71891 NIGERIA 2011 An Assessment of the Investment Climate in 26 States Giuseppe Iarossi and George R. G. Clarke, eds. THE WORLD BANK Nigeria 2011: An Assessment of the Investment Climate in 26 States Giuseppe Iarossi and George R. G. Clarke, eds. June 2011 World Bank Africa Finance and Private Sector Development (AFTFP) THE WORLD BANK Washington, DC Contents Executive Summary ix Preface and Acknowledgements xv Chapter 1 Productivity in the Manufacturing Sector 1 Labor Productivity 1 Wages and Unit Labor Costs 5 Total Factor Productivity 7 Worker Earnings 9 Chapter 2 The Business Environment in Nigeria 13 Perceptions of Managers in Nigeria and the Comparator Countries 16 The Indirect Costs of Key Constraints 16 The High Cost of Power Outages 18 Tax Rates 20 Chapter 3 Access to Finance 23 Access to Finance: Objective Indicators 23 Characteristics of Loans 25 Long-Term Finance 28 Reasons for Not Having Loans 29 Chapter 4 The Investment Climate for Microenterprise 33 Top Perceived Constraints 33 iv Nigeria 2011: An Assessment of the Investment Climate in 26 States Indirect Costs 34 Corruption 37 Registration 38 Chapter 5 Women Entrepreneurs, Women Workers: Opportunities and Constraints 43 Women Entrepreneurs 44 Do Male and Women Entrepreneurs Face the Same Constraints? 48 Women Entrepreneurs as Employers 53 Wages and Firm Characteristics 56 Chapter 6 The Investment Climate in Nigeria’s Free Zones 59 Introduction 59 Free Zones in Nigeria 60 Key Differences in the Firm Pro�le 60 Do Nigeria’s Free Zones Improve the Investment Climate? 61 Electricity 63 Access and Cost of Finance 63 Transportation and Trade Facilitation 64 Tax Rates and Administration 67 Corruption, Crime, and Security 68 The Missing Links between Investment Climate and Firm Performance 69 References 75 Annexes – State Snapshots 79 Annex 1 State of Adamawa 81 Annex 2 State of Akwa Ibom 85 Annex 3 State of Bayelsa 89 Annex 4 State of Benue 93 Annex 5 State of Borno 97 Annex 6 State of Delta 101 Annex 7 State of Ebonyi 105 Annex 8 State of Edo 109 Annex 9 State of Ekiti 113 Annex 10 State of Gombe 117 Annex 11 State of Imo 121 Annex 12 State of Jigawa 125 Contents v Annex 13 State of Katsina 129 Annex 14 State of Kebbi 133 Annex 15 State of Kogi 137 Annex 16 State of Kwara 141 Annex 17 State of Nassarawa 145 Annex 18 State of Niger 149 Annex 19 State of Ondo 153 Annex 20 State of Osun 157 Annex 21 State of Oyo 161 Annex 22 State of Plateau 165 Annex 23 State of Rivers 169 Annex 24 State of Taraba 173 Annex 25 State of Yobe 177 Annex 26 State of Zamfara 181 Figures 1.1 Labor Productivity is Lower in Nigeria than in Comparator Countries 2 1.2 Labor Productivity is Similar to other Low-Income Countries in Sub-Saharan Africa 3 1.3 Value Added Per Worker in Nigeria is Low, Even Accounting for Higher Per Capita Income 4 1.4 Nigeria’s Unit Labor Costs are Similar to the comparator Countries 6 1.5 Unit Labor Costs are Higher than in Many other Countries in Sub-Saharan Africa 7 1.6 Total Factor Productivity is Lower in Nigeria than in the Comparator Countries 9 1.7 Percentage of Firms Offering Training 10 2.1 Top Ten ‘Serious’ Constraints 14 2.2 Indirect Costs of the Manufacturing Sector: Comparison across Countries 19 2.3 Various Tax Rates: Cross-Country Comparison 21 3.1 Domestic Credit Over GDP 24 3.2 Firms’ Access to Finance: International Comparison 24 3.3 The Ratio of Collateral to the Size of Loan or Line of Credit 27 4.1 Indirect Costs: Comparison between Microenterprises, small Firms and the Entire Formal Sector 36 5.1 Share of Female Entrepreneurs in Sub-Saharan African Countries 44 vi Nigeria 2011: An Assessment of the Investment Climate in 26 States 5.2 Prevalence of Female Entrepreneurship, by Industry 45 5.3 Female-Owned Firms are Smaller than Male-Owned Firms 47 5.4 Female and Male Entrepreneurs’ Mentions of Major Constraints on Business 49 5.5 Estimated Probability That an Entrepreneur Perceives a Constraint as “Major� or “Very Severe�, by Gender of the Business Owner 51 5.6 Male and Female Entrepreneurs’ Access to Credit 53 5.7 Female-Owned Firms Employ more Women than do Male-Owned Firms 54 6.1 Percentage of Free Zone Firms Ranking Constraint as Among Their “Top 3� Obstacles 62 6.2 The Effect of Unreliable Power Supply* 64 6.3 Percentage of Firms with Access to Line of Credit/loans 64 6.4 Cost of Finance and Collateral Requirements 65 6.5 Percentage of Sales Lost Due to Transport Disruptions 66 6.6 Ef�ciency of Customs Clearance 66 6.7 Complying with Taxes and Regulations in Free Zones 67 6.8 Unof�cial Payments Inside and Outside Free Zones 68 6.9 Crime and Security Expenses in Free Zones 69 6.10 Impact of Indirect Costs Inside the FZs vs. Outside 70 6.11 Zone Investment Climate Improvements: Electricity Downtime 71 6.12 Zone Investment Climate Improvements: Export Customs Clearance 72 6.13 Percentage of Respondents Indicating Factor as One of Their Top 3 Constraints 73 Tables 1.1 Exporters and Large Firms have Higher Labor Product 4 1.2 Labor Productivity by Sector 5 2.1 Percentage of Firms Reporting Major or Very Severe Constraints 15 2.2 Percentage of Firms Reporting Major or Very Severe Constraints – International Comparison 17 2.3 For Manufacturing Firms, Electricity Outages and Bribes Imposed the Highest Costs 17 2.4 Retail Firms and Small Firms are Most Affected by Electricity Losses 18 2.5 Indicators of Power Usage and Access 19 2.6 Electricity Outages and Usage in Comparator Countries 20 Contents vii 3.1 Nigerian Firms’ Access to Finance 25 3.2 More Loans in Nigeria Require Collateral than in Comparator Countries 26 3.3 Collateral is Most Often Required from Small and Domestic Firms 26 3.4 Loan Durations for Nigerian Firms 28 3.5 Source of Long-Term Financing 29 3.6 Applying for Loans and Reasons for Loan Rejection 30 3.7 Reasons for Not Applying for Loans: International Comparison 31 3.8 Why Don’t Some Nigerian Firms Apply for Loans? 32 4.1 Constraints Rated ‘Major’ or ‘Very Severe’ 34 4.2 Indirect Costs: Micro Versus Small Firms 35 4.3 Electricity Infrastructure Indicators – Micro and Small Firms have Electricity Connections, but Suffer Frequent Outages 36 4.4 Access to Finance Indicators for Micro, Small and Larger Establishments 37 4.5 Perception of Government and Regulations from Micro and Small Firms 38 4.6 Perceptions of Government Regulations: Comparison of Microenterprises, Small Firms and the Entire Formal Sector 39 4.7 Top Reasons to Register a Business 39 4.8 Top Reasons to NOT Register a Business 41 5.2 Constraints Suffered by Male and Female Business Owners in Manufacturing 52 5.3 Percentage of Firms with No Female Employees, by Gender of Owner and Size of Firm 54 5.4 Women’s Probability of Finding Paid Employment in Formal Manufacturing and Micro Sector 56 6.1 Key Differences between Free Zone and other Firms 61 6.2 Firm Performance in FZ and Non-FZ Firms 70 Boxes 1 Advantages and Limitations of the TFP Approach 8 5.1 Nigerian Legislation on Maternity Leave and Child Care 55 6.1 Uncertainty About Institutional Responsibilities for Free Zones 74 Executive Summary This Investment Climate Analysis reviews the experiences of over 3000 surveyed business owners in 26 states of Nigeria about the aspects of the business climate that affect their businesses. It complements a similar study in 2007 that covered 11 other Nigerian states. The survey asks business owners about both their perceptions and the actual costs of selected constraints. The analysis benchmarks Nigeria against comparator countries, and provides detailed data for each state. Productivity of Nigerian Firms Nigerian �rms have low productivity, as measured by their output in relation to their labor and capital inputs. Firms in Kenya are about 40 percent more ef�cient, �rms in Russia almost twice as productive, and �rms in South Africa almost four times as productive. Nigerian �rms that export are about 90 percent more productive than non-exporters. Although labor in Nigeria is inexpensive, it is not inexpensive enough to compensate for this low productivity. The poor performance of Nigerian �rms reflects many factors. This study focuses on constraints in the business climate and the serious costs they impose on Nigerian �rms. Taken together, the total indirect costs of poor quality infrastructure, crime and security, and corruption amount to over 10% of sales for Nigerian �rms. This is twice as high as in South Africa, Brazil, Russia and Indonesia. x Nigeria 2011: An Assessment of the Investment Climate in 26 States Unreliable Power Nigerian businesses’ biggest reported problem is the unreliable power supply. About 83 percent of all managers surveyed considered electricity outages to be a serious problem—more than any other constraint. Firms of all sizes, in all states and sectors, report average power outages equiva- lent to 8 hours per day. The average �rm reported that outages lost them money equivalent to more than 4 percent of sales. No comparator coun- try experiences such severe business losses related to the power supply. Access to Finance Business owners’ second biggest obstacle is �nancing. About half of all �rms reported that access to �nance and its high cost constitute a seri- ous problem. Only about 12 percent of surveyed �rms have an overdraft facility and only about 14 percent have a line of credit or loan—about one-half or one-third the shares in comparator countries like Kenya and South Africa. About 60 percent of �rms that applied for loans in the previous year had their applications rejected—far more than in most of the comparator countries. Collateral requirements are high in Nigeria: fully 89% of loans re- quired collateral, and the average collateral amount was 160% of the loan, compared to say, 100 % in South Africa. Loan duration is relatively short, as well. This suggests that even �rms that have loans might not be able to get as much credit as they want and may not be able to �nance Top Ten Constraints 100% or vvery severe problem % saying area is major 75% 50% 25% 0% Electricity Access to finance Cost of finance Tax rates Macroeconomic environment Corruption Transportation Tax administration Crime Access to land Executive Summary xi Top 10 Facts You Probably Don’t Know about the Investment Climate in Nigeria… 1. Only 15% of Nigerian entrepreneurs are women—one of the lowest shares in all Sub-Saharan Africa 2. Almost 70% of firms in Akwa Ibom train their employees while just 1% of firms in Zamfara do so. And workers that receive training earn up to a quarter more than non-trained workers. 3. Female entrepreneurs need credit more than men, but they are less likely to apply for and less likely to obtain a loan. 4. Unreliable power supply obliges almost 90% of firms to have a generator, and 70% of the energy used by manufacturers comes from their own generators. 5. Nearly 70% of small firms with loans had to pledge their personal assets—usu- ally their house—as collateral. 6. Over half of the manufacturing firms in Nigeria do not employ any woman. 7. Losses due to unreliable power, transportation disruption, bribes, crime, and security amount to 10 percent of sales. Twice as high as in South Africa. 8. Nigerian firms that apply for bank loans are almost three times as likely to be rejected as firms in Brazil and Kenya. 9. Half of the small firms that today are registered started as unregistered firms. 10. Female entrepreneurs are 20% more likely to hire a female worker compared to male entrepreneurs. However, a women looking for a job in Nigeria is three times more likely to find it in male-owned then in a female owned company. long-term investment. Consistent with this, most �rms still depend on their own savings to grow their business, and this especially disadvantages small and microenterprises and female-owned business. Thus—despite recent advances that have made the Nigerian banking sector more stable and better capitalized—banks are not yet supplying Nigerian �rms with all the access to credit they require. Other Important Constraints Five other areas of the investment climate were rated as serious prob- lems by at least one-third of �rms—tax rates and tax administration, the macroeconomic environment, corruption, and transportation. Manufacturing �rms reported paying an average of 3.2 percent of their sales in bribes—second only to electricity outages among the costs measured by the study. Large and foreign-owned �rms were more likely than others to rate corruption an important constraint, although as many as one-third of microenterprises also af�rm that informal payments/gifts are commonplace. Losses of goods during transit emerged as an important cost, especially for exporters and larger �rms. xii Nigeria 2011: An Assessment of the Investment Climate in 26 States Spotlight: Microenterprises Microenterprises—�rms with fewer than �ve workers—face similar constraints as larger �rms—unreliable power, limited access to �nance, corruption, and transportation bottlenecks. But the consequences for their businesses are far more severe. For instance, most microenterprises cannot afford generators, so power outages are more likely to shut down their operation. Lacking collateral, almost no microenterprises have access to formal external �nancing. Spotlight: Women in Business The entrepreneurial potential of Nigerian women isn’t yet being ful�lled. Fewer than one in �ve entrepreneurs is a woman. Women business owners are concentrated in sectors with low revenues and wages, like garments and catering. Women’s businesses are severely hampered by electricity shortages to the same degree as men’s businesses. Women are more likely than men to need credit. Yet they are less likely to apply for loans—most commonly because they fear they lack enough collateral. When they do apply, though, they are equally likely as men to obtain the loan. Female entrepreneurs create employment at the same rate as male entrepreneurs, especially for female and young workers, so removing barriers to women entrepreneurs could unlock big economic gains. And yet, although women entrepreneurs have a much higher propensity to hire women, the average woman looking for a job in the Nigerian formal sector is three times more likely to �nd it in a male-owned than in a female-owned enterprise, simply because women entrepreneurs are so few. Spotlight: Free Zones There has been substantial investment in establishing new free zones across Nigeria, but overall the free zones program has failed to deliver catalytic change. Firms in Nigeria’s free zones do enjoy better business conditions than �rms outside the zones—for example, lower taxes, lighter regulation, fewer losses due to crime and ‘unof�cial payments’, and speedier customs procedures. These advantages should translate into better performance from �rms based in the zones. But unreliable power and transportation bottlenecks are still big constraints for them—much more than in other countries’ free zones. Firms in Calabar Free Zone, for instance, without a dredged, deepwater port and many hours on poor roads from Lagos, consider transport their Executive Summary xiii second biggest constraint after unreliable power. Moreover, Nigeria has failed to establish a stable, predictable policy environment for its free zones. As a result, the zones have not attracted many �rms aiming to export globally. Firms surveyed in Nigerian free zones have actually been growing slower, as a group, than �rms outside the free zones. Taken together, the 2010 and the 2009 ICAs demonstrate that unreli- able energy and inadequate access to �nance are the most important im- pediments to private sector development throughout Nigeria. The impact of secondary constraints, like transport, taxes, and corruption, depends on the industry and geographical location in which the �rm operates. Federal, state, and municipal governments can use the richness of this diagnostic work and data to engage relevant stakeholders and frame the appropriate policy design to enhance Nigeria’s competitiveness. Preface and Acknowledgements This book is the second of a series of reports analyzing Nigeria’s business environment. It was produced in March 2011by the Finance and Private Sector Development Group of the World Bank’s Africa Region and the African Development Bank under the Joint World Bank Group-DFID Nigeria Investment Climate Program. Those interested in more details should read the full ICA report available at www.worldbank.org/afr/aftps. Although this report was prepared by Giuseppe Iarossi (World Bank) and George Clarke (Texas A&M International University), the full Investment Climate Assessment 2011 study was produced by a larger team, which also included Elena Bardasi (World Bank), Thomas Farole (World Bank), James Habyarimana (Georgetown Public Policy Institute), Fares Khoury (Etude Economique Conseil, Canada), Peter Ondiege and his team (African Development Bank), Jose�na Posadas (World Bank), and Colin Xu (World Bank)—each having responsibility for different chapters. Numerous other people participated in the completion of the report, and their names are listed in the ICA’s acknowledgments section. While the �rst report was based on survey data from 11 states, the analysis of this volume is based on a survey of 3,157 establishments across the other 26 states : Adamawa, Akwa Ibom, Bayelsa, Benue, Borno, Delta, Ebonyi, Edo, Ekiti, Gombe, Imo, Jigawa, Katsina, Kebbi, Kogi, Kwara, Nasarawa, Niger, Ondo, Osun, Oyo, Plateau, Rivers, Taraba, Yobe, and Zamfara. The overall management of the survey and quality control were overseen by Giuseppe Iarossi and Giovanni Tanzillo. The design of the survey and the data collection �eld work was managed by xvi Nigeria 2011: An Assessment of the Investment Climate in 26 States Etude Economique Conseil (EEC Canada) during the June 2009 through January 2010 period. Particular acknowledgments are due to the Federal Ministry of Finance and the DFID Country Of�ce in Nigeria. The former for its leadership in promoting a state-level approach to investment climate analysis; the latter for its sustained commitment and �nancial support to the Investment Climate Program. Without these champions, this major survey work and report would not have been possible. CHAPTER 1 Productivity in the Manufacturing Sector This chapter outlines how well Nigerian �rms perform compared to �rms in other low and middle income countries in Sub-Saharan Africa and other regions. The different measures of �rm performance help to indicate how competitive Nigerian �rms are in both international and domestic markets.1 Labor Productivity Value-added per worker is a basic measure of labor productivity. It is calculated as the value of the goods and services that the �rm produces less the cost of the raw materials and intermediate inputs used to pro- duce the output divided by the number of workers in the �rm.2 Firms 1 For the most part, because many of the measures of performance are more easily compared across �rms in the same sectors of the economy and because many of the most important measures of productivity are collected only for manufacturing �rms and are not collected for microenterprises, this chapter focuses on manufacturing �rms with over 5 employees. Another reason to restrict the analysis to �rms with more than 5 employees (i.e., no microenterprises) is that data on microenterprises has not been collected for many of the comparator countries. 2 The number of workers is the number of permanent and temporary full-time workers. Data on part-time workers is not collected in most countries outside of Sub-Saharan Africa and so these workers are omitted to allow for reasons of comparability. In practice, for countries with data on part-time workers, including these workers does not have a large impact on relative rankings. 2 Nigeria 2011: An Assessment of the Investment Climate in 26 States that produce more output with less raw material and fewer workers have higher labor productivity. Differences in labor productivity can be the result of differences in technology, organizational structure, worker skills, management ability, or capital use. Labor productivity is generally higher in �rms that are capital intensive. Value-added per worker is lower in Nigeria than in most of the com- parator countries with available data, as shown in Figure 1.1. Whereas the median manufacturing �rm reports producing about $2,100 of value- added per worker, the median �rms in Kenya, Russia, and South Africa report producing about $7700, $9100, and $18700 of value-added per worker.3 The inter-country differences are all statistically signi�cant. Since Nigeria is poorer than Russia and South Africa, with correspondingly lower human capital, it is also useful to compare labor productivity in Nigeria with other countries in Sub-Saharan Africa, as illustrated in Figure 1.2. Labor productivity in the median manufacturing �rm in Nigeria (at about $2,100) is similar to that in Uganda, Mali, Mozambique and Rwanda, but signi�cantly lower than in Cape Verde, Cameroon, Angola, Botswana, and Figure 1.1 Labor Productivity is Lower in Nigeria than in Comparator Countries Value added per worker (2005 US$) 20,000 15,000 10,000 5,000 0 Nigeria Kenya Russia South Africa Source: World Bank Enterprise Surveys. Note: See Table 1 for notes. Data are for various years and are converted to US dollars after deflating values to 2005 values using the GDP deflator and 2005 exchange rates to convert to US dollars. Weights are used when available. 3 The chapter focuses on the median �rms in terms of the different measures of performance, because medians are less vulnerable to outliers than means. For the purpose of brevity, the term ‘median �rm’ is used to refer to the median �rm on that particular measure of �rm performance. For example, in this section on labor produc- tivity, the ‘median �rm’ will refer to the median �rm in terms of labor productivity (value added per worker). Productivity in the Manufacturing Sector 3 Figure 1.2 Labor Productivity is Similar to Other Low-Income Countries in Sub-Saharan Africa Value added per worker (2005 US$) 20,000 15,000 10,000 5,000 0 Gambia Ghana Niger Guinea Ivory Coast Madagascar Guinea Bissau Burundi Uganda Mali Nigeria Mozambique Rwanda Congo, DR Chad Eritrea Malawi Benin Senegal Tanzania Mauritania Zambia Cape Verde Cameroon Angola Burkina Faso Swaziland Botswana Mauritius Congo Namibia Gabon South Africa Source: World Bank Enterprise Surveys. Note: See Table 1 for notes. Data are for various years and are converted to US dollars after deflating values to 2005 values using the GDP deflator and 2005 exchange rates to convert to US dollars. South Africa. There are also signi�cant differences between Nigeria and the best-performing low-income countries such as Kenya, Zambia, and Senegal. Although the median �rm in Nigeria is signi�cantly more productive than the median �rms in the countries with the lowest measured labor productivity such as Sierra Leone and Gambia, �rms in Nigeria appear about as productive as �rms in most other low-income countries in Sub- Saharan Africa.4 So although labor productivity is higher in Nigeria than in the worst and best performing low-income countries in Sub-Saharan Africa, it appears similar to labor productivity in the majority of low income countries in the region. Since Nigeria’s per capita GDP is higher than that of many of the low-income countries in the region, its labor productivity might be ex- pected to be higher, but this is not the case. Value added per worker is lower than in many poorer countries, as shown in Figure 1.3. This could reflect Nigeria’s dependence upon natural resources, which drive its per capita income higher than would be expected based upon value-added per worker in the manufacturing sector. 4 That is, the differences between median �rms in Nigeria in terms of labor productiv- ity and other low-income countries in Sub-Saharan Africa are small and statistically insigni�cant in most cases. 4 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure 1.3 Value Added Per Worker in Nigeria is Low, Even Accounting for Higher Per Capita Income $8,000 Value added per worker $6,000 $4,000 $2,000 Nigeria $0 $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 Per Capita GDP Large manufacturing �rms are more productive than smaller manu- facturing �rms, as shown in Table 1.1. Value added per worker is about $7,200 for the median large �rm, about $2,500 for the median medium- sized �rm and about $2,000 for the median small �rm,5 and the differ- ences are statistically signi�cant. This could reflect large �rms’ higher capital intensity, and/or differences in worker education, technology, or managerial ef�ciency. Table 1.1 Exporters and Large Firms have Higher Labor Product Value added Unit labor Labor costs Average No of per worker costs per worker monthly wage observations $ % $ $ All 1548 2,141 42 882 67 Small 1078 2,040 41 853 66 Medium-Sized 402 2,495 *** 49 ** 1,120 *** 84 *** Large 67 7,232 *** 29 ** 2,397 *** 154 *** Non-exporter 1509 2,084 42 872 66 Exporter 39 9,586 *** 38 ** 3,642 *** 158 *** Source: World Bank Enterprise Survey. Notes: All values are (weighted) median values for enterprises with available data. Value added is calculated by subtracting intermediate inputs and energy costs from sales from manufacturing. Workers include permanent and temporary full-time workers. Labor cost is the total cost of wages, salaries, allowances, bonuses and other benefits for both production and non-production workers. Unit labor costs are labor costs divided by value- added. ***, **, * means that the weighted median is statistically significantly different from the value for the base group at a 5 percent significance level. The base groups, indicated by bold italics for each category, are: small firms; non-exporters; slow growth; and no youth employment. 5 As noted above, the ‘median’ �rm refers the median �rm in that class for each of the individual measures. For example, the ‘median’ large �rm for value added per worker refers to the median level of value-added per worker for large �rms. Productivity in the Manufacturing Sector 5 Exporters appear more than four times as productive as non-exporters. The median exporter in reports value added per worker of about $9,600 compared to $2,100 of the non exporter. Although there are only a few exporters in the sample, the difference is statistically signi�cant. Exporters tend to be more capital intensive and larger than non-exporters, poten- tially explaining their higher labor productivity. Table 1.2 shows that labor productivity is roughly similar across sec- tors. The garment sector, with its low median levels of about $1,700 per worker, is signi�cantly different from the other two groups. As discussed in more detail in Chapter 5, female-owned �rms are slightly less productive than male-owned �rms—on average, labor pro- ductivity is about $187 dollars lower for female-owned �rms. But this appears to be because female-owned �rms are sectors such as garment production where productivity is lower. After taking this into account, the difference becomes much smaller (about $74 on average) and not signi�cant. Wages and Unit Labor Costs Wages are relatively low in Nigeria. The median �rm reported annual wages of about $882 per worker (see Table 1.1), far lower than in most of the comparator countries. For example, annual wages were about $1,800 in Kenya, about $4,400 in Russia and about $7,600 in South Africa. Differences in wages can reflect differences in worker education and skills. Because wages and productivity are both relatively low in Nigeria, �rms could potentially remain competitive despite low labor productivity. In order to account for differences in productivity, wages can be cal- culated as a percentage of value added. This measure, the unit labor cost is a measure that make it easier to assess the net impact of labor costs Table 1.2 Labor Productivity by Sector Value added Unit Labor Average No of per Worker Labor costs per monthly wage Observations $ Costs worker $ Manufacturing—Food 231 1,961 37% 778 66 Manufacturing—Garments 161 1,716 53% 822 62 Manufacturing—Other 1156 2,332 40% 920 71 Retail trade 449 2,170 23% 504 — Other 899 — — 730 — Source: World Bank Enterprise Survey. Notes: See Table 2 for notes. 