03/03/2016
Gupta: CBN’s Forex Policy Will Enhance Real Sector Growth
March 1, 2016
Chairman, African Industries Group, Raj Gupta
Recently the Central Bank of Nigeria excluded some imported goods from the list of items valid for foreign exchange from the official market. The chairman, African Industries Group, Raj Gupta shared with Eromosele Abiodun how the policy has spurred massive investments in the real sector and the challenges facing manufacturers
African Industries Group has been operating in Nigeria for over 40 years, Can you tell us about you and what you do in the group?
I am Raj Gupta, Chairman of the African Industries Group. We have 12 manufacturing plants across Nigeria, out of which six are steel manufacturing plants. All together, we produce one million tons of steel, which account for at least 60 to 70 per cent of the steel requirement of Nigeria. Our plants are situated in several states starting from Lagos, where we have the African Steel Mills and Ikorodu Steel Mills. In Ogun State, we have African Foundries Limited.
We have Abuja Steel Mills in the Federal Capital Territory (FCT), Trident Steel Mills in Port Harcourt and African Wires and Allied Industries in Agbara. Aside from steel, we manufacture glass and alum, which is used in water treatment and used by most of the state’s water board. We also manufacture sodium silicate, Sulphuric acid.
In addition we generate power. In total, we are able to generate 108 megawatts of power and we are in the process of supplying power to the national grid. We also have a lead refinery where we produce refined lead ingots.
We are a major supplier of industrial chemicals to most of the multinationals, Fast Moving Consumer Goods (FMCG) companies, food and beverage companies and the healthcare industry. Let me reinforce that, we are the only steel plant in Nigeria that is producing our own power and also sell power to the national grid.
This demonstrates our business’ commitment to Nigeria. Our vision is to continue to add value to the Nigerian economy and our business.
Now you have been in Nigeria since about four decades; as a major player in the manufacturing sector, can you share some of your experience and give an overview of the manufacturing sector?
These are very challenging times for any manufacturer. As you are aware, the world economy is not doing too well at the moment, commodity prices have gone down and obviously Nigeria is affected by what is happening around the world. At the same time, the scarcity of foreign exchange is also affecting our business.
Fortunately the federal government stepped in otherwise, I am sure most of the local industries would have folded up by now. By protecting the local industries by not giving foreign exchange to the 41 banned items, it has helped our industries in a very big way.
Most countries around the world have imposed anti-dumping regulations on foreign goods, in Nigeria, there is no such mechanism. Regulations like this have protected countries and prevented people from importing substandard and cheap products into their markets.
How will the government’s foreign exchange policy enhance your growth plans and capacity to employ more Nigerians?
Currently we are looking at sustainability of the policy to help local industries survive. Growth is something that will take place as the countries grow. The country is going through a difficult time and this policy is helping us to survive to a large extent. We are praying that the Central Bank of Nigeria (CBN) will continue to support the manufacturing sector. Remember that the manufacturing sector generates local employment.
The steel sector is a labour intensive sector and in our case we source most raw materials locally. Our main input is scrap metal – it is collected by people who would otherwise be unemployed – whether graduates or under educated people.
This alleviates a lot of the social problems of Nigeria. The production and sales process also generates many jobs. In my opinion, the focus of the government on the steel sector is not commensurate with the importance of the steel sector as the single largest employer in the country.
In recent times, I have talked to several local manufacturers and one of the complaint is the negative impact of cheap Chinese products. Aside this, what other challenges will you like the government to tackle to help the sector in Nigeria?
If you look at things in a fair way, people should be able to appreciate quality. The National Agency for Foods and Drugs Administration and Control (NAFDAC) and the Standards Organisation of Nigeria (SON) are responsible to checking quality and I believe they are doing a good job.
That also helps. NAFDAC’s registration of food products ensures that the quality of foods coming into the country is of very good quality. Similarly, the SON does the same thing for other products.
In what ways are imported Chinese products affecting local industries?
It has to do with pricing of the products. They have huge government subsidies and are given export grants by their government. Secondly, their interest rates are in single digit. If they are able to borrow money at three per cent, they are at an advantage. Industry is not a one day affair, it is something that takes a long time, a long gestation period to come through. China has a national industrial policy.
I urge the federal government to look at the steel industry and see how they can support it with funding. Today, we are borrowing from the banks at 16 per cent. Now at 16 per cent manufacturing cannot survive in the long run. A few of the local manufacturers that still survive gets loans outside Nigeria at six per cent or seven per cent. But they are exposed to foreign exchange fluctuations.
So we are stuck between the rock and the hard place. If the government can create a fund like they have for the power sector that steel manufacturers can access at a reasonable interest rate, this will go a long way in revolutionising the sector. I would add another thing, while steel production was in the public sector, the government spent billions of dollars public sector.
The reason they embarked on the efforts is because they understood that steel production is the backbone of an economy. It is the engine that basically drives all other sectors. Now that the sector is being handled by private sector investors, the government should equally be committed to prevent a total collapse of the sector.
Now let us look at interest rates. Will you advise the government to create a special interest rates for manufacturers?
