Opening doors to investment: The state is set to serve new investors as it streamlines procedures and improves infrastructure

Known as the “pace setter state”, Oyo is in south-west Nigeria and borders the states of Ogun, Osun and Kwara, as well as Benin. With an extensive interstate road network and the ability to capitalise on high volumes of cross-border activity, the state benefits from a strategic location, enabling companies to receive shipments from the ports of Lagos, reach markets in the country’s northern and eastern regions, or supply customers in Benin and beyond. Businesses in the state still face challenges posed by infrastructure bottlenecks, but new policies, developed in conjunction with federal programmes, are helping to incentivise investment by strengthening Oyo’s competitive advantages.

DEMOGRAPHIC INDICATORS: Although links to neighbouring markets are a major attraction for investors, the local market holds sizable appeal as well, both in terms of potential consumption and labour supply. The last census in 2006 recorded a total state population of 5.6m people. By 2011 the total had risen to an estimated 6.59m, making it the fifth-most-populous state in Nigeria, according to the figures from the National Bureau of Statistics (NBS), which projected the state population to stand at 7.1m people in 2013. Based on this data, Oyo State’s population has grown by approximately 3.35% per year since 2006.

Looking at demographic patterns, there is an equitable gender split with over 49% of the population being female, according to 2013 estimates. There is a strong bias in age, however, and like many emerging economies the population is young as around 47%, or 3.4m, of the population is under the age of 24. Meanwhile, population density was estimated to be 242 people per sq km in 2011. The NBS estimates that the five local government areas of Ibadan, the largest city, have a combined population of 1.7m, although this number swells significantly with the daily commute. There are a total of 33 local government authorities in the state.

PURCHASING POWER: According NBS data, Oyo State’s per capita income in 2011 was N49,903 ($314), ranking it 23rd in the country. The state was highlighted in a recent 2013 report by Russian-owned investment bank Renaissance Capital as offering significant opportunities for consumer-oriented firms, due to its high per capita income, along with Lagos, the Federal Capital Territory, Kaduna and Osun. Official estimates of unemployment from the state government peg the joblessness rate at 8.8%, although unofficial estimates range much higher, and the informal market comprises a large part of economic activity.

NATURAL RESOURCES: Although Oyo State does not benefit from the same level of hydrocarbons richesse as some of the states of the Delta region, it still provides a number of natural attributes that allow for large-scale primary and secondary activity. NBS ranks it as the 14th-largest state in the federal republic with a total land area of 28,454 sq km. This area is split into two distinctive ecological zones, the western rainforest to the south and the intermediate Guinean savannah to the north. Both zones harbour an abundance of natural resources, including solid mineral deposits of gold, marble, clay, kaolin and granite, among others. There are also thick forest reserves and swathes of uncultivated agricultural land.

The equatorial climate is highly conducive to arable cultivation and livestock agriculture with average daily temperatures ranging from 25°C to 35°C, varying between wet (April-October) and dry ( November-March) seasons. The state receives a mean annual rainfall of 1194 mm in the north of the state and 1278 mm in the south, which feeds an extensive fluvial network that includes the Ogun, Oba, Oyan, Otin, Ofiki, Sasa, Oni, Erinle and Osun perennial rivers.

BASIC ECONOMIC INDICATORS: These natural resources are paramount to a state economy that is largely agrarian in nature. According to the Oyo State government, the gross state product (GSP) reached N320.68bn ($2.02bn) in 2011, the last year for which full-year statistics were available, growing at 3.2% year-on-year. The local economy contributed 0.86% of national GDP in the same year, which left Oyo 21st out of 36 states in terms of economic output. In terms of non-oil activity, however, with oil and gas production excluded from the equation, its national position rises to 15th.

MAJOR SECTORS: A closer look at the breakdown reveals that nine key sectors contribute to nearly 85% of GSP. At the top of the list is crop production, including both cash crops like cassava and oil palm and staples, which had a worth of N93.18bn ($587.03m) in 2011, or roughly 29% of GSP. Husbandry, livestock and fisheries are worth an aggregate N22.7bn ($143.01m), or roughly 7.08% of GSP. This is a comparatively large component in relation to other states – something that is reflected in the fact that Oyo State is one of the largest poultry producers in the country.

The second-largest source of state output is wholesale and retail trade with a 19.74% contribution to GSP worth N63.3bn ($398.79m). This makes Oyo the sixth-largest state contributor to national output in wholesale and retail activity, and is in part a reflection of both the high level of cross-border volumes and the rising rate of local consumption. While the local trading sector is still largely dominated by the grey market, efforts are being made to formalise transactions through public and private sector initiatives – with some success as evidenced by the arrival of large investors such as South African retail chain Shoprite, which recently established a presence in Ibadan.