6 Nigeria 2011: An Assessment of the Investment Climate in 26 States on competitiveness by taking differences in productivity into account. Unit labor costs are higher when higher wages labor costs are not fully reflected in higher productivity. In this situation, �rms will �nd it more dif�cult to compete on international markets. Although unit labor costs are not the only factor that affect competitiveness—for example, they do not take the cost of capital or capital intensity into account—they are a better measure of competitiveness than labor costs alone. In terms of unit labor cost the median �rm in Nigeria reports that labor costs are equal to about 42 percent of value-added—about the same as in Russia (41 percent) and South Africa (45 percent). Unit labor costs are higher than in Brazil (32 percent) and Kenya (25 percent) and lower than in Indonesia (51 percent), and these differences are statisti- cally signi�cant. (Figure 1.4) Compared to other countries in Sub-Saharan Africa, Nigeria’s unit labor costs are relatively high, as shown in Figure 1.5. The median �rm in Nigeria reports unit labor costs of about 42 percent—in the top third of countries in Sub-Saharan Africa. Overall, this suggests that unit labor costs in Nigeria are among the most expensive in Sub-Saharan Africa. Larger �rms tend to be both more productive and to pay higher wages than small �rms (see Table 1.1). The difference in terms of labor pro- ductivity, however, is greater than the difference in terms of labor costs. As a result, large �rms tend to have signi�cantly lower unit labor costs than small �rms—about 29 percent of value added for the median large manufacturing �rm compared to 41 percent for small �rms. Figure 1.4 Nigeria’s Unit Labor Costs are Similar to the Comparator Countries Labor costs over value added per worker 60% Labor costs and % of value added 40% 20% 0% Kenya Brazil Russia Nigeria South Africa Indonesia Source: World Bank Enterprise Surveys. Note: See Table 1 for notes. Data are for various years between 2006 and 2009. Unit labor costs are labor costs divided by value-added per worker. Productivity in the Manufacturing Sector 7 Figure 1.5 Unit Labor Costs are Higher than in Many other Countries in Sub-Saharan Africa Labor costs over value added per worker 60% 40% 20% 0% Congo Eritrea Cape Verde Burkina Faso Benin Togo Mauritius Niger Malawi Cameroon Gabon Liberia Tanzania Botswana Namibia Swaziland Chad Zambia Guinea Ivory Coast Madagascar Burundi Congo, DR Senegal Nigeria Uganda Rwanda Mali South Africa Gambia Mauritania Sierra Leone Mozambique Ghana Guinea Bissau Angola Source: World Bank Enterprise Surveys. Note: See Table 1 for notes. Data are for various years between 2006 and 2009. Unit labor costs are labor costs divided by value-added per worker. A similar pattern can be observed for exporters—although exporters have higher labor costs, labor productivity is also higher. As a result, the median exporter reports lower unit labor costs than the median non- exporter. The difference, however, is more modest than for large and small �rms—about 38 percent for exporters compared to 42 percent for non-exporters. Total Factor Productivity When considered in isolation, labor productivity and unit labor costs can be misleading. Firms can have high labor productivity and low unit labor costs but still remain uncompetitive if, for instance, they are highly capital intensive. Total factor productivity (TFP) or technical ef�ciency (TE) takes into account both capital and labor use. Differences in TFP between groups of �rms are due to differences in things other than capital or labor. For example, differences might be due to differences in �rm organization, differences in management ef�ciency, or differences in worker skills or education. When looking at the results however it is important to keep in mind the advantages and limitations of the TFP approach (Box 1). 8 Nigeria 2011: An Assessment of the Investment Climate in 26 States Box 1 Advantages and Limitations of the TFP Approach TFP has some advantages over the partial methodologies (e.g., labor or capital pro- ductivity), such as: 1. Because TFP is calculated in a regression framework, it is possible to control for multiple things when calculating it. For example, when comparing average TFP across countries it is possible to control for differences in sector composition. 2. The regression framework also makes it possible to estimate an augmented production function. This makes it possible to estimate differences between different types of firms while controlling for other factors. For example, foreign- owned firms tend to be more productive than other firms. However, if there are more foreign-owned firms in some sectors than others—and there are sectoral differences in productivity—then it is difficult to know whether it is the sectoral differences or other differences between foreign and domestic firms that are causing the differences in productivity. Within a regression framework it is pos- sible to control for multiple factors (e.g., sector, ownership, or export status) simultaneously. At the same time TFP approach has the following limitations: 1. For cross-country comparisons, value-added and capital must be denominated in a common currency. Because these two variables are denominated in local currency in the survey, cross-country comparisons of TE are vulnerable to ex- change rate fluctuations: if the exchange rate is overvalued relative to its long- run equilibrium then TE might look artificially low in that country. Although this can make it difficult to interpret differences in TE between countries, this shouldn’t have a significant impact on the coefficients on the firm-level variables 2. For cross-firm comparisons, there are potential endogeneity issues. For ex- ample, the observation that ISO certification is associated with higher levels of productivity could reflect that firms that become ISO certified were already more productive than other firms or that the process of certification encour- ages firms to become more productive. In the absence of panel data or more sophisticated econometric techniques to establish causality, it is not possible to establish causality with data from the Enterprise surveys. For the most part, �rms in Nigeria are less productive than similar �rms in the comparator countries. Firms in Kenya are about 40 percent more ef�cient, �rms in Russia are close to twice as productive, and �rms in South Africa are almost four times as productive. (Figure 1.6) Nigerian exporters are about 90 percent more productive than non- exporters after controlling for difference in sector of operations, size of the �rms, and capital intensity. This does not necessarily imply that Productivity in the Manufacturing Sector 9 Figure 1.6 Total Factor Productivity is Lower in Nigeria than in the Comparator Countries TFP in Nigeria relative to other countries 400% TFP relative to Nigeria 300% (Nigeria=100) 200% 100% 0% Nigeria Kenya Russia South Africa Source: World Bank Enterprise Surveys. Note: See Table 1 for notes. Data are for various years between 2006 and 2009. Unit labor costs are labor costs divided by value-added per worker. exporting improves ef�ciency—rather, it may be that only the most productive �rms enter export markets. Although value-added per worker is higher for larger �rms than for small �rms, there is no evidence that technical ef�ciency is higher for large �rms. This suggests that the difference in labor productivity is due to differences in sector of operations or capital intensity. Worker Earnings Given Nigeria’s high labor cost to productivity ratio, we examine the extent to which worker wages are associated with �rm size, training and �rm activity. Survey evidence shows that very large �rms pay median wages for production workers that are nearly 60 percent higher than �rms with less than 20 employees. Regression analysis with controls for additional characteristics shows wage-�rm size gap estimates even higher for both skilled and unskilled production workers and managers. Controlling for other factors such as the �rm’s age, export and ownership status and the skill ratio of production workers, �rms with more than 100 employees pay production workers and managers nearly 70% more than �rms with less than 20 workers. The �rm size gap narrows slightly for non-production workers with a 60% wedge between small and large �rms. An important limitation of this analysis is that it does not control for differences in worker quality across small and large �rms. To address this 10 Nigeria 2011: An Assessment of the Investment Climate in 26 States limitation we use the employee data to control for worker characteristics such as schooling, experience, gender and training history. All other things equal, a worker in a �rm with more than 100 employees earns about 30% more than an otherwise similar worker in a �rm with less than 20 employees. This con�rms the presence of compositional differences in worker characteristics between very large and small �rms. With the exception of managers who earn 50% more if they work for an exporting �rm, skilled production workers in exporting �rms enjoy only a 20% wage premium over their non-exporting counterparts. Consistent with human capital theory, �rms that provide training to workers pay higher wages to both skilled production workers and managers. For production workers, �rms that train pay about 10% higher wages while managers in �rms that train enjoy a 20% premium. Using the matched �rm-employee data to control for differences in worker characteristics, we �nd similar results. Workers that receive training earn about 15–25% more than non-trained workers, holding �rm and worker attributes constant. At the same time manufacturing �rms in Nigeria lag behind comparator countries with respect to the provision of on-the-job training, as shown in Figure 1.7 below. Just over a quarter of �rms provide training in Nigeria, compared to more than half of the �rms in Brazil, 43% in South Africa and nearly 40 percent in Kenya. Firms in Nigeria that do provide training, though, compare favorably with comparator countries with respect to the proportion of the skilled workforce that is trained. Worker characteristics have a strong effect on individual wages. An extra year of schooling increases earnings by about 2 to 4.5 percent—in the middle of the distribution of returns to schooling found in other de- veloping countries. We also document a high return to worker experience. Figure 1.7 Percentage of Firms Offering Training 60 50 40 30 20 10 0 Nigeria 2009 Nigeria 2006 Brazil South Africa Kenya Indonesia (26 states) (11 states) 2009 2007 2007 2009 Productivity in the Manufacturing Sector 11 Consistent with evidence from elsewhere, returns to an extra year in the labor market are positive at the beginning of a worker’s career and negative towards the end of the career. An additional year of experience increases wages by about 4 percent at the beginning of the career. There is also a moderate gender gap in earnings: a female worker earns less than an otherwise similar male worker—about 10 to 15 percent lower. As discussed in Chapter 5, this is lower than in most developing countries. Workers who have received any training earn between 20–30 percent more than otherwise similar workers. However, workers who obtained their job through an informal network earn signi�cantly less than workers hired through more formal channels. CHAPTER 2 The Business Environment in Nigeria As discussed in the previous chapter, value-added per worker in Nigeria is lower than in the middle-income comparator countries and is lower than in most middle-income countries in Sub-Saharan Africa. While it is comparable to labor productivity in many poorer countries in the region, Nigeria’s productivity should be higher. Measures of �rm performance alone do not tell us why Nigerian �rms are struggling. The next two chapters give an overview of the areas of the investment climate that �rm managers say are the greatest constraints, and focuses on their main concerns, namely the poor quality of infrastructure and access to �nance. Since �rm managers know most about the immediate problems fac- ing their businesses, a useful starting point for analysis of the investment climate is to identify what they consider their biggest obstacles. Managers’ perceptions do not, however, provide a complete measure of investment climate constraints. Perceptions of managers of existing enterprises might not reflect the perceptions of potential new entrants, other taxpayers, workers and consumers. Moreover, managers might not know the underly- ing problems that cause the constraints that they perceive. In this sense, managers’ perceptions provide a useful starting point for the analysis but should not be the only information considered. With these caveats in mind, this section looks at what managers in Nigeria say are the most serious constraints upon their �rms’ operations. 14 Nigeria 2011: An Assessment of the Investment Climate in 26 States They were asked to rate the degree to which various areas of the invest- ment climate affected their �rm’s operations on a 5-point scale ranging from “no obstacle� to “very severe obstacle,� with “minor,� “moderate� and “major obstacle� in between. Figure 2.1 shows the share of �rms that rated each constraint as either “major� or “very severe�—referred to as a serious obstacle. More �rm managers said that electricity was a serious constraint than any other area of the investment climate. About 83 percent of Nigerian �rms said that electricity was a serious obstacle—far higher than the 52 percent that said the same that access to �nance, the second greatest concern, was a serious problem. Moreover, as shown in Table 2.1, electricity problems appear to af- fect �rms regardless of size, ownership, gender of the owner, or sectors. Although concern was slightly more pronounced among domestic �rms and among manufacturing �rms, it still ranked as the top constraint for each sub-category of �rms. After electricity, the next greatest constraints were related to �nance. Close to half of respondents said access to �nance and the cost of �nanc- ing were serious obstacles. As in most countries, small and medium-sized �rms were more likely to say access to �nance was a problem than large �rms. Because informational asymmetries between borrower and lender are less severe for large �rms, lenders �nd it easier and cheaper to extend credit to them (Beck, Demirgüç-Kunt, and Maksimovic, 2008). As discussed in Chapter 5, although male and female entrepreneurs rated access to �nance as the second greatest constraint, male entrepreneurs Figure 2.1 Top Ten ‘Serious’ Constraints 100 % saying area is major or very severe problem 75 50 25 0 Electricity Access to finance Cost of finance Tax rates Macroeconomic environment Corruption Transportation Tax administration Crime Access to land The Business Environment in Nigeria 15 Table 2.1 Percentage of Firms Reporting Major or Very Severe Constraints (All Formal Sectors Top 10 Constraints) (% of Firms) Size Ownership Sector Other Constraint Total Small Medium Large Foreign Dom Manuf. Retail services Electricity 83 82 85 78 74 83 88 76 81 Access to 52 56 50 44 36 53 58 42 49 finance (e.g. collateral) Cost of finance 46 50 41 42 24 46 43 54 45 (e.g. interest rates) Tax rates 44 34 52 59 46 44 46 39 44 Macroeconomic 40 36 44 40 25 40 38 49 37 environment Corruption 37 34 40 42 40 37 36 40 38 Transportation 35 38 32 38 34 35 41 41 23 Tax 34 35 31 44 24 34 33 31 36 administration Crime, theft 25 24 28 14 27 25 18 32 32 and disorder Access to land 21 27 17 7 11 22 20 30 17 Source: ICA survey. were slightly more likely to say that access to credit was a problem after taking into account differences between male and female �rms in terms of size, age and industry. Although this might suggest that access to credit is a lesser problem for female entrepreneurs, it is important to note that objective data are not consistent with perceptions. The difference in perceptions might, therefore, reflect differences in expectations between male and female entrepreneurs rather than differences in access. As in most countries, domestic �rms were more likely to say that �- nance was a constraint than foreign �rms. Because foreign �rms can often tap into �nancing sources that Nigerian �rms cannot access—including internal funds from foreign owners—this is not surprising. It also reflects foreign �rms’ better ability to provide adequate guarantees or collateral. Access to �nance is discussed in greater detail in the following chapter. After electricity and �nance, the next most common concern were tax rates, with 44 percent of �rms saying it was a serious problem. In contrast to �nancing, large �rms were more concerned about taxation than small �rms. This could reflect that large �rms are less able to avoid or evade taxation than small �rms. 16 Nigeria 2011: An Assessment of the Investment Climate in 26 States Perceptions of Managers in Nigeria and the Comparator Countries Cross-country comparisons of perceptions should be treated cautiously because of cultural differences or persistent differences in expectations about the investment climate. For example, expectations about political freedom and freedom of speech might affect whether managers are will- ing to complain to interviewers about the investment climate more than it affects their willingness to answer objective questions.6 With these provisos in mind, it is useful to compare perceptions in Nigeria with perceptions in other countries. Compared to other countries, �rms in Nigeria were far more likely to say that electricity was a serious problem, as shown in Table 2.2. In South Africa and Kenya, for instance, as few as 20% of �rms reported that electricity was a major or very severe problem. Of all the countries taken into consideration Nigeria is the only country in which electricity outages are the dominant problem reported by managers. Electricity outages were also rated as a serious constraint in an earlier (2006) survey in Nigeria covering the other 11 states. About three-quarters of �rms said it was a serious problem in the earlier survey. The Indirect Costs of Key Constraints Managers’ perceptions about the investment climate can be validated using actual measures of cost. Firm managers provided information about their indirect costs due to four factors: power outages, bribes; production lost in transit, and crime. Table 2.3 displays the �ndings for manufacturing �rms because the question on production lost during transit was asked only of manufacturing �rms. Consistent with managers’ perceptions, �rms reported greater losses due to power outages—4.3% of sales—than to any other area of the investment climate. Foreign and large �rms report higher losses than domestic and small �rms, and exporters report higher losses than non- exporters. This could be because these �rms’ production processes are more reliant on power than those of small �rms. 6 See, for example, Hallward-Driemeier and Alterido (2009), Gelb and others (2006) and Kaplan and Pathania (2010) for comparisons of perceptions and objective measures of the investment climate. Jensen et al (2008) show that non-response patterns and lying reduce measured corruption in politically repressive environments. But similar patterns also appear for less sensitive questions. In particular, Clarke et al (2006) show that �rms appear to complain more about access to �nance in countries that are more free politi- cally than in other countries after controlling for other country and �rm characteristics. The Business Environment in Nigeria 17 Table 2.2 Percentage of Firms Reporting Major or Very Severe Constraints – International Comparison Nigeria Nigeria South Africa Brazil Russia Indonesia Kenya 2009 2006 2007 2009 2009 2009 2007 Electricity 83 76 21 42 46 14 28 Access to finance 52 53 16 56 35 14 42 (e.g. collateral) Cost of finance 46 45 N/A N/A N/A N/A N/A (e.g. interest rates) Tax rates 44 21 5 83 49 4 58 Macroeconomic 40 29 N/A N/A N/A N/A N/A environment Corruption 37 25 17 70 50 14 38 Transportation 35 28 4 40 32 10 31 Tax 34 14 2 75 20 5 32 administration Crime, theft and 25 23 38 57 38 13 33 disorder Access to land 21 25 10 39 48 12 7 Source: ICA survey. Table 2.3 For Manufacturing Firms, Electricity Outages and Bribes Imposed the Highest Costs Exporter Firm size Ownership Indirect costs as % sales Total Yes No Small Medium Large Foreign Dom Electricity 4.3 5.8 4.2 3.6 5.1 5.6 7.1 4.2 Bribes 3.2 4.5 3.1 3.3 2.8 4.4 3.6 3.1 Production 2.4 4.3 2.3 2.0 2.7 3.5 5.3 2.3 lost in transit Theft Robbery 0.7 2.4 0.6 0.5 0.9 1.0 2.3 0.7 Total 10.5 16.9 10.3 9.4 11.5 14.5 18.3 10.3 Source: ICA survey. Firms reported paying an average of 3.2 percent of their sales in bribes, and 2.4 percent in losing goods during transit. Losses due to theft and robbery were much lower. As discussed in chapter 5, female entrepreneurs report higher losses than male entrepreneurs along some dimensions—power outages, theft, security costs, and transportation but lower bribe payments. Other than for bribes, however, the differences are statistically insigni�cant, 18 Nigeria 2011: An Assessment of the Investment Climate in 26 States suggesting that for the most part, male and female entrepreneurs face similar indirect costs. Table 2.4 displays the costs for surveyed �rms of all types, not just manufacturing. Losses due to power outages are even higher for retail and other service �rms than for manufacturers. Smaller retailers and other �rms are affected more than their larger counterparts. Losses were higher for foreign �rms than for domestic �rms, for exporters than non- exporters, and for large than small �rms. Not surprisingly, retail �rms report higher losses due to theft than manufacturers or other service �rms. The measures of indirect costs con�rm cross-country comparisons regarding electricity presented earlier, and highlight the costs that the poor performance of the power sector imposes on �rms in Nigeria. Losses due to outages are far higher in Nigeria than in any of the comparator countries other than Kenya, as shown in Figure 2.2. The same is true for aggregate measures of indirect costs. Only in Kenya are the indirect costs for �rms in the manufacturing sector comparable to costs in Nigeria. Indirect costs are at least twice as high for �rms in Nigeria as they are for �rms in South Africa, Brazil, Russia, and Indonesia. Indirect costs are, however, lower than in the 11 states covered by the earlier 2006 survey in Nigeria. To the extent that 11 states covered the earlier survey is representative of the business environment in the 26 states covered in 2010, this could suggest that indirect costs in Nigeria have decreased in recent years. The High Cost of Power Outages The high level of concern about electricity and the high indirect costs associated with power outages suggests that it is important to look at this issue in more depth. Table 2.4 Retail Firms and Small Firms are Most Affected by Electricity Losses Firm size Ownership Industry Indirect costs as Other % sales Total Small Medium Large Foreign Dom Manuf. Retail services Electricity 5.3 6.1 4.6 4.2 5.9 5.3 4.3 7.0 5.9 Bribes 3.2 3.1 3.3 3.5 5.0 3.2 3.2 3.9 2.9 Theft, robbery 1.0 0.8 1.2 1.0 1.8 1.0 0.7 2.0 1.0 Total 9.5 10.1 9.1 8.7 12.7 9.5 8.1 12.9 9.8 Source: ICA survey. The Business Environment in Nigeria 19 Figure 2.2 Indirect Costs of the Manufacturing Sector: Comparison across Countries 18 16 14 12 % of sales 10 8 6 4 2 0 Nigeria Nigeria South Africa Brazil Russia Indonesia Kenya 2009 2006 2007 2009 2009 2009 2007 Theft robbery Transportation disruptions Bribes Electricity Source: ICA survey. As shown in Table 2.5, about 95 percent of surveyed �rms reported having experienced power outages in the previous year, and they were experienced by all types of �rms, irrespective of �rm size, industry, and nationality of ownership. The average �rm reported power outages equivalent to eight hours per calendar day. Large �rms reported more outages than small �rms and foreign �rms reported more outages than domestic �rms. Table 2.5 Indicators of Power Usage and Access Firm size Ownership Industry Other Indicator Total Small Medium Large Foreign Dom Manuf. Retail services % firms expe- 95 94 96 94 92 95 96 97 93 rienced power outages Average duration 239 209 266 277 313 238 248 233 229 of outages per month (hours) % firms with 88 83 92 100 87 88 88 87 N/A generator** % electricity 69 68 69 75 85 68 69 N/A N/A coming from generator*** Source: ICA survey. ** only manufacturing and retail sector. *** only manufacturing sector. 20 Nigeria 2011: An Assessment of the Investment Climate in 26 States Given the frequency and duration of power outages, Nigerian �rms really must own generators in order to conduct business, and 88 percent of surveyed �rms do so. Manufacturing �rms reported that approximately 69 percent of their total electrical utilization comes not from the pub- lic grid, but from their own generators, with large manufacturers more dependent than small ones on generator power. The burden that power outages impose on Nigerian �rms can be ap- preciated by comparing Nigeria with the comparator countries, as shown in Table 2.6. Whereas 95 percent of Nigerian �rms suffered from power failures from the public grid, only half as many �rms in South Africa, Brazil, and Indonesia did so. A mere 29 percent of Russian �rms reported experiencing power outages. Only in Kenya were outages reported at levels close to Nigeria. There were few differences between �rms owned by male and female entrepreneurs with respect to power outages. In particular, after taking into account differences related to size, sector and location, there were no differences between �rms owned by male and female entrepreneurs with respect to the frequency or duration of outages. Although female entrepreneurs reported higher losses, the difference was not statistically signi�cant (see Chapter 5). Tax Rates After electricity, the next greatest concern was �nancing (access and cost), the focus of Chapter 3. The next greatest concern was tax rates. Although �rm managers were very concerned about tax rates, there is less evidence that taxes in Nigeria are high in comparison with other countries. In fact, data from the 2010 Doing Business Report reveals that Nigerian �rms, along with those located in South Africa, face lower tax rates (combined rates include pro�t, labor and other taxes) than any other country of the comparator group (see Figure 2.3). Nigerian and South African �rms pay Table 2.6 Electricity Outages and Usage in Comparator Countries Nigeria Nigeria South Africa Brazil Russia Indonesia Kenya 2009 2006 2007 2009 2009 2009 2007 % firms expe- 95 96 45 49 29 45 84 rienced power outages % of firms with 88 86 18 9 8 6 66 own generator Source: ICA survey. The Business Environment in Nigeria 21 Figure 2.3 Various Tax Rates: Cross-Country Comparison 80 70 60 50 40 30 20 10 0 Nigeria South Africa Brazil Russia Indonesia Kenya Other taxes (%) Labor tax and contributions (%) Profit tax (%) Source: DOING BUSINESS 2010. approximately 30.2 percent in taxes, compared to 69.2 percent in Brazil, and close to 50 percent in both Kenya and Russia. CHAPTER 3 Access to Finance Finance is vitally important for �rm expansion and entrepreneurship. An ef�cient �nancial system directs household and �rm savings to producers who can most ef�ciently produce various goods, and therefore facilitates entrepreneurship, �rm growth, economies of scale, and ultimately eco- nomic growth. Firms in Nigeria are concerned about their access to �nance and the cost of �nance—after electricity outages, it was their second and third rated problems. About 52 percent of �rm managers said that access to �nance was a serious constraint and 46 percent the same about the cost of �nancing. Manager of small �rms and domestically owned �rms were particularly concerned about access to �nance. Managers in Nigeria were more likely to say that access to �nance is a serious problem than manag- ers in most of the comparator countries. This chapter will supplement the analysis of perceptions with a de- tailed look at objective data on access to �nance. Access to Finance: Objective Indicators Nigeria’s �nancial sector is signi�cantly less developed than those of the comparator countries. As Figure 3.1 illustrates, the ratio of domestic credit to GDP is lower in than in all the comparator countries. It is thus not surprising that �rms in Nigeria were more concerned about access to �nance than in most of the comparator countries. 