Investment opportunities in a number of sectors in Nigeria's Osun State

Even with such a large income-sensitive population, few markets in Africa offer the potential scale and consumer base as Nigeria, which makes the country a natural destination for manufacturers and industrial firms looking to gain a foothold in the region. High operating costs and cheap unregulated imports have traditionally made it difficult for producers to ensure cost-efficiencies and have dampened growth. However, state governments are taking increasingly aggressive measures to attract labour-intensive and value-added activities – in a bid to increase internally generated revenue (IGR) and expand employment opportunities.

The state’s geographical location, only four hours by road from the country’s single largest consumer market, along with plans for improved rail links and a designation by the federal government of Nigeria as a national industrial centre mean it offers a host of comparative advantages. Several large firms already have a presence in the state, but given the large size of the agricultural sector, agro-processing should also see a significant uptick in the near future, while prospects are good for commercial mining across the state.

Key Players

By far Osun’s largest employer and biggest contributor to IGR, International Breweries is the single biggest manufacturing operation in the state. Located in Ilesa and publicly listed on the Nigerian Stock Exchange, the company recorded N10bn ($61m) in revenues in the second quarter of 2014, up more than 16% from the second quarter of 2013.

In 2012, South Africa’s SABM iller acquired a 72.9% stake in the firm. Since the acquisition, International Breweries has invested N6.6bn ($40.2m) and expanded production capacity by 30%. This investment drive has provided an estimated 15,000 direct jobs in the state.

Other major firms present include Integrated Steel, Nigeria Machine Tools and the Omoluabi Garment Factory. Integrated Steel began life as Osogbo Steel Rolling Mills, established by the federal government in the 1980 as part of a national steel development scheme, but it was privatised in 2002, acquired by Dangote Industries. In 2010 it received a N7.5bn ($45.8m) injection from Dangote Industries to expand capacity and upgrade equipment, and the firm now produces steel rods and bars with a capacity of 400,000 tonnes per year. Nigeria Machine Tools is located in Osogbo, consisting of four assembly and heavy machine shops, three light machine shops, one foundry, casting shops and a training school. The manufacturer of machine tools and mechanical components, which was partly privatised in 2007 – the federal government and HMT India have a combined 30% stake – has over 200 direct employees. Located in Osogbo, the Omoluabi Garment Factory commenced operations in 2013 and has recently has seen a jump in activity following the rollout of the state’s O-UNIFORM scheme for education. Under the programme – a part of the state government’s efforts to expand local sourcing for domestic initiatives – the factory serves as the official provider of 750,000 uniforms to all public school students in the state, employing 3000 workers in the garment industry.

Constraints & Challenges

In Nigeria, reliability and cost of power remains the single greatest constraint affecting manufacturing activity. While the State of Osun is currently undertaking a number of reforms and spending campaigns to improve overall electrification and should see expanded supply under the government’s electricity privatisation programme (see Infrastructure analysis), local industrial players can still expect to face shortfalls in electricity distribution.

The cost of running independent diesel generators for large energy consumers, such as industrial producers, can increase overhead by as much as 30%.

Adding to high operating expenditures is the price of financing industrial operations in the country. Commercial lending rates in the country regularly surpass 20% for all but blue-chip firms, leaving small and medium-sized enterprises and firms outside major commercial clusters with only limited access to credit. Many businesses resort to alternative routes to capital, including personal cash reserves and supplier credit lines.

Local producers must also grapple with smuggling and informal wholesales and retailing, with a vast number of finished goods entering the market every year affecting every component of the value chain, from mobile phones to textiles.

Improving local procurement programmes for the public sector, a sizeable consumer in and of itself, should help mitigate the risk of imports for certain industries, as the government is doing with Omoluabi Garment Factory under the O-UNIFORM programme.

Free Zones

State governments have significant latitude in determining their investment promotion policies, and to a lesser extent, their business regulations. Osun has sought to take advantage of this, allowing the use of pioneer status for specific investors at its discretion, and granting tax holidays to new industrial investments for a maximum of five years.

The state is also home to free-trade zones, which in Nigeria are licensed by the Nigerian Export Processing Zones Authority, a federal government agency under the Ministry of Industry, Trade and Investment. The agency is responsible for promoting and facilitating local and international investments into licensed free zones in Nigeria, and stimulating export-oriented activities under an enabling environment. The Omoluabi Free Trade Zone, formerly called the Living Spring Free Trade Zone, is located in the State of Osun and is one of 25 such zones in the country. The state government has set aside 1600 ha for the project, which is currently under construction. Certain infrastructure like asphalt, roads, street lights, water and some office buildings have already been put in place, while an assembly plant for motor vehicles is also under construction.

In addition, the state is looking at service sectors as potential tenants for zones, including tourism. “Tourism is still very rudimentary in Osun,” Oladipo Soyode, special adviser to the governor on tourism, told OBG. “There are no systematic logistics and travel is still expensive. We estimate we need about $1bn to develop the sector properly.” However, there have been early successes. Osun is attempting to create a tourism enterprise zone and has already signed a memorandum of understanding with financiers Thomas & Thomas of the US. This 8000-ha zone centred around a man-made lake 15 minutes from Osogbo has the potential to bring in an estimated $100m in the medium term.

Wholesale & Distribution

Osogbo, the capital of the State of Osun, has long been a commercial centre for trading and distribution for the markets of the south-west, often drawing buyers from the east and middle-belt regions of Nigeria for locally manufactured goods. In order to strengthen its positioning and attract new activity, the current government has introduced the Osun Hub programme (O-HUB). The initiative seeks to improve market linkages for manufacturers, farmers and consumers by combining logistical planning, bulk warehousing, a wholesale hypermarket and retail mega-stores into a single organised facility.

The facility, when completed, will also connect with rail spurs from the nearby town of Dagbolu to the national network, which will help facilitate regional freight access. To date, approximately 200 ha of land has been acquired for the market. Construction has yet to begin, but the government is now looking to attract private sector operators for the logistics and warehousing components of the project.

MIning

While oil has traditionally been king in Nigeria, falling prices and dwindling international demand has spawned pressure across the country to exploit other resources, notably solid minerals.

The National Bureau of Statistics lists solid minerals as contributing less than 1% to GDP despite sizeable estimated quantities of coal and iron ore reserves, along with gold, uranium and tin. Rights to ownership of mineral resources sit with the federal government, specifically the Ministry of Solid Minerals. Osun is looking to expand mining activity, and to help facilitate this, in 2006 it established the Omoluabi Minerals Company, a limited liability parastatal. Since then, the company has acquired several mineral titles, which were previously held by the now-defunct Nigerian Mining Corporation, from the federal Bureau of Public Enterprises.

The company currently has three mining licences, four quarrying leases and 10 exploration licences for gold, quartz, feldspar, lead and zinc; however, as is the case in much of the rest of Nigeria, resource mapping is minimal and much is based on speculation. A recent survey conducted by the Nigerian Geological Survey Agency on exploration licence 1916 confirmed the existence of primary gold in commercial quantities.

The prospects have been enough to entice players from abroad. CGA Mining, an Australian firm which has a local presence through Segilola Nigeria, concluded exploration programmes in the beginning of 2014 and confirmed more than 1m ounces of gold. Meanwhile, the Omoluabi Mineral Company has confirmed 20m tonnes of talc, commonly used as an extender in paints, lubricants for paper manufacturing, and wall tile and other ceramic products. In addition, some 700 tonnes of feldspar, also used in paints and ceramic materials, have been located in Atakunmosa East and Ede.