This is the Final Report of the Team of Consultants appointed by Adam Smith International, following the comprehensive review of the institutional, regulatory, legislative and associated instruments affecting businesses in Nigeria. The views expressed in this report are those of the Consultants engaged to conduct this Assignment and will be considered as submissions to the President of the Senate of the Federal Republic of Nigeria.
The report identifies the significance of Micro, Small and Medium Enterprises (MSMEs) to Nigeria’s economy and the need to amend, repeal or create legislation that would significantly improve the Business environment in Nigeria. Utilising the Doing Business Report 2016 and a collaborative survey conducted by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) and the National Bureau of Statistics (NBS) in 2013, the Consultants have sets out a menu of proposals to address the legal and regulatory problems facing micro, small and medium sized businesses in Nigeria. It outlines necessary reforms for how government operates to support these businesses and to increase growth and prosperity. There is a single objective behind all the proposals: to create an environment where hardworking firms, and not just a select few individuals, can flourish.
The Importance of MSMEs
MSMEs are the engine of job creation in Nigeria. With so much emphasis on Government as panacea to our economic and other difficulties, small businesses are often underestimated because, they are in fact, small. The truth is, there is nothing small about the impact they have on the Nigerian economy. According to the 2013 SMEDAN and NBS collaborative survey, there are over 37 million MSMEs in Nigeria that contribute almost 50% of Gross Domestic Product in nominal terms and account for 84.02% of all Nigerian jobs.
With the decline in oil prices triggering an economic downturn in Nigeria, these are challenging times for small businesses. Many excellent, profitable firms are unable to get the finance they need to continue and to prosper. Now, more than ever, Nigeria needs its small businesses to succeed. This starts with government providing the right environment for small businesses today, and positioning itself for the global economy of the future.
An active government approach must go beyond economy wide policies to improve the conditions for growth, as important as they are. Government must offer clear direction to businesses in individual sectors and across the economy. It must shift from being passive and reactive, to proactive and strategic – and must be wholly supportive of small firms. The Legislature has a critical role to play in this regard. It can exercise its powers to make, amend or repeal the necessary laws that would facilitate the development of small and medium enterprises. It can also use its oversight powers to monitor compliance to extant laws and attitudinal change on the part of government agencies.
Key Findings & Recommendations
This Final Report contains a broad range of legislative and policy interventions, as progress is required on a broad range of fronts. They are not an exhaustive list, but each would make a contribution to improving the Business Environment for MSMEs.
A. Passage of the Reform Bills:
With the reform of key sectors of the economy, there is a critical need to facilitate an enabling environment for private sector participation. There are Bills pending before the National Assembly that are of priority importance to doing business and overall private sector development in Nigeria especially in infrastructure delivery.
If no other recommendation in this Report is implemented, the enactment of the following Bills would be a major achievement of the 8th
1. Federal Competition and Consumer Protection Bill, 2015.
2. Federal Roads Authority Bill, 2015.
3. National Inland Waterways Authority Bill, 2015.
4. National Roads Funds Bill, 2015.
5. National Transport Commission Bill, 2015.
6. Nigerian Ports & Harbours Authority Bill, 2015.
7. Nigerian Postal Commission Bill, 2015.
8. Nigerian Railway Authority Bill, 2015.
B. Establishment of a Federal Legislative Clearinghouse:
We recommend the establishment of a Federal Legislative Clearinghouse to scrutinise and review Bills before presentation to the respective Chambers for first reading. The Clearinghouse could be established within the National Assembly’s Directorate of Legal Services. Consequential amendments to the Senate and House Standing Rules will be required to establish the Clearinghouse and set out the review procedure.
One principle we believe should guide the National Assembly in considering the Bills before it is the need to avoid the setting up of multiple agencies with overlapping or conflicting mandates. Consequently, there is need to follow a cost-benefit approach in deciding when and where a new agency is required.