24 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure 3.1 Domestic Credit Over GDP Nigeria Brazil Indonesia Kenya Russian Federation South Africa 0 20 40 60 80 Private credit from banks (% of GDP) Source: World Bank Financial structure database. Besides their perceptions about access to and the cost of �nancing, �rms provided information about the �nancial products they use, and �rms not using �nancial products are asked why not. Only about 12 percent of Nigerian �rms have an overdraft facility and only about 14 percent have an overdraft or loan. This is lower than in any of the comparator countries, as shown in Figure 3.2. For example 54 percent and 30 percent of �rms in South Africa have access to overdraft and loans, respectively. The limited use of �nancial products appears consistent with the macroeconomic observation that domestic credit is lower in Nigeria than in most of the comparator country. It suggests that—despite the ad- vances that have made the Nigerian banking sector more stable and better capitalized—the bene�ts have not made it easier for �rms to get �nance. Figure 3.2 Firms’ Access to Finance: International Comparison Nigeria Kenya South Africa Brazil Russia Indonesia 0 20 40 60 80 % of firms Share with overdraft Share with LOC/loan Source: ICA Survey. Access to Finance 25 Access to �nance is particularly dif�cult for small and medium-sized �rms, as shown in Table 3.1. Only 9.5 percent of small �rms have over- drafts and 13.4 percent have lines of credit and loans, compared to about 71.8 percent and 46.6 percent of large �rms. This is consistent with the results in Chapter 2 that suggest that small �rms are more concerned than larger �rms about access to �nance. There are several reasons why small �rms might have more lim- ited access to �nance. Many studies have found that it is dif�cult for banks to obtain enough information about small and medium-sized enterprises’ �nances. Or, it could reflect large �rms’ market power or better performance. As discussed in chapter 1, labor productivity, although not technical ef�ciency, is higher for large �rms. Finally, it is possible that banks allocate loans in ways that are not based upon economic criteria. As seen in chapter 2, foreign-owned �rms were far less likely than domestic �rms to consider access to �nance a serious problem. This could be because they have access to internal �nancing from parent �rms, or because they have better access to external �nancing—perhaps because they �nd it easier to post collateral or have more transparent accounts. Objective indicators con�rm that they have better access to external �nancing. Whereas only 12 percent of domestic �rms have overdrafts and 14 percent have loans, 45 and 26 percent of foreign �rms do. Exporters were also more likely to have loans than non-exporters, suggesting that these �rms might also be advantaged in this respect. Characteristics of Loans Firms having loans provided information about conditions under which the loans were given, to help shed light on barriers to expanding access Table 3.1 Nigerian Firms’ Access to Finance % with overdraft % with line of credit or loans Size Small (5–19) 9.5 13.4 Medium (20–99) 24.7 11.9 Large (100+) 71.8 46.6 Total 12.2 13.7 Ownership Domestic 11.9 13.6 Foreign 45.2 25.9 Export Non-Exporter 11.2 13.6 Exporter 78.8 19.3 26 Nigeria 2011: An Assessment of the Investment Climate in 26 States and the availability of long-term �nancing for investment. As Table 3.2 shows, close to 89 percent of Nigerian �rms report that their most recent loan required collateral—more than in any comparator country. Small �rms were especially likely to have been required to post col- lateral—91 percent of them did so for their most recent loan, as shown in Table 3.3. In comparison, only about 77 percent of medium-sized �rms and 82 percent of large �rms posted collateral. Foreign �rms are less likely than domestic �rms to have posted collateral. Collateral requirement is common in advanced banking sectors and does not necessarily constitute a problem. The type and amount of Table 3.2 More Loans in Nigeria Require Collateral than in Comparator Countries Requiring the following types of assets as collateral Accounts Personal wealth % requires Land, Machinery, receivable and of owners such as collateral building equipment inventories houses Others Nigeria 88.6 45.1 63.2 42.8 62.5 66.2 Kenya 86.1 51.5 58.2 46.4 28.2 1.2 South 71.2 44.2 50.6 38.2 59.0 1.9 Africa Brazil 31.5 30.4 42.8 50.5 26.7 18.9 Indonesia 87.5 57.0 15.4 1.7 38.1 18.3 Table 3.3 Collateral is Most Often Required from Small and Domestic Firms Requiring the following types of assets as collateral? % of firms requiring Personal collateral for Accounts assets of overdraft or Land, Machinery, receivable & owner such LOC or loan building equipment inventories as houses Others Total 88.6 45.1 63.2 42.8 62.5 66.2 Small (5–19) 90.5 40.7 64.2 44.3 68.6 63.9 Medium 76.5 68.1 45.2 31.4 27.2 78.9 (20–99) Large 82.2 84.7 83.1 38.6 14.4 82.8 (100–100+) Domestic 88.7 44.7 63.2 42.6 63.3 66.3 Foreign 82.2 74.8 62.9 57.8 8.7 63.2 Non-Exporter 89.2 44.4 63.3 43.0 63.3 65.9 Exporter 61.4 91.4 59.4 32.9 4.5 91.4 Access to Finance 27 collateral is important, though, because excessive collateral requirements can make it dif�cult for �rm owners to get loans. And the inability to use certain types of assets —notably movable machinery and equipment and accounts receivable—can suggest an underdeveloped banking sector. Firms in Nigeria often use machinery and equipment and accounts receivable for collateral. About 63 percent of �rms reported using ma- chinery and equipment and about 43 percent reported using accounts receivable as collateral, as shown in Table 3.3. For both types of collateral, this is higher than in most of the comparator countries. This is consistent with the idea that Nigeria’s banking sector is relatively developed given its level of income. Firms were also slightly less likely to use land as col- lateral than �rms in other countries. Firms in Nigeria were, however, far more likely to use the owner’s personal assets as collateral. Close to two-thirds of �rms reported that they used the personal assets, usually the home, of the owners as collateral. This is higher than in any of the comparator countries. Small �rms in Nigeria were far more likely than larger �rms to use the owner’s personal assets as collateral (see Table 3.3) Domestic �rms were more likely than foreign-owned �rms to use the owner’s assets as collateral. Collateral amounts were also far higher in Nigeria than in several comparator countries, as shown in Figure 3.3. Average requirements in Nigeria were 160 to 170 percent of the value of the loan or line of credit—compared to 70 percent in Brazil and 115 percent in Russia . There were not substantial differences across �rm types with respect to amount of collateral relative to loan size. Long-term investment is easier to support when long-term loans are available, but most loans reported by Nigerian �rms are of short duration. The average loan was for about 3 years—signi�cantly lower than South Africa (around 5–6 years), China (4 years), and India (4 years). Figure 3.3 The Ratio of Collateral to the Size of Loan or Line of Credit 180 160 140 120 100 80 60 40 20 0 Nigeria South Africa Brazil Russia Indonesia Kenya 28 Nigeria 2011: An Assessment of the Investment Climate in 26 States Although small �rms are considerably less likely to have loans than larger �rms, they do not appear to be disadvantaged with respect to loan duration. In fact, the average loan length for a small �rms was longer than the average length for medium and large �rms, small �rms tend to have longer duration (3 years compared to 2 years) (see Table 3.4). Loan periods were also shorter for foreign-owned �rms and exporters than for domestic �rms and non-exporters. Long-Term Finance Consistent with the �nding that average loan duration was relatively short, �rms in Nigeria also rely heavily on internal sources and retained earnings to �nance long-term investment in �xed assets (86 percent of long-term �nancing). Borrowing from formal sources (banks, non-bank �nancial institutions) accounts for only 6 percent of long-term �nancing. The rest comes from the state owned banks (3 percent), trade credit (2 percent), and other sources (2 percent). This heavy dependence on internal �nancing is clearer when comparing long-term �nancing with the comparator countries. Nigerian �rms depend more on internal �nance or retained earnings than most other countries. Although �rms in Indonesia rely on internal funds to a similar degree (87 percent of long-term �nancing), �rms in the other countries do to a much lesser extent (see Table 3.5). This con�rms that Nigerian �rms are severely constrained in access to long-term �nance by international standards. Reasons for Not Having Loans It is important to understand why �rms without loans do not have them. Some �rms may be unable to get them, while others simply prefer to Table 3.4 Loan Durations for Nigerian Firms Duration of loans in months Size Small (5–19) 40.1 Medium (20–99) 24.8 Large (100–100+) 24.0 Total 37.4 Ownership Domestic 37.7 Foreign 23.4 Export Non-Exporter 37.7 Exporter 28.4 Access to Finance 29 Table 3.5 Source of Long-Term Financing (%) Internal source, retained Banks, non-bank financial earnings institutions Trade credit Nigeria 2009 86.1 6.0 2.1 Kenya 2009 76.9 14.5 3.7 South Africa 2007 68.5 26.4 3.9 Brazil 2009 44.5 35.6 16.4 Indonesia 2009 87.0 5.9 0.3 Note: Other sources are not included. rely on internal funds, if they can, because they are cheaper and easier to access. Although not all �rms without loans were asked why not, �rms were asked whether they had applied for new loans within the past year, whether any such application was successful and, if not, why not. If they had not applied for a loan, they were asked why not. Only 19.4 percent of �rms had applied for a loan in the year before the survey, and 60 per cent of these were rejected. In comparison, about 20 percent of �rms in Brazil, 17 percent of �rms in Russia and 19 percent in Kenya said that they had had an application rejected in the previous year. This strongly suggests—especially when considered jointly with the information on perceptions—that many large �rms in Nigeria desiring access to external �nancing cannot obtain it. What accounts for the high share of rejections? The most common reasons—as shown in Table 3.6—were that collateral or cosigners were unacceptable (34 percent), the �rm was insuf�ciently pro�table (23 percent), that the �rm’s credit history or report was not good enough (14 percent), and that the application was incomplete (13 percent). Large �rms were much more likely to apply for loans and their rejection rates are lower. For large �rms, the most common reasons for rejection are incomplete application (29 percent) and concern about debt levels (25 percent). The second concern, in particular, suggests that many large �rms do have access to some external �nancing at least. For small and medium �rms, application rates were much lower (around 18 percent) and rejection rates are much higher (44–62 percent). They are much more likely to report being rejected due to unaccept- able collateral or cosigners (34–42 percent) and insuf�cient pro�tability (16–24 percent). Foreign-owned �rms have relatively favorable access to �nancing. Their application rate is higher than domestic �rms and their loan rejection rates are lower (38 versus 60 percent). For domestic �rms, the most common 30 Table 3.6 Applying for Loans and Reasons for Loan Rejection Why were loan applications rejected? Share of reasons (%) % of firms Collateral applying for Rejection rate or cosigners Insufficient Credit history/ Incomplete Concern for debt loans for loans unacceptable profitability report application level Others All 19 60 34 23 14 13 5 12 Small (5–19) 19 62 34 24 14 13 3 12 Medium (20–99) 17 44 42 16 13 9 12 9 Large (100–100+) 40 34 10 11 13 29 25 12 Domestic 19 60 34 23 14 13 5 12 Foreign 28 38 27 9 38 16 11 0 Nigeria 2011: An Assessment of the Investment Climate in 26 States Access to Finance 31 reasons for loan rejections are unacceptable collateral and cosigners (34 percent), insuf�cient pro�tability (23 percent), and poor credit history or credit report (14 percent. For foreign �rms, the top reasons are credit history or report (38 percent) and that collateral and cosigners unac- ceptable (27 percent). It is important to understand why 80 per cent of �rms do not apply for loans. As shown in Table 3.7, the most common reason in Nigeria was that the �rm did not need external �nancing (28 percent of �rms). In most of the comparator countries a higher share of �rms had enough capital. Nigerian �rms were much more likely to blame high interest rates (22 percent), collateral requirements (21 percent), and complex procedures (17 percent) for their failure to apply for loans. The reasons for not applying for loans differ by �rm size (Table 3.8). For large �rms, the most important considerations are suf�cient capital (50 percent), high interest rate (23 percent). For small and medium �rms, the two reasons above are also important, but they also add two more important reasons: complex procedures (15–18 percent) and collateral requirements (15–22 percent). Small �rms also worry that their applications will not be approved (10 percent). As discussed in Chapter 5, female entrepreneurs were less likely to say that they had suf�cient capital—suggesting that they are more credit constrained. Female entrepreneurs were more likely say that collateral requirements were unattainable and they did not think they would be approved than male entrepreneurs. Relative to foreign �rms, domestic �rms are less likely to cite suf- �cient capital as the reasons for not applying for loans (28 versus 54 percent), more likely to cite collateral or cosigner issues (21 versus 10 percent), much more likely to think procedure too complex (17 versus Table 3.7 Reasons for Not Applying for Loans: International Comparison Share of Reasons (%) No need for Interest Collateral Did not think loan, sufficient Procedure rate too requirement it would be capital too complex high unattainable approved Others Kenya 40.7 9.8 25.8 11.8 4.5 4.3 Nigeria 28.0 17.1 21.7 21.1 8.5 2.2 South Africa 63.9 9.8 14.4 3.3 4.6 3.3 Brazil 71.4 8.3 7.2 4.4 0.0 8.7 Russia 67.5 5.1 12.2 6.6 0.1 7.2 Indonesia 28.9 12.1 15.9 18.0 12.7 6.0 32 Nigeria 2011: An Assessment of the Investment Climate in 26 States 4 percent), and regard loan approval as mission impossible (9 percent versus no such complaint). Table 3.8 Why Don’t Some Nigerian Firms Apply for Loans? Share of Reasons (%) No need Did not for loan, Procedure Interest Collateral Size of loan think it sufficient too rate too requirement or maturity would be capital complex high unattainable insufficient approved Others Total 28.0 17.1 21.7 21.1 1.4 8.5 2.2 Small 26.4 17.6 20.9 22.2 1.3 9.5 2.2 (5–19) Medium 37.4 15.0 26.6 15.0 1.5 2.9 1.8 (20–99) Large 50.3 5.0 22.9 6.7 4.6 1.6 8.9 (100+) Domestic 27.8 17.2 21.7 21.2 1.3 8.6 2.2 Foreign 54.0 3.8 23.5 9.7 3.6 0.0 5.5 CHAPTER 4 The Investment Climate for Microenterprise This chapter spotlights the survey �ndings from the 260 �rms classed as microenterprises—that is, �rms with fewer than �ve employees—and benchmarks them against �ndings about the 1185 surveyed small �rms, those that have 5 to 9 employees. Top Perceived Constraints Enterprises were asked to rate the severity of 18 potential issues’ im- pact on their business operations, using a 5-point scale ranging from “no obstacle� to “very severe obstacle�. The percentage of �rms rating the obstacle as either “major� or “very severe� is presented in Table 4.1. Fully 82% of the respondents reported the provision of electricity as a major or severe constraint. This constraint was perceived equally by registered and unregistered �rms, and in the manufacturing and services sectors. The second most important obstacles for microenterprises relate to �nancial considerations. Access to �nance (e.g. collateral), corruption, dealing with tax administrations, the cost of �nance (e.g. interest rates), and tax rates all represented either a major or a severe concern for ap- proximately half of the microenterprises. Microenterprises reported corruption and dealing with tax administrations as considerably more constraining than did small �rms. 34 Nigeria 2011: An Assessment of the Investment Climate in 26 States Table 4.1 Constraints Rated ‘Major’ or ‘Very Severe’ (%) Microenterprises Small firms Registered Sector (5 to 9 Constraint Total Yes No Manuf. Services employees) Electricity 82 83 79 83 81 81 Access to finance 54 48 63 56 53 56 (e.g. collateral) Corruption 50 54 45 37 53 34 Tax administration 47 57 33 49 47 33 Cost of finance 43 41 48 46 43 51 (e.g. interest rates) Transportation 37 38 36 39 37 39 Tax rates 34 39 27 39 33 34 Macroeconomic 34 41 23 37 33 34 environment Telecommunications 30 38 20 22 32 16 Policy uncertainty 29 36 20 34 28 26 Political environment 29 34 21 17 31 20 Crime, theft and disorder 27 30 22 20 28 24 Number of observations 260 153 107 41 219 1185 Source: ICA survey. Registered and unregistered �rms perceive these constraints differently. Whereas registered �rms reported more dif�culties than non-registered �rms with corruption, tax administration, and tax rates, the reverse was true regarding access to and the cost of �nancing. Microenterprise �rms may thus face a trade-off: either register and have to deal with the public administration, or not register and have more dif�culty obtaining �nanc- ing. Constraints such as the macroeconomic environment, telecommu- nications, policy uncertainty, political environment, and crime, theft and disorder were reported as major or severe constraints by approximately 30% of �rms. Registered �rms reported this dif�culty more often than unregistered �rms. Indirect Costs In addition to their perceptions of important constraints, respondents pro- vided data about the actual costs to their businesses of different problems. Consistent with �rms’ perceptions of constraints, the highest in- direct cost reported was unreliable electricity, as shown in Table 4.2. Access to Finance 35 Table 4.2 Indirect Costs: Micro Versus Small Firms (% of Sales) Microenterprises Small firms Registered Sector Registered Total Yes No Manuf. Services Total Yes No Electricity 8.0 9.4 6.1 8.5 8.0 6.2 6.1 6.8 outages Bribes 1.2 1.4 0.9 2.3 1.0 3.0 3.1 2.9 Production lost 2.5 3.2 1.6 1.2 2.8 1.8 1.5 4.0 while in transit Theft robbery 1.2 1.4 0.9 0.9 1.2 0.7 0.7 0.8 Total indirect 13.0 15.4 9.5 12.8 13.0 11.8 11.3 14.5 costs Source: ICA survey. Microenterprises reported that power outages cost them approximately 8% of their annual sales. Outages tended to affect registered �rms (9.4% of sales) more than unregistered �rms (6.1%). Losing a part of production in transit cost microenterprise �rms 2.5% of total sales. This indirect cost was higher for registered �rms (3.2% of sales) than for unregistered �rms (1.6%). The costs of bribes and theft/ robbery each amounted to approximately 1.2% of total sales. It is also worth noting that total indirect costs had a signi�cantly greater effect on registered �rms (15.4% of sales) than unregistered �rms (9.5%). Data seems to reveal a disincentive to migrate from unregistered to registered status within the microenterprises category. As shown in �gure 4.1, the indirect costs associated with power failures are greater as �rm size decreases. Since, as noted above, small �rms are less likely to own costly generators than larger �rms, a power shortage would thus translate to a real interruption in their business operations. On the other hand, the likelihood of bribe payments to of�cials in order to “get things done� increases with �rm size, which seems reasonable in that larger �rms likely require more services from public of�cials. Finally, �rm size does not appear to influence the �nancial impact of theft and robbery. Electricity The provision of electricity is fraught with problems, but access to the public grid does not appear to be the main issue, as 94% of microenterprises report having a connection as shown in Table 4.3. 36 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure 4.1 Indirect Costs: Comparison between Microenterprises, Small Firms and the Entire Formal Sector 12 10 8 % of sales 6 4 2 0 Micro Small Formal sector (5 to 9 employees) (5+employees) Electricity Bribes Theft/Robbery Source: ICA Survey. The real problem is that 98% of microenterprises reported having experienced power outages, lasting on average 9 days. The average duration of power outages was consistent regardless of �rms’ registra- tion status and sector. About half of microenterprises own a generator, using them to meet approximately 57% of their electricity requirements. Small �rms are more likely to own generators, and they rely upon them more. Table 4.3 Electricity Infrastructure Indicators – Micro and Small Firms have Electricity Connections, but Suffer Frequent Outages Registered Sector Small firms (5 to 9 Indicator Total Yes No Manuf. Services employees) % of firms with electrical 94 98 89 95 94 N/A connection % of firms experienced 98 98 99 97 99 95 power outages Average duration of outages 218 223 210 213 219 209 per month (hours) % of firms with generator 58 59 57 54 59 81 % of electricity coming from 57 56 58 60 56 67 generator Source: ICA survey. Access to Finance 37 Access to Finance Access to credit varies distinctly by �rm size. Only 2 of the 260 (less than one percent) surveyed microenterprises had a line of credit, a loan or both from a �nancial institution. The shares were 13% for small �rms, and 16% for bigger �rms. The cost of credit, by contrast, is independent of �rm size , since risk to lenders is more or less the same for �rms in this size range. (Table 4.4) Microenterprises—like all other small �rms—rely almost exclusively on their internal funds to �nance any �xed asset needed (67%), and on cash flow funded by customers’ advances and suppliers’ credit (29%). Those numbers con�rm that access to �nance is a material obstacle to growth and signi�cantly hinders day-to-day business operations. Corruption In Nigeria, only 28% of the surveyed microenterprises considered that the of�cials’ interpretation of laws were consistent and predictable. One-third of microenterprises reported that informal payments/gifts to government of�cials were commonplace. Twice as many registered as unregistered �rms took this view, suggesting that registered �rms confront more requests for such bribes. (Table 4.5) Table 4.4 Access to Finance Indicators for Micro, Small and Larger Establishments Micro firms Small firms Larger firms (less than 5 (5 to 9 (10 to 19 employees) employees) employees) % of firms with overdraft 3.5 8.7 10.7 Average interest rate of overdraft (%) 13.1 14.4 13.8 % of firms with line of credit, loans or 0.8 13.1 16.0 both from a financial institution % of working capital financed by in- 67.2 67.3 65.6 ternal funds/retain earning % of working capital financed by 29.2 27.5 28.5 credit from suppliers and advance from customers % of working capital financed by bor- 2.9 2.4 2.1 rowing from family/friends % of working capital financed by 0.7 2.8 3.8 other sources Source: ICA survey. 38 Nigeria 2011: An Assessment of the Investment Climate in 26 States Table 4.5 Perception of Government and Regulations from Micro and Small Firms Registered Industry % firms who agree Small firms with statement Total Yes No Manuf. Services (5 to 9 employees) Consistent and predict- 28 30 26 37 27 33 able interpretation of law Informal payment/gifts 33 42 21 41 32 42 commonplace Advance knowledge of 20 24 14 27 18 35 informal payment/gift Percentage of annual sales 1.2 1.4 0.9 2.3 1.0 2.9 spent on informal pay- ments gifts Percentage of contract 4.3 4.6 4.0 6.7 3.9 7.2 value paid to secure contract Source: ICA survey. Only 20% of microenterprise �rms reported having advance knowl- edge of the amount of the payment required to “get things done�. Such uncertainty adds to the challenge posed by informal payments, since the amount to be set aside cannot even be planned for. Informal payments/ gifts represented approximately 1.2% of annual sales for all microenter- prises. Microenterprises dealing in government contracts expected to pay approximately 4.3% of the contract value in order to secure it. The bribes required to obtain contracts appear much small for services (3.9%) than for manufactured goods (6.7%). Microenterprises have a greater mistrust of institutions than formal �rms. Indeed, 63% of formal sector �rms reported that the application of laws was not consistent and predictable, compared to 72% of microenterprises. But formal sector �rms may have to pay more for corruption: 47% of formal �rms claimed that informal gifts/payments were commonplace, compared to 33% of microenterprises. Finally, 41% of formal �rms reported that they had advanced knowledge of informal payments/gifts, compared to 20% of microenterprises. As for the costs, informal payments/gifts represented 3.2% of annual sales and the cost of securing a government contract reached ap- proximately 8.4% of its total value for formal �rms; these proportions were much lower, 1.2% and 4.3%, respectively, for microenterprises. (Table 4.6) Registration Almost 60% of the surveyed microenterprises were registered—a smaller share than for small �rms, as shown in Table 4.7. Why do �rms choose Access to Finance 39 Table 4.6 Perceptions of Government Regulations: Comparison of Microenterprises, Small Firms and the Entire Formal Sector Micro Small firms Formal sector (less than 5 (5 to 9 (5 and more % of firms who agree with statement employees) employees) employees) Consistent and predictable interpre- 28 33 37 tation of law Informal payment/gifts 33 42 47 commonplace Advance knowledge of informal 20 35 41 payment/gift % of annual sales spent on informal 1.2 2.9 3.2 payments gifts % of contract value paid to secure 4.3 7.2 8.4 contract Source: ICA survey. to register? Many unregistered �rms, both small and micro, believe that registration gives better access to credit, yet registered �rms themselves are much less likely to believe this. They perhaps come to realize that accessing credit is dif�cult in spite of their registered status. Table 4.7 Top Reasons to Register a Business Micro firms Small firms Registered Registered Yes No Yes No % of firms 59 41 84 16 Benefit of registration: to have better access to credit 63 87 28 45 to avoid paying bribes 61 86 39 55 to use the courts to enforce contracts 52 7 27 44 to avoid paying penalties 42 49 46 55 to gain access to new customers or suppliers 29 0 32 17 to benefit from government incentive 26 37 43 31 programs to operate on a visible scale or with visible 12 7 40 38 hours of business to be able to advertise 9 5 34 12 to export 3 0 10 4 Source: ICA survey. 