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Nigeria: Ayebae – Consistent Policies Required for Manufacturing to Thrive

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The Chairman, Pharmaceutical Manufacturers Group of the Manufacturers Association of Nigeria and Founder/Chief Executive Officer of Fidson Healthcare Plc, Mr. Fidelis Ayebae, in this interview with members of the Finance Correspondents Association of Nigeria, held in Lagos, spoke about issues around the Central Bank of Nigeria intervention fund for the healthcare sector Excerpts:

Can you speak on the Central Bank of Nigeria (CBN) healthcare intervention fund and how it has impacted pharmaceutical companies and the manufacturing sector in a whole?

A lot of pharmaceutical manufacturers are not borrowing entities and we were not into too much of borrowing for the simple reason that pharmaceuticals is a specialised industry and it is an industry with very low profit margins especially if you are a manufacturer in Nigeria. That is because importation has literally persuaded and not encouraged people to invest in this space. Therefore, at any given time, margins are very low.

So, if you now at the interest regime of the 25 to 30 per cent that it used to be a few years back, there was no way you were going to be profitable. So, owners and practitioners in the industry had always worked within the means that was available to them. And that is the reason why capacity utilisation is low and the share of the market for locally manufactured products is today about 40 per cent. Ordinarily, the share of local products should not be less that 75 per cent. And indeed, in most parts of the world, given the national security nature of pharmaceutical products, local manufacturers are responsible for above 80 per cent of the pharmaceutical needs of their people. But in Nigeria, unfortunately, today it is between 35 to 30 per cent and it can certainly go above that if the National Agency for Food and Drug Administration (NAFDAC) continues to reduce the incidences of fake and substandard drugs are being smuggled into Nigeria and by giving manufacturers a self-regulating environment to work as that is the second thing that would incentivise manufacturers to invest more. The third thing that has helped us is the Bank of Industry (BoI) and a lot of our members have accessed BoI loans before the advent of this CBN intervention funds.

So, between not borrowing before and now accessing BoI loans and a few commercial bank loans, working capital of most of members already had a bit of liabilities to cater too. So, when CBN came and because most these companies were not borrowing companies, some of them did not understand what to do in order to access that fund. But as time went on, everybody has now perfected how it is and they can access these funds. As we speak, given the confidentiality companies work with in terms of their corporate governance culture, we are aware that 15 of our members especially the very senior members of Pharmaceutical Manufacturers Group of the Manufacturers Association of Nigeria (PMG-MAN) have accessed this loan. We are also aware that another 15 to 20 applications are being processed by the CBN as we speak. And as you know, the window CBN gave is about nine months for people to access these funds and I’m sure that over time, because I have accessed the fund through FIDSON Plc, where I am the Managing Director, I am sure that overtime everybody could access it especially if you apply. The fund is real and CBN is indeed eager to assist the Nigerian Industry to contribute its quota to nation building.

Can you speak on the pharmaceutical industry and what are the challenges your sector faces?

The pharmaceutical industry is a highly regulated industry for good reasons because these are products that are ingested and taken into your bloodstream and anything that goes in that is not compactable with your body system can lead to death. So, nobody can quarrel with the stringency of regulatory environment. However, the stringency of the regulatory by overbearing government operatives whom I do not know what drives them whether they have budget for revenue collection or are just unpatriotic Nigerians, but whatever the motivations are, these people are slowly killing the industry especially the pharmaceutical manufacturing industry. In an era where Covid-19 has ravaged the entire supply chain, slowed down imports as access to forex have become terrible and we are also talking of the African Continental Free Trade Area (AfCFTA) regime coming up next year, in which Nigeria of over 200 million people should be highly competitive, but they have made us uncompetitive.

