Signposts on the Road to a New Business Environment

Culled—Proshare

November 10, 2017/Vetiva Research 

At the end of October, the World Bank released its annual Doing Business report for 2018, revealing that Nigeria rose 24 spots to 145th place, the country’s biggest ever jump and its highest position since 2013 (131st). This development came on the back of efforts by the Presidential Enabling Business Environment Council (PEBEC) in the preceding 18 months to foster the growth of small businesses in Nigeria.

As part of this mandate, PEBEC instituted a 60-day National Action Plan (NAP 1.0) at the start of the year to remove critical bottlenecks and bureaucratic constraints to doing business in Nigeria, targeting a 20-place advance on the Doing Business rankings – a target eventually surpassed. The Vice President also passed an Executive Order in his capacity as Acting President in May 2017, aimed at promoting transparency and efficiency across government agencies.

The Doing Business report was initiated by the World Bank in 2003 to assess the conduciveness of business environments for the growth of Small & Medium Scale Enterprises (SMEs) around the world. It is premised on the principle that businesses thrive in an environment with clear and conducive rules, so seeks to gauge the transparency and efficiency of business rules and supporting institutions.   

Proshare Nigeria Pvt. Ltd.

With its impressive rise up the rankings – 8th most improved nation by Distance-to-Frontier (DTF) score – Nigeria climbed from 37th to 21st among Sub-Saharan African (SSA) countries. Significant improvements were recorded across the Dealing with construction permits and Getting credit criteria – moving from 174th and 44th to 147th and 6th respectively, both of which were explicitly targeted by the NAP 1.0.

Nigeria’s other notable improvement was in Enforcing contracts – from 139th in 2017 to 96th in 2018 – an area that was not directly covered by the NAP 1.0. Overall, Nigeria recorded improvements in seven of ten indicators.

Proshare Nigeria Pvt. Ltd.

Success for the first National Action Plan
The NAP 1.0 sought to enact quick wins for improving Nigeria’s business environment by focusing on seven Doing Business indicators and including a homegrown one – Entry & exit of people.

Proshare Nigeria Pvt. Ltd.

Priority placed on ease of business registration…

With plans to reduce impediments that discourage the creation of formal small businesses in Nigeria, PEBEC pushed through several changes to shorten the duration of business registration. Key initiatives included enabling company name search and online document submission on the Corporate Affairs Commission (CAC) portal, introducing a single incorporation form, and integrating the Federal Inland Revenue Service (FIRS) e-payment solution into the CAC portal.

According to PEBEC secretary, Dr. Jumoke Oduwole, initial challenges with improving CAC portal reliability to ensure 99% portal uptime were resolved with the help of input from private sector stakeholders after the close of the 60-day timeframe. Overall, these reforms generated a noteworthy reduction in the average time it takes to start a business (from 25.2 days to 18.9 days) and helped Nigeria eight places up the ranking to 130th place. 

Proshare Nigeria Pvt. Ltd.

EIA directive propels notable improvement in securing permits…

Nigeria’s ranking here improved from 174th to 147th, supported by a much stronger building quality control index score – from 6.8 to 11.8 vs. maximum value of 15. It is likely that the move to restrict Environmental Impact Assessments (EIA) to construction works with a potentially heavy impact on the environment played a significant role here by making the permit application process less cumbersome.

In addition, whilst the World Bank did not log definite improvement in the time taken to acquire permits, the provision of more precise timelines, fee structures, and qualification laws online reduced costs for business owners.  

Proshare Nigeria Pvt. Ltd.

… but structural challenges maintain electricity woe

The primary target of the NAP 1.0 in this area was to reduce the procedures required for SMEs to secure a connection to the national grid – currently the highest in SSA. So far, the Nigerian Electricity Regulatory Commission (NERC) has issued a draft order to reduce the official timeline in a bid to streamline the process, but compliance has been weak. And the reality is that connection to the grid is just one step of the chain; cost and reliability of electricity are equally relevant for SMEs. 

Price is still comparably low in Nigeria; for example, the World Bank estimates the cost of grid connection in Nigeria to be the fourth lowest in SSA. However, Nigeria’s current electricity tariff structure has proved inefficient and exacerbated liquidity challenges in the power sector. Meanwhile, reliability continues to be an enduring puzzle, with power outages a regularity for small businesses. Majority of these are hard infrastructure challenges – so outside the purview of PEBEC – and would only be resolvable in the long-term. 

A mild change in the ease of registering property…
The NAP 1.0 had a marginal effect on streamlining the business registration process (Nigeria rose from 182nd to 179th on the Registering Property indicator), mainly by removing the requirement for presenting an affidavit for conducting a title search at the Lagos Land Registry. One critical issue that would be addressed through the second 60-day National Action Plan (NAP 2.0) is the process of obtaining Governor’s Consent when perfecting land titles and transferring property.  

Proshare Nigeria Pvt. Ltd.

…But Nigeria breaks into Top 10 for accessing credit
Nigeria made significant strides in the area of accessing credit, largely through the eventual passage of the Secured Transaction in Movable Assets Act (National Collateral Registry Act) and the Credit Bureau Services Bill (Credit Reporting Act). The National Collateral Registry Act provides legal backing for the National Collateral Registry (NCR), a CBN initiative established to facilitate credit extension to SMEs by enabling a standardized and transparent way of registering, storing, and searching for movable assets as collateral for loans.

The Act also provides avenues for creditors to realize the security in the event of default. It is our view that a functioning collateral registry of this kind is a necessary part of the solution for stimulating credit extension to SMEs, most of which would not have access to landed properties and similar collateral. Moreover, international experience is positive: loans secured with movable collateral grew four-fold in Mexico after a national collateral registry was established and 84% of Chinese SMEs secured loans as a result of a registry.