40 Nigeria 2011: An Assessment of the Investment Climate in 26 States Avoiding paying bribes and penalties is an important reason to register, in the view of microenterprise owners—both registered and unregistered— as well as for unregistered small �rms. Only 28% of registered small �rms agreed that being registered increased access to credit, whereas 45% of small unregistered �rms did believe this to be the case. Registered small �rms, though, tend to value more the access to government incentive programs, and the ability to operate on a visible and larger scale that registration affords. In order to better understand why �rms do not register we collected data on micro and small �rms that moved from informal to being regis- tered at some point in the past. Of the 59% of microenterprises in our sample that are currently registered (table 4.8), nearly half had previously operated without being registered. This means that at one time in the history of their operations, the �rm chose to register. With respect to small �rms, the percentage is quite similar (54%). That is to say, of the 84% of larger �rms that are currently registered, slightly more than half have operated in the past without being registered. All micro �rms, both registered and unregistered, considered the top reasons for not registering were: (i) to avoid paying taxes, (ii) the process of registering was too time consuming, and (iii) the costs of operating as a registered business were too high. The only signi�cant difference is in the cost of registration. While �rms that were never informal consider this process very expensive, those that actually moved from informal to being registered do not share such a concern. Small �rms add to this list the notion that registering does not provide any particular tangible bene�t. Table 4.8 Top Reasons to NOT Register a Business Micro Small Not currently Not currently Currently Registered registered Currently registered registered % of firms 59 41 84 16 But which But which And have operated in the And have operated in the always been past without always been past without registered being registered registered being registered % of firms 49 51 46 54 Categories: a b c a b c % of firms considering those arguments as disadvantages of registration to avoid paying taxes 72 56 65 47 29 29 process of registering too time consuming 76 55 61 42 39 40 costs of operating as a registered business too 69 50 63 32 40 45 high not sure how or where to register 14 37 15 25 45 29 process of registration too expensive 50 33 20 50 35 31 no benefits from being registered 8 24 10 43 31 41 businesses like mine are not registered 3 19 28 9 16 35 business too small 4 14 34 31 36 28 Access to Finance not aware of any requirement to register 5 6 5 21 30 22 Source: ICA survey 41 CHAPTER 5 Women Entrepreneurs, Women Workers: Opportunities and Constraints The full participation of women as entrepreneurs and workers in the Nigerian economy is crucial to ensure gender equality and women’s economic empowerment, as well as to utilize all of Nigeria’s human resources to the bene�t of households and the country as a whole. When obstacles exist that impede the access of women to entrepreneurship or paid employment—or place them in a disadvantaged position, remov- ing those obstacles is not only essential to move towards greater gender equality, but also makes economic sense to achieve poverty reduction and support economic growth. This chapter seeks therefore to identify constraints that should be addressed and opportunities that need to be created in order to advance women as entrepreneurs and workers and enhance overall development. This chapter analyzes the relative position of men and women entre- preneurs in the formal manufacturing and service sector and in the micro informal sector. The second part of the chapter analyzes the position of women workers in the formal manufacturing sector, as well as the gender wage differential. 44 Nigeria 2011: An Assessment of the Investment Climate in 26 States Women Entrepreneurs Only 14 percent of Nigeria’s formal entrepreneurs in manufacturing and services are women, according to the 2010 Enterprise Survey. The 2007 Enterprise Survey (in 11 different states) found a share of 20 percent. Even using the higher 2007 �gure, Nigeria has one of the lowest shares of female entrepreneurs in Sub-Saharan Africa, as shown in Figure 5.1. The share of female entrepreneurs among sole proprietors—a narrower de�nition of entrepreneurship connoting full control/management over the �rm—is just 25 percent—far from the almost gender-balanced rates of Ghana and Botswana shown in Figure 5.1. Figure 5.1 Share of Female Entrepreneurs in Sub-Saharan African Countries (Percentage of All Entrepreneurs Who are Women) a. Female participation in ownership 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% NER GNB MWI MLI MRT ZAR NGA GMB ZAF BFA SEN GIN MOZ AGO TZA UGA BDI CMR NAM KEN SWZ ZMB RWA BWA GHA CPV b. Sole proprietors 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% NER GHA MRT GNB BFA MLI ZAF MWI GMB CMR MOZ SEN ZAR AGO GIN NGA UGA BDI TZA KEN ZMB SWZ RWA NAM BWA CPV Source: Enterprise Surveys, World Bank uses pre-crisis data dating 2006–2008, and for Nigeria shows there- fore the higher statistics for 2007). Note: The sample in Figure 1 (a) is represented by all formal �rms for which it is possible to determine the sex of the entrepreneur; the sample in Figure 1 (b) is limited to formal sole proprietorship enterprises. Women Entrepreneurs, Women Workers: Opportunities and Constraints 45 The share of female entrepreneurs is higher in the informal sector than in the formal sector—about 29 percent (Table 5.1, fourth column). However, this is still a relatively low rate, considering that women typi- cally concentrate in micro/informal businesses. Table 5.1 shows that the prevalence of female entrepreneurship is very uneven across states and it is not possible to identify spatial regularities in the distribution of women entrepreneurs across states. Women entrepreneurs are mostly found in garments, retail, and other services (which includes hotel and restaurants). Men entrepreneurs, on the other hand, are more evenly distributed across sectors (Figure 5.2). Interestingly, garments, retail, and other services are the same sectors where women are overrepresented in all Sub-Saharan Africa.7 Women entrepreneurs may concentrate in these particular sectors because they involve traditional female activities like fashion and food preparation. These types of businesses also require lower start-up capital . They may also be smaller and/or less ef�cient, because of constraints they face in both the business environment and other domains (for example, Figure 5.2 Prevalence of Female Entrepreneurship, by Industry Distribution of Female and Male Entrepreneurs across Industries Female Male Food Garments Other Retail Other services manufactures Note: The index of concentration in 7.2. (b) is the ratio between the percentage of entrepreneurs in each industry who are female and the percentage of all entrepreneurs in the country who are female. An index of 1 would mean that a particular industry has the same share of women entrepreneurs as the average for all industries. 7 Bardasi, Elena, Shwetlena Sabarwal, and Katherine Terrell. 2010. How do Female Entrepreneurs Perform? Evidence from Three Developing Regions. Paper presented at the 5th IZA/World Bank Conference: Employment and Development, May 3–5, 2010, Cape Town, South Africa. 46 Nigeria 2011: An Assessment of the Investment Climate in 26 States Table 5.1 Percentage of Female-Owned Firms, by State All formal State Manufacturing Services (manuf+services) Micro Adamawa 11 24 20 20 Akwa Ibom 10 22 17 80 Bayelsa 0 23 18 30 Benue 6 31 20 10 Borno 18 25 22 0 Delta 14 2 8 50 Ebonyi 24 27 26 33 Edo 4 5 4 56 Ekiti 0 18 6 10 Gombe 9 11 10 20 Imo 13 20 17 50 Jigawa 9 11 9 10 Katsina 0 22 8 10 Kebbi 0 32 11 10 Kogi 5 24 15 10 Kwara 0 32 20 30 Nasarawa 2 27 12 29 Niger 3 18 10 50 Ondo 1 29 18 10 Osun 5 32 17 30 Oyo 27 11 25 44 Plateau 10 17 13 20 Rivers 10 9 9 11 Taraba 0 20 9 50 Yobe 5 24 19 50 Zamfara 0 20 11 30 All Enterp. Survey 2009 8 21 14 29 Abia 22 24 23 19 Abuja 14 43 31 36 Anambra 12 26 21 23 Bauchi 10 16 14 17 Cross River 13 21 18 20 Enugu 22 28 26 31 Kaduna 10 22 16 49 Kano 13 19 16 24 Lagos 14 26 20 25 Ogun 15 23 20 50 Sokoto 9 25 21 36 All Enterp. Survey 2007 14 25 20 29 Women Entrepreneurs, Women Workers: Opportunities and Constraints 47 constraints in accessing capital, credit, information networks, but also because of competing demand on their time due to family responsibilities). Enterprises owned by women have on average about 20–30 percent fewer employees than those owned by men, in both manufacturing and services, as shown in Figure 5.3. Not only do female-owned enterprises tend to be smaller, but they also tend to be smaller at start-up (Figure 5.3). Micro �rms are the only ones that are equally small for both men and women and that do not grow over time. Female-owned �rms, while smaller, have on average higher employment growth than male-owned �rms. In manufacturing, the average employ- ment growth8 since start-up was about 6 percent a year in male-owned �rms and 8 percent a year in female-owned �rms. (Figure 5.3). Figure 5.3 Female-Owned Firms are Smaller than Male-Owned Firms (Average Number of Employees and Yearly Growth, by Gender of the Business Owner and Sector) 12 10 8 6 4 2 0 Male-owned Female-owned Male-owned Female-owned Manufacturing Services At start up (number of workers) Yearly growth since start up (%) Note: Yearly growth rates are weighted for manufacturing and services and unweighted for micro informal �rms. No weights are used to calculate employment averages. Bolded numbers indicate values statistically signi�cant. 8 Using the employment growth definition by Davis, Haltiwanger and Schuh (1996),Davis, Steven J., John Haltiwanger and Scott Schuh, 1996, Job Creation and Destruction, MIT Press. The DHS growth rate is de�ned as Xt − X g= t −1 , Xt + X t −1 2 where t and t–1 de�ne the current and initial period. De�ning the growth rate in this way allows for the inclusion of entrants (those �rms for which Xt–1=0); moreover, it “compresses� the very large growth rates that may be easily associated with small �rms (because they typically start from a very low amount of sales). 48 Nigeria 2011: An Assessment of the Investment Climate in 26 States The gender gaps are also evident in total revenue. However such gaps are sector speci�c and there is some evidence that women entrepreneurs tend to concentrate in sectors where total revenue is lower. In garments, both men and women entrepreneurs obtain lower revenue than in other sectors, but women are highly overrepresented in this sector. The sectors where revenue is higher—for example machinery and equipment—are not those where women tend to operate. Even within the sectors where women are concentrated, such as hotel and restaurants, food, and textiles, there are statistically signi�cant gender gaps. Women operate businesses that produce less revenue. When considering value added per worker—a more direct measure of ef�ciency—a gender gap is observed, but again this depends on the sector and is not necessarily associated with gender per se. As a matter of fact when �rm’s characteristics (age, location, gender of owner, and sector of operation) are taken into account the gender effect disappears, but a negative coef�cient is estimated for garments, a sector where women are highly concentrated. Moreover, a premium is found in machinery and equipment—typically a male sector. These results indicate that women entrepreneurs are not necessarily less ef�cient than male entrepreneurs, but operate in sectors where revenue and value added tend to be smaller. Do Male and Women Entrepreneurs Face the Same Constraints? Men and women entrepreneurs tend to agree that electricity and access to �nance are the most important constraints, as shown in Figure 5.4. Indeed, for all entrepreneurs—formal and informal, men and women—these are the two main obstacles that �rms face: 86 percent of formal �rms and 82 of informal �rms consider electricity and obstacle for current operations, and 57 percent of formal �rms and 51 of informal ones have that same perception regarding access to �nance. There are only a few signi�cant differences in male and female entrepreneurs’ perceptions of the severity of constraints, and these are circled in Figure 5.5. Among formal entrepreneurs, slightly more males than females consider electricity and labor regulations a “major� or “very severe� obstacle, while female entrepreneurs are more concerned than men with tax rates. Among informal entrepreneurs, women are slightly more likely to perceive all obstacles as “major� or “very severe� than men. For three constraints—access to �nance, tax administration, and crime, theft, and disorder—the difference is signi�cantly larger. This result is consistent with the common �nding that female entrepreneurs are more likely than men to be informal as opposed to formal and, especially as Women Entrepreneurs, Women Workers: Opportunities and Constraints 49 Figure 5.4 Female and Male Entrepreneurs’ Mentions of Major Constraints on Business a. Formal firms Electricity Access to finance Cost of finance Macroeconomic enviroment Transportation Tax administration Corruption Tax rates Crime, theft and disorder Access to land Practices informal sector Political enviroment Telecommunications Business licensing and permits Labor Regulations Inadequate labor force Customs and regulations 0 20 40 60 80 100 Percentage of firms b. Micro informal firms Electricity Access to finance Corruption Tax administration Cost of finance Transportation Macroeconomic enviroment Tax rates Telecommunications Political enviroment Access to land Crime, theft and disorder Practices informal sector Business licensing and permits Inadequate labor force Labor regulations Customs and regulations 0 20 40 60 80 100 Percentage of firms Male Female Note: Constraints for which perceptions differ in a statistically signi�cant way between men and women are circled. 50 Nigeria 2011: An Assessment of the Investment Climate in 26 States informal entrepreneurs, face more obstacles than men in managing their business. The gender differences in the perception of constraints are small and in any case might be the result of differences in personal characteristics of the entrepreneurs, the characteristics of the �rm, or the sector in which they work. Moreover, these gender differences, where they exist, do not necessarily reflect the objective constraints that entrepreneurs face in running their business. To investigate the �rst possibility—that is, that it is differences in characteristics rather than gender-speci�c attitudes and biases driving differences in perceptions—we estimate the probability of a constraint being perceived as “major� or “very severe� controlling for gender of the owner, the �rm’s size, the �rm’s age, industry dummies, and regional dummies. Contrary to what was observed before, once we control for other characteristics we observe female entrepreneurs complaining more than male entrepreneurs about electricity and competition from the informal sector, while male entrepreneurs complain more than female entrepre- neurs about access to �nance (Figure 5.5). Albeit statistically signi�cant, the difference is however small in economic terms. For the remaining constraints, the estimated probabilities are not signi�cantly different for male and female entrepreneurs. Regarding electricity, male and female entrepreneurs report virtually the same experiences of objective measures of access and use. Both men and women report that almost every day of the month they experience a power outage, each lasting around 8 hours on average (see Table 5.2). There is no statistically signi�cant difference in the length of outages, nor the share of �rms having (or sharing) a generator. However, women report a higher percentage of sales lost compared to men, 6.8 vs. 8.2 respectively. There is little difference between men and women entrepreneurs in the amount of time they spend dealing with state and federal taxes, with the only statistically signi�cant difference being that women spend 10 hours, and men spend only 8, dealing with federal taxes.9 9 On average men owners spend almost 8 hours in procedures related to state taxes and another 8 hours for federal taxes, while women owners report 11 and 10 hours respectively. However, this difference is only signi�cant for federal taxes at the 10 percent level. At the same time, managers in female-owned enterprises spend a higher percentage of their time dealing with taxes and regulations compared to the manag- ers of male owned �rms, but these differences are very small and not signi�cantly different from zero. The manager corresponds to the owner in 89% of female-owned enterprises and 77% of male-owned enterprises. Women Entrepreneurs, Women Workers: Opportunities and Constraints 51 Figure 5.5 Estimated Probability that an Entrepreneur Perceives a Constraint as , by Gender of the Business Owner “Major� or “Very Severe� 100 Electricity 80 Female owned firms (%) 60 Cost of finance Access to finance Corruption Macro instability 40 Tax adm Tax rate Access to land Transport Informality Crime 20 Political inst. Licences Inadequacy labor Telecomunications Labor regs Customs 0 0 20 40 60 80 100 Male-owned firms (%) Note: Regression includes as controls: gender of the owner, �rm‘s size (categorical), �rm‘s age (categorical), industry dummies, and regional dummies. Values evaluated at the mean of all remaining control variables. A higher percentage of female entrepreneurs consider tax rates (in the case of formal �rms) and tax administration (in the case of informal �rms) a “major� or “very severe� obstacle. Furthermore, men declare that about 6 percent of sales are spent to deal with regulation vs. 4 percent of female owners (and this difference is statistically signi�cant at a 10 percent level). We also observe statistically signi�cant gender differences in objective measures associated to corruption: the percentage of sales lost to “get things done� and the percentage of sales the typical �rm reports for tax purposes. Contrary to a-priori expectations, the �rst variable suggests that male owners face a more corrupt environment and are forced to pay larger briberies than women. At the same time, tax evasion also appears more widespread among male owners. As for crime, women owners report a larger percentage of sales lost due to thefts or because of the need to pay for security. However, this �nding should be interpreted with caution because of the large number of missing values and, therefore, the likely presence of selection issues for the sample of those who replied. The same caveat applies to the percentage of sales lost due to theft and breakages during transportation. Access to �nance is also considered by a large percentage of entrepre- neurs as a “major� or “very severe� obstacle to their business. Access to credit has several dimensions—an entrepreneur may need credit but not 52 Nigeria 2011: An Assessment of the Investment Climate in 26 States Table 5.2 Constraints Suffered by Male and Female Business Owners in Manufacturing Electricity Male Female Average length of power outage (hrs) 8.3 7.9 Average number of power outages per month 29.8 26.9 Taxes Percentage of time spent by managers in federal and state taxes and 4.6 4.9 regulations Percentage of time spent by managers in federal taxes and regulations 1.7 1.8 Percentage of time spent by managers in state taxes and regulations 2.9 3.2 Hours spent dealing with requirements of federal and state taxes 15.4 20.9 Hours spent dealing with requirements of federal taxes 7.6 10.9 Hours spent dealing with requirements of state taxes 7.7 10.0 Corruption Percentage of sales the typical establishment reports for tax purposes 71.3 75.8 Percentage of sales lost to “get things done� 3.5 2.7 Percentage of sales lost due to power outage 6.8 8.2 dealing with federal and state taxes and regulations 5.8 4.2 dealing with state taxes and regulations 3.5 2.6 dealing with federal taxes and regulations 1.7 1.5 thefts 5.5 9.0 paying for security 3.9 4.5 breakages during transportation 1.8 2.5 thefts during transportation 0.6 0.5 Notes: numbers in bold are statistically significant differences at 5% level, and in italics at 10% level. All aver- ages are weighted. (a) This difference is conditional on having reported a theft. Although more women than men report they experienced a theft (21.5 vs. 19.9 percent), the difference is not statistically significant. (b) This difference is conditional on using own transportation to make shipments to its customers. More men than women entre- preneurs use own transportation (46.5 vs. 22.1 percent), and this difference is statistically significant. apply for it, or may apply but be rejected. Figure 5.6 shows that male owners are less likely than female owners to need a loan. Women might have less available capital in the form of savings, accumulated assets, etc. or may face higher obstacles in running their enterprise that result in higher need for credit. Female owners—although they need credit more—are less likely to apply for a loan. When entrepreneurs did not apply for a loan, women were more likely to say10 that this was because of problems with collateral or because 10 29% of women vs. 21% of men. Women Entrepreneurs, Women Workers: Opportunities and Constraints 53 Figure 5.6 Male and Female Entrepreneurs’ Access to Credit Distribution of entrepreneurs according to credit status Needed, applied and succeed Needed, applied and rejected Needed, not applied Not constrained 0 10 20 30 40 50 60 70 Percentage of entrepreneurs Male Female they thought they would not be approved, while men explained that the interest rates were not favorable. Women who did apply for credit were equally (or slightly more) likely than men to obtain the loan. Among male and female entrepreneurs who applied for credit but were rejected, there was no difference associated with the gender of the business owner. Most entrepreneurs report that their collateral was unacceptable (34 percent of the �rms), or that they were not deemed pro�table enough (23 percent), or that their credit history was considered too weak (14 percent). Women Entrepreneurs as Employers Only an exceptionally low 12 percent of full-time permanent workers in the formal manufacturing sector are women. Men and women entre- preneurs operating in the formal manufacturing sector are more likely to hire male than female employees. But in female-owned manufacturing �rms, 32 percent of workers are women, compared to only 10 per cent in male-owned manufacturing �rms (Figure 5.7). The micro informal sector offers more job opportunities to women than the formal sector, because it is larger and employs a higher propor- tion of female workers (38 percent of all informal workers are women). And in female-owned micro �rms, about 60 percent of employees are women, compared to 30 percent in male-owned �rms (Figure 5.7). In Nigeria, like most developing countries, the micro informal sector appears thus to be the most likely employer of women. This �nding has a dual implication—on the one hand, the micro informal sector is con�rmed 54 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure 5.7 Female-Owned Firms Employ more Women than do Male-Owned Firms (Female Workforce Composition, by Sector and Gender of the Business Owner) 70 % of female emploees 60 50 40 30 20 10 0 Male-owned Female-owned All firms Manufacturing Micro to be an important source of paid employment for women; on the other hand wages, bene�ts, and working conditions are usually worse in the micro informal than in the formal sector, reinforcing women’s disadvan- tage in the labor market. A full 57 percent of male-owned �rms and 46 percent of female- owned manufacturing �rms do not count any woman among their full-time permanent workforce, as shown in Table 5.3. Small �rms are much more likely than medium and large �rms to hire no women, sug- gesting that there are costs of hiring women that fall disproportionately on small �rms. Although in the micro informal sector the percentage of �rms with- out women employees is lower, it is still high with respect to what one would have expected. Among female-owned enterprises the percentage of �rms without women is substantially lower, especially in the micro Table 5.3 Percentage of Firms with No Female Employees , by Gender of Owner and Size of Firm Share of firms with no female employee Manufacturing Gender of owner Micro Small Medium Large All Male-owned 51 61 28 0 57 Female-owned 22 49 16 0 46 All 42 60 27 0 56 Notes: All percentages for manufacturing firms are weighted averages (1424 firm-level observations). No weights are used for micro firms (259 firm-level firms). Information based on the labor module of the enter- prise questionnaire. Micro firms are informal firms, with less than 4 employees, small firms have between 5 and 19 employees; medium firms have between 20 and 99 employees; and large firms have 100 or more employees. Women Entrepreneurs, Women Workers: Opportunities and Constraints 55 informal sector. This �nding suggests that female workers tend to be highly concentrated in a few �rms. Nigerian legislation requires employers to provide maternity leave, job protection during pregnancy, and child-care facilities, as detailed in Box 5.1. These provisions aim to help women combine family obligations with paid employment. Since the legislation assigns the employer—rather than the social security or social insurance system—the costs of those provisions, it creates a disincentive for employers to hire women, other things equal. This disincentive is probably stronger for small �rms, which have less room for �nancial maneuver and face proportionately bigger �xed costs (for example, of setting up child-care facilities, etc.). Why are female entrepreneurs more likely to hire women? After ac- counting for size and sector distribution, women entrepreneurs are still much more likely to hire women. Survey evidence shows that female entrepreneurs are 23 percent more likely to hire female workers com- pared to men entrepreneurs. Moreover, some sectors are less likely to hire women (retail and other manufacturing much less than garments); small �rms are on average 30 percent less likely to hire women than large and medium �rms. Although women entrepreneurs have a much higher propensity to hire women, the average woman looking for a job in the Nigerian Box 5.1 Nigerian legislation on maternity leave and child care The Nigeria Labor Act (1971) requires employers to provide 12 weeks of paid ma- ternity leave at 50 percent of wages. The Abolition of All Forms of Discrimination Against Women in Nigeria and Other Related Matters Act (2006) reiterates the right of every woman to maternity leave “with pay or with comparable social benefit without loss of former employment, seniority or social allowances�a in compli- ance of the Labor Act, and establishes that “any employers who [dismiss women from employment on the grounds of pregnancy, maternity leave, or on the basis of marital status] commits an offence and shall be liable on conviction to a fine of 300,000 Naira or to a term of imprisonment for three years or to both such fine and imprisonment�.b This Act also requires that the employer provides “the necessary supporting social services to enable women to combine family obligations with work responsibilities and participation in public life, in particular through the estab- lishment and development of a network of child-care facilities�.c a Abolition of All Forms of Discrimination Against Women in Nigeria and Other Related Matters Act (2006), Part II, Art. (4). b Ibid., Part II, Art. (7). c Ibid., Part II, Art (8). 