Real estate accounted for 17.74% of GSP in 2011 with N56.87bn ($358.31m) in revenues for the sector, making it the fifth-most-valuable market in Nigeria. Current development and public works projects are heavily concentrated in the state capital, creating employment in the building and construction sector, which generated N5.36bn ($33.7m), or 1.7% of GSP, in 2011. Although estimates vary, this figure has risen in the past two years thanks to additional public infrastructure investments in transport networks.

The fourth-largest sector in Oyo State is the road transport sector, comprising both passenger and freight traffic, and is valued at N25.8bn ($162.54m), or 8.05% of GSP. Ensuring the steady performance and expansion of activity in road transportation, alongside concurrent capital investment in infrastructure and improvements in the business environment, will be crucial to sustaining growth in other key segments – particularly industries such as local manufacturing, which generated just 2.19% of GSP, or N7.03bn ($44.32m), in 2011. Given the need for improved job creation and value addition, manufacturing is a focal point for the state government, although even this comparatively minor contribution put Oyo among the top six states for manufacturing output (see analysis).

PLANNING AHEAD: Although the broad indicators for Oyo State’s current performance and economic makeup are better than average in comparison to other states, there has been a push in recent years to strengthen output in the secondary and tertiary sectors, as well as channel investment into key areas. To this end, the current administration, which took over in 2011 with the election of Action Congress of Nigeria candidate Governor Abiola Ajimobi, has rolled out a development strategy known as the Restoration, Transformation and Repositioning (RTR) agenda, which was launched in 2012. The intention of the programme is to “halt drift in poorly performing sectors, consolidate on the gains in good sectors and move ahead to regain positions in areas of comparative advantages”.

The RTR agenda is intended to dovetail with some of the priorities – namely agriculture, agro-allied industries and industry – from a previous three-year plan that ran from 2010 to 2012, known as the Oyo State Economic and Empowerment Development Strategy programme. The RTR agenda will also be harmonised with the federal government’s Vision 20:2020 agenda, an ambitious plan which aims to make Nigeria one of the world’s 20 largest economies by 2020 through improved performance in key areas like electricity and agriculture. The state government has also been considering developing a 10-year master plan for the state that will coordinate all sectoral development goals, although no concrete details have yet been released.

PUBLIC SERVICE DELIVERY: The three-phased RTR agenda seeks to address longstanding challenges. As the administrative capital for the former Western State during the colonial era, Oyo State was once a regional epicentre for investment and growth, as well as a major crossroads for trade. Prior to independence, Ibadan was lauded for its well-developed infrastructure and thriving trade. However, the onset of hydrocarbons production in the 1970s shifted investment focus towards oil exploration and production, ushering in an era of decline for the once prosperous state.

For the past three decades, as in much of Nigeria, underinvestment has constrained improvements in social sectors such as health and education, as well as in public services like infrastructure and sanitation. Inevitably, economic productivity has dwindled as agricultural output fell, and as Dutch Disease affected the country’s manufacturing sectors, Oyo’s industrial production slowed. As a result, in recent years Oyo State has focused on restoring basic services and improving fundamental indicators to improve the overall operating environment and lay the groundwork for broad-based growth. Among the key areas of focus have been improving security, redeveloping access roads in major towns, renewing the urban environment, mitigating flood risk, and investing in education and health.

Major changes have also occurred within the government, with moderate organisational restructuring and an overhaul of public finances. In fact, the state government decided in February 2013 to reduce the number of its bank accounts from 614 to three, gaining N7bn ($44.1m) in the process. The government has also improved its performance in terms of meeting its spending targets, from realising 43.05% of planned expenditure in 2010 to 73% in 2012.

FISCAL STRUCTURE: The 2013 budget has been referred to as the Transformation Budget, officially kicking off the second phase of the state’s development agenda. The total budget estimate stands at N159.62bn ($1bn), with N74.61bn ($470m), or 46.7%, available for capital expenditure. This spending plan continues to prioritise infrastructure and social services, allocating 33.9% of spending to economic development, 29.3% to social services and 13.1% to regional development.

The government’s spending plans reflect in many ways the urgency of increasing economic activity in the industry and service sectors; manufacturing, retail, tourism and transport all receive significant funds under the budget plan. An estimated N10.44bn ($65.7m) has been allocated for hotel projects, cooperative housing developments and repositioning of state-owned companies. Funding has also been set apart for the establishment of the Okerete Transnational Border Market, a joint initiative between the federal government, state administration and the UK’s Department for International Development that aims to create 5m jobs. The border market is expected to formalise trade activities, increasing cross-border trade and efficiency, as well as offering more services for those crossing the border.

