Monday, November 12, 2012

Non-Oil Export Trade And The EEG Scheme

Export Expansion Grant (EEG) is a post-shipment export incentive scheme that is designed to encourage non-oil exporters whose minimum annual export turnover is N5 million. It is a scheme designed to assist exporters to expand their volume and value of non-oil exports, diversify export markets and make them more competitive in international markets. It was established by the Export (Incentives & Miscellaneous Provisions) Act of 1986. It is being administered by inter-ministerial committee made up of the Federal Ministry of Finance, Central Bank of Nigeria, Nigerian Custom Service, Nigerian Export Promotion Council, and the Special Assistant to the President on Manufacturing Association of Nigeria and the private sector in general.

The beauty of EEG
Though the management of this laudable scheme has been a subject of criticism, to some extent, there has been some good side to it. Informed stakeholders like Femi Boyede, the CEO of Koinonia Ventures Limited (now technical adviser to the Minister of Trade and Investment on export) said “with the EEG, the non-oil export sector has grown at double digits growth rate compared to single digit growth rate of Nigeria’s GDP.  This momentum has to be sustained and improved upon if Nigeria is to progress meaningfully towards achieving Vision 20: 2020.

For him, unlike many other government concessions and subsidies, EEG scheme is for the entire non-oil export sector and not for any particular individual company or set of companies.

A Senate Committee on Investment presentation at an interactive forum on diversification of the Nigerian economy through non-oil exports in May, discussed the disadvantages faced by Nigerian exporters, saying that “EEG is critical to offset several cost disadvantages faced by Nigerian exporters.

The committee’s list of cost disadvantages include high cost of power and need to set up own infrastructure; high finance cost and lack of long term funds; high transportation cost; high labour cost due to lack of skilled workers and low productivity; high cost of doing business  and loss of preferential market access to the European Union.
For the Committee, citing UNIDO study, when benchmarking a number of Nigerian input cost factors with a panel of countries, which Nigeria competes with, it becomes evident that Nigeria has very high costs for the most important inputs. It said although this study was done for the textile industry, the results could be applied universally to the entire manufacturing sector in Nigeria.

On cost of power, it argued that Nigeria is the highest among competing countries, adding that “the cost of short-term borrowing at 18 percent interest rate is a major international cost disadvantage for Nigerian manufacturers as the comparison clearly shows.

Both India and Pakistan provide concessional funds to exporters at 3-4.5 percent points below above rates. Nigerian exporters face several disadvantages due to lack of an enabling environment reflected in policy implementation bottlenecks.

The Senate Committee drew attention to China and India, two countries that are doing better than Nigeria because of government’s supportive policies. For China, the Committee said, “International practices as per WTO report (2006), China introduced an elaborate package of incentives to attract FDI and boost exports. Over 50 types of subsidies were notified to WTO. India aims to double its exports in three years. Its Foreign Trade Policy provides a package of incentives and these include, among others,  Duty draw back (DEPB) scheme to refund all taxes and duties on exports; concessional export credit at 3 percent subsidy; tax holiday up to 10 years in SEZ; focus product  and  focus market scheme to offer higher incentives for specific products. India became the world’s 14th largest export nation with exports valued at US$220 billion in 2010.

It also argued that EEG has made a remarkable impact to achieve the Transformation Agenda, listing growth in non-oil exports; employment generation; diversification into new markets, and encouraging exports to move through official channels as growth drivers. Non-oil exports increased by 400 percent under extant EEG policy regime (2005-11) while share of non-oil exports in Nigeria’s total exports, although small, has doubled in the last five years (2006-11).
Agro-allied products drive Nigeria’s non-oil exports with cocoa and leather contributing about 50 percent of total exports. Over 11 million Nigerians are employed directly and indirectly in agro-allied non-oil sector, mostly in rural areas. Non-oil exports impact the lives of Nigerians in all the geo-political zones. Exporters have diversified the market base with entry to the US market in particular under AGOA.

Present policy, according to the Committee, encourages exports to be conducted through official channels; 100 percent export shipments undergo pre-shipment inspection by private inspection agencies(PIA) to verify quantity, quality and value; all non-oil export proceeds are repatriated into domiciliary account with the commercial banks. CBN confirms repatriation and monitors the utilization of export proceeds for eligible transactions. The apex bank’s Annual report contains the list of Top 100 non-oil exporters.

The problem with EEG
The EEG scheme has, however, been the weeping horse of stakeholders who strongly believe it is not being properly managed. The Senate Committee presentation highlighted some of the schemes drawbacks, saying: EEG disbursement involves cumbersome process spread over 12-18 months; Policy instability and discontinuity have crippled the non-oil export sector, and there are major policy disruptions in (2005-11.

It faulted the 2005 blanket suspension of EEG and review by PWC and PCTM.
Suspension of all incentives and concessions; review by Udoma Committee.

Customs Service alert to suspend acceptance of NDCC for duty payment, pointing out that policy instability and discontinuity have crippled the non-oil export sector and is affecting Nigeria’s status as a reliable international trading partner.

Leather manufacturers/hides and skin dealers’
The Leather and Allied Product Manufacturers Association of Nigeria (LAPAN) was recently at the forefront of a crusade that the EEG scheme should be scrapped because “it is impacting negatively on the Nigerian skin and leather industry”.
The Association argued that more than N300 billion has been distributed since the introduction of the grant, but the money has not delivered any positive outcome. The group added that “there is no sign of development or any change in the export infrastructure”.

LAPAN said a single tannery in Kano has bagged a grant of over N35 billion over the last five years with no evidence of any form of improvement in the tannery. “Foreigners, who pass the benefits of the grant to other countries, have benefited the most from the said grant”, it noted.

