Doing business in the "worst" state of Nigeria

Last month I had the opportunity to visit Ogun State in Nigeria and to look at how the Ogun State Government approaches the business sector. It’s a pretty bleak picture, but there are signs of change and there are many state commissioners and senior civil servants who are promoting change.

This is a reflection on what I saw.

Nigeria is famous for its entrepreneurial flair. This large country is twice the size of California and home to 160 million people and 350 ethnic and language groups. One in five Africans is a Nigerian. While independence in 1960 was greeted with great enthusiasm, the decay of governance and the emergence of dictatorships and military rule undermined the achievements and eroded the confidence in government. Civilian rule has brought new freedoms and space, but the opaque links with the oil industry have continued. Nigeria desperately requires to diversify its economy and private enterprise will play a central role in this process. While government has designed new policies and reform programmes that position the private sector as the “engine” of economic growth, the old tensions between state and business are proving difficult to overcome.

Lagos, the commercial centre of the country, is a major hub for business across West Africa. With close to ten million people, the city is a crucible of all kinds of entrepreneurial activity. The Indumota market, for example, is one of the oldest markets in Lagos and the largest single market in West Africa and possibly Africa. There are tens of thousands of lock up shops among many multiple storey buildings some measuring five or more floors. Most of the shops are actually apartment rooms converted into shops.

Drive three bumpy hours to the west of Lagos, toward Benin, and you reach the city of Abeokuta, the capital of Ogun State, one of thirty-six states in the Nigerian federation. Ogun State benefits from its proximity to Lagos and the Benin border. Many larger manufacturing firms prefer to operate here, close to, but away from the bustle and cost of Lagos. Despite this, some seventy percent of the four million people who reside in Ogun are involved in subsistence farming. Sixty two percent of the Ogun State population live in Absolute Poverty, on one US dollar a day.

Ogun State was ranked the worst state in Nigeria to do business in by the World Bank’s Doing Business sub-national assessment in 2010. Nigeria ranked poorly in the global assessment that year, at 125th out of 183 countries, making Ogun a bad place to do business in a country that’s considered pretty unfavourable to business in general. The state level assessment found that it takes on average ninety days to obtain the registrations and licenses required to establish a business, 101 days to register a property, 102 days to get the clearances required to construct a business premises, and 455 days to deal with a commercial dispute.

The four measures used by the World Bank for these state Doing Business comparisons are only the tip of the iceberg. Power supply is a problem, as it is throughout Nigeria. Most businesses are required to invest in a back-up generator and it is not unusual for established firms to have a back up for their back up. It has been estimated that power outages average 196 hours or eight days a month across the country. Water supply exits, but its distribution is problematic. Many roads are in disrepair and rail is largely non-functional.

Perhaps the most troubling aspect of government and business relations in Ogun concerns taxation. Nigeria has a relatively low rate of corporate tax, but it is the number of taxes that concerns business. The Nigerian federation has a confusing array of taxes spread across federal, state and local governments. The Nigerian federation is made up of thirty-six states and 774 local governments. State and local governments combined control about half of the national revenues.

Jos Informal-1-BW
[Photo: Simon White]
The national Taxes and Levies Act of 1998 established a basic schedule for taxation. There are eight taxes prescribed to the Federal Government in this legislation, ranging from companies income tax, withholding tax on companies, petroleum profits tax, value added tax, education tax, capital gains tax, stamp duties and personal income tax for police, the armed forces and residents of the federal capital. The Act assigns eleven taxes to state governments, including individual pay-as-you-earn tax, withholding and capital gains taxes on individuals only, taxes on roads, business premises, land and markets. But it is local government that can tax. There are no less than twenty items listed in the 1998 legislation, including taxes and levies on shops, kiosks, liquor licenses, marriages, births, deaths, bicycles, trucks, canoes, wheelbarrows, carts, cattle, radios –– including car radios, parking signboards, public conveniences, sewage and refuse disposal.