In the transportation sector, N10bn ($63m) will be spent on bridge construction, dualisation of urban roads, reinstatement of traffic controls and development of public transit. Agriculture will receive N2.70bn ($17m) in state funding to be spent on the expansion of agricultural services, water management, development of new farm settlements, seed production, three cassava processing centres and new storage facilities.

SOCIAL SPENDING: The primary capital expenditures related to social sectors regard ongoing commitments by the state, which include the provision of free primary health care and primary and secondary education. However, the quality of human development indicators in the state remains low, and the government is working to address deficiencies. About N12.71bn ($80.07m) will be spent on education in 2013 to develop a technical university, four model schools, libraries and science laboratories in secondary schools. In the health sector, N4bn ($25.2m) will be available for construction and upgrades of health care infrastructure, procurement of pharmaceuticals and medical equipment, and provision of mobile clinics.

Environmental clean-up and improved utility and waste services have also received a hefty injection of funds, in part due to their emphasis in the RTR agenda, with some N9.78bn ($61.6m) to be used for related activities. An estimated N3.27bn ($20.6m) will be spent on environmental sanitation, sewerage and drainage, and N2.73bn ($17.2m) on water resources. Expenditure will focus on maintenance of waterways and supply systems, upgrading of current dumpsites and clearing of unauthorised refuse depots. In addition, an allocation of N1.79bn ($11.2m) will go towards the housing sector for the development of a Land Deed Registry, housing loans, compensation for demolitions and development of a housing estate.

REVENUES: With respect to how capital expenditure will be financed, a brief look at the breakdown of state revenue for 2013 shows that the statutory allocation, value-added tax and other funds from the federal allocation constitute 48.9% of estimated budgetary revenue. This is followed by capital receipts at 30.4% and internally generated revenues (IGR) at 20.7%. The breakdown is not unusual among Nigeria’s states, for while they have authority under the 1999 constitution to raise revenues independently, tax collection is generally constrained by the large size of the informal economy and only a handful of states have turned to debt markets. However, in recent months Oyo State has sought to reduce its reliance on federal revenue-sharing, halt external loans and drive up IGR.

TAX REVENUE: Given the low levels of contribution to GDP from taxes collected across Nigeria, raising tax revenues is no easy task. The state is strengthening the Oyo State Government Board of Internal Revenue, empowering the office of the accountant-general and bringing informal operators into the tax system. David Olatunde, the permanent secretary at the Oyo State Ministry of Finance, told OBG the state government is improving IGR collection in various ways, such as the introduction of a Land Use Charge whereby all premises are assessed in terms of their commercial value and taxed on a percentage basis. There has also been a rise in capital gains tax revenues as the government brings informal traders into the tax net by relocating roadside plots to specially designed business centres, which provide basic retail units with subsidised rents.

The government has made an effort to reduce recurring expenditure, largely by improvements in due process and prudential management of state funds. Over the past two years, the Bureau of Public Procurement has attempted to streamline the tendering and bidding processes, with a registry of contractors and vendors now in place to ensure prequalification and technical competency for all bidders. Similarly, a price index for common goods and services has been circulated among government ministries and agencies, which, according to the Oyo State Ministry of Finance, has generated a 40% saving on procurement of materials as the index prevents procurements officers from overpaying. These measures have enabled improvements in Oyo State’s overall budgetary performance, with the government reporting that it realised 73% of planned spending in 2012, up from 46% in 2011. As elsewhere in Nigeria, the government’s capital spending now relies heavily on public-private partnerships (PPPs), in an attempt to stoke investment without weakening the balance sheet.

PPP: Although the PPP process is still in the early stages in Oyo State, several projects are already under way. Two four-star hotels are slated for construction as PPPs. The hotels are being built by Nigerian real estate developer Hometel Hospitality and the N3bn ($18.9m) project cost is being split with the state government, which has already committed N300m ($1.89m) under the 2013 budget. Development has begun with the construction of the boundary fence, but the main construction is yet to start for the first hotel: Four Points By Sheraton. The project is slated for completion in 2016.

The state has a history of transfers of power during local elections, which does increase the risk for PPP projects, particularly given the track record elsewhere in Nigeria of cancelled or delayed projects following a change in government. “Changing leadership and the complications or issues this creates for investors are an inherent attribute of Nigeria’s democratic experiment,” Oluseun Abimbola, the senior partner at Nigerian firm Prime Solicitors, told OBG. “Ease of business is improving in Oyo State under the current administration, however. In the past, private negotiations were more political, but now the process is opening up and sound investment thinking tends to prevail,” Abimbola added. However, the PPP framework was substantially strengthened in July 2013 when the Oyo State House Assembly passed the PPP Bill. The legislation is set to boost transparency and improve due process during the bidding and contracting processes, and allows for the establishment of an office dedicated to handling PPPs. The office will be responsible for administering and regulating all PPP activities, ensuring compliance among all parties and brokering agreements between state ministries and investors. Legislation will be supported by a PPP policy framework which will guide government activities. There is no stipulation on specific PPP models to be implemented, but the government intends to consider partnership on a case-by-case basis.

