Although, there was marginal recovery of some key manufacturing indicators in the fourth quarter of 2021, the sector’s dependence on imported raw materials and its attendant high cost took its toll. In order of intensity, the high cost of local and imported raw materials topped the issues that plagued the sector in the last quarter. This has prompted manufacturers’ renewed call on government to incentivise investment in the development of raw-materials locally through the backward integration and resource-based industrialisation initiatives. Will their call hit the right chord? Assistant Editor CHIKODI OKEREOCHA writes.
The manufacturing sector recorded a mixed grilled performance in the fourth quarter of 2021. For instance, aggregate Manufacturers Confidence Index (MCCI) score for the quarter increased to 55.4 points, from 54.0 points recorded in the preceding quarter (Q3). The increase of 1.4 points highlighted a slight improvement in the macro-economic and manufacturing operating environment.
The MCCI is an Index created by the Manufacturers Association of Nigeria (MAN) to gauge the pulse of the economy on quarterly basis in relation to movement in the macro-economy and government policies. The Index is, therefore, a barometer used by MAN to aggregate the views of CEOs of manufacturing companies on changes in the economy.
The Index said despite the marginal improvement in the macro-economic and manufacturing operating environment, the sector’s performance was still below the mark, as manufacturers were still plagued by numerous familiar constraints during the quarter under review.
The MCCI specifically fingered the high cost of local and imported raw materials as the biggest constraint in manufacturers’ quest for enhanced capacity utilisation, competitiveness and of course, profitability. Insecurity across the country, particularly within the industrial areas, and shortage of skilled manpower took the second and third position, respectively.
Indeed, unlike the preceding quarters when unstable access to Foreign Exchange (forex), excessive forex depreciation, or outright lack of forex, topped the list of manufacturers’ woes, CEOs of manufacturing companies ranked raw materials sourcing as number one in the long list of issues that almost forced the sector to its knees in the last quarter.
Accordingly, this has compelled manufacturers to renew their call for the resuscitation of the Backward Integration Policy (BIP) and resource-based industrialisation programmes of the government. This is in a bid to improve the performance of the manufacturing sector and by extension, the economy going forward.
BIP is an import substitution strategy that seeks to build capacity in local manufacturing in order to reduce imports, create jobs and drive industrialisation. Backward integration, according to experts, is a process in which a company acquires or merges with other businesses that supply raw materials needed in the production of its finished product.
Businesses pursue backward integration with the expectation that the process will result in cost savings, increased revenues, and improved efficiency in the production process. So, at its core is the need to create a competitive supply value chain and reduce dependence on imported raw materials.
On the other hand, the adoption of the policy of resource-based industrialisation by the government was aimed at utilising the country’s abundant natural resources to sustain the manufacturing sector.
Since the inception of the BIP in 2002, manufacturers from diverse sectors have been on the same page with regards to the need to support the policy and leverage it to boost local production capacity.
They believe that leveraging the BIP to source raw materials locally for production will help save scarce foreign exchange, boost capacity utilisation in the sector and also curb the difficulties experienced at the ports while waiting longer time for the shipments of imported raw materials.
It was against this backdrop that manufacturers, last week, renewed their push that “government needs to intentionally put in place mechanism that will further incentivise investment in the development of raw-materials locally through the BIP and resource-based industrialisation initiates.
“Government should call for more investors to key into these initiatives with appropriate and definite incentives. For instance, there is need for urgent investment and production of Active Pharmaceutical Ingredients (API) in the country; investment and production of machines; iron and steel; petrochemical materials, etc. to support manufacturing activities.”
Their plea for government to rethink and resuscitate the BIP and resource-based industrialisation was contained in the MCCI for fourth quarter 2021.
MCCI has a baseline index of 50 points, which suggests a stationary point in the economy. Therefore, any index point above 50 points indicates that manufacturers have confidence in the economy and improvement in manufacturing performance, while any index point below 50 points indicate otherwise.
The more the index point tends to 100 points, the higher the level of confidence in the economy and improvement in manufacturing activity. So, with the aggregate MCCI score increasing to 55.4 points in Q4 2021, from 54.0 points obtained in the preceding quarter (Q3), it meant an improved performance in the period and a growing confidence of manufacturers in the economy.
The marginal improvement in the last quarter, which triggered the increase in the aggregate MCCI score, was said to have been made possible by “the resilience of manufacturers, seasonal transactions and passive policy support that sustained manufacturing in the quarter.”