The Credit Reporting Act would provide a platform for “credit info providers” to provide credit bureaus with information on the creditworthiness of prospective borrowers. The Act seeks to reduce the information asymmetries that discourage lending to SMEs in the country by creating a channel for efficient credit assessments of borrowers.  

Proshare Nigeria Pvt. Ltd.

These two pieces of legislative reforms alone were enough to shoot Nigeria up the Doing Business Getting Credit rankings which focus primarily on the legal and institutional framework for facilitating credit access, rather than the actual level of credit extension. Specifically, this Doing Business indicator gauges “the strength of credit reporting systems and the effectiveness of collateral and bankruptcy laws in facilitating lending.”

We note that whilst Nigeria’s improvement in this area does not quite translate into higher bank lending to SMEs, the rankings indicate that the necessary legal and institutional frameworks are in place for SMEs to access credit in the country. The key is ensuring that the framework is adhered to and translates to more credit access. Of course, other challenges exist in this area, from prevailing asset quality challenges in Nigeria’s banking sector to high inflation, private sector crowding out, and a low-trust environment – all of which discourage lending to SMEs in the country. 

Proshare Nigeria Pvt. Ltd.

Challenges in Trading Across Borders…
Despite efforts to reduce needed documentation for exports and improve the efficiency of examining imports, Nigeria lagged in the trading across borders indicator, with ongoing challenges at the nation’s ports a primary reason for the poor performance. Whilst PEBEC still seeks to enable quicker and easier movement of goods across borders, only slow progress has been made in an area challenged by a high prevalence of inefficiency, opacity and graft.

…As FG tax efforts bear fruit?
The Doing Business Paying Taxes indicator records the taxes that a medium-sized company must pay in a year, as well as the administrative burden of these payments. Nigeria rose from 182nd to 171st place, mostly due to a lower recorded time required to comply with tax requirements – from 907 hours per year to 360 hours per year. Though NAP 2.0 aims to reduce this duration further, it does not entirely address Nigeria’s primary problem of a narrow tax base. 

On this front, the Federal Government is banking on the Voluntary Assets and Income Declaration Scheme (VAIDS) to expand the tax net over the next 12 months, as well as the support of international experts in leveraging technology for tax identification and efficiency.  

Proshare Nigeria Pvt. Ltd.

How will this all affect Nigeria’s economy?
The economic impact of Nigeria’s success in the Doing Business indicators would be difficult to quantify in the near-term and may include reduced business costs, especially when processing permits or registering property. In addition, greater transparency and certainty in the business environment would reduce graft and wastage, encouraging more enterprise and investment to further drive the economy. 

Moreover, nominal improvements in credit access and trading across borders lay the groundwork to facilitate the expansion of SMEs. All of these are significant as SMEs are a primary growth driver in Nigeria, accounting for over 50% of national GDP and 80% of employment. Given this, measuring the real economic impact of Doing Business initiatives must assume a central role in PEBEC activities going forward, as this would generate buy-in from the business community and engender confidence in policy.

Proshare Nigeria Pvt. Ltd.

What next? National Action Plan 2.0
NAP 2.0 carries over the eight focus areas of NAP 1.0 and adds three extra areas: enforcing contracts (a Doing Business indicator), selling to government, and trading within Nigeria. For the existing focus areas, the emphasis is on driving compliance with regulations put in place (e.g. by closing manual company registration portals across states) and tackling related bottlenecks (e.g. creating an independent dispute resolution mechanism for compliance issues related to building code requirements). This is all consistent with ensuring that previous gains translate into long-term economic effects. 

Across the three new indicators, PEBEC is looking to establish special magistrate courts to handle commercial cases for enforcing contracts, disseminate clear guidelines for public procurement, and address the blight of illegal roadblocks across the nation. We are of the view that reducing the cost of contract enforcement and strengthening confidence in dispute resolution would foster greater trust in Nigeria’s business environment and encourage risk-taking.
 

We also consider public procurement to be a strategic area as the government can be a key customer for SMEs who presently face the usual challenges of graft and opacity when dealing with some government bodies.

Proshare Nigeria Pvt. Ltd.

Beyond Doing Business reforms
One drawback of using Doing Business rankings as a barometer is that because the indicators are so narrowly defined and focused on regulations, it is easier for a country to improve its Doing Business rankings than its underlying business environment. We know that when a measure becomes a target, it ceases to be a good measure, so it is imperative that Nigeria looks beyond the Doing Business framework in improving its business environment.

There are signs that PEBEC is on this path – particularly the inclusion of home-grown indicators and an increased willingness to engage with more states as part of the NAP 2.0.

Going further, we recommend five ways of supplementing the Doing Business framework: I) Engaging directly with SMEs and business owners to understand the realities of business environment and sector-specific impediments to growth; II) Expanding work to other states to address Nigeria’s regional imbalances; III) Focusing on promoting foreign direct investment by addressing challenges specific to foreign investors in the country; IV) Increasing efforts to understand and capture businesses in the informal sector to boost their growth, not just for revenue generation; V) Implementing sector-specific reforms and legislature across critical industries such as power, oil & gas, and finance.

The World Bank Doing Business indicators are a powerful tool for policy-makers looking to address impediments to SME growth in the country. To maximize the realized impact on SMEs, these measures must be complemented with macroeconomic and policy stability, and a tailored approach to improving the ease of doing business in the country. 

Proshare Nigeria Pvt. Ltd. 

 

opan



investadvocate