56 Nigeria 2011: An Assessment of the Investment Climate in 26 States formal sector is three times more likely to �nd it in a male-owned than in a female-owned enterprise, because women entrepreneurs are so few. Because female-owned formal manufacturing �rms are a small minority of all �rms, even if in female-owned enterprises one third of the work- force is female (as opposed to one tenth in male-owned enterprises) the probability of a woman to be employed by a female-owned �rm is only 3 percent11 (Table 5.4), while the chances to �nd a job in a male-owned enterprise are three times as high—9 percent (column II). In the micro- sector the chances that a female-owned �rm chooses a woman employee are also much bigger than for a male-owned enterprise, but still women have an overall probability to �nd a job that is slightly larger in a male- owned (21 percent) than in a female-owned enterprise (17 percent). Wages and Firm Characteristics Female workers are paid about 10 to 15 percent less than male workers with similar skills. This differential is lower than the 30 percent12 observed in most developing countries. But since it applies only to workers em- ployed full-time in formal �rms, who (especially in the case of women) tend to have above average skills and above average wages, the gender wage gap for all workers is likely to be higher than 15 percent. The gender wage gap remains as high as 13–14 percent after con- trolling for �rm characteristics. When including �rm and entrepreneur characteristics in the wage regression, the gender wage gap barely changes, Table 5.4 Women’s Probability of Finding Paid Employment in Formal Manufacturing and Micro Sector (%) Probability of being hired … by a female-owned firm by a male-owned firm (I) (II) Women Manufacturing 3 9 Micro 17 21 Notes: own calculation based on Table 1 and Table 7. 11 Note that these probabilities are not adjusted for the worker’s characteristics or of the �rms that hire them, so they have to be considered as ‘gross’ probabilities for the typical man and the typical woman who are currently employed in the manufactur- ing and micro sector. 12 Blau, Francine, Marianne Ferber, and Anne Winkler “The Economics of Women, Men, and Work. Upper Saddle River, NJ: Prentice-Hall, 5th ed. 2006. Women Entrepreneurs, Women Workers: Opportunities and Constraints 57 suggesting that the reason why women are paid less is not due to women being disproportionately employed by �rms that pay less (for example because they are less productive, or are exposed to higher competition). The gender wage gap remains as high as 8–10 percent even after controlling for unobservable �rm characteristics, by including �rm �xed effects in the regression. The close-to-10 percent wage gap that remains at this stage can be interpreted as the part of the gap that is not explained/ justi�ed by productivity differential between men and women workers. Female and male entrepreneurs pay comparable wages. The coef�cient of the dummy variable for a female-owned �rm is not statistically sig- ni�cant and is small in magnitude. The inclusion of several interactions between female ownership and �rm and entrepreneur characteristics does not capture any additional wage effect speci�c to female-owned �rms (there is a couple of notable exceptions that will be discussed below). What does this imply for women entrepreneurs as buyers of labor? The regression results suggest that women entrepreneurs do not pay a pre- mium or can impose a lower wage. There is no gender wage gap in female-owned �rms—women entre- preneurs pay similar wages to their male and female employees. And women working for women earn the same wage as men working in either female- or male-owned �rms. However, on average, women working for women entrepreneurs tend to work fewer hours per month than male workers, and therefore still earn less than men on a daily or monthly basis. Women entrepreneurs who operate a small business (5 to 20 employ- ees) pay considerably lower wages than men entrepreneurs, to all their employees—men and women. In general, small �rms pay lower wages than medium and large �rms irrespective of the ownership—on average about 12 percent less. However, this ‘wage penalty’ is larger in small �rms owned by women, an additional 60 percentage points. This is an extremely large penalty, which disproportionately affects young workers, who are more likely to �nd a job in small �rms. CHAPTER 6 The Investment Climate in Nigeria’s Free Zones Introduction By overcoming the barriers that contribute to a poor investment climate in the wider economy, free zones (FZs) , export processing zones (EPZs) and other forms of special economic zones (SEZs) can play an important role in attracting export-oriented investment and supporting diversi�- cation of a country’s industry—in the case of Nigeria, these objectives are of critical importance. Evidence from around the world shows that for free zone programs to attract and retain investment they must look beyond simple �nancial incentives and provide an investment climate in the zones that greatly facilitates �rm-level competitiveness. How successful have Nigeria’s free zones been in establishing an improved investment climate? This chapter will assess the experience of investors in Nigeria’s free zones and the factors which contribute to its investment climate performance. We �nd that across most of the most critical constraints identi�ed by Nigerian �rms, the free zones appear to offer a somewhat improved investment climate. The cumula- tive bene�ts that result from this are signi�cant—ranging from a one- third to a two-thirds decrease in sales losses resulting from �ve main business constraints. Yet, there is no evidence that this translates into signi�cantly improved performance from free-zone based �rms, in terms 60 Nigeria 2011: An Assessment of the Investment Climate in 26 States of productivity and growth. We stress three primary reasons why this may be the case: 1) the investment climate in the free zones still falls short of “threshold levels� required for international competitiveness; 2) the regulatory structure under which the free zones program operates fails to establish the right incentive environment to promote �rm com- petitiveness; and 3) the free zone environment fails to shield investors from an uncertain macroeconomic and political environment—indeed, �rms in the free zones face even greater policy uncertainty than those outside the program. Free Zones in Nigeria Nigeria’s free zones program was established in 1992 and actual opera- tions in the �rst zone began only in 2001. Since then, there has been a substantial expansion of the program—at least 24 zones are now registered in the country of which nine are operational ( most in their early stages), twelve are under construction and another three are in planning or design phases. The main stated objectives of the program were to: (a) Increase employment; (b) Increase access to foreign exchange; (c) Increase the level of processing of exportable products; and (d) Encourage technology transfer from foreign direct investment. This chapter is based on surveys conducted in Nigeria’s two main zones: 12 �rms in the Calabar Free Zone (FZ) and 57 in the Onne Oil & Gas Free Zone. Key Differences in the Firm Profile The pro�le of the 69 free zone companies differs from that of those in the overall survey sample. These aggregate differences may affect the survey �ndings, as they will shape the requirements, capabilities, and constraints faced by the different categories of investors. These differences are summarized as follows (see Table 6.1): • Firm size: The average �rm size in the free zones is signi�cantly higher than for the overall sample of Nigerian �rms, with �rms in Calabar more than twice as large as in the overall sample, and �rms in Onne on average six times larger than �rms in the overall sample. • Sector focus: Firms in Calabar are heavily concentrated in the manu- facturing sector, while only 50% of �rms in the overall sample are manufacturing-oriented, with many in retail and services. Firms in the Onne FZ, by contrast, are mainly in the services sector. The Investment Climate in Nigeria’s Free Zones 61 Table 6.1 Key Differences between Free Zone and other Firms Nigeria overall Exporters Calabar FZ Onne FZ (n=3,157) (n=41) (n=12) (n=53) Avg firm size 31 276 78 189 Manufacturing sector share 49 95 83 25 Share foreign-controlled* 1 22 50 53 Export intensity reported 1 37 74 96 (actual for manufacturing (17) (12) sample) Local input share 94 76 29 14 * “Foreign-controlled� defined as at least 50% foreign-owned • Ownership: Only 1% of Nigerian �rms in the overall sample are foreign-controlled versus more than half of the FZ �rms. • Market focus: While �rms in the overall sample sell almost exclusively in the domestic market, �rms in the free zones report a substantial share of exports.13 • Supply sources: Free zone �rms source a small share of inputs from the local markets; in contrast �rms outside the free zones rely heav- ily on locally-produced inputs. Do Nigeria’s Free Zones Improve the Investment Climate? Nigerian �rms face an array of constraints that restrict their competitive- ness. Figure 6.1 illustrates the constraints identi�ed as most severe by �rms in the survey. Electricity stands out clearly as the most important constraint. The other main constraints include: �nance (access and cost); transportation, taxes (rates and administration); corruption; and the macro-economic environment. 13 However, on more detailed examination, it appears that true exports from the free zone based �rms is actually much smaller than is reported For manufacturing �rms only, the survey asks direct exporters to indicate the speci�c countries to which it exports. In the case of Calabar FZ, it turns out that a large share of the respondents indicate “Nigeria� as their main market—so for these manufacturers only 17% of exports are actually outside the domestic customs territory. Firms in the free zone may consider Nigeria to be an export market because the free zone technically sits outside the national customs territory. The same situation exists in Onne, although it is important to caution that manufacturing �rms are only a minority of the sample there. In this case, only 12% of manufacturing �rms output is exported beyond the Nigerian customs territory. 62 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure 6.1 Percentage of Free Zone Firms Ranking Constraint as among their “Top 3� Obstacles Electricity Access to finance Transportation Tax rates Cost of finance Macroeconomic enviroment Corruption Access to land Crime, theft and disorder Tax administration Political enviroment Informal competition Policy uncertainty Business licensing and permits Inadequately educated workforce Labor regulations Telecommunications Customs and trade regulations Courts Other 0 10 20 30 40 50 60 70 80 Free zones are designed to overcome the de�ciencies that may ex- ist in the national investment environment. So to what degree are Nigeria’s free zones overcoming the constraints identi�ed in Figure 6.1. The remainder of this section will assess this question across the most important obstacles identi�ed by �rms in Nigeria. We focus on the �ve most prominent constraints identi�ed by �rms, in some cases combining related aspects—these include:14 • Electricity • Access to �nance, along with cost of �nance • Transportation, along with customs and trade regulations15 • Tax rates, along with administration • Corruption, along with crime, theft, and disorder 14 This section does not address the sixth most important constraint identi�ed by �rms in Nigeria—the macroeconomic environment—as the free zone �rms will face the same macroeconomic environment as all other �rms in Nigeria. This issue is, however, discussed later in this Chapter. 15 While customs and trade regulations are not reported as a major constraint by the overall sample of Nigerian �rms, it is a prominent constraint rated by exports and so is included in the discussion, along with transportation. The Investment Climate in Nigeria’s Free Zones 63 Electricity Firms in Nigeria face a severe problem in accessing reliable utilities in- frastructure, most importantly electricity. Fully 90% of exporters identi- �ed electricity as a major or very severe constraint, and 80% identi�ed it as the single most important constraint they face. Firms in Calabar and Onne also identify electricity as the largest single barrier they face. Yet as Figure 6.2 shows, the two free zones appear to offer a somewhat improved utilities environment. Firms based in Calabar FZ report 50% less downtime resulting from power outages than exporters based outside the free zone. In the Onne zone, the provision of shared generators has eliminated the problem of electricity downtime.16 However, although �rms in Calabar report less hours lost to power outages per month than the average �rm in Nigeria, the percentage of sales lost to electricity downtime is signi�cantly higher. This is because �rms in Calabar are more heavily concentrated in the manufacturing sector—and include many �rms in process-intensive activities like the chemicals and machinery & equipment sectors—which tends to be more dependent on power. Access and Cost of Finance Both free zone �rms and non-FZ exporters make only limited use of external �nancing, instead �nancing working capital mainly through retained earnings and supplier credit. However, as Figure 6.3 shows, a much greater share of �rms based inside the free zones report having access to lines of credit or bank loans. This is most likely not a function of the free zone environment per se, but rather the size and nature of the �rms operating within them—i.e. larger and with much greater foreign ownership than the average Nigerian �rm. Indeed, selecting only export- ers from the sample of non-FZ based �rms returns an even higher share (49%) accessing credit. The results shown in Figure 6.4 suggest there is no evidence from the survey that free zone based �rms access loans at more attractive interest rates than is available to �rms outside the zones. This is perhaps surprising, given the larger foreign ownership of free zone �rms and the possibility of these �rms to access bank loans from outside the domestic market. 16 Although this of course comes at a cost, which is normally at least twice as high for diesel-generated power versus power accessed through the mains. For this reason, electricity is still rated as the single biggest constraint, with 74% of �rms reporting it as one of their top three obstacles (versus 92% in Calabar). 64 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure 6.2 The Effect of Unreliable Power Supply* Hours lost to power outages per month Percentage of sales lost to power outages Non-FZ firms 221 Non-FZ firms 4.3 Calabar 136 Calabar 11.5 0 50 100 150 200 250 0 5 10 15 Average hours/month % Sales * Firms in Onne FZ reported zero hours lost to power outages per month. Figure 6.3 Percentage of Firms with Access to Line of Credit/Loans Non-FZ firms 15 Onne 38 Calabar 33 0 10 20 30 40 % Firms However, free zone companies do appear to bene�t from slightly lower collateral requirements. Transportation and Trade Facilitation With respect to transportation and trade facilitation, the investment cli- mate bene�t of the free zones appears to be mixed. Firms in Onne, based at Port Harcourt, consider transport to be only their eighth most important constraint. In contrast, �rms in Calabar, without a dredged, deepwater port and many hours on poor roads from Lagos, consider transport their second biggest constraint—indeed, half of �rms in Calabar FZ consider transportation to be one of their three biggest obstacles, compared with only one-third of all surveyed �rms in Nigeria. The Investment Climate in Nigeria’s Free Zones 65 Figure 6.4 Cost of Finance and Collateral Requirements Non-FZ firms 15 Non-FZ firms 176 Onne 17 Onne 145 Calabar 18 Calabar 125 0 5 10 15 20 0 50 100 150 200 Interest rate Value of colateral required (% loan) The poor road network in Nigeria is a severe constraint for most �rms in the country, especially in states located far from the main economic centers. In this respect, the Calabar and Onne free zones—and the ac- cess to port facilities they provide—allow �rms to bypass the problem of poor road connectivity and quality to a certain extent. However, there are signi�cant differences in the degree of “insulation� the two zones offer—these arise mainly from differences in the infrastructure and con- nectivity of the ports located next to these zones.17 In Onne, having access to the better infrastructure and connectivity of Port Harcourt, almost all �rms rely on that port to receive supplies and ship products to clients (only 2 �rms have inputs delivered by road and one �rm uses roads to deliver products to clients). The situation is slightly different in Calabar, mainly because the port is not as ef�cient as Port Harcourt. All �rms in the Calabar zone have at least some of their inputs delivered by road, mostly from Port Harcourt and from other cities in the Cross River state. On the other hand, �rms that target the domestic market use the Calabar port instead of roads when delivering products to clients, as do �rms that export to neighbor countries (Benin and Equatorial Guinea). However, �rms that export to more distant countries (China and Italy, but also Ghana and Liberia) must make use of Port Harcourt (180km) or Apapa (700km). 17 Firms in the free zones also have greater control over the delivery of their inputs. In Calabar, 71% of inputs/supplies are of foreign origin and 66% of �rms import at least some of their inputs directly. In Onne, 86% of inputs are of foreign origin and 100% of �rms import some of their inputs directly. In contrast, only 6% of inputs are of foreign origin for the average non-FZ based �rm. 66 Nigeria 2011: An Assessment of the Investment Climate in 26 States The option that the Calabar and Onne zones provide to bypass road connectivity and quality issues translates into at least a two-thirds re- duction in the percentage of sales lost in transit, both because products do not spoil or break on long trips to clients and because they are less exposed to theft (see Figure 6.5). In trade facilitation, the picture is reversed, as can be seen in Figure 6.6. Here, �rms in Calabar face a much-improved environment relative to non-FZ based exporters, while the environment in Onne appears to be poor. That said, �rms in Onne do not appear to consider customs and trade regulations to be any more of a barrier to their business than do �rms in Calabar or outside the free zone system. This could be the result of the different type of products exported in Onne, which include oil pipe coatings, casings and oil industry speci�c goods that take more time to clear customs than more traditional products (between 25 and 60 days). Figure 6.5 Percentage of Sales Lost Due to Transport Disruptions Non-FZ firms 1.9 0.7 Onne 0.5 0.4 Calabar 0.1 0 1 2 3 Breakage or spoilage Theft Figure 6.6 Ef�ciency of Customs Clearance Costs of customs clearance Days to clear customs (exports) (% consignment value) Non-FZ firms 8 Non-FZ firms 11 Onne 26 Onne 12 Calabar 6 Calabar 3 0 10 20 30 0 5 10 15 Days % Consigment value The Investment Climate in Nigeria’s Free Zones 67 Tax Rates and Administration Clearly, �rms in the free zones face a much more attractive tax environ- ment than those based outside the zones. Free zone companies receive a complete and inde�nite tax holiday on all federal, state, and local taxes, including corporation tax and VAT; they are also exempt from any local rates, customs duties, and levies. As a result, no �rms in the free zones identify tax rates as a severe constraint. Similarly, taxes impose a low administrative burden for �rms located inside the zones, given the exemptions they receive: they have a lower probability of being visited by tax of�cials, receive half the number of annual visits, and spend about half the time ful�lling requirements to �le taxes. Only 17% of �rms inside the FZs reported being visited by tax of- �cials in the last year, versus 82% of all Nigerian �rms in the survey.18 Furthermore, free-zone based �rms that received visits from tax of�cials reported an average of two visits per year, while �rms outside the free zones report an average of nearly 3.5 visits. Finally, �rms in Calabar and Onne report signi�cantly lower times required to �ll in forms and pay taxes (3.3 and 8.1 hours respectively) than non-FZ �rms (15.7 hours) (Figure 6.7). Figure 6.7 Complying with Taxes and Regulations in Free Zones Percentage of sales spent on Hours spent dealing with taxes dealing with regulations Non-FZ firms 7.9 7.7 Non-FZ firms 3.4 2.1 Onne 8.1 Onne 0.2 4.8 Calabar 3.3 Calabar 0.2 3.5 0 5 10 15 20 0 1 2 3 4 5 6 State/local Federal State Federal 18 Note that being exempt from taxes does not preclude free zone �rms from being visited by tax of�cials. Tax of�cials may still review the records of free zone based �rms to ensure that they are complying with tax rules and to assess if there are any activities being undertaken that should incur taxes. 68 Nigeria 2011: An Assessment of the Investment Climate in 26 States Although incentives are available to both FZ and non-FZ exporters for purchasing inputs, �rms in Calabar and especially in Onne, make much greater use of duty exemptions than non-free zone �rms. Firms in Calabar also make much greater use of the VAT reimbursement.19 Operating in the free zone makes many of these incentives schemes automatic, whereas the non-FZ available exporter must go through processes of application to become eligible and then further administrative hurdles to claim the incentive. Corruption, Crime, and Security The lower regulatory burden faced by �rms in the free zones may also explain why they report facing less corruption than �rms outside the zones. No FZ �rm declared that informal payments were expected when applying for basic services, nor as a result of a visit from tax of�cials.20 In contrast, 19% of non-FZ exporters report informal payments were expected to get an electricity connection and 25% as a result of a visit from tax of�cials. The impact that this less corrupt environment has on the bottom line is reflected in the signi�cantly lower burden that informal payments pose on free zone based �rms: they report informal payments of less than 1.5% of sales compared to 3.5% for the average Nigerian �rm. (Figure 6.8) Figure 6.8 Unof�cial Payments Inside and Outside Free Zones Non-FZ firms 3.2 Onne 1.2 Calabar 1.5 0 1 2 3 4 % Sales 19 Note that most �rms in Onne purchase virtually all inputs from foreign markets and so are unlikely to make use of the VAT reimbursement. 20 The response rate for FZ-based �rms was 100% on these questions. The test for “reticent respondents� to the corruption questions found no reticent respondents among the FZ survey respondents. The Investment Climate in Nigeria’s Free Zones 69 Similarly, FZ �rms may also be shielded from the problems non-FZ �rms face with respect to the costs of crime and security (see Figure 6.9). Although a similar share of �rms inside and outside the zones has expe- rienced losses as a result of crime (theft, robbery, vandalism or arson), the average loss as a percentage of sales is signi�cantly lower in the zones (0.8% in Onne and 1.7% in Calabar) compared with the average Nigerian �rm (8.7%). Additionally, the more secure environment translates to lower security payments inside the zones, with the bene�ts (in terms of less money spent on security) ranging from 0.6% to 2.5% of total sales compared to the average �rm in Nigeria. These results seem to con�rm the expectation of free zone �rms, 57% of which cited crime and civil unrest as a major concern in the country and a reason why they decided to invest inside a free zone. The Missing Links Between Investment Climate and Firm Performance Firms in Nigeria’s free zones operate in a substantially more attractive environment than that faced by �rms outside the free zones, substantially lowering their indirect costs resulting from the poor investment climate (see Figure 6.10). Firms in Onne can expect almost a two-thirds decrease (equivalent to 20 percentage points), and �rms in Calabar a one-third decrease (10 percentage points) in sales losses due to �ve main business constraints examined here. This should translate into improved performance for FZ �rms relative to those outside them. However, evidence from the survey suggests this may not be the case. Figure 6.9 Crime and Security Expenses in Free Zones Non-FZ firms 4.3 8.7 Onne 3.7 0.8 Calabar 1.8 1.7 0 5 10 15 Security payments Crime 70 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure 6.10 Impact of Indirect Costs Inside the FZs vs. Outside (% of Sales Lost Due to Selected Factors) Non-FZ firms 7 6 3 13 2 Onne 5 1 5 1 Calabar 11 4 2 3 0 10 20 30 40 Electricity Regulations Corruption Crime Transport Robust comparisons of productivity performance inside and outside the free zones are not possible, due to the very small sample size inside the zones21 and signi�cant differences in industry composition inside and outside the zones. Value-added per worker and labor costs are much higher inside the zones than outside. Median sales volumes are greater in the zones due to the nature of the �rms: US$16 million in Onne and US$2.2 million in Calabar versus US$ 79,000 outside the zones. But growth rates are much higher outside the zones—�rms outside the free zones reported sales growth of 45% between 2005 and 2008, while �rms in Calabar and Onne reported only 25% and 21% respectively. And while �rms in Onne reported slightly higher levels of production intensity (as measured by hours of weekly operation) than non FZ-based �rms, the reverse was true for the Calabar FZ. (Table 6.2) Given the more attractive investment environment and the incentives in the free zones, what explains the failure to observe more systematic Table 6.2 Firm Performance in FZ and Non-FZ Firms Calabar Onne Non-FZ firms Value added per worker (US$ ) 13,238 146,835 2,141 Capacity utilization (%) 37.5 50 75 Hours of weekly operation 50 84 60 Sales growth (2005–2008) 28.3 8.2 30.0 21 e.g. TFP can be calculated on only 10 �rms from Onne FZ and none from Calabar). The Investment Climate in Nigeria’s Free Zones 71 performance improvements in zone-based �rms ? Several hypotheses are explored in this section. Firms in Nigeria’s free zones face an investment climate that—while better than outside the free zone—is still full of constraints. Electricity, downtime, for instance, is much lower for �rms based in the zones, but is still cited as by far their biggest constraint. As shown in �gure 6.11, �rms in Calabar face more downtime than �rms in all other countries surveyed, whether inside or outside free zones. The impact is signi�- cant—in Calabar, for example, investors note that the cost of diesel for the generators on which they must rely outweighs any �scal incentives they get from operating in the zone. It may also be that the truly binding constraints are not addressed by the free zone’s improvements. For example, improved customs clear- ance in Calabar may save exporters a few days. But the original plan for the Calabar FZ also envisaged a deep-water port which, twenty years on, has still not been dredged. As a result, �rms exporting from Calabar are forced to truck goods to Lagos, incurring high costs due to distance and poor road conditions. Thus, the improvements in customs inside the zones may well be in vain for most �rms. (Figure 6.12) A second possible factor is that the incentives available in the free zones, in relation to incentive programs available outside the free zones, do not attract “world-class� foreign investors. Nigeria’s free zone program, for instance, allows 100% sales to the local market, which helps attract �rms selling into to the local market rather than those seeking to use the FZ as a global export platform. Indeed, more than 80% of sales from Figure 6.11 Zone Investment Climate Improvements: Electricity Downtime (days) Nigeria vs. African SEZs Nigeria vs. Non-African SEZs 250 250 206 206 200 200 150 136 150 136 120 113 100 95 100 70 67 50 50 34 32 31 50 11 18 2 6 2 8 4 0 0 Calabar Senegal Tanzania Ghana Kenya Lesotho Calabar Bangladesh Vietnam Honduras Country Zones Country Zones 72 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure 6.12 Zone Investment Climate Improvements: Export Customs Clearance (Days) Nigeria vs. African SEZs Nigeria vs. Non-African SEZs 30 30 26 26 25 25 20 19 20 15 13 13 14 15 13 13 12 11 11 12 9 9 10 10 10 8 10 6 6 7 6 5 4 5 3 4 4 2 0 0 Calabar Onne Senegal Tanzania Ghana Kenya Lesotho Onne Calabar Bangladesh Vietnam Honduras Dominican Republic Country Zones Country Zones Onne-based �rms are sold to the Nigerian customs territory, as are almost 90% of sales from �rms in the Calabar FZ. Moreover, a raft of incentive regimes (EEG, manufacturing-in-bond, Pioneer Investor Status) is available to exporters based in the domestic market, and this package is often more favorable than what is available inside the zones. Thus, the policy environment does not create any selec- tion bias toward export-oriented, globally competitive �rms, as might normally exist in a free zone program. Indeed, the �rm survey indicates that nearly half the �rms based in Calabar and Onne already operated in Nigeria and shifted into the zones, rather than representing new investment. Moreover, most of them focus primarily on the domestic market—more than 80% of sales from Onne-based �rms are sold to the Nigerian customs territory, as are almost 90% of sales from �rms in the Calabar FZ. With such a strong orientation toward the local Nigerian market, it is little surprise that �rms in the free zones do not exhibit levels of competitiveness signi�cantly greater than that of their competitors in the domestic market. Finally, the macroeconomic environment is considered a major constraint by virtually all �rms in Nigeria , ranking as the �fth most signi�cant obstacle. For free zone �rms it was considered even more important, ranking second in Onne and fourth in Calabar. But what is most striking is the FZ �rms’ much higher concerns than non-FZ �rms about the political environment, and policy uncertainty, as shown in Figure 6.13. The Investment Climate in Nigeria’s Free Zones 73 Figure 6.13 Percentage of Respondents Indicating Factor as One of Their Top 3 Constraints Macroeconomic 42 25 environment 17 Political 40 33 environment 7 Policy 26 25 uncertainty 7 0 10 20 30 40 50 Onne Calabar Non-FZ firms Why the greater concern over the political environment and policy uncertainty? One possible reason is that because the zones improve other aspects of the investment environment, broader issues come to loom larger in importance. A second reason may be related to the greater concentra- tion of foreign-owned �rms in the free zones. The evidence from surveys conducted in other free zone programs around the world suggests that these two factors are at least partial explanations. In the case of Nigeria, the history of policy uncertainty in the free zone programs is likely to be another important factor, and one which may well have had a substantial impact on the competitiveness of free zone based �rms. Examples of this uncertainty are outlined in Box 6.1. The impact of policy inconsistency goes beyond simply those issues related directly to the free zone program. For example, in 2005, among the companies operating in Calabar FTZ were a furniture manufacturer, a detergent manufacturer, and three garment manufacturers. All of these companies relied in part on selling into the Nigerian domestic market. However, in 2005, the Nigerian government banned the import of these three products—this ban included production from the free zones as these were considered to be outside the national territory. It took another three years to get the legislation amended to allow such products manufactured in free zones to be sold into the local market again (with a 35% tariff added). By this time, the detergents company left Nigeria and all three garments companies shut down—only the furniture manufacturer survived. 