To some industry players, like Kamilu Ila, the EEG scheme is killing the industry, especially those industrialists with feeble financial clout. According to him, the many negative effects of the grant have thrown him and some 40 other industrialists out of business.

The National Association of Hides and Skin Dealers (NAHSD) would not however, agree with LAPAN. Scrapping the scheme, according to the association, “will be injurious to the economy”. Chairman of the association, Ali bdu Gezawa said his association “represents the interest of ordinary Nigerians whose survival depends on activities in the hides and skin value chain”.

Aganga’s response
Olusegun Aganga, Trade and Investment Minister, however told Business Day in Lagos that government expects an improved and more effective EEG, explaining that  “when you are running a scheme, you must get to a point where you appraise the situation. You want to know if it is giving the desired result. You want to know the things that you need to improve or change”.

He continued: “There are so many stories surrounding the EEG that I need to check. I need to confirm which of these stories are right or wrong. And if they are right, what do I do about them?
He said his ministry has undertaken a comprehensive review of the scheme. “One was an inter-ministerial committee looking at it. I had a meeting with all exporters in Abuja recently to talk about my strategy going forward in terms of trade and also to hear more about the points of view of exporters.

“So, we should have an improved version of the scheme at the end of the day. We want to make sure it is properly classified. Secondly, we want to make sure that the administration is very transparent and that there is accountability across the board. And we want to see close monitoring,” he said.

Customs and EEG certificates
Business owners across the country, including manufacturers and many others engaged in non-oil business, are currently stuck with about N60 billion worth of NDCCs, an instrument of EEG scheme.

According to a Central Bank of Nigeria’s data, in 2011 alone, non-oil export in Nigeria accounted for N485.2 billion. Industry analysts told Business Day that considering the cumulative figure from 2005 when the scheme was created up to now and considering government’s current drive to boost non-oil exports, the N60 billion stalled EEG certificate in question is conservative.

Holders of the certificates allege that Customs Service officials are spoilers as they refuse to honour NDDCs presented by businesspersons in defiance to directives from the supervising ministry. Thus, as good as this scheme may be, lack of synergy between departments of government is currently the scheme’s killing pill.

In a letter addressed to the Comptroller of the Nigerian Customs Service, dated December 1, 2010 and signed by Aganga as Minister of Finance then,  the Customs Service boss was directed  to accept the NDCC for payment of import duty for industrial machinery and raw materials. The Comptroller General had earlier issued orders to its formations to restrict use of the instrument.

And only recently, Minister of State for Finance, Yerima Ngama and his Trade and Investment counterpart, Samuel Ortom, appeared before the Senate Committee on Investment to explain the workings of the EEG and NDCC. The committee regretted that the EEG scheme, introduced in 2005, designed to ensure export support incentive scheme currently operational in the country, was beset with challenges thereby crippling the essence for which it was introduced.
The committee therefore, agreed that the scheme should be reviewed in order to bring it in line with global best practices. It particularly asked the Nigerian Customs Service to honour the NDCCs.

The committee’s request was sequel to complaints by some beneficiaries of NDCCs that some operatives of the Nigerian Customs Service were not  honouring the NDCC, leading to difficulties in import transactions.
In their reaction, Representative of the Comptroller General of Customs Service, Abdullahi Diko said the Customs Service was open to honouring the NDCCs but that “this leads to loss of revenue to the service since it does not count as part of the revenue collectable by the Customs Service”.

Comments by industry analysts who are also players in the industry corroborate this argument. According to Shuaibu Idris, former deputy managing director, Dangote Flours Plc, the Nigerian Customs and the Federal Inland Revenue Service do not accept the certificates from importers in place of cash for payment of taxes and custom duty. This, he said, “is most unfair to exporters”.  For him, “government needs to streamline the operation by directing its agencies to accept these certificates from holders before they become useless. Holders normally give ‘discount’ to government officials which ranges between 5 percent and 15 percent of the face value of each certificate. This discount is not enjoyed by government”.

He said customs only accepts not more than N500 million of such certificates monthly for duty payment, adding that a  “few exporters have cornered this amount!”. For him, there is a need for a total overhaul of the scheme.
And Obiora Madu, CEO, Multimix Export Academy, a Nigerian frontline international trade training institute, agrees  with Idris, saying  “there has always been complaints that customs pay less attention to this certificate holders because it does not count as part of their generated revenue. This matter, if true, needs to be addressed at very high quarters because, if companies cannot utilize their incentives, then it does not make sense to claim that there are incentives
The EEG, according to him, needs to be reviewed because some of the conditions favour foreign companies. “The consultants who handled the incentives were not trade experts and as such, there were bound to be some issues. 

When the next review is done, it should be subjected to stakeholders’ public hearing to ensure that all stake holders have their interest protected. Given that this is the only export incentive working, it requires urgent attention before it turns to a disincentive”, he said.

The Manufacturing Association of Nigeria (MAN) in its Blue-Print on manufacturing released recently, said that the NDCC should be accepted by the Customs in accordance with the EEG guideline for the payment of import and excise duties, adding that the EEG should therefore, be implemented in accordance with the approved guidelines.

MAN also advised that the Nigerian Export Promotion Council (NEPC) should be strengthened and better funded to enable it meet some of its challenges such as holding regular meetings of EEG Implementation Committee to avoid backlog of claims.

Way forward
The Senate Committee on Investment advised that existing policy should be continued and reviewed to make it more effective towards the realization of the Transformation Agenda.

They say NDCC should be accepted for duty payment; the report of the EEG review committee by Ministry of Trade and Investment should be considered by the government to make the scheme more effective; backlog of EEG claims for 2010/2011 and even past years 2004-2011 should be processed, just as NEPC should improve its customer service delivery, and NDCCs should be recognized as revenue generation for Customs.

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