Boosting economic development and facilitating investment in Nigeria's Osun State

While it lacks the hydrocarbon resources of Nigeria’s Delta states and, with a modest population, has traditionally received one of the lowest amounts of revenue allocation from federal government, the State of Osun has nonetheless been aggressive about working to promote growth and development.

Although Osun does face its fair share of challenges, including a large dependency on the volatile agricultural sector and neglected infrastructure, the current administration has taken a number of steps to block monetary leakages, improve project preparation and delivery, and raise internally generated revenue (IGR). These efforts have been in parallel with attempts to improve the business environment in the state, with initiatives from a number of ministries to reduce the informal market, which by some estimates comprises 57.9% of Nigeria’s GDP, according to the UN Development Programme, while the Office of Economic Development and Partnerships (OEDP) acts as a first point of contact for potential investors.

Economy

The state’s headline indicators are solid, in spite of constraints on national-level spending due to the drop in oil prices in late 2014. According to the National Bureau of Statistics, the State of Osun’s gross state product (GSP) is estimated at $650m. The state’s official unemployment rate is one of the lowest in the country, although this is impacted in part by the government’s large youth training scheme as well as by the general challenge of discerning the size of Nigeria’s active labour force, given the large informal sector.

The state’s economic activity is primarily driven by agriculture, which employs 70% of the population. Key crops include maize, yams, and cassava, as well as cocoa, plantain and palm oil. Osun is one of the largest exporters of cocoa in Nigeria, and its forestry sub-sector ranked fifth in the country. Extensive poultry and livestock schemes are also in place to enhance these value chains (see Agriculture analysis). As is the case elsewhere in Nigeria, manufacturing provides only a modest contribution to output, but efforts at the state and national levels have sought to revive the sector. The sector has been negatively impacted by the growth of hydrocarbons production, suffering from under-investment and Dutch disease, but Osun does nonetheless have a strong manufacturing base, with several firms present, including publicly listed International Breweries – the state’s largest formal employer, and its largest taxpayer.

Revenues

While Osun’s 2015 budgetary estimates were still in the approval stage by the House of Assembly as of the time of writing, figures are expected to be sizably reduced compared to the previous year, with both federal and state governments trimming budgets given the fall in oil prices. Approved revenue budget estimates for 2014 topped out at N234bn ($1.4bn), with N29bn ($176.9m, 12.64%) coming from IGR, N72bn ($439.2m, 30.69%) from the federation account, and N132bn ($805.2m, 56.6%) in capital receipts, which include loans and donor funds. This is primarily made up of a N15bn ($91.5m) internal loan, N11bn ($67.1m) external concessionary loan, N15bn ($91.5m) from the French Development Agency and N7.5bn ($45.8m) from the World Bank’s Water Project. About N47bn ($286.7m) comes from an assortment of other international donors. The State of Osun has generally received among the smallest federal allocations out of the 36 states.

The limited volume of federal transfers has prompted the state to bolster IGR to stabilise its budgets. The targeted IGR laid out by the state administration is N1bn ($6.1m) monthly, but in recent years it has grown significantly. IGR stood at N325m ($2m) per month in 2010 and by 2013 this number had reached N1.6bn ($9.8m) per month. Crucially, this has been accomplished primarily through plugged leakages. A number of reforms have made this possible, including the automation and digitisation of IGR processes, which has enhanced accountability and transparency. All payments to the state government now go directly through commercial banks, without staff intervention, and the money is made available immediately.

While the streamlining and improving the governance and management of existing revenues has been a priority in recent years, the state is also looking to widen the tax net by improving integration of informal activities. To help with this, a Revenue Administration Bill was with the House of Assembly as of February 2015 that gives the state IRS more autonomy.