74 Nigeria 2011: An Assessment of the Investment Climate in 26 States Box 6.1 Uncertainty about Institutional Responsibilities for Free Zones The creation of the Oil & Gas Free Zone Authority (OGFZA) in 1996 created signifi- cant confusion over where its roles and responsibilities ended and where those of NEPZA, as the export processing zones authority, took over. For firms in the zones this created significant uncertainty over the legal and regulatory framework under which they were expected to operate. Finally in 2008, the attorney general issued a ruling declaring OGFZA responsible for all oil and gas related activities in the country. This meant that NEPZA not only did not have any authority over the oil and gas free zones, but that oil and gas activities within NEPZA-regulated zones are technically the responsibility of OGFZA. This could lead to further confusion and overlapping regulation for oil and gas related companies that may want to invest in zones under the NEPZA remit. A second example of the impact of policy uncertainty derived from institutional conflict between Customs and NEPZA. Taking the side of Customs, the government reversed its policy on the establishment of Export Processing Factories after such status had already been granted to 23 investors. This action undermined the busi- ness model of the Tinapa Business and Leisure resort* after US$400m in investment had already been sunk into the project. * The Tinapa Business and Leisure Resort in the Cross River State was intended primarily to offer duty free shop- ping to the residents of the State capital Calabar (2.3 million inhabitants) and more widely wealthy Nigerians and Africans – essentially as an alternative to Dubai and London. References Aw, Bee Yan, Sukkyun Chung, and Mark J. 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Available on line at http://papers.ssrn. com/sol3/papers.cfm?abstract_id=1149363. References 77 Salehi-Esfahani, Haideh. 1988. “Informationally Imperfect Labor Markets and the ‘Dutch Disease’ Problem.� Canadian Journal of Economics 21(3):617–624. Svensson, Jakob. 2003. “Who Must Pay Bribes and How Much? Evidence From a Cross Section of Firms.� Quarterly Journal of Economics 118(1):207–230. Verhoogen, Eric. 2008. “Comments on Escribano-Guasch methodology for Estimating the Effects of Investment Climate on Productivity.� Columbia University, New York, NY. Processed. Westphal, Larry E. 2002. “Technology Strategies for Economic Development in a Fast Changing Global Economy.� Economics of Innovation and New Technology 11(4–5):275–320. World Bank. 2007. “Turkey: Investment Climate Assessment.� Finance and Private Sector Department, Europe and Central Asia, World Bank: Washington DC. Annexes State Snapshots ANNEX 1 State of Adamawa The most important obstacles perceived by �rms located in the State of Adamawa include electricity, reported by 74% of �rms, access to �nance, cited by 55% of �rms, and tax rates cited by 37% of �rm, as illustrated in Figure A.1.1. These constraints were perceived more intensely in the manufactur- ing sector than the services sector. Also of interest, the top three ranked constraints were perceived more acutely by negative and slow employ- ment growth �rms over high employment growth �rms. Electricity was not only perceived as the greatest obstacle for busi- nesses in the State of Adamawa, it was also the source of high indirect costs; indeed, losses due to power outages represent 6.6% of total sales. These losses were greater than the national average, which amounted to 5.3% of total sales. The �rms operating in the State of Adamawa had greater access to overdraft facilities than did the average �rm in Nigeria (23% vs. 19%). In contrast, Adamawa �rms had less access to lines of credit and loan facilities. Tax of�cials visited 94% of �rms (100% of manufacturing �rms) an average of 4 times a year. About 38% of �rms declared that informal payments/gifts were expected/required during these visits. 82 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.1.1 Top Three Ranked Perceived Constraints – All Formal Sectors 90% 80% 82% 70% 74% 60% 70% 64% 50% 55% 40% 48% 44% 30% 37% 32% 20% 10% 0% Electricity Access to finance Tax rates (e.g. collateral) Total Manufacturing Services Table A.1.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Sector Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 74 82 70 74 79 67 Access to finance 55 64 48 61 60 51 (e.g. collateral) Tax rates 37 44 32 37 49 29 Figure A.1.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.5 1.0 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Adamawa 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 1 – State of Adamawa 83 Table A.1.2 Selected Indicators – All Formal Sectors Adamawa Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 6.6 5.0 7.5 5.3 4.3 6.3 Average duration of power outage 237 319 187 239 248 230 (hrs) % of firms with gen 96 98 88 88 88 87 % of electricity from gen 79 N/A 69 N/A Average duration to obtain an 6 3 6 15 18 13 electric connection (days) Finances % of working capital financed by 71 74 69 69 70 68 internal funds/returns earnings % of firms with overdraft 23 25 22 19 16 21 % of firms currently have either line 12 2 18 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 100 N/A 70 N/A by road Average duration to ship inputs to 10 N/A 8 N/A the establishment (hrs) % of firms using own transport 60 N/A 53 N/A % of shipment value transported by 80 N/A 69 N/A own transportation Losses due to transportation 1.0 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 82 97 74 72 70 74 % of firms visited by tax officials 94 100 90 82 82 82 Average number of visits 4 3 4 3 3 3 % of visits with informal payments 38 43 34 34 33 34 expected/required Corruption 3.9 2.9 4.4 3.2 3.2 3.3 % annual sales on bribes Crime and Theft Losses due to theft in % of sales 0.8 0.0 1.2 1.0 0.7 1.3 % of firms paying for security 75 68 79 78 75 80 Cost of security in % of sales 1.2 0.7 1.5 1.5 1.3 1.8 ANNEX 2 State of Akwa Ibom The most important obstacles perceived by �rms located in the State of Akwa Ibom include access to �nance, reported by 71% of �rms, followed closely by electricity, cited by 65% of �rms, and the cost of �nance, cited by 43%, as illustrated in Figure A.2.1. Problems with the provision of electricity and access to �nance were perceived more severely by manufacturing �rms than by �rms operating in the service sector, 89% vs 48% and 94% vs. 55%, respectively. In contrast, the cost of �nance was ranked as major obstacle by a greater number of service sector �rms than by manufacturing sector �rms. Electricity was the source of high indirect costs in the State of Akwa Ibom, with losses due to power failures representing a total of 6.4% of sales. Service sector �rms lost an average of 10% of their sales due to failures in the supply of electricity while manufacturing �rms lost only 2.7%. Nine manufacturers out of ten had a generator, which supplied about 79% of these �rms’ power. On average, �rms in the state of Akwa Ibom had more access to lines of credit and loan facilities than the average �rm in Nigeria (22% vs. 15%). Service sector �rms had greater access to such facilities than the manufacturing sector. On the other hand, the latter had less access to overdraft facilities. 86 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.2.1 Top Three Ranked Perceived Constraints – All Formal Sectors 100% 90% 94% 80% 89% 70% 71% 60% 65% 50% 55% 40% 48% 50% 43% 30% 34% 20% 10% 0% Access to finance Electricity Cost of finance (e.g. collateral) (e.g. interest rates) Total Manufacturing Services Table A.2.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Sector Employment growth Negative Slow High Total Manufacturing Services growth growth growth Access to finance 71 94 55 70 80 71 (e.g. collateral) Electricity 65 89 48 56 75 65 Cost of finance 43 34 50 51 31 46 (e.g. interest rates) Figure A.2.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.5 1.0 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Akwa Ibom 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 2 – State of Akwa Ibom 87 Table A.2.2 Selected Indicators – All Formal Sectors Akwa Ibom Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 6.4 2.7 9.1 5.3 4.3 6.3 Average duration of power outage 286 427 185 239 248 230 (hrs) % of firms with gen 90 90 90 88 88 87 % of electricity from gen 79 N/A 69 N/A Average duration to obtain an elec- 28 7 30 15 18 13 tric connection (days) Finances % of working capital financed by 70 78 64 69 70 68 internal funds/returns earnings % of firms with overdraft 17 5 25 19 16 21 % of firms currently have either line 22 13 29 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 100 N/A 70 N/A by road Average duration to ship inputs to 5 N/A 8 N/A the establishment (hrs) % of firms using own transport 35 N/A 53 N/A % of shipment value transported by 71 N/A 69 N/A own transportation Losses due to transportation (% of 0.5 N/A 2.4 N/A sales) Tax % of sales reported for tax purpose 88 85 90 72 70 74 % of firms visited by tax officials 84 94 77 82 82 82 Average number of visits 3 2 3 3 3 3 % of visits with informal payments 27 24 30 34 33 34 expected/required Corruption 3.9 2.9 4.4 3.2 3.2 3.3 % annual sales on bribes Crime and Theft Losses due to theft in % of sales 0.5 0.1 0.8 1.0 0.7 1.3 % of firms paying for security 73 66 79 78 75 80 Cost of security in % of sales 1.4 0.9 1.7 1.5 1.3 1.8 Corruption % annual sales on bribes 3.1 2.4 3.6 3.2 3.2 3.3 ANNEX 3 State of Bayelsa The most important obstacles perceived by �rms located in the State of Bayelsa include electricity, reported by 84% of �rms, with constraints such as access to �nance and transportation a distant second and third, cited by 43% and 28% of �rms, respectively, as illustrated in Figure A.3.1. A glance at Table A.3.1 reveals a manufacturing sector that does not appear to have much to complain about except for electricity. Indeed, the other most signi�cant constraints perceived by the group were access to �nance and transportation, cited by 21% and 25% of �rms, respectively. Service sector �rms in the State of Bayelsa appear to perceive the provi- sion of electric power more on par with the rest of the country, with 83% of �rms citing it as a constraint. Electricity was a source of high indirect costs in the State of Bayelsa and the losses due to power outages represented 6.5% of the total sales. Service sector �rms lost 7.7% of their sales due to power failures while manufacturing sector �rms lost only 2%. All service sector �rms had a generator and in the manufacturing sector, almost nine out of every ten �rms possessed one, which suppied about 85% of their total power. On average, �rms in the state of Bayelsa had less access to lines of credit or loan and overdraft facilities. The case of service sector �rms was more problematic. In effect, only 2% of service �rms had a line of credit or a loan facility and only 4% had an overdraft facility. Transportation was also a signi�cant source of indirect costs, with losses due to goods lost in transportation representing 4% of total sales. These losses were greater than the national average, which amounted to 2.4% of total sales. 90 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.3.1 Top Three Ranked Perceived Constraints – All Formal Sectors 100% 90% 80% 89% 84% 83% 70% 60% 50% 40% 49% 43% 30% 20% 28% 25% 29% 21% 10% 0% Electricity Access to finance Transportation (e.g. collateral) Total Manufacturing Services Table A.3.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 84 89 83 86 76 89 Access to finance 43 21 49 36 37 46 (e.g. collateral) Transportation 28 25 29 7 32 28 Figure A.3.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.5 1.0 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Bayelsa 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 3 – State of Bayelsa 91 Table A.3.2 Selected Indicators – All Formal Sectors Bayelsa Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 6.5 2.0 7.7 5.3 4.3 6.3 Average duration of power outage 230 319 206 239 248 230 (hrs) % of firms with gen 95 89 100 88 88 87 % of electricity from gen 85 N/A 69 N/A Average duration to obtain an 11 33 6 15 18 13 electric connection (days) Finances % of working capital financed by 76 66 78 69 70 68 internal funds/returns earnings % of firms with overdraft 5 11 4 19 16 21 % of firms currently have either line 5 16 2 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 46 N/A 70 N/A by road Average duration to ship inputs to 3 N/A 8 N/A the establishment (hrs) % of firms using own transport 35 N/A 53 N/A % of shipment value transported by 65 N/A 69 N/A own transportation Losses due to transportation 4.0 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 74 70 76 72 70 74 % of firms visited by tax officials 27 90 17 82 82 82 Average number of visits 3 2 3 3 3 3 % of visits with informal payments 27 90 17 34 33 34 expected/required Corruption 3.9 2.9 4.4 3.2 3.2 3.3 % annual sales on bribes Crime and Theft Losses due to theft in % of sales 1.1 0.8 1.2 1.0 0.7 1.3 % of firms paying for security 72 46 79 78 75 80 Cost of security in % of sales 1.5 1.3 1.8 Corruption % annual sales on bribes 2.8 5.2 2.1 3.2 3.2 3.3 ANNEX 4 State of Benue The most important obstacles perceived by �rms located in the State of Benue include electricity, reported by 81% of �rms, followed by the ac- cess to �nance, cited by 46% of �rms, and transportation, cited by 45%, as illustrated in Figure A.4.1. Problems with the provision of electricity was perceived more acutely by manufacturing �rms than by service sector �rms, cited by 88%, and 75% of �rms, respectively. It is worthwhile to note that transportation was cited as a top obstacle by 45% of �rms, well above the national average of 30%. Although electricity was perceived as a top constraint by 81% of �rms in the state of Benue, the average duration of power outages was equal to 184 hours, well below the national level of 239 hours. Besides, 81% of �rms owned a generator, compared to 88% at national level, and losses due to power outages represented 5.4% of total sales. Access to �nance seems limited in Benue compared to the Nigerian average. 78% of Benue �rms �nanced their working capital through inter- nal funds (versus 69% on average for Nigeria). Moreover, the percentage of �rms that had either a line of credit or loans or both was only 6% for Benue, compared to 15% for Nigeria. Although transportation was perceived as the third most signi�cant constraint, losses due to transportation are evaluated at only 0.9% of sales, compared to the national average of 2.4% of sales. 94 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.4.1 Top Three Ranked Perceived Constraints – All Formal Sectors 100% 90% 80% 88% 70% 81% 75% 60% 50% 58% 53% 40% 46% 45% 30% 37% 39% 20% 10% 0% Electricity Access to finance Transportation (e.g. collateral) Total Manufacturing Services Table A.4.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 81 88 75 87 77 83 Access to finance 46 58 37 58 49 38 (e.g. collateral) Transportation 45 53 39 15 28 69 Figure A.4.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.5 1.0 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Benue 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 4 – State of Benue 95 Table A.4.2 Selected Indicators – All Formal Sectors Benue Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 5.4 3.1 7.2 5.3 4.3 6.3 Average duration of power outage 184 245 135 239 248 230 (hrs) % of firms with gen 81 80 83 88 88 87 % of electricity from gen 68 N/A 69 N/A Average duration to obtain an 16 16 15 15 18 13 electric connection (days) Finances % of working capital financed by 78 82 75 69 70 68 internal funds/returns earnings % of firms with overdraft 21 7 32 19 16 21 % of firms currently have either line 6 10 3 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 100 N/A 70 N/A by road Average duration to ship inputs to 6 N/A 8 N/A the establishment (hrs) % of firms using own transport 37 N/A 53 N/A % of shipment value transported by 74 N/A 69 N/A own transportation Losses due to transportation (% of 0.9 N/A 2.4 N/A sales) Tax % of sales reported for tax purpose 83 92 77 72 70 74 % of firms visited by tax officials 93 99 89 82 82 82 Average number of visits 7 7 6 3 3 3 % of visits with informal payments 50 45 55 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 0.7 0.7 0.7 1.0 0.7 1.3 % of firms paying for security 80 80 80 78 75 80 Cost of security in % of sales 0.9 0.7 1.1 1.5 1.3 1.8 Corruption % annual sales on bribes 3.9 4.8 3.1 3.2 3.2 3.3 ANNEX 5 State of Borno The most important obstacles perceived by �rms located in the State of Borno include electricity, reported by 71% of �rms, followed by tax rates, cited by 41% of �rms, and the access to �nance, cited by 34% of �rms, as illustrated in Figure A.5.1. Furthermore, service sector �rms expressed problems with the access to �nance in greater proportion than manufacturers. It is worthwhile to note that tax rates were cited as a top obstacle by 41% of �rms, well above the national average of 30%. Electricity was not only perceived as the top constraint in the State of Borno, but it was also a great source of indirect costs, with losses due to power failures representing up to 7.2% of total sales. Furthermore, the average duration of power outages was longer than the national average (257 hours vs. 239 hours). Meanwhile, the average delay required for obtaining an electrical connection in Borno was 37 days, compared to 15 days at the national level. Consequently, 94% of �rms reported owning a generator. 88% percent of �rms in the state reported receiving visits from tax of�cials about 4 times a year. However, only 22% of �rms reported that these of�cials expected informal payments or gifts. Access to �nance is ranked as the third top constraint in the State of Borno. However, Borno seemed to have better access to �nance than the national average, as 29% of �rms had either a line of credit, or loans or both (15% for the national average) and only 61% of �rms �nanced their working capital exclusively through internal funds (69% for the national average). 98 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.5.1 Top Three Ranked Perceived Constraints – All Formal Sectors 80% 70% 74% 71% 60% 64% 50% 50% 40% 41% 30% 34% 32% 38% 20% 23% 10% 0% Electricity Tax rates Access to finance (e.g. collateral) Total Manufacturing Services Table A.5.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 71 74 64 86 72 55 Tax rates 41 50 23 54 38 32 Access to finance 34 32 38 42 35 25 (e.g. collateral) Figure A.5.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 4.0 3.5 Tax administration 3.0 Access to finance 2.5 2.0 1.5 1.0 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Borno 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 5 – State of Borno 99 Table A.5.2 Selected Indicators – All Formal Sectors Borno Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 7.2 7.3 7.0 5.3 4.3 6.3 Average duration of power outage 257 287 196 239 248 230 (hrs) % of firms with gen 94 94 91 88 88 87 % of electricity from gen 69 N/A 69 N/A Average duration to obtain an 37 53 29 15 18 13 electric connection (days) Finances % of working capital financed by 61 67 49 69 70 68 internal funds/returns earnings % of firms with overdraft 34 37 29 19 16 21 % of firms currently have either line 29 26 34 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 91 N/A 70 N/A by road Average duration to ship inputs to 14 N/A 8 N/A the establishment (hrs) % of firms using own transport 72 N/A 53 N/A % of shipment value transported by 79 N/A 69 N/A own transportation Losses due to transportation 1.6 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 83 85 80 72 70 74 % of firms visited by tax officials 88 93 78 82 82 82 Average number of visits 4 3 5 3 3 3 % of visits with informal payments 22 21 24 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 0.3 0.2 0.3 1.0 0.7 1.3 % of firms paying for security 80 88 65 78 75 80 Cost of security in % of sales 1.4 1.2 1.6 1.5 1.3 1.8 Corruption % annual sales on bribes ANNEX 6 State of Delta The most important obstacles perceived by �rms located in the State of Delta include electricity, reported by 87% of �rms, followed by the ac- cess to and cost of �nance cited by 52%, and 40% of �rms, respectively, as illustrated in Figure A.6.1. The ranking was consistent across manufacturing and service sector �rms. Problems associated with electricity were acute in the State of Delta, with losses due to power failures reported to represent approximately 5.6% of total sales. Moreover, the average duration of power outages was longer on average in Delta than globally in Nigeria, with an average dura- tion of 297 hours vs. 239 hours nationwide. Otherwise, the average delay experienced to obtain an electrical connection was 28 days, compared to 15 days nationally. Quantitative information appears to support the claim that access to �nance was dif�cult, as 72% of �rms �nanced their working capital through internal funds alone. On the other hand, on average, �rms in the state of Delta had better access to lines of credit and loan facilities than the average �rm in Nigeria (18% vs. 15%). Service sector �rms had greater access than manufacturers. Almost all �rms in the state of Delta (94%) reported receiving visits from tax of�cials, on average 3 times a year, with 30% of �rms reporting that the of�cials expected to receive informal payments and gifts. Firms on average only reported 61% of sales for tax purposes. 102 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.6.1 Top Three Ranked Perceived Constraints – All Formal Sectors 100% 90% 80% 87% 88% 86% 70% 60% 61% 50% 52% 40% 44% 30% 40% 41% 39% 20% 10% 0% Electricity Access to finance Cost of finance (e.g. collateral) (e.g. intrest rates) Total Manufacturing Services Table A.6.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 87 88 86 67 86 92 Access to finance 52 61 44 54 50 53 (e.g. collateral) Cost of finance (e.g. 40 41 39 51 43 34 interest rates) Figure A.6.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 4.0 Tax administration 3.0 Access to finance 2.0 1.0 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Delta 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 6 – State of Delta 103 Table A.6.2 Selected Indicators – All Formal Sectors Delta Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 5.6 5.8 5.4 5.3 4.3 6.3 Average duration of power outage 297 284 308 239 248 230 (hrs) % of firms with gen 87 86 94 88 88 87 % of electricity from gen 66 N/A 69 N/A Average duration to obtain an 28 67 6 15 18 13 electric connection (days) Finances % of working capital financed by 72 74 70 69 70 68 internal funds/returns earnings % of firms with overdraft 16 13 18 19 16 21 % of firms currently have either line 18 16 19 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 93 N/A 70 N/A by road Average duration to ship inputs to 37 N/A 8 N/A the establishment (hrs) % of firms using own transport 35 N/A 53 N/A % of shipment value transported by 56 N/A 69 N/A own transportation Losses due to transportation 1.5 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 61 61 60 72 70 74 % of firms visited by tax officials 94 96 93 82 82 82 Average number of visits 3 3 3 3 3 3 % of visits with informal payments 30 31 29 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 0.6 0.4 0.7 1.0 0.7 1.3 % of firms paying for security 82 75 88 78 75 80 Cost of security in % of sales 1.3 0.9 1.7 1.5 1.3 1.8 Corruption % annual sales on bribes 0.2 0.2 0.1 3.2 3.2 3.3 ANNEX 7 State of Ebonyi The most important obstacles perceived by �rms located in the State of Ebonyi include electricity, reported by 81% of �rms, the access to �nance, and transportation, cited by 52%, and 35% of �rms, respectively, as illustrated in Figure A.7.1. The constraints identi�ed are consistent with those identi�ed for the full sample of Nigerian �rms. Electricity was perceived as a highly constraining obstacle in the State of Ebonyi, but the losses due to power outages were lower there than the national average (4.3% of total sales vs. 5.3%). Although the average duration of power outages was longer than the national average (279 hours vs. 239 hours), only 75% of �rms owned a generator. Only 6% of �rms reported having an overdraft facility in the state, and only 5% reported having a line of credit or a loan facility. Manufacturing companies reported using these �nancial instruments the least, with only 3% of them having an overdraft facility and 4% having a line of credit or a loan facility. Losses due to transportation in the manufacturing sector were com- parable (2.3% of sales) to the national average (2.4%). 