters. – Provide concessional loans to current downstream players to encourage backwards integration. – Incentivise local sourcing of raw materials wherever possible (iron ore, coal, limestone, scrap) via specific levers, e.g., tailored import tariffs, subsidised prices. – Develop a skill building programme/encourage knowledge transfer by attracting global experts. – Develop and enforce crude steel quality limits through a dedicated regulatory agency, e.g., Standards Organisation of Nigeria. ■ Finishing – Promote backwards integration capabilities for current processing players, e.g., pioneer privileges. – Develop and enforce specific finished steel quality limits (e.g., dimensional accuracy, brittleness) through a dedicated regulatory agency like SON. – Incentivise local sourcing of crude steel, e.g., subsidised prices of crude steel to international prices for a period. ■ Transportation – Ensure continued free trade agreements within the ECOWAS region. AUTOMOTIVE ASSEMBLY Launched in the 1960s, the Nigerian automotive industry reached its heyday in the 1980s. Since then, it has been in sharp decline, unable to compete with vehicle imports, and increasing production costs arising from large infrastructure deficits. Nevertheless, the combination of a large and growing domestic market, a potential regional market and a cheap labour base make automotive assembly an attractive investment option for global OEMs. By 2022, Nigeria aspires to increase its ability to produce local cars to meet local demand by attracting one or two strategically chosen global automobile manufacturers and building a globally competitive supplier park around the assembly operations. Current status Nigeria’s automotive industry dates back to the early 1960s when companies like UAC, Leventis, SCOA, BEWAC, and R.T. Briscoe established assembly plants using completely knocked down (CKD) or semi-knocked down (SKD) parts. In 1970-80, the government concluded agreements with European automobile plants to set up two car (Peugeot Nigeria Ltd. (PAN), Kaduna, and Volkswagen of Nigeria Ltd. (VON) Lagos) and four truck/light commercial vehicle (Anambra Motor Manufacturing Company (ANAMMCO), Enugu, Steyr Nigeria Ltd., Bauchi, National Truck Manufacturers (NTM), Kano, and Leyland Nigeria Ltd., Ibadan) assembly plants using completely knocked down (CKD) parts. These have been privatised since 2007. The industry reached its production peak in the 1980s, when it was turning out up to 70,000 vehicles a year. Since the 1980s, the industry has seen a sharp decline. Today, 5 million vehicles are circulating on Nigeria’s roads, and demand is running at 275,000 vehicles a year. As the economy improves, this figure is set to rise. Manufacturing is centred on four clusters that are sub-scale and unproductive, placing Nigeria low down the list of emerging countries engaged in automobile production. China, the leader, produces in excess of 18 million cars a year vs. Nigeria’s 2,000 The industry faces a set of problems common to other sectors. The technical skills and industry know-how to design individual parts or assemble vehicles is lacking, so innovation is non-existent. There is no reliable supplier network or consumer desire for local products. In addition, high capital requirements limit players to large multinationals. In the face of declining local production, local demand has been met almost exclusively through imports. The industry is powerless to compete, as poor transportation and power supply push up the cost of producing vehicles locally. They are not helped by government policy. Import duties on full cars and car parts are low compared to most other emerging economies (Exhibit 31). Sector potential Yet, the foundation for growth is solid. Nigeria has a large and growing domestic market, a large potential regional market, and a cheap labour base. These factors combine to create an attractive investment environment for global OEMs. The ECOWAS region also offers significant potential. It currently has no automotive hub and the Trade Liberalisation Scheme offers an opportunity to increase exports. Nigeria also has a large work force that is cheaper than that of South Africa, Kenya, and Brazil. Aspirations and next steps The automotive assembly subsector aspires to increase its ability to produce local cars to meet local demand. Specifically, by 2020: ■ Nigerian local production should meet over 50 per cent of demand for vehicles; ■ Local content should account for 30 per cent of the automotive industry. This equates to increasing vehicle production from the current level of 1,000 units per annum, to over 300,000 units by 2020 (Exhibit 34). This assumes the following: ■ Demand is 275,000 vehicles a year, growing at a constant rate of 6.5 per cent per annum going forward. ■ Two OEMs commit to starting operations in Nigeria before the end of 2013. ■ Each OEM ramps up assembly operations to 150, 0002 vehicles a year and reaches full production by the end of the third year. ■ Assembly plants are completed within two years of the start of construction The NIRP recommends the following programmes across automotive assembly to kick-start and develop the subsector: ■ Raw materials – Incentivise local sourcing of specific imports, e.g., steel, by setting up target import barriers. – Ensure all raw materials meet the high industry quality standards (to be monitored by a dedicated regulatory body like SON). ■ Tier 3 suppliers – Assign locations for supplier parks close to assembly plants. – For specific inputs, encourage fast-track importation operations to facilitate just-in-time sourcing. – Assign dedicated agencies to monitor tailored quality requirements at all levels of parts manufacturing (e.g., brake pads, gear boxes). – Develop manufacturing skill building and training programmes and channels. – Set up an agreement with the commercial banks to recognise government guarantees on loans to facilitate financing solutions. – Encourage local content targets for suppliers through specific incentives (highest for tier 3 suppliers). ■ Assembly manufacturers – Attract global car makers to start production in Nigeria. – Review import barrier schemes to promote relative competitiveness and increase the correlation between tariffs and level of completion of imports (CKD, SKD and FBU). – Provide business incentives, for OEMs in the first few years of operation/profit e.g., tax holidays. – Assess and develop long-term leasing schemes for assembly facilities. – Grant OEMs access to universities, ITF centres, etc., for training programmes and support in shaping these training programmes – Enforce standards and quality and sustainability targets for assembled vehicles via regulatory bodies like SON. ■ After-market players – Consider enforcing government bodies to procure Nigerian cars. – Incentivise/promote local vehicles to the public, e.g., offer VAT reductions on Nigerian-assembled vehicles and expedite registration. – Enforce age restrictions/safety requirement on vehicles (similar to the MOT test in the United Kingdom). – De-incentivise imports of older cars by aligning import duties with vehicle age and enforcing this very strictly.
Posted on: Wed, 03 Sep 2014 13:30:34 +0000
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