The tax system in the state is progressive. According to the Personal Income Tax Act amended in 2011, a consolidated relief allowance of N200,000 ($1220) subject to 1% of gross income, whichever is higher, plus 20% of the gross income and the balance, is taxable. The first annual N300,000 ($1830) is taxed at 7%, the next N300,000 ($1830) at 11%, the next N500,000 ($3050) at 15%, the next N500,000 ($3050) at 19%, the next 1.6m ($9760) at 21% and anything above N3.2m ($19,520) at 24%. The corporate tax rate is 30%.

State Spending

In 2013, Osun’s capital expenditures sat at N167bn ($1bn, 71.6%) and its recurrent expenditures at N66bn ($402.6m, 28.34%). Capital expenditures dropped to N134bn ($817.4m, 57.38%) in 2014, with recurrent expenditures rising to N99bn ($603.9, 42.62%). Receiving the largest budget allocation is transport infrastructure, with significant funds allocated to road rehabilitation and construction since 2010. The Ministry of Works was allocated N43.5bn ($265.4m) for capital expenditures in 2014, along with N6m ($36,600) to the Osun Road Maintenance Agency. The last four years alone have seen 129 km built, with more upgrades in the pipeline. Maintaining capital expenditures in this regard will be crucial to ensuring growth in other segments, particularly construction, manufacturing and agriculture, all key drivers of employment. The public-private partnership (PPP) legislation enacted at federal level, though yet to be fully realised at the state level, seeks to bring greater transparency to the bidding process and expand private participation in infrastructure projects. Another key set of line items for current budget is social spending, particularly on health and education. Attendance in primary school has seen dramatic improvements since the introduction of the revamped school feeding programme, while its O-SCHOOLS initiative has built and rehabilitated numerous schools across the state. Likewise, 80 new primary health centres have been built and equipped since 2010, accompanied by more ambulances and employment of additional paramedics.

Of 2014’s total expenditure estimates, N4.3bn ($26.2m, 3.5%) was allocated to agriculture, livestock, forestry and fisheries; N49bn ($298.9m, 40.7%) to electrification, industry, finance, cooperatives and transportation; N26bn ($158.6m, 22%) to health, education, culture and youth; and N15bn ($91.5m, 12.9%) to water resources, sanitation, housing and town planning. General administration represents the last category measured at N24bn ($146.6m, 20.6%).

Debt Financing

In its annual national debt sustainability analysis conducted in 2014, the Federal Ministry of Finance’s Debt Management Office estimated the total domestic debt of Nigerian states exceeds N1.4trn ($8.5bn). This figure was up nearly 20% from the year before, indicative of a trend among the country’s states of turning towards debt to help fund both current and capital spending. The State of Osun has followed suit. Following the acceptance of a three-year, N18.3bn ($111.6m) loan from UBA, the subsequent obligations of N625m ($3.8m) per month proved to be a heavy burden on its treasury and prompted a fiscal crisis in the state house as Osun’s short-term debt profile rose to around N21bn ($128.1m). The state government restructured its existing obligations, refinancing the loan to N25bn ($152.5m) under a seven-year tenure and imposing moratoriums that freed cash flow for other obligations. Osun now pays N100m ($610,000) per month on loan servicing. To improve the state’s ability to access financing in a more transparent fashion, a bond bill and a debt management bill were passed by the State House of Assembly in 2012, which led to the sale of a N30bn ($183m) bond at a 14.75% fixed rate in December 2012 that was oversubscribed by more than 100%. The bond is due in 2019, with 60% cornered by the Pension Fund Administrators. Osun was also the first issuer of ria, and one of the first in Africa, following the sale of N11.4bn ($69.5m) worth of seven-year paper in 2013.

Doing Business

In 2014, the World Bank completed its third sub-national report on doing business in Nigeria, updated from 2010 and covering all 35 states plus the Federal Capital Territory. The report examined four stages in the life of a business and found significant differences in performance among the states. Overall, the State of Osun improved since 2010, although progress has been mixed. The State of Osun ranks third of 36 when it comes to dealing with construction permits – a total of 57 days required – and in terms of contract enforcement Osun ranked number 10, requiring 438 days and a 30.7% cost of claim value. There is still room for further improvement. On starting a business, for example, Osun ranked 33 out of 36, requiring 11 procedures and 37 days, more than half of which is spent with the Corporate Affairs Commission. In terms of registering property, Osun ranked in the bottom seven, one above Lagos, requiring 12 procedures and 91 days.