Another challenge is policy summersault. One example of government policy summersault that is not helping manufacturers, not only pharmaceutical companies is the Value Added Tax (VAT). When VAT came in, in the 80s in the wisdom of people that brought VAT at that time, they exempted pharmaceutical products from VAT – whether it is imported or input for manufacturing of pharmaceutical products – they were all exempted from VAT, so that the prices of pharmaceutical products are affordable to the man on the streets. And it had remained like that up until three months ago when somebody in Federal Inland Revenue Service (FIRS) announced that raw materials, and packaging materials which are an input in pharmaceutical product will now be subjected to VAT. And before we could even blink, they have started collecting 7.5 per cent VAT from local manufacturers. The same thing is not applicable to imported finished products.

In a situation where, local manufacturers are playing catchup and where they are almost not competitive in terms of pricing with other countries who have huge capacities that have been built for competitiveness, how do you compete when 7.5 per cent is added to your cost which is already too high for the ordinary Nigerian? Today, the local pharmaceutical manufacturer is bedeviled with policy summersault even though we had reached out to the Federal Ministry of Finance, Federal Ministry of Trade and Investment and NAFDAC. As we know, when these pronouncements have been made, the wheels of government is very slow to roll back. In the last three months, importers are enjoying a duty-free window and local manufacturers are suffering a 7.5 per cent tax penalty. There are too many policy summersaults that are not helping the industry and if you must grow this country and provide jobs for young Nigerians, industry is the quickest and the easiest way to develop a nation.

Earlier in your presentation, you said banks are relaxing requirements for new borrowers in order to enable them access the intervention funds, but you also raised concerns by members of the Manufacturers Association of Nigeria (MAN) with regards to third party access to forex, what DO you think should be the way forward?

The policy on the ban on purchasing from third party providers is a faulty policy. Again, it is one of those summersaults in our policy environment that is not helping the manufacturing industry as a whole. It is wrong policy, because the CBN must have done it in the heat of the moment given the avalanche of demands that came up for foreign exchange. It is not a well thought out policy because everywhere in the world, big manufacturers do not sell directly to manufacturers, they sell to appointed and accredited distributors in various regions of the world. These accredited distributors, it is their jobs to cascade what they are supposed to distribute within the zone where they operate.

If you take polyvinyl chloride (PVC) which is the raw material for manufacturing plastic, which we use for packaging, they would sell to only a few accredited third-party agents who are then in the business of redistribution and they are the ones with the supply chain expertise to reach out to the end user of those products. And these are the ones that the CBN has completely eliminated form that supply chain process. We reached out to some of them to see if we can buy directly from them and they said sorry as they have never heard anywhere in the world where an apex bank or trade ministry is insisting that they should sell directly to end users. They are primary manufacturers of raw materials and do not have expertise to distribute therefore they outsource it to international distributors who are in the business of reaching end users.

That policy is not going to work, it is hampering pharmaceutical manufacturing companies and many other industries. If that policy is not changed very quickly, the production of our manufacturing industry will continue to drop. You can see that the national output of the industry has already dropped because of foreign exchange alone and even when you now get the forex, you cannot open Form ‘M’ to suppliers because they are all third-party suppliers. So, slowly we are inflicting pain and death on industries that are not even sufficient. It is not easy to be a central banker because the pressures are enormous because you have to be tactical and strategically to respond to situations per time. So, it is a high-pressure job and I do not envy them. So, these guys are not doing this deliberately, they have done it under pressure. Now that they have seen the harm that it will bring to manufacturing and industry as a whole, they should quickly roll back something that they have done that is not helpful nationally. This is not only harmful to pharmaceutical industry, it is to all industry because every manufacturer needs raw materials to package or input to their business and these materials are offered today by third party providers not by the direct manufacturers.

And on loans?

It should remain a permanent fixture for industry because that is the only way countries and industry can grow. However, I think CBN should do, which they are already doing is to now create specialiSed banks. Also, firstly there should be an industrialisation policy which the National Assembly working along with MAN, Federal Ministry of Trade, Federal Ministry of Finance should sit down to look into our national industrial policy and update it to be more relevant to the 21st century rather than leaving at what it is when the law was enacted. So, we can have a more useful law that governs industrial development in Nigeria and when that has been done, one of the tools to rapidly accelerate industrial growth is access funding.