However, to further boost the sector’s performance, manufacturers insist that intentionally putting in place permanent mechanism that will address the challenges hurting the sector, beginning with incentivising investment in the development of raw-materials locally through backward integration and resource-based industrialisation will turn things around.
Prior to MAN’s renewed call to rejig the BIP, its President, Mansur Ahmed, had been quite vociferous in the Association’s campaign to sustain the implementation of the policy by properly funding relevant institutions and initiating policies that will prioritise the development of local raw-materials in commercial quantity.
At various fora, including MAN’s Annual General Meetings (AGMs), Ahmed also drew attention to the need to create friendlier environment for investment on the value-chains of local raw materials as well as ensure that adequate forex is made available for importation of vital raw materials that are not available locally.
According to the MAN president, encouraging manufacturers to locally source for their inputs by formulating a comprehensive industrialisation policy that would prioritise the drive towards backward integration programmes and the creation of linkages for various value chains in the manufacturing industry would reduce cost in the supply chain and support the Federal Government’s drive for economic diversification.
Mansur also pointed out that improved manufacturing value chain linkages will make the manufacturing sector competitive, contribute more to the nation’s Gross Domestic Product (GDP), which currently stands at about 10 per cent, and create the much-needed jobs in Nigeria.
He, however, harped on the need for government to strategically involve private sector operators in the crafting and implementation of its backward integration policies to facilitate the creation of industry friendly and enduring policies that would not erode the little gains made so far in the nation’s industrialisation drive.
Why BIP’s implementation waned
Checks by The Nation show that up until the third quarter of 2019, the implementation of BIP and resource-based industrialisation programmes were still on course, though not at an appreciable level. But the policies, which started promisingly, seem to have lost steam, even ‘technically abandoned,’ due to forex crisis and other economic challenges particularly infrastructure such as poor electricity supply.
Backward integration, according to experts in development economics, is the prerogative of private operators or businesses. It is not a policy that is centrally enforced; it can only be supported by an enabling environment created by effective government policies. Government is only required to create incentives for private operators to capitalise on the opportunities to do what is right for them.
However, the severely forex crisis, which hit the economy in the wake of low revenue earning from crude oil sale at the international market, was said to have undermined government’s capacity to incentivise investment by private operators in the development of raw materials locally through the BIP.
BIP’s success in cement, dairy driving renewed call
However, in renewing their advocacy for revisiting the implementation of the BIP and the resource-based industrialisation programmes, manufacturers drew strength from the remarkable success of the policies in the cement and dairy sectors, for instance.
Recall, for instance, that the implementation of the BIP in the cement sector in 2002, during the administration of former President Goodluck Jonathan, paid off. The adoption and implementation of the policy in the production of cement by ensuring that cement import licences were granted only to importers who show proof of building factories for local cement manufacturing in the country literarily worked magic.
On the strength of the BIP on cement, Nigeria has achieved self-sufficiency in cement, the most critical input in the built industry. The country has since moved from the era of cement importation to exportation, although a small quantity is still being imported. And this has significantly cut the huge foreign exchange spent on the importation of the product while also creating several jobs.
Before BIP, Nigeria had an installed capacity of 4.03 Million Metric Tonnes Per Annum (MMTPA), but producing only 2 MMTPA. The country’s production capacity following the BIP stood at 50 MMTPA at the end of 2019. And there are hopes that local cement production capacity may hit 60 MMTPA this year, as BUA Cement plans to establish three million metric tonnes cement plants in the country.
The BIP is also gradually changing the fortunes of the local dairy industry, with dairy manufacturer FrieslandCampina WAMCO Nigeria Plc pioneering a Dairy Development Programme (DPP) that seeks to improve the quantity and quality of local raw milk production.
Launched in 2010, the DPP is a Private-Public Partnership (PPP) initiative aimed at sustainably developing the local dairy value chain by improving milk quality and increasing milk production via the training of local pastoralists on dairy farming practices, while also supporting the Federal Government’s BIP.
In July 2019, the Godwin Emefiele-led Central Bank of Nigeria (CBN) gave fillip to the policy for the local production of select items including dairy products. The idea was to latch on the BIP to significantly cut the huge capital flight that goes into the importation of milk and other dairy products, rev local production capacity and create .