106 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.7.1 Top Three Ranked Perceived Constraints – All Formal Sectors 100% 90% 80% 88% 70% 81% 75% 60% 50% 52% 55% 50% 40% 30% 35% 31% 39% 20% 10% 0% Electricity Access to finance Transportation (e.g. collateral) Total Manufacturing Services Table A.7.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 81 88 75 88 87 74 Access to finance 52 55 50 43 50 57 (e.g. collateral) Transportation 35 31 39 36 35 35 Figure A.7.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.0 1.5 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Ebonyi 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 7 – State of Ebonyi 107 Table A.7.2 Selected Indicators – All Formal Sectors Ebonyi Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 4.3 1.7 6.7 5.3 4.3 6.3 Average duration of power outage 279 377 188 239 248 230 (hrs) % of firms with gen 75 69 88 88 88 87 % of electricity from gen 58 N/A 69 N/A Average duration to obtain an 8 11 5 15 18 13 electric connection (days) Finances % of working capital financed by 69 71 67 69 70 68 internal funds/returns earnings % of firms with overdraft 6 3 8 19 16 21 % of firms currently have either line 5 4 6 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 82 N/A 70 N/A by road Average duration to ship inputs to 10 N/A 8 N/A the establishment (hrs) % of firms using own transport 6 N/A 53 N/A % of shipment value transported by 53 N/A 69 N/A own transportation Losses due to transportation 2.3 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 74 77 71 72 70 74 % of firms visited by tax officials 76 79 72 82 82 82 Average number of visits 3 2 3 3 3 3 % of visits with informal payments 37 43 31 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 0.4 0.4 0.4 1.0 0.7 1.3 % of firms paying for security 72 65 78 78 75 80 Cost of security in % of sales 1.7 1.6 1.8 1.5 1.3 1.8 Corruption % annual sales on bribes 2.7 3.5 2.0 3.2 3.2 3.3 ANNEX 8 State of Edo The most important obstacles perceived by �rms located in the State of Edo are electricity, reported by 80% of �rms, followed by tax rates and transportation, cited by 45%, and 35% of �rms, respectively, as illustrated in Figure A.8.1. It is somewhat surprising to see that access to and the cost of �nance do not appear in the most important constraints to doing business in Edo state. On the other hand, tax rates were considered as a larger burden in Edo state; compared to the national average (45% vs 30%). Electricity was not only perceived as a severe constraint in the State of Edo, but it represented also signi�cant indirect costs. In fact, losses due to power outages represented 6.8% of total sales. However, the av- erage duration of power outages in Edo, 212 hours, was lower than the national average of 239 hours and the average delay experienced when attempting to obtain an electrical connection was 9 days, compared to 15 days at national level. Approximately three manufacturing �rms out of four (74%) owned a generator. Losses due to transportation represented 4.2% for manufacturing �rms in the State of Edo, almost twice the national average (2.4%). In order to deal with transportation problems, manufacturing �rms tend to have their own transportation system: 78% of the shipment value was transported by �rms’ own transportation in the State of Edo compared a national average of 69%. Although crime, theft and disorder was not mentioned as a major issue, the losses due to theft accounted for 2.8% of indirect costs (compared to 1% on average in Nigeria). Approximately 69% of �rms paid for security, the average cost of which represented 2.0% of total sales. 110 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.8.1 Top Three Ranked Perceived Constraints – All Formal Sectors 100% 90% 80% 90% 70% 80% 60% 71% 50% 40% 50% 48% 45% 30% 35% 20% 29% 23% 10% 0% Electricity Tax rates Transportation Total Manufacturing Services Table A.8.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 80 90 71 61 87 81 Tax rates 45 50 29 13 45 54 Transportation 35 48 23 39 38 31 Figure A.8.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.0 1.5 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Edo 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 8 – State of Edo 111 Table A.8.2 Selected Indicators – All Formal Sectors Edo Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 6.8 8.0 5.8 5.3 4.3 6.3 Average duration of power outage 212 235 193 239 248 230 (hrs) % of firms with gen 87 90 80 88 88 87 % of electricity from gen 74 N/A 69 N/A Average duration to obtain an 9 6 11 15 18 13 electric connection (days) Finances % of working capital financed by 66 72 60 69 70 68 internal funds/returns earnings % of firms with overdraft 18 8 26 19 16 21 % of firms currently have either line 22 6 36 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 31 N/A 70 N/A by road Average duration to ship inputs to 16 N/A 8 N/A the establishment (hrs) % of firms using own transport 52 N/A 53 N/A % of shipment value transported by 77.9 N/A 69 N/A own transportation Losses due to transportation 4.2 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 73 77 70 72 70 74 % of firms visited by tax officials 79 69 87 82 82 82 Average number of visits 3 1 3 3 3 3 % of visits with informal payments 28 20 33 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 2.8 1.0 4.3 1.0 0.7 1.3 % of firms paying for security 69 53 82 78 75 80 Cost of security in % of sales 2.0 0.9 2.9 1.5 1.3 1.8 Corruption % annual sales on bribes 3.5 1.0 5.6 3.2 3.2 3.3 ANNEX 9 State of Ekiti The most important obstacles perceived by �rms located in the State of Ekiti include electricity, reported by 77% of �rms, followed by transpor- tation and tax rates in a distant second and third position, cited by 53%, and 36% of �rms, respectively, as illustrated in Figure A.9.1. The intensity of these obstacles varied considerably according to the sector of activity. Transportation seemed to affect Ekiti manufacturing �rms particularly strongly. While only 16% of service sector �rms ranked the constraint as one of the most important, 71% of manufacturing �rms did so. Moreover, manufacturing �rms are much more concerned with electricity provision and tax rates than service sector �rms. Indirect costs relative to electricity were not as signi�cant in the State of Ekiti as in Nigeria as a whole (3.3% vs 5.3% of sales). However, �rms operating in the State of Ekiti had on average 427 hrs of power outages during a typical month, almost twice more than the Nigerian average (239 hours). Despite this, only 68% of �rms reported complementing the public grid with owned generators. Losses due to transportation represented 9.3% of sales for manufac- turing �rms in the State of Ekiti, almost four times the national average (2.4%). That is consistent with respondents’ perception that transporta- tion is as signi�cant an obstacle for manufacturers’ business. Over one third of �rms (36%) declared that informal payments and gifts were expected during visits from tax of�cials, to whom only 63% of sales were declared for tax purposes. 114 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.9.1 Top Three Ranked Perceived Constraints – All Formal Sectors 100% 90% 92% 80% 70% 77% 60% 71% 50% 48% 53% 40% 44% 30% 36% 20% 10% 21% 16% 0% Electricity Transportation Tax rates Total Manufacturing Services Table A.9.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 77 92 48 72 69 85 Transportation 53 71 16 48 51 52 Tax rates 36 44 21 25 43 39 Figure A.9.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.0 1.5 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Ekiti 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 9 – State of Ekiti 115 Table A.9.2 Selected Indicators – All Formal Sectors Ekiti Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 3.3 2.2 5.5 5.3 4.3 6.3 Average duration of power outage 427 513 234 239 248 230 (hrs) % of firms with gen 68 65 88 88 88 87 % of electricity from gen 90 N/A 69 N/A Average duration to obtain an 17 10 35 15 18 13 electric connection (days) Finances % of working capital financed by 69 78 52 69 70 68 internal funds/returns earnings % of firms with overdraft 11 7 20 19 16 21 % of firms currently have either line 15 1 43 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 38 N/A 70 N/A by road Average duration to ship inputs to 21 N/A 8 N/A the establishment (hrs) % of firms using own transport 47 N/A 53 N/A % of shipment value transported by 53 N/A 69 N/A own transportation Losses due to transportation 9.3 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 63 53 84 72 70 74 % of firms visited by tax officials 61 53 77 82 82 82 Average number of visits 4 3 5 3 3 3 % of visits with informal payments 36 25 51 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 0.8 1.1 0.2 1.0 0.7 1.3 % of firms paying for security 77 81 69 78 75 80 Cost of security in % of sales 1.8 2.1 1.3 1.5 1.3 1.8 Corruption % annual sales on bribes 2.5 2.5 2.5 3.2 3.2 3.3 ANNEX 10 State of Gombe The most important obstacles perceived by �rms located in the State of Gombe include electricity, reported by 52% of �rms, followed by the access to �nance and corruption, cited by 39%, and 20% of �rms, respectively, as illustrated in Figure A.10.1. Service sector �rms perceived access to �nance and corruption as major constraints in a greater proportion than manufacturing sector �rms. It is somewhat alarming to note that 23% of service sector considered corruption in Gombe as one of the top obstacles, while the national average is 17%. Electricity was perceived as one of the top constraints in the State of Gombe; this is echoed in data on indirect costs. Losses due to power failures for establishments operating in the state represented 8.0% of total sales and the average delay experienced to obtain an electrical connec- tion was of 45 days. Approximately 90% of �rms owned a generator to compensante for power outages, the average duration of which was 199 hours, lower than the national average of 239 hours. On average, �rms in the state of Gombe had better access to credit and loan facilities than the average �rm in Nigeria (23% vs. 15%). Manufacturing sector �rms had greater access than the service sector. On the other hand, manufacturing �rms reported having less access to overdraft facilities. Corruption was identi�ed as one of the top constraint by managers in the state. This is echoed by quantitative data on the value of bribes paid in the state. Firms in Gombe appear to pay more than globally in Nigeria (4.2% of annual sales on bribes compared to 3.2%). 69% of sales were reported for tax purposes and tax of�cials visited 92% of �rms, on average 4 times a year. 118 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.10.1 Top Three Ranked Perceived Constraints – All Formal Sectors 60% 50% 52% 55% 49% 48% 40% 39% 30% 34% 20% 23% 20% 17% 10% 0% Electricity Access to finance Corruption (e.g. collateral) Total Manufacturing Services Table A.10.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 52 55 49 44 66 45 Access to finance 39 34 48 20 50 41 (e.g. collateral) Corruption 20 17 23 50 8 10 Figure A.10.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.0 1.5 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Gombe 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 10 – State of Gombe 119 Table A.10.2 Selected Indicators – All Formal Sectors Gombe Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 8.0 8.1 7.7 5.3 4.3 6.3 Average duration of power outage 199 218 169 239 248 230 (hrs) % of firms with gen 90 91 90 88 88 87 % of electricity from gen 67 N/A 69 N/A Average duration to obtain an 45 68 11 15 18 13 electric connection (days) Finances % of working capital financed by 61 56 67 69 70 68 internal funds/returns earnings % of firms with overdraft 27 26 30 19 16 21 % of firms currently have either line 23 25 20 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 1 N/A 70 N/A by road Average duration to ship inputs to 2 N/A 8 N/A the establishment (hrs) % of firms using own transport 63 N/A 53 N/A % of shipment value transported by 33 N/A 69 N/A own transportation Losses due to transportation 3.0 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 69 68 70 72 70 74 % of firms visited by tax officials 92 90 96 82 82 82 Average number of visits 4 5 2 3 3 3 % of visits with informal payments 30 37 21 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 0.1 0.2 0.1 1.0 0.7 1.3 % of firms paying for security 74 69 81 78 75 80 Cost of security in % of sales 1.9 1.9 1.9 1.5 1.3 1.8 Corruption % annual sales on bribes 4.2 4.1 4.5 3.2 3.2 3.3 ANNEX 11 State of Imo The most important obstacles perceived by �rms located in the State of Imo include electricity, reported by 70% of �rms, followed by access to �nance, and transportation, cited by 42% and 27% of �rms, respectively, as illustrated in Figure A.11.1. Firms reporting negative employment growth were more likely to iden- tify dif�culties in accessing �nance than their slow and high employment growth counterparts. Manufacturing’ respondents cited transportation as a problem more often than service sector managers (42% vs 17%). Electricity was perceived as a very severe constraint in the State of Imo. On average, losses due to power outages represent 5.0% of total sales, which was slightly lower than the national average. The average delay experienced when obtaining an electrical connection was 16 days and 92% of �rms reported owning a generator. The average duration of power outages was 206 hours, which was lower than the national aver- age of 239 hours. On average, when comparing with �rms across Nigeria,�rms in the state of Imo had better access to lines of credit or loans and equal access to overdraft facilities. Nonetheless, more than three quarter of Imo �rms �nance their working capital by internal funds. Manufacturing �rms operating in the State of Imo lost merchandise worth 3.0% of their sales while in transit, slightly more than the national average (2.4%). 84% of sales were reported for tax purposes and tax of�cials had visited about three �rms out of four (74%), on average 3 times a year. 122 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.11.1 Top Three Ranked Perceived Constraints – All Formal Sectors 90% 80% 84% 70% 70% 60% 61% 50% 40% 42% 45% 39% 42% 30% 20% 27% 10% 17% 0% Electricity Access to finance Transportation (e.g. collateral) Total Manufacturing Services Table A.11.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 70 84 61 81 68 67 Access to finance 42 45 39 50 35 42 (e.g. collateral) Transportation 27 42 17 14 26 36 Figure A.11.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.0 1.5 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Imo 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 11 – State of Imo 123 Table A.11.2 Selected Indicators – All Formal Sectors Imo Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 5.0 3.2 6.2 5.3 4.3 6.3 Average duration of power outage 206 172 230 239 248 230 (hrs) % of firms with gen 92 90 96 88 88 87 % of electricity from gen 67 N/A 69 N/A Average duration to obtain an 16 9 20 15 18 13 electric connection (days) Finances % of working capital financed by 74 77 72 69 70 68 internal funds/returns earnings % of firms with overdraft 19 21 17 19 16 21 % of firms currently have either line 21 15 25 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 87 N/A 70 N/A by road Average duration to ship inputs to 11 N/A 8 N/A the establishment (hrs) % of firms using own transport 53 N/A 53 N/A % of shipment value transported by 74 N/A 69 N/A own transportation Losses due to transportation 3.0 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 84 86 82 72 70 74 % of firms visited by tax officials 74 75 73 82 82 82 Average number of visits 3 2 4 3 3 3 % of visits with informal payments 34 33 35 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 1.5 1.5 1.4 1.0 0.7 1.3 % of firms paying for security 88 92 85 78 75 80 Cost of security in % of sales 2.0 2.0 1.9 1.5 1.3 1.8 Corruption % annual sales on bribes 2.8 2.1 3.3 3.2 3.2 3.3 ANNEX 12 State of Jigawa The most important obstacles perceived by �rms located in the State of Jigawa include electricity, reported by 58% of �rms, followed by the access to �nance and tax administration, cited by 32% and 29% of �rms, respectively, as illustrated in Figure A.12.1. Service sector �rms of Jigawa expressed more dif�culties in accessing �nance and dealing with tax administration than manufacturing �rms. Firms in the State of Jigawa reported electricity shortages as a great source of indirect costs. Losses due to power outages were reported to represent 8.4% of total sales. Obtaining an electrical connection required an average of 65 days (15 days nationwide). Power outages lasted an average of 183 hours; to compensate, 85% of �rms reported owning a generator. Although access to �nance was reported as a major constraint, �rms operating in the state had better access to �nancing than the national average. Indeed, 28% of �rms had an overdraft facility and 32% of �rms were able to bene�t from a line of credit or a loan facility. Firms operating in the State of Jigawa spent an average of 3.7% of their total sales on bribes and 67% of total sales was reported for tax purposes. 126 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.12.1 Top Three Ranked Perceived Constraints – All Formal Sectors 70% 60% 60% 50% 58% 52% 40% 30% 32% 31% 35% 34% 29% 27% 20% 10% 0% Electricity Access to finance Tax administration (e.g. collateral) Total Manufacturing Services Table A.12.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 58 60 52 43 60 57 Access to finance 32 31 35 43 52 9 (e.g. collateral) Tax administration 29 27 34 30 23 34 Figure A.12.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.0 1.5 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Jigawa 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 12 – State of Jigawa 127 Table A.12.2 Selected Indicators – All Formal Sectors Jigawa Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 8.4 8.4 8.4 5.3 4.3 6.3 Average duration of power outage 183 193 153 239 248 230 (hrs) % of firms with gen 85 87 67 88 88 87 % of electricity from gen 55 N/A 69 N/A Average duration to obtain an 65 85 19 15 18 13 electric connection (days) Finances % of working capital financed by 60 64 47 69 70 68 internal funds/returns earnings % of firms with overdraft 28 22 46 19 16 21 % of firms currently have either line 32 38 12 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 75 N/A 70 N/A by road Average duration to ship inputs to 2 N/A 8 N/A the establishment (hrs) % of firms using own transport 62 N/A 53 N/A % of shipment value transported by 45 N/A 69 N/A own transportation Losses due to transportation 2.0 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 67 65 74 72 70 74 % of firms visited by tax officials 90 90 90 82 82 82 Average number of visits 5 5 4 3 3 3 % of visits with informal payments 28 28 29 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 0.5 0.2 1.6 1.0 0.7 1.3 % of firms paying for security 70 74 56 78 75 80 Cost of security in % of sales 1.7 1.6 2.0 1.5 1.3 1.8 Corruption % annual sales on bribes 3.7 3.3 4.9 3.2 3.2 3.3 ANNEX 13 State of Katsina The most important obstacles perceived by �rms located in the State of Katsina include electricity, reported by 72% of �rms, followed by access to �nance, and tax rates cited by 48% and 34% of �rms, respectively, as illustrated in Figure A.13.1. Problems with tax rates, tax administration and corruption were more frequently expressed by service sector �rms than by manufacturing �rms. Although electricity was perceived as a severe constraint in the State of Katsina, losses due to power outages for establishments (1.9% of the total sales) were lower than the national average (5.3%). The average delay to obtain an electrical connection was 13 days and 84% of �rms owned a generator. The average duration of power outages was 106 hours, which was lower than the national average of 239 hours. Access to �nance is indeed a problem in the State of Katsina. Only 10% of �rms had a line of credit or loans or both, and on average, Katsina �rms �nanced more than 70% of their working capital through internal funds; that ratio is larger for service sector �rms). Firms reported approximately 67% of their sales for tax purposes and tax of�cials visited 88% of �rms; �rms further reported being visited by tax of�cials on average 3 times a year. 130 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.13.1 Top Three Ranked Perceived Constraints – All Formal Sectors 90% 80% 70% 77% 72% 60% 63% 50% 55% 40% 48% 45% 30% 35% 34% 20% 28% 10% 0% Electricity Access to finance Tax rates (e.g. collateral) Total Manufacturing Services Table A.13.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 72 77 63 78 73 63 Access to finance 48 55 35 56 57 26 (e.g. collateral) Tax rates 34 28 45 44 31 31 Figure A.13.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.0 1.5 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Katsina 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 13 – State of Katsina 131 Table A.13.2 Selected Indicators – All Formal Sectors Katsina Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 1.9 1.4 2.7 5.3 4.3 6.3 Average duration of power outage 106 100 116 239 248 230 (hrs) % of firms with gen 84 84 84 88 88 87 % of electricity from gen 50 N/A 69 N/A Average duration to obtain an elec- 13 12 14 15 18 13 tric connection (days) Finances % of working capital financed by 73 70 79 69 70 68 internal funds/returns earnings % of firms with overdraft 22 23 20 19 16 21 % of firms currently have either line 10 8 13 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 1 N/A 70 N/A by road Average duration to ship inputs to 2 N/A 8 N/A the establishment (hrs) % of firms using own transport 48 N/A 53 N/A % of shipment value transported by 81 N/A 69 N/A own transportation Losses due to transportation (% of 1.1 N/A 2.4 N/A sales) Tax % of sales reported for tax purpose 67 64 72 72 70 74 % of firms visited by tax officials 88 86 92 82 82 82 Average number of visits 3 2 4 3 3 3 % of visits with informal payments 21 17 26 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 0.2 0.3 0.2 1.0 0.7 1.3 % of firms paying for security 88 89 87 78 75 80 Cost of security in % of sales 1.1 1.3 0.8 1.5 1.3 1.8 Corruption % annual sales on bribes 2.3 1.9 2.9 3.2 3.2 3.3 ANNEX 14 State of Kebbi The most important obstacles perceived by �rms located in the State of Kebbi include electricity, reported by 84% of �rms, followed by access to �nance and tax rates, reported by 54% and 46% of �rms respectively, as illustrated in Figure A.14.1. Access to �nance and tax rates were perceived as more constraining by manufacturing �rms than service sector �rms. Although the average duration of power outages was 128 hours in Kebbi, which was signi�cantly lower than the national average, electricity was perceived as a top constraint by a great number of respondents. This can be explained by the level of losses due to outages, which represented 6.3% of total sales which is greater than the national average. It required an average of 16 days to obtain an electrical connection and 78% of �rms owned their own generator. Access to credit was especially scarce in the State of Kebbi, where only 5% of �rms had a line of credit or loans or both, and only 5% had an overdraft facility. Only 60% of total sales were reported for tax purposes and tax of�cials visited 87% of �rms, on average 3 times a year. Finally, the amount spent on bribes represented 4.5% of total annual sales. 134 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.14.1 Top Three Ranked Perceived Constraints – All Formal Sectors 100% 80% 88% 84% 76% 60% 56% 55% 54% 50% 40% 46% 20% 29% 0% Electricity Access to finance Tax rates (e.g. collateral) Total Manufacturing Services Table A.14.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 84 88 76 97 80 80 Access to finance 54 56 50 57 64 37 (e.g. collateral) Tax rates 46 55 29 75 35 42 Figure A.14.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 4.0 Tax administration 3.0 Access to finance 2.0 1.0 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Kebbi 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 14 – State of Kebbi 135 Table A.14.2 Selected Indicators – All Formal Sectors Kebbi Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 6.3 2.0 13.5 5.3 4.3 6.3 Average duration of power outage 128 87 194 239 248 230 (hrs) % of firms with gen 78 77 80 88 88 87 % of electricity from gen 56 N/A 69 N/A Average duration to obtain an 16 24 10 15 18 13 electric connection (days) Finances % of working capital financed by 72 70 76 69 70 68 internal funds/returns earnings % of firms with overdraft 6 5 7 19 16 21 % of firms currently have either line 5 1 12 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 100 N/A 70 N/A by road Average duration to ship inputs to 3 N/A 8 N/A the establishment (hrs) % of firms using own transport 49 N/A 53 N/A % of shipment value transported by 74 N/A 69 N/A own transportation Losses due to transportation 0.6 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 60 55 69 72 70 74 % of firms visited by tax officials 87 91 79 82 82 82 Average number of visits 3 2 5 3 3 3 % of visits with informal payments 14 2 37 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 0.6 0.1 1.4 1.0 0.7 1.3 % of firms paying for security 63 61 67 78 75 80 Cost of security in % of sales 1.4 1.1 2.0 1.5 1.3 1.8 Corruption % annual sales on bribes 4.5 4.9 3.8 3.2 3.2 3.3 ANNEX 15 State of Kogi The most important obstacles perceived by �rms located in the State of Kogi include electricity, reported by 80% of �rms, followed by corruption and tax rates, cited by 49%, and 36% of �rms, respectively, as illustrated in Figure A.15.1. Aside from the close to unanimous agreement with regards to problems with electricity, more than half of manufacturing �rm in Kogi reported problems with corruption and tax rates. Corruption was cited by only 25% of service sector �rms, tax rates by only 15% of service sector �rms. It is somewhat surprising to observe such differences in perceived obstacles in the state of Kogi between manufacturing and service sector �rms. Electricity was perceived as a top constraint in the State of Kogi; it is therefore not surprising that it also represents a signi�cant source of indirect costs. Losses due to power outages represented 7.0% of total sales. Moreover, obtaining an electrical connection required 33 days on average (compared to 15 days across Nigeria). The power outages lasted on average 269 hours. Consequently, almost all (97%) �rms possessed their own generator. Corruption appears to be a problem in Kogi. Firms operating in the State of Kogi spent an average of 6.1% of their total sales on bribes. Moreover, close to one �rm out of two (47%) declared that informal payments/gifts were expected/required during visits from tax of�cials. Three quarters of sales were reported for tax purposes and tax of�cials visited 52% of the �rms, on average 5 times a year. 138 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.15.1 Top Three Ranked Perceived Constraints – All Formal Sectors 120% 100% 96% 80% 80% 75% 60% 65% 58% 40% 49% 36% 20% 25% 15% 0% Electricity Corruption Tax rates Total Manufacturing Services Table A.15.