Established in 2011, the OEDP acts as the state’s first point of contact for investors and promotes innovation in economic development. It aims to leverage creative partnerships and facilitates PPP arrangements.

Land

Controlled at the sub-national level, land has traditionally been one of the biggest challenges facing foreign investors in Nigeria – and indeed throughout Africa as a whole, where traditional ownership and legal ownership can sometimes conflict. A majority of landowners in the State of Osun still hold their plots informally. As a result, the state recently rolled out the Osun Certificate of Occupancy fast-track scheme in an attempt to bring 300,000 properties into the system.

The Ministry of Land, Physical Planning and Urban Development, which maintains a working registry of property sales, has set the goal of streamlining the process of obtaining a certificate of occupancy to 60 days while reducing the cost of procurement. All this is made easier through a new GIS platform, which has base-mapped Osun through photos at 10-cm resolution. “Agencies are able to key into the system and pull data, and land titling as a whole in the State of Osun is being built atop this platform,” Muyiwa Ige, commissioner for lands, physical planning and urban development, told OBG. “This makes government more efficient and valuations more accurate.” According to officials, the process will eventually be automated – four-fifths of Nigeria’s states maintain paper registries – and the government is also planning to introduce the Urban and Physical Planning Bill to bolster implementation of policies and create a stronger enforcement agency.

Improving land transparency and planning is a focal point for one of the state’s development initiatives. Osun ranks among the most urbanised of Nigeria’s 36 states, having experienced exceptional growth over the past few decades. However, in tandem with this has come uncoordinated physical planning and inadequate infrastructure development, causing congestion and environmental degradation. To ensure a more investorfriendly environment around land, the current administration has developed a plan for urban renewal with the UN Human Settlements Programme as a technical partner. This will create structural plans for the state’s nine biggest cites that will guide development over the next 20 years, reviewed on a five-year basis, while facilitating regeneration of the individual city centres.

Development Agenda

The state government’s overarching development framework includes an ambitious six-point agenda that aims to banish poverty and hunger, create work and wealth, restore healthy living, provide functional education, and ensure communal peace and progress. The objectives of the agenda are challenging and will require significant efforts if they are to be realised. As a result, the government is looking to channel resources into several schemes that it hopes will yield results in key areas. Labour-intensive sectors, such as manufacturing and tourism, are being targeted, with support for small and medium-sized enterprises and the Osun Youth Empowerment Scheme (O-YES), rolled out in 2011. O-YES, which has supported 42,000 youths in apprenticeships and training programmes, is currently recruiting its next 20,000 cadets for 2015-17 period. On a monthly basis, it is estimated by the state government that O-YES injects N200m ($1.2m) into the local economy through allowances and initiatives like the utilisation of local tailors. The scheme has been so successful that the World Bank adopted O-YES as a model for its own Youth Empowerment and Social Support Operation, and it is currently being replicated across 18 states. The scheme is chiefly credited with the dramatic drop in the State of Osun’s unemployment rate over the past three years, from 12.4% to 3%, according to the National Bureau of Statistics.

Similarly, given that agriculture remains the largest contributor to employment and state output, the government is aiming to encourage farm estate expansion, support cooperatives and attract new private operators. The health component includes the expansion of physical systems, with an estimated N2.1bn ($12.8m) allocated to capital expenditures under the Ministry of Health, and the promotion of good health practices through private sector partners. Under the water category, attempts will be made to improve potable water supply while increasing irrigation networks. Physical infrastructure will also be overhauled, with the state focusing on road and rail networks, along with an improvement in water supplies. Last but not least is the push for participatory and accountable governance, which includes reforms to the justice system, developing legislative capacity and improving transparency.