C. Access to Finance and Property :
Access to Finance:-
Access to finance and land are major challenges to MSMEs. Data from the SMEDAN and NBS collaborative survey revealed that of a total of 80,312 Small and Medium Enterprises, only 13,031 (representing 17%) listed their source of capital as a loan. As it concerned Micro Enterprises, only 3% of the surveyed Enterprises listed their source of capital as a loan. Early-stage start-ups often do not have the collateral or assets requested by banks before they will administer a loan, making it difficult to obtain a loan.
The Independent Warehouse Regulatory Agency Bill holds the potential of solving the challenge of collateral by allowing businesses to securitise their commercial warehouse receipts. Likewise, the Secured Transactions in Movable Assets Bill proposes to establish a National Collateral Registry. This Bill will give creditors need an effective way to discover whether the potential borrower has already granted a security interest in the collateral and, if so, what priority those rights have.
If properly implemented (with all identified deficiencies addressed), both of these Bills could improve access to finance for MSMEs.
The National Development Bank of Nigeria Bill which seeks to consolidate the operations of development finance institutions (Bank of Industry, Bank of Commerce & Industry and National Economic Reconstruction Fund) is important to the business environment in Nigeria.
These Bills merit priority attention, as their passage would ensure that businesses, especially SMEs, have access to different avenues of financing at reasonable interest rate.
Access to Property:
The majority of MSMEs also identified lack of work space as being a significant problem. The requirement to obtain Governor consent to property transfer remains the largest bottleneck in Nigeria.
There are several laws in the housing sector including the Federal Housing Authority Act, the National Housing Fund Act, the Federal Government Housing Act, the Federal Mortgage Bank Act, the Urban and Regional Planning Act and Mortgage Institutions Act. All these enactments constitute regulatory challenges.
Eliminating Governor’s consent would significantly speed up the total time required to register property across the country. Alternatively, delegating the power to grant consent will significantly decrease the waiting time.
We have also recommended the ‘liberalization’ of land holding and allocation as well as the review of planning laws, environmental laws, among others.
D. Establishment of a National Legislative Forum:
Generally, Nigerian Federal Laws are fairly consistent with international best practices. However, we need to improve on our regulatory framework, procedures and practices at Federal and State levels.
Indeed, in 2016, Nigeria is ranked 169 out of 189 economies in the World Bank Doing Business (DB) Report. The Consultants reviewed the Report extensively and identified the deficiencies in the Nigerian system that led to the low ranking and made specific recommendations. Be that as it may, Nigeria’s DB 2016 ranking is based on regulatory processes, procedures and practices at State level, in this case, Lagos and Kano. Collaboration between the Federal and State Governments is imperative to improve the Business Environment in Nigeria and also Nigeria’s ranking in DB Report.
The National Assembly should facilitate dialogue between the Federal and State Governments, and between the State Governments inter se, with a view to modernising and harmonising laws, regulations and practices affecting the Business Environment. This dialogue could be implemented through the establishment of a National Legislative Forum (modelled upon the Nigerian Governors Forum). The Forum will set out minimum standards in the law making process, and in the oversight functions to ensure that the relevant government agencies at the Federal and State levels improve on their practices and procedures.
The specific recommendations made by the Consultants in respect of DB Report can be discussed at such Forum.
E. Improving Commercial Dispute Resolution:
The Federal Capital Territory and other States of the Federation should follow the example set by Lagos State by introducing specialised Commercial Courts, with judges assigned solely for hearing commercial matters.
The draft Federal Arbitration and Conciliation Bill, 2007 should be updated to repeal and re-enact the Arbitration and Conciliation Act, while other states should emulate Lagos State and pass the Arbitration and Conciliation Bill, 2007 into law.
Some states already have the Multi-door Courthouses. This should be replicated in all states so that all Alternative Dispute Resolution (ADR) processes are available in all states.
F. Simplifying the Payment of Taxes:
Under the current system, businesses pay similar taxes on the same or substantially similar tax base. For instance, Companies Income Tax, Information Technology Tax (NITDA Levy), Education Tax, Nigerian Content Development Levy are all based on income or profits. Multiple taxation increases the number of payments businesses must make, the frequency of the said payments and the compliance time.
The Legislature should consider enacting legislation to streamline tax payments by introducing one tax for each tax base (e.g. a single tax based on income of profits).