PRIVATISATION: As is the case at the federal level, private sector partners are not only being sought to drive new projects, but to take over existing government interests as well. Nigeria has long made the privatisation of state assets a key priority for its economy, but only in recent years has the process gained momentum in critical public services, such as rail and electricity. The process is being replicated at the state level as well, and Oyo is no exception. The state’s investment holding company, Oyo State Finance and Investment Company Limited (OSFICOL), is looking to divest and privatise its interests. Established in 1996, OSFICOL took over from the state’s previous investment company, TICOL, and has investments in a variety of sectors. OSFICOL has announced its plans to reduce its stakes in wholly owned subsidiaries Oyo State Paper Mill and Cashew Nuts Processing Industries, as well as affiliate companies Trans Wonderland, responsible for the management of a local amusement park, and concrete pole manufacturer Conpole Nigeria. The companies have in recent years been a burden on the public balance sheet. According to local press reports, for example, the state-owned amusement park Trans Wonderland has not broken even in 20 years and was even temporarily handed over to private sector management by a previous administration. In 2009 the Oyo Paper Mill generated N10m ($63,000) in working revenue, largely through property rentals, but the limited revenues were wiped out by the costs of maintaining 350 KV of power generation due to limited grid access – a challenge across Nigeria. A similar policy is being pursued by the Odu’a Investment Company, which is the combined investment arm of five south-western states, excluding Lagos, and which recently embarked on a strategy to reduce ownership stakes in all of its wholly owned subsidiaries – 10 companies that span the hospitality, aviation, cocoa, telecoms, real estate, agriculture, publishing, power and manufacturing industries.

Speaking to OBG, Adebayo Jimoh, the group managing director and CEO of Odu’a, said, “All state parastatals should be privatised with the government retaining a minority share and no role in company management. This will allow private sector efficiency to drive profitability, while profits help to fund government IGR.”

INVESTMENT INCENTIVES: In addition to being able to generate their own IGR independent from federal allocations, states also have wide latitude to roll out their own incentive programmes for investors to help channel investment into targeted sectors. As a result, Oyo State has designed a package of structured incentives to attract investors in priority industries for development, namely agriculture and agro-industrial processing, manufacturing, transport infrastructure, culture and tourism, solid minerals and power.

Given that the cost of land in Lagos State has risen sharply in the last decade, and that quality sites with good access and support infrastructure are limited in availability, Oyo State is becoming ever more attractive in this respect. The Oyo State Ministry of Trade, Investment and Cooperatives has stated that it is prepared to offer discounts of more than 80% on the cost of land for non-PPP investments. The ministry is also offering support infrastructure, such as access roads, for larger projects, thereby addressing some of the key challenges to doing business in the region. Furthermore, the federal government has promised personal income tax holidays in some cases, as well as expedited processing of regulatory consent and requirements.

In streamlining the land acquisition process, the first phase of an automated deed registry has already been completed, with digitised registration helping to avoid duplication of titles. “Efforts are under way to fast-track project approvals and shorten the timeline between project conceptualisation and execution. Key points that are being addressed include ensuring a robust project development phase and streamlining the administrative and funds-release process,” Biyi Oloko, special adviser to the executive governor of Oyo State on Economic Planning and Budget, told OBG.

DOING BUSINESS: Such initiatives are important with respect to international business rankings. The implementation of major reforms can be a delicate process. If handled injudiciously, it can cause uncertainty amongst the business community and lead to significant changes in operating costs that could slow output. According to Abimbola, the batch of amendments to Oyo State’s regulatory codes in recent months has helped in some ways, but cause extensive confusion in others. The introduction of a Land Use Charge in 2012, for example, presented local companies with a significant hike in property taxes, and Nigeria’s Manufacturers Association has challenged the new tax in the courts.

OUTLOOK: In spite of the state’s competitive advantages, however, total direct investment is still low. There are still key challenges to doing business that must be addressed, and international companies with a strong risk appetite and an eye on the local market are among the first to enter the market. Agricultural production and food processing are significant areas of interest for incoming investors such as the UK’s Karma Foods and Malaysia-based Oriental Foods, which already have parcels of land under development close to Ibadan. Investment incentives such as land concessions and tax breaks available via the Ministry of Trade, Investment and Cooperatives will attract further investor attention, while new regulations will help streamline processes. The local consumer market is equally attractive.