Yes I would. In all fairness, there is actually such a scheme under the Bank of Industry (BoI). But it is still very high. The rate is 10 per cent. The power intervention fund was given out at seven per cent, if this can also be done in the steel sector at even a lower rate, it will go a long way.
I have heard some manufacturers complain about multi agency supervision that lead to multiple taxation, in what way is multiple taxation affecting local industries?
I believe that if there is a single government body that is looking into all the problems that manufacturers have, things can be different. But the Manufacturers Association of Nigeria (MAN) has to be represented in that agency. At the moment, MAN has to deal with several ministries and time coordination is an issues. There are issues of multiple taxation but these are complex issues.
They cannot be addressed without having an agency handling the affairs of manufacturers. There is the Nigerian Investment Promotion Council (NIPC) that is for investment. There should be an agency focusing on the issue of industries, perhaps on the under the auspices of the Ministry of Industry, may be under the Ministry of Industry.
Importantly, it has to interact on a regular basis with the MAN and the manufacturers. This will create the enabling environment to find solutions to the challenges facing manufacturers.
Earlier you talked about the denial of access to foreign exchange to the 41 items listed by the CBN, can you tell us what you have been able to achieve since the regulations were announced?
Capacity utilisation is a function of demand. At the moment, demand has been low. There was hardly any government spending last year and government is the biggest spender and the major driver of any economy. If they are not able to spend money demand gets affected and therefore affects capacity utilisation.
The 2016 budget proposal has a very high portion devoted to infrastructure, if that is implemented, it will have a major impact on capacity utilisation. The caveat however is that we must get the foreign exchange to bring in raw materials that are not available locally.
Some people have argued that the decision by the CBN to deny the 41 items access to official foreign exchange was a bad decision. What is your counter argument against some of their points?
In my view it is a good policy. Why is it a good policy? With the collapse of the oil price the country does not have the foreign exchange to support everyone’s demands. Banning of these items from getting official foreign exchange means that the CBN can now support the real sector.
So the argument is clear, the CBN can support the real sector and not frivolous imports! This policy should be supported by all Nigerians and it should be sustained for a long time. Since the policy took effect, we have outlined plans to invest in the country.
We have plans to build a plywood factory, an agro allied company, green house farms using hydroponics, which will be used for making fresh vegetables so that all the supermarkets are not selling imported vegetables. At the same time, we are exploring other projects as well.
All these will have a direct impact on foreign exchange savings and generate local employment. I will like to emphasize add that our group currently with about 12 manufacturing plants produces goods which otherwise when imported will drain foreign exchange from the economy in the region of $620 million (N122.1 billion).
Our readers will like to know the process that goes into steel manufacturing and what backward integration has to do with steel manufacturing.
Backward integration can be done by producing steel from iron ore. Our Group has already acquired mining leases and exploration is going on. We will be using coal and iron ore to make what can be used as substitute for steel scrap in our melting process.
We manufacture BS4449 grade which is used by all the major construction companies who, until recently, were only insisting on imported steel. In fact we are now CARES certified: A UK certification that is the predominant certification for reinforced steel used all over the world. It allows construction companies to comfortably use them with further testing.
In terms of further investments and expansion where do you see African Steel in the next 10 years?
Our destiny is tied to the destiny of Nigeria. We are a Nigerian company, our Group has been operating here for over 40 years. As the country faces its challenges like it is facing currently, we are also feeling them. We need to get out of the current economic crisis and move ahead. I see us pioneering investments in West Africa and Nigeria been the giant.
We will expand further into other West African countries. We are currently exporting even though the export grants have been withdrawn. At the same time, if we are able to expand our branch network across Africa that will equally help us to pe*****te into those markets.
The government said it suspended the export grant because of the abuses. Will you advice the government to reinstate it?
I will strongly advise the government to do so. However, I will advise them to look into the reasons why they suspended it. This will help eliminate manipulation and abuses in the future.
Earlier you talked about high interest rate in Nigeria, as a group that has been in Nigeria for over 40 years, one will expect that you explore cheap funds in the stock market and list on the exchange?
Equity and debt are two separate things. There has to be adequate debt and equity in a company. Any company should have both debt and equity in its capital structure. We did, in 2007, sign an advisory to take us to the equity market, but the 2008 global recession put that on hold. We are not ruling out returning to the Exchange in the future, but at the moment the steel sector is not doing well globally and it needs help to survive in Nigeria.
India is one of Nigeria’s big trade partners, how would you advise Indian businessmen who would like to come and invest in Nigeria?
India and Nigeria share a common colonial heritage and apart from that, both countries have the same geopolitical issues. Both countries are multi-cultural, multi-religion, share similar legal systems and mentality. Some of us ethnic Indians have made Nigeria a home for generations; I believe that these two countries have a lot to do together in the future.
Where Nigeria partners with India it will always be a win-win situation for both countries. To answer your question, I will advise them to first of all understand Nigeria, understand the challenges in the country and set up industries. India became a success because of its industrial policies not trading policies. That is something they should come and do here.