A lot of people would have been industrialists, but they choose to remain in a rent-taking formal or informal business because they were afraid of taking loans at 20 per cent and there is no way you can operate any industry in a high-interest rate environment and be profitable as well as rising inflation figure. So specialised banks should be created. We have the BoI, but the BoI alone is not enough as we need a manufacturing bank, manufacturing finance bank and other specialised banking outfits. An industrial policy is what would help us and deriving for that, we need institutions that would make that industrial policy work for Nigeria. And that for me are the additional steps that need to be taken.

Beyond the loans, what types of policies do you suggest to improve the manufacturing sector?

One of the biggest problems in Nigeria is that every single Ministry or Commission that government creates are going after revenue and they are all charging the same lean cow. So, tax on industry, tax on the workers that have jobs all amounts to taxing the industry. And is the industry buoyant enough? The thing to therefore do, is to de-emphasise taxation, levies, fees which are a lot. I sit in an office where every day I ask myself why I went into manufacturing. So, we need to focus on how we can make industry thrive and when that is done, the same industry that was once lean would give more when it is fat.

How much effort is going on into sourcing locally produced raw materials?

Some of our members at the beginning of the year began conversations to set up Active Pharmaceutical Ingredients (API) factories which are basically primary pharmaceutical inputs for the manufacturing of pharmaceutical products. Right now, it doesn’t make any sense to start now because the exchange rate does not justify that kind of industry right now in Nigeria. That is because you would never be competitive with the imported materials. In an investment environment for industry which is very hostile, policy summersault has made Nigeria that ought to be a country that other West African and central African economies should depend become very uncompetitive. So, there should be a government policy that is consistent and can guarantee that for the next 10 or 15 years or 20 years, any government that comes, the regime under which you started that business would not change in terms of policy. For now, manufacturers are the mercy of importing raw material and it would take a few years to scale. So the building blocks for getting to where you want us to get to, does not exists today.

What are the impact of the hike in VAT, forex scarcity and devaluation in exchange rate in the last one year on the sector?

The impact is clear and can be visibly seen in our statistics and data and it is driving inflation upwards because goods are getting more expensive. Generally, across all industries, I am aware that people have had to increase prices in the last six months on the minimum of 10 per cent. And it is a double-whammy and to be honest, I don’t envy government. In the phase of dwindling resources, shortages and inability to export our main commodity that gives Nigeria about 80 per cent of our revenue, it simply means that you are not able to fund your import bills as at when due. And when you are not able to fund your import bills at when due, your partners abroad begin to be jittery and begin to withdraw their credit lines to you.

And therefore, the banks now go for more expensive avenues for getting foreign exchange and all of these spirals into increased cost production. The cost production then increases beyond the cost that can be accommodated by the manufacturers. The manufacturers then are now forced to increase the price of their product and then all of this ends up spiraling inflation.

How ready are manufacturers for the AfCTA commencing in 2021?

From my perspective as a pharmaceutical manufacturer, note that I am not speaking for other industries, I am speaking for pharmaceuticals. Pharmaceuticals is a specialised industry and for you to go and sell in someone else’s country, you have to go there and register your products and brands. And afterwards your brands most be competitive for those people to buy. If it is cheaper, to import into Nigeria, why would it be cheaper to export what is expensive to manufacture in Nigeria? The arithmetic does not add up. AfCTA has the potential if not properly managed to rubbish industry that has not gained traction in Nigeria. The Nigerian industry is bedeviled with deficits in infrastructure, therefore the cost of product output is high. Using a technical term, it’s not competitive. So, the only way we can then participate in AFCTA is to use the excess capacity that we have to try and compete which then means that you will be selling, what you are exporting, when converted to naira at a cheaper price than what you are selling locally in Nigeria. In other words, what that simply means is that Nigeria will be subsidising what other countries are buying from us. From a pharmaceutical perspective, we are not ready. If you look at the rule of origin for example, it is where other countries are going to kill us because we do not have the mechanism to monitor what they are doing.