I met Dolapo Ogutuga who has run his own business in Ogun State for over forty years. Curiously, his initial project was wine production based on the indigenous kola nut. Having developed his kola nut wine during his PhD studies in the United Kingdom, Ogutuga began production when he returned to Ogun. These days, he produces three kinds of alcoholic wines, including Holy Communion Wine, along with non-alcoholic products, such as Popapine, a sparkling pineapple juice, which he supplies from his pineapple plantation. He also produces, Latropicana, a grape juice blended from an imported concentrate. Ogutuga is also is chairman of the Ogun State Chapter of MAN – the Manufacturers Association of Nigeria. When we met, he could not contain his frustration with the “multiple taxation” faced by Ogun businesses. He quickly provided me with a recent report by MAN on this topic, which documented how a typical manufacturing business in the state is required to pay no less than forty-three taxes and levies: 25 issued by local government, 18 by the state. The other substantial file he drew from his case was collection of the permits and licenses required by a single truck to operate in the state – see photo.

Some of the permits required by a single truck in Ogun State [Photo: Simon White]
Chief Bimbo Ashiru, the commissioner for commerce and industry in Ogun State, has urged businesses in the state pay their taxes and levies regularly. “Our industries, our investors should be responsible enough to pay their taxes and levies as and when due so that we continue to provide the necessary amenities and infrastructure for them.”

Businessmen such as Dolapo Ogutuga are obliging. There is no question that tax should not be paid. The problem is that the payment of taxes and levies is a constant and opaque activity, from which little public benefits accrue. Potholes litter the roads, power remains intermittent, crime and insecurity are pervasive, and new taxes and levies appear to be dreamt up by public officials on a regular basis.

Emmanuel Okonmah, the executive secretary of MAN described a recent local government invention: a tax on trucks that on-load or off-load in their jurisdiction. There appeared to be no legal basis for this tax. In addition, there are other kinds of informal tax collectors –– those clad with yellow vests and survey poles, wielding tire spikes and demanding small payments before allowing a truck or car to proceed. One never quite knows just what these payments are for, but it is clear they never reach the revenue accounts of state or local authorities.

Revenue is a major concern to state and local governments. What is typically referred to as “internally generated revenue” is a constant concern to state and local governments. Under the federated system, Nigerian states rely on allocations from the national accounts. The sums received typically fall short of what these authorities require and this shortfall must be addressed through revenue generated from with. Ogun has no oil reserves, and even if it did, these revenues would be sent to the Federal Government where they would be allocated to the national budget and a proportion returned to the states. Ogun does generate funds through its Idi-Iroko border post, but these are federal revenues and treated in the same manner.

The Ogun State Government is in the midst of reform. Stung by a poor performance in the Doing Business assessments and mindful of the need to mobilise greater volumes of private investment for the development of the state, it has embarked on a programme of reform. Its Economic Masterplan for 2012 to 2015, subtitled “Rebuilding Ogun State”, aims to achieve annual growth of nine to eleven percent. This can only be accomplished, it says, “if the government and business sector embrace a new way of thinking, a new way of working and a new way of conducting business”. This new way is focused on improving access to finance by small and medium enterprises, formalising informal firms “to enable taxation” and generate internal revenue, and the establishment of a one-stop-shop to reduce the bottlenecks in establishing a business.

At a meeting with the senior adviser to the governor on internal revenue I asked about the forty-three state and local taxes and levies demanded of businesses and the problem of the so-called “multiple taxation”. Astute to the political realities of the state, Adewale Ogunyomade was clearly aware of the problem and spoke at length about the ambitions of the governor to address this situation. He described the challenges of working with the twenty local governments of the state to address the problem, but indicated that the same political party as the governor governed most of them, so reform is more likely now than before. He was working on reforms that would lead to the State Government issuing a single, annual invoice to businesses within the state itemising all taxes and levies in the one document. The state government would collect funds on behalf of the local authorities. This would increase transparency in tax collection and overcome the problem of ad hoc taxes and levies. He was not, however, prepared to entertain a review of the state and local tax regime. Such a process, it seems, would threaten too many ministries and departments. While there may be more strategic, growth-oriented ways to improve tax collection and increase internal revenue, this is a process that faces significant resistance within the civil service.

Business and government meet in Ogun State
Business and government meet in Ogun State [Photo: Simon White]
It could be said that Ogun State is coming off a low base. There is clearly much to be done. However, it is useful to see how even in places where the business environment is challenging, there are public officials who are talking about reforms and some signs that this talk is leading to action. The business community in Ogun is relatively weak and unorganised, but it too is showing a willingness to work with government to improve the situation.