Nigeria, according to the apex bank, spends between $1.3 billion and $1.5 billion yearly on the importation of milk and other dairy products. The humongous import bill is as a result of the wide gap between supply and demand for dairy products in Nigeria.
It was in a bid to help close the gap and cut the import bill that FrieslandCampina WAMCO, through the DDP, threw its weight behind the CBN’s BIP. And as it turned out, the programme appears to be the most successful private-sector led initiative to ramp up local milk production.
Raw milk production has since increased to 40,000 litres per day, even as over 7, 000 dairy farmers have been empowered. And as the first dairy company to champion backward integration and lead sustainable dairy development in Nigeria, FrieslandCampina WAMCO and its partners are said to have invested over N21 billion in the DDP.
An obviously excited Managing Director of FrieslandCampina WAMCO Nigeria Plc. Mr. Ben Langat recently said that from the DDP’s initial concentration in Oyo, Ogun, Osun and Kwara states, the programme has been extended to other parts of the country. For instance, a large DDP project is going on in Bobi Grazing Reserve, a pilot grazing reserve in Maringa Local Government Area of Niger State, North central Nigeria.
He also said the company, encouraged by the DDP, has surpassed the target of 10 per cent local raw materials sourcing it set for itself in 2016. “We have achieved and surpassed the target we set in 2016 on dairy development. “We have even moved beyond just surpassing our target to setting up a complete business line with the peak yoghurt.”
Supply chain disruption by COVID-19 also
Since the COVID-19 pandemic, which first broke out in Wuhan, Central China, eventually found its way into Nigeria on February 27, 2020, it has been a tale of woes for Africa’s largest and most populous economy, particularly the manufacturing sector. And the reason is not far to seek.
Economist/CEO, Centre for the Promotion of Private Enterprises (CPPE), Dr. Muda Yusuf, said the pandemic deeply disrupted the global supply chain, as China, which is the second largest economy in the world, is a major supplier of input for manufacturing companies around the world, including Nigeria.
He said many manufacturers and service providers in the country experienced acute shortage of raw materials and intermediate input. This, according to him, had implications for capacity utilisation, employment generation (and retention) and adequacy of products’ supply to the domestic market.
Yusuf, who was former Director-General of Lagos Chamber of Commerce and Industry (LCCI), stated that this is so because China represents Nigeria’s biggest trading partner, with about 19 per cent of its imports sourced from the Asian giant. Between 70 to 80 per cent of Nigeria’s raw material imports also come from China and the Asian countries.
Indeed, prior to the pandemic, most Nigerian manufacturing companies imported a significant percentage of their materials from China, but the pandemic and its emerging variants disrupted that supply chain thus compelling manufacturers to look for alternatives and innovative means of raw material sourcing.
Forces against renewed call for BIP
Encouraged by the game-changing capacity of the BIP as an import substitution strategy, and of course, the devastating impact of COVID-19 and its emerging variants on global supply chain, it is hardly surprising that manufacturers from diverse sectors are re-echoing the need for government, working with the private sector, to re-energize the implementation of the BIP.
In his keynote address at a recent CBN roundtable discussion, billionaire businessman and President of Dangote Industries Limited (DIL), Alhaji Aliko Dangote, did not mince words when he said that backward integration was about the surest way to hasten the long-awaited diversification of the economy.
However, while Nigeria’s current economic challenges have heightened the urgent need to look inwards and diversify the economy by leveraging BIP, the question is: does manufacturers’ latest call to incentivize investment in the development of raw materials locally resonate with government?
With manufacturers identifying the creation of a competitive supply value chain and reducing dependence on imported raw materials as a strategic imperative, will government summon the necessary political will and do the needful, which, according to Ahmed, include considering the introduction of fiscal measures such as waivers on import duties on Active Pharmaceutical Ingredients (APIs), for instance?
These questions are germane considering the fact that manufacturers appear to have shifted the focus of their advocacy in favour of resuscitate the implementation of BIP and resource-based industrialisation at a time campaigns ahead of next year’s general elections are gathering momentum.
A manufacturer in the food and beverage sector told The Nation that with the benefit of hindsight, every election year or the one preceding it is usually characterized by lull in economic activities, with government focusing attention on election matters rather than policies that drive the economy.
The manufacturer, who declined to have his name in print, admitted that backward integration, is actually within the purview of private operators or business. He, however, expressed doubt that government will, at this time, see the imperativeness of appropriate policy responses to encourage its implementation to salvage the manufacturing sector.