Bridging the divide: Reforms are under way to harmonise the business environment

As the country focuses on filling important gaps in transport and power infrastructure to improve the business environment in Nigeria, overcoming important shortfalls in the soft infrastructure will also be key to accelerating economic growth in the years to come. Having dropped 28 places in the World Economic Forum’s Competitiveness Index to 127th out of 133 in 2009 – where it remains in 2011 – there are still important hurdles in areas such as sanctity of contract and property registration. On the World Bank’s Ease of Doing Business Index, Nigeria dropped to 133rd place in 2011, from 108th in 2007, due to the long processes involved in starting up a business, obtaining a construction permit, electrification and contract enforcement. Improvements in the business environment have lagged behind those in other countries in the region such as Ghana and Kenya, which ranked 63rd and 109th, respectively, on the World Bank’s 2012 Ease of Doing Business Index.

IMPROVING GOVERNANCE: The government is conscious of the need to significantly improve competitiveness as emerging economies vie for greater foreign direct investment inflows in the midst of a global economic downturn, and with this in mind, is implementing reforms expected to drive improvements across all states. Yet improvements in governance have been slow to materialise despite attempts to improve oversight. The country is ranked 134th out of 178 states on Transparency International’s Corruption Perception Index and is 41 out of 53 African states covered by the 2011 Mo Ibrahim Governance Index, both unchanged since the previous year. Large-scale fiscal decentralisation since 1999, with over 40% of public spending at the subnational level, coupled with significant soft and hard infrastructure deficits have caused great variations between Nigeria’s states.

REGIONAL DISPARITY: While many of the bottlenecks constraining improvement in Nigeria’s rankings are structural, such as power and transport infrastructure, and are thus under the federal government’s remit, there is widespread disparity in investment environments across the country. A number of state-level World Bank reports since 2007 have highlighted these disparities among states. The latest “Investment Climate Analysis” in 2011 is based on a survey carried out in the 26 largest states, while the second sub-national “Doing Business” report in 2010 covers all 36 states and the Federal Capital Territory of Abuja. While starting a business was reported to be easiest in Abuja, Jigawa, Borno and Gombe, enforcing contracts was easier in northern states, with Katsina ranking top. Registering a property was quickest in Gombe State in the Middle Belt, while obtaining a construction permit was easiest in Jigawa.

In aggregate, doing business is most challenging in the Igbo state of Imo and the Yoruba state of Osun, according to the 2010 state rankings. The top 10 easiest states in which to do business are all in the Middle Belt and in the north, indicating a significant lag among states in the south and south-west. The higher volume of business taking place in southern business centres like Lagos, Ibadan and Port Harcourt leads to frequent delays and bottlenecks, as these states have not yet achieved economies of scale and resources to improve the efficiency of their soft infrastructure. A notable outperformer among states in the south is Akwa Ibom, where the cost of doing business and the time it takes to start up a company, for example, are much lower than in other states in the Niger Delta.

NORTH-SOUTH DIVIDE: Significant regional differences in human development between the north and south have also contributed to disparities in human capital among the country’s states. The northernmost state, Sokoto, recorded the highest incidence of poverty, at 86.4%, compared to the lowest levels in the Middle Belt state of Niger, at 43.6%, and southwestern Osun, at 47.5%.

The World Bank notes improvements in the majority of the 11 states it first covered in its 2007 “Doing Business” report, which is testimony to the state-level interest in improving conditions for investors.

Yet surprisingly states with the largest economies, such as Lagos, Abuja and Kano, remained in the middle tier in 2010, ranked 25th, 17th and 8th, respectively. The report’s key recommendation was for the federal government to work alongside states to harmonise investment procedures in order to reduce variation. The World Bank estimates that if all states improved procedures, bringing them up to standard with the best practice in other states, Nigeria’s ranking would improve by 53 places to 72nd.

A number of states eager to tap a growing subnational bond market have already been prompted to improve government efficiency and increase internally generated revenue. The extra funding for states like Lagos, Rivers and Bayelsa is being steered to priority capital expenditure projects in infrastructure and social welfare. While such market-driven improvements will help develop around one-third of states eligible to issue state bonds, the federal government has also been pushing for closer coordination of investment policies for all states.

TOP-DOWN APPROACH: The Goodluck Jonathan administration is aiming to establish a more coherent and concerted investment policy. Meetings of the Nigerian Governors’ Forum, established in 1999 to promote good governance, have traditionally focused on issues of a political and fiscal nature, rather than coordination of state-level investment policies. The new Ministry of Trade and Investment (MTI) was set up in 2011 to help steer improvements in the investment environment across the country. Olusegun Aganga, a former Goldman Sachs banker and former minister of finance, was appointed its head.

Facilitating investment will be key to the success of many government initiatives that rely on private investment, from agricultural transformation to reforming the power sector. “For investors, the most important sign of a positive business environment is improvement, even if incremental,” said Elizabeth Littlefield, the president and CEO of the Overseas Private Investment Corporation, the US government’s private sector financing arm.

ONGOING REFORMS: With technical support from the UK’s Department for International Development, the MTI is carrying out a series reforms aimed at reducing the time needed to set up a business to two days. This is expected to be in place by the end of 2012. The reforms include two technical committees established in July 2012 to tackle investment procedure problems and improve Nigeria’s rankings. The competitiveness committee represents the private sector’s recommendations for improvements of the business environment, monitoring legislation that is related to the conduct of business and proposing amendments. The after-care commission will relay complaints from investors to policymakers, providing a way to track the progress of investment implementation across the different states.

While a new incentives regime will be proposed to the National Assembly in 2013, the Nigerian Investment Promotion Council (NIPC) has focused on improving coordination across the federal bureaucracy and states by encouraging the establishment of state-level one-stop investment centres. “The NIPC is encouraging state governments to set up a mirror agency at the local level in order to ensure effective coordination of investment promotion, facilitation and policy advocacy,” Mustafa Bello, the executive secretary and CEO of NIPC, told OBG. A number of states, including Rivers, Lagos and Cross River, have already established such agencies, aiming to better track and support the full investment process. The MTI is currently working on a pilot project with Lagos state to reduce the cost and time it takes to register a property, enforce contracts and award construction permits. In addition, it is moving the process of registering a business online.

Reforms at the Corporate Affairs Commission (CAC), in charge of business registration, have already been launched with a new e-payments system for administrative procedures, which has reduced the time for incorporation with the CAC to five days, from up to three months prior, while the number of steps has been cut from nine to five. The CAC site now also includes a platform for the verification of business registrations online for instance. Smaller changes, such as a revision of immigration procedures to facilitate access for foreign investors in early 2012, have also highlighted the administration’s reform drive.

Despite the limits on any federal-level reform effort, Nigerian states are increasingly competing to improve their investment environments. While the lack of improvement in corruption perceptions presents limits to improving the country’s ease of doing business rankings, closer coordination between the three tiers of government, larger private sector representation in policymaking and a more concerted effort generally should ease the soft infrastructure bottlenecks that have been problematic for investors in Nigeria.