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 80 96 65 77 83 78 Corruption 49 75 25 47 49 29 Tax rates 36 58 15 49 35 29 Figure A.15.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 4.0 Tax administration 3.0 Access to finance 2.0 1.0 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Kogi 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 15 – State of Kogi 139 Table A.15.2 Selected Indicators – All Formal Sectors Kogi Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 7.0 3.7 10.1 5.3 4.3 6.3 Average duration of power outage 269 309 229 239 248 230 (hrs) % of firms with gen 97 100 82 88 88 87 % of electricity from gen 82 N/A 69 N/A Average duration to obtain an 33 18 34 15 18 13 electric connection (days) Finances % of working capital financed by 63 74 52 69 70 68 internal funds/returns earnings % of firms with overdraft 24 15 33 19 16 21 % of firms currently have either line 16 0 31 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 0 N/A 70 N/A by road Average duration to ship inputs to N/A N/A 8 N/A the establishment (hrs) % of firms using own transport 63 N/A 53 N/A % of shipment value transported by 36 N/A 69 N/A own transportation Losses due to transportation 2.0 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 75 69 80 72 70 74 % of firms visited by tax officials 52 33 71 82 82 82 Average number of visits 5 4 5 3 3 3 % of visits with informal payments 47 58 42 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 1.0 0.0 1.9 1.0 0.7 1.3 % of firms paying for security 53 35 70 78 75 80 Cost of security in % of sales 0.9 0.2 1.5 1.5 1.3 1.8 Corruption % annual sales on bribes 6.1 6.9 5.4 3.2 3.2 3.3 ANNEX 16 State of Kwara The most important obstacles perceived by �rms located in the State of Kwara include electricity, reported by 89% of �rms, followed by tax rates and access to �nance, cited by 48% and 39% of �rms, respectively, as illustrated in Figure A.16.1. All those constraints appeared to pose more of an obstacle to manu- facturing �rms than to service sector �rms. Although close to two-thirds (60%) of manufacturing �rms had major issues with tax rates, only 31% of service sector �rms shared this point of view. Although electricity was perceived as a severe constraint in the State of Kwara, losses due to power outages were lower in the state than the national average, representing 4.6% of total sales. The average delay to obtain an electrical connection was only 9 days. The average duration of power outages was 128 hours, which was much lower than the national average of 239 hours. Despite this, 92% of �rms owned their own generator 71% of sales were reported for tax purposes and tax of�cials visited 85% of �rms, on average of 3 times a year. Moreover, close to one �rm out of two (47%) declared that informal payments/gifts were expected/ required during visits from tax of�cials. Access to �nance was reported as representing a major issue in the state. In fact, among the �rms operating there, only 12% were able to obtain an overdraft facility and 11% bene�ted from a line of credit or a loan facility. 142 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.16.1 Top Three Ranked Perceived Constraints – All Formal Sectors 100% 90% 94% 80% 89% 84% 70% 60% 50% 60% 40% 48% 30% 39% 40% 38% 20% 31% 10% 0% Electricity Tax rates Access to finance (e.g. collateral) Total Manufacturing Services Table A.16.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 89 94 84 88 87 93 Tax rates 48 60 31 56 54 33 Access to finance 39 40 38 52 29 38 (e.g. collateral) Figure A.16.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.5 1.0 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Kwara 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 16 – State of Kwara 143 Table A.16.2 Selected Indicators – All Formal Sectors Kwara Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 4.6 2.1 6.7 5.3 4.3 6.3 Average duration of power outage 128 130 126 239 248 230 (hrs) % of firms with gen 92 93 86 88 88 87 % of electricity from gen 68 N/A 69 N/A Average duration to obtain an 9 13 9 15 18 13 electric connection (days) Finances % of working capital financed by 74 74 74 69 70 68 internal funds/returns earnings % of firms with overdraft 12 19 7 19 16 21 % of firms currently have either line 11 9 13 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 73 N/A 70 N/A by road Average duration to ship inputs to 7 N/A 8 N/A the establishment (hrs) % of firms using own transport 57 N/A 53 N/A % of shipment value transported by 82 N/A 69 N/A own transportation Losses due to transportation 1.6 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 71 63 77 72 70 74 % of firms visited by tax officials 85 96 76 82 82 82 Average number of visits 3 2 3 3 3 3 % of visits with informal payments 11 1 22 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 0.8 0.3 1.2 1.0 0.7 1.3 % of firms paying for security 77 84 71 78 75 80 Cost of security in % of sales 1.7 0.8 2.4 1.5 1.3 1.8 Corruption % annual sales on bribes 3.4 2.9 3.8 3.2 3.2 3.3 ANNEX 17 State of Nassarawa The most important obstacles perceived by �rms located in the State of Nassarawa include electricity, reported by 81% of �rms, followed by cor- ruption and transportation, cited by 48% and 41% of �rms, respectively, as illustrated in Figure A.17.1. These obstacles appeared to pose more of an obstacle to manufacturing �rms than to service sector �rms. Twice as many manufacturing �rms had dif�culties with corruption. Over half of negative employment growth �rms cited transportation as a top constraint to their business operations. Electricity was perceived as a severe constraint to business operations in Nassarawa. However, other indicators appear more positive. At 3.5% of sales, losses due to power outages were lower than the national average. The average delay experienced to obtain an electrical connection was 10 days and 94% of �rms owned their own generator. The average duration of power outages in the state was 180 hours, which was lower than the national average of 239 hrs. Access to �nance was not reported as a major issue in the State of Nassarawa, However, among the �rms operating there, only 4 % were able to bene�t from a line of credit or a loan facility. On the other hand, 21% of �rms had an overdraft facility. On average, �rms operating in Nassarawa spent 4.5% of their total sales on bribes. Sixty-�ve percent of total sales were reported for tax purposes and tax of�cials visited 64% of �rms, on average 3 times a year. Moreover, about one quarter of �rms (24%) declared that informal payments/gifts were expected/required during visits from tax of�cials. Although transportation is cited as a big obstacle, losses due to trans- portation for manufacturing �rms represented only 0.8% of sales, com- pare to 2.4% for the national average. This misperception may found an explanation in the fact that this state is central and locked. 146 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.17.1 Top Three Ranked Perceived Constraints – All Formal Sectors 90% 80% 81% 82% 80% 70% 60% 50% 60% 40% 48% 46% 41% 30% 34% 20% 28% 10% 0% Electricity Corruption Transportation Total Manufacturing Services Table A.17.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 81 82 80 92 85 64 Corruption 48 60 28 17 61 45 Transportation 41 46 34 67 26 39 Figure A.17.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.5 1.0 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Nasarawa 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 17 – State of Nassarawa 147 Table A.17.2 Selected Indicators – All Formal Sectors Nassarawa Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 3.5 2.0 5.9 5.3 4.3 6.3 Average duration of power outage 180 190 159 239 248 230 (hrs) % of firms with gen 94 97 78 88 88 87 % of electricity from gen 75 N/A 69 N/A Average duration to obtain an 10 8 10 15 18 13 electric connection (days) Finances % of working capital financed by 69 71 66 69 70 68 internal funds/returns earnings % of firms with overdraft 21 24 15 19 16 21 % of firms currently have either line 4 1 10 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 0 N/A 70 N/A by road Average duration to ship inputs to N/A N/A 8 N/A the establishment (hrs) % of firms using own transport 19 N/A 53 N/A % of shipment value transported by 51 N/A 69 N/A own transportation Losses due to transportation 0.8 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 65 60 74 72 70 74 % of firms visited by tax officials 64 65 61 82 82 82 Average number of visits 3 4 3 3 3 3 % of visits with informal payments 24 33 7 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 0.1 0.0 0.2 1.0 0.7 1.3 % of firms paying for security 40 27 62 78 75 80 Cost of security in % of sales 0.5 0.2 1.2 1.5 1.3 1.8 Corruption % annual sales on bribes 4.5 5.9 2.1 3.2 3.2 3.3 ANNEX 18 State of Niger The most important obstacles perceived by �rms located in the State of Niger include electricity, reported by 71% of �rms, followed by the access to �nance and transportation, cited by 68%, and 42% of �rms, respectively, as illustrated in Figure A.18.1. Transportation was a substantially greater problem for manufacturers. Although electricity was perceived as a severe constraint in the State of Niger, losses due to power outages were lower than the national av- erage, representing 3.5% of the total sales. The average delay to obtain an electrical connection was 8 days and 74% of �rms owned their own generator. The average duration of power outages was 95 hours, signi�- cantly lower than the national average of 239 hours. Transportation was cited as one of the top constraints in the state, but the losses due to transportation for manufacturing �rms were lower than the Nigerian average (1.2% vs. 2.4%). Niger is a very large central state close by Benin and transportation must be an issue for that. Access to �nance was perceived as a signi�cant obstacle, but �rms in the State of Niger had better access to credit than the national average: 20% of �rms currently had a line of credit or loans and 24% of �rms had overdraft facilities. Almost all manufacturing establishments (93%) operating in the State of Niger were visited by tax of�cials while 78% of service sector �rms were visited. The proportion of �rms visited by tax of�cials in the state was greater than the national average. On a positive note, only 7% declared that informal payments/gifts were expected/required during visits from tax of�cials. Finally, �rms reported that about 4.2% of total sales were spent on bribes. 150 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.18.1 Top Three Ranked Perceived Constraints – All Formal Sectors 80% 70% 71% 72% 70% 60% 68% 70% 66% 50% 58% 40% 42% 30% 20% 23% 10% 0% Electricity Access to finance Transportation (e.g. collateral) Total Manufacturing Services Table A.18.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 71 72 70 65 75 66 Access to finance 68 70 66 68 67 83 (e.g. collateral) Transportation 42 58 23 55 36 46 Figure A.18.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.5 1.0 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Niger 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 18 – State of Niger 151 Table A.18.2 Selected Indicators – All Formal Sectors Niger Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 3.5 1.9 5.3 5.3 4.3 6.3 Average duration of power outage 95 85 107 239 248 230 (hrs) % of firms with gen 74 70 83 88 88 87 % of electricity from gen 65 N/A 69 N/A Average duration to obtain an elec- 8 10 7 15 18 13 tric connection (days) Finances % of working capital financed by 68 67 69 69 70 68 internal funds/returns earnings % of firms with overdraft 24 30 17 19 16 21 % of firms currently have either line 20 23 16 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 93 N/A 70 N/A by road Average duration to ship inputs to 4 N/A 8 N/A the establishment (hrs) % of firms using own transport 48 N/A 53 N/A % of shipment value transported by 86 N/A 69 N/A own transportation Losses due to transportation (% of 1.2 N/A 2.4 N/A sales) Tax % of sales reported for tax purpose 70 67 73 72 70 74 % of firms visited by tax officials 86 93 78 82 82 82 Average number of visits 3 2 4 3 3 3 % of visits with informal payments 7 0 16 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 0.7 0.4 1.1 1.0 0.7 1.3 % of firms paying for security 78 77 78 78 75 80 Cost of security in % of sales 1.7 1.4 2.1 1.5 1.3 1.8 Corruption % annual sales on bribes 4.2 4.7 3.5 3.2 3.2 3.3 ANNEX 19 State of Ondo The most important obstacles perceived by �rms located in the State of Ondo include electricity, reported by 83% of �rms, followed by trans- portation and tax rates, cited by 39%, and 34% of �rms, respectively, as illustrated in Figure A.19.1. Here again, quite logically, a greater proportion of manufacturers found transportation more problematic than service sector �rms. Electricity was perceived as a severe constraint in the State of Ondo, but losses due to power outages (3.7%) were lower than the national average. The average duration of power outages in the state was 135 hours, which was also lower than the national average of 239 hours. Transportation was cited as one of the top constraints in the state. In fact, the losses due to transportation for manufacturing �rms were slightly higher than the Nigerian average (2.6% vs. 2.4%). Access to �nance was not reported as a major issue in Ondo. However, among the �rms operating there, only 7% were able to bene�t from an overdraft facility, while only 1% had a line of credit or a loan facility. 154 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.19.1 Top Three Ranked Perceived Constraints – All Formal Sectors 100% 90% 80% 83% 88% 79% 70% 60% 50% 57% 40% 30% 39% 34% 35% 33% 20% 25% 10% 0% Electricity Transportation Tax rates Total Manufacturing Services Table A.19.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 83 88 79 48 90 82 Transportation 39 57 25 41 35 41 Tax rates 34 35 33 47 34 33 Figure A.19.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.5 1.0 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Ondo 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 19 – State of Ondo 155 Table A.19.2 Selected Indicators – All Formal Sectors Ondo Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 3.7 3.3 4.0 5.3 4.3 6.3 Average duration of power outage 135 100 159 239 248 230 (hrs) % of firms with gen 91 94 87 88 88 87 % of electricity from gen 58 N/A 69 N/A Average duration to obtain an 4 4 5 15 18 13 electric connection (days) Finances % of working capital financed by 74 61 83 69 70 68 internal funds/returns earnings % of firms with overdraft 7 3 10 19 16 21 % of firms currently have either line 1 0 1 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 84 N/A 70 N/A by road Average duration to ship inputs to 5 N/A 8 N/A the establishment (hrs) % of firms using own transport 82 N/A 53 N/A % of shipment value transported by 71 N/A 69 N/A own transportation Losses due to transportation 2.6 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 70 61 77 72 70 74 % of firms visited by tax officials 71 58 80 82 82 82 Average number of visits 3 2 3 3 3 3 % of visits with informal payments 69 86 60 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 0.4 0.5 0.3 1.0 0.7 1.3 % of firms paying for security 83 87 80 78 75 80 Cost of security in % of sales 1.8 1.1 2.3 1.5 1.3 1.8 Corruption % annual sales on bribes 1.9 2.5 1.4 3.2 3.2 3.3 ANNEX 20 State of Osun The most important obstacles perceived by �rms located in the State of Osun include electricity, reported by 85% of �rms, followed by the access to �nance, and the macroeconomic environment, cited by 42%, and 35% of �rms, respectively, as illustrated in Figure A.20.1. Macroeconomic environment was felt more adversely by manufactur- ing �rms than service sector �rms. Electricity was perceived as a severe constraint in the State of Osun, yet losses due to power outages were lower than the national average, representing 4.6% of total sales. Service sector �rms lost approximately 7.9% of their sales due to outages, though losses for manufacturers amounted to only 2.1% of sales. The average duration of power outages in the state was 128 hours, which was lower than the national average of 239 hours. In the State of Osun, only 7% of �rms were able to bene�t from an overdraft facility, while 14% of �rms had a line of credit or a loan facility. About two-thirds of total sales were reported for tax purposes and tax of�cials visited 82% of �rms, on average 3 times a year. Moreover, about one third of �rms declared that informal payments/gifts were expected/ required during visits from tax of�cials. 158 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.20.1 Top Three Ranked Perceived Constraints – All Formal Sectors 100% 90% 80% 89% 85% 70% 80% 60% 50% 40% 48% 42% 40% 45% 30% 35% 20% 10% 17% 0% Electricity Access to finance Macroeconomic (e.g. collateral) environment Total Manufacturing Services Table A.20.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 85 89 80 90 83 84 Access to finance 42 40 45 43 48 39 (e.g. collateral) Macroeconomic 35 48 17 63 28 28 environment Figure A.20.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.5 1.0 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Osun 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 20 – State of Osun 159 Table A.20.2 Selected Indicators – All Formal Sectors Osun Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 4.6 2.1 7.9 5.3 4.3 6.3 Average duration of power outage 128 104 162 239 248 230 (hrs) % of firms with gen 90 89 90 88 88 87 % of electricity from gen 52 N/A 69 N/A Average duration to obtain an 8 6 11 15 18 13 electric connection (days) Finances % of working capital fincanced by 71 68 74 69 70 68 internal funds/returns earnings % of firms with overdraft 7 4 11 19 16 21 % of firms currently have either line 14 13 15 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 83 N/A 70 N/A by road Average duration to ship inputs to 4 N/A 8 N/A the establishment (hrs) % of firms using own transport 58 N/A 53 N/A % of shipment value transported by 64 N/A 69 N/A own transportation Losses due to transportation 1.3 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 66 62 72 72 70 74 % of firms visited by tax officials 82 81 84 82 82 82 Average number of visits 3 2 5 3 3 3 % of visits with informal payments 33 41 22 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 1.0 0.8 1.3 1.0 0.7 1.3 % of firms paying for security 89 93 84 78 75 80 Cost of security in % of sales 1.4 1.0 2.0 1.5 1.3 1.8 Corruption % annual sales on bribes 2.1 2.7 1.2 3.2 3.2 3.3 ANNEX 21 State of Oyo The most important obstacles perceived by �rms located in the State of Oyo include electricity, reported by 84% of �rms, followed by tax rates, and transportation, cited by 48% and 39% of �rms, respectively, as il- lustrated in Figure A.21.1. Tax rates are perceived as equally constraining by manufacturing and service sector �rms. Electricity was perceived as a severe constraint in the State of Oyo; it was also a great source of indirect costs. Losses due to power outages represented 5.8% of total sales, lasting on average 424 hours. Almost all �rms (97%) reported owning a generator, including 100% of manufactur- ing �rms. The generators were used to supply 82% of �rms’ electricity. Firms operating in the State of Oyo spent an average 3.4% of their total sales on bribes. 65% of total sales were reported for tax purposes and tax of�cials visited 78% of �rms, on average 2 times a year. Moreover, 44% of �rms declared that informal payments/gifts were expected/required during visits from tax of�cials. Losses due to transportation for manufacturers are very high (4.2% of sales), almost double of the national average (2.4%). Moreover, losses due to crime in the state of Oyo were higher than the national average (1.7% versus 1% of sales). More than nine �rms out of ten (92%) paid for security, the average cost of which was 1.7% of total sales, compared to 1.5% of total sales at the national level. 162 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.21.1 Top Three Ranked Perceived Constraints – All Formal Sectors 100% 90% 80% 90% 84% 70% 80% 60% 50% 40% 48% 48% 48% 47% 30% 39% 33% 20% 10% 0% Electricity Tax rates Transportation Total Manufacturing Services Table A.21.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 84 90 80 62 89 82 Tax rates 48 48 48 46 54 43 Transportation 39 47 33 38 31 49 Figure A.21.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 4.0 Tax administration 3.0 Access to finance 2.0 1.0 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Oyo 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 21 – State of Oyo 163 Table A.21.2 Selected Indicators – All Formal Sectors Oyo Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 5.8 7.3 4.5 5.3 4.3 6.3 Average duration of power outage 424 419 428 239 248 230 (hrs) % of firms with gen 96 100 89 88 88 87 % of electricity from gen 82 N/A 69 N/A Average duration to obtain an 7 6 8 15 18 13 electric connection (days) Finances % of working capital financed by 64 63 64 69 70 68 internal funds/returns earnings % of firms with overdraft 20 20 20 19 16 21 % of firms currently have either line 13 17 10 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 39 N/A 70 N/A by road Average duration to ship inputs to 7 N/A 8 N/A the establishment (hrs) % of firms using own transport 76 N/A 53 N/A % of shipment value transported by 87 N/A 69 N/A own transportation Losses due to transportation 4.2 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 65 63 67 72 70 74 % of firms visited by tax officials 78 81 76 82 82 82 Average number of visits 2 3 1 3 3 3 % of visits with informal payments 44 46 42 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 1.7 2.4 1.1 1.0 0.7 1.3 % of firms paying for security 92 91 93 78 75 80 Cost of security in % of sales 2.3 2.5 2.2 1.5 1.3 1.8 Corruption % annual sales on bribes 3.4 4.1 2.7 3.2 3.2 3.3 ANNEX 22 State of Plateau The most important obstacles perceived by �rms located in the State of Plateau include electricity, reported by 69% of �rms, followed by cor- ruption and inadequately educated workforce, cited by 47% and 38% of �rms, respectively, as illustrated in Figure A.22.1. These constraints were perceived as more problematic by service sec- tor �rms than manufacturing �rms. Also the State of Plateau was unique in its strong concern with the education of their workforce. Electricity was perceived as a severe constraint in the State of Plateau, although losses due to power outages were lower than the national aver- age, representing 3.9% of the total sales. The average duration of power outages in the state was 254 hours, which was greater than the national average of 239 hours. Approximately 85% of �rms, 92% for service sector �rms, reported owning a generator, which supplied 72% of electricity for manufacturing companies. Firms operating in the State of Plateau are among the most leveraged by �nancial institutions across Nigeria. Indeed, 46 % of �rms were able to bene�t from an overdraft facility, while 21% had a line of credit or a loan facility. Corruption was perceived as a major issue in the State of Plateau. Indeed, the payment of bribes represented 6.6% of total sales. Tax of�cials visited more than three-quarters of �rms on average 6 times a year and over one third of �rms (34%) declared that informal payments/gifts were expected/required during visits from tax of�cials. The inadequately educated workforce was a concern. 11% of �rms declared having dif�culties in �nding new skilled employees (8% was the national average). 166 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.22.1 Top Three Ranked Perceived Constraints – All Formal Sectors 80% 70% 74% 60% 69% 64% 50% 56% 40% 47% 44% 30% 39% 38% 32% 20% 10% 0% Electricity Corruption Inadequately educated workforce Total Manufacturing Services Table A.22.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 69 64 74 96 66 62 Corruption 47 39 56 55 36 49 Inadequately edu- 38 32 44 54 32 34 cated workforce Figure A.22.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.5 1.0 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Plateau 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 22 – State of Plateau 167 Table A.22.2 Selected Indicators – All Formal Sectors Plateau Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 3.9 4.6 3.1 5.3 4.3 6.3 Average duration of power outage 254 243 268 239 248 230 (hrs) % of firms with gen 85 84 92 88 88 87 % of electricity from gen 72 N/A 69 N/A Average duration to obtain an 41 61 14 15 18 13 electric connection (days) Finances % of working capital financed by 60 62 59 69 70 68 internal funds/returns earnings % of firms with overdraft 46 37 56 19 16 21 % of firms currently have either line 21 29 12 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 57 N/A 70 N/A by road Average duration to ship inputs to 3 N/A 8 N/A the establishment (hrs) % of firms using own transport 59 N/A 53 N/A % of shipment value transported by 51 N/A 69 N/A own transportation Losses due to transportation 2.6 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 71 72 70 72 70 74 % of firms visited by tax officials 77 81 72 82 82 82 Average number of visits 6 6 6 3 3 3 % of visits with informal payments 34 36 32 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 0.3 0.2 0.3 1.0 0.7 1.3 % of firms paying for security 75 69 82 78 75 80 Cost of security in % of sales 0.8 1.3 0.3 1.5 1.3 1.8 Corruption % annual sales on bribes 6.6 5.4 8.0 3.2 3.2 3.3 ANNEX 23 State of Rivers The most important obstacles perceived by �rms located in the State of Rivers include electricity, reported by 69% of �rms, followed by access to �nance, and obtaining business licenses and permits, cited by 53%, and 26% of �rms, respectively, as illustrated in Figure A.23.1. The identi�cation of business licensing as a top constraint is unique to the State of Rivers. Service sector �rms had more problems obtaining the licenses and permits necessary for their business operations. Electricity was perceived as a severe constraint in the State of Rivers. Its shortage also led to high indirect costs, representing 5.3% of total sales. Moreover, the power outages lasted on average 260 hours and 87% of �rms, among which 92% of manufacturing �rms, owned their own generator, which supplied 74% of the latter’s electricity. Service sector �rms had much better access to credit than manufac- turing �rms: 28% versus 19% of �rms had a line of credit, loans or both. The difference vanishes with regards to overdraft facilities. Losses due to transportation are not especially high (1.9% of sales) compare to the national average (2.4%). Approximately 82% of total sales were reported for tax purposes and tax of�cials visited 94% of �rms, on average 4 times a year. Moreover, 54% of �rms declared that informal payments/gifts were expected/required during visits from tax of�cials. 170 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.23.1 Top Three Ranked Perceived Constraints – All Formal Sectors 90% 80% 70% 79% 60% 69% 63% 50% 53% 54% 52% 40% 30% 31% 20% 26% 10% 18% 0% Electricity Access to finance Business licensing (e.g. collateral) and permits Total Manufacturing Services Table A.23.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 69 79 63 73 73 68 Access to finance 53 54 52 66 46 53 (e.g. collateral) Business licensing 26 18 31 21 26 29 and permits Figure A.23.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.5 1.0 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Rivers 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 23 – State of Rivers 171 Table A.23.2 Selected Indicators – All Formal Sectors Rivers Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 5.3 5.5 5.2 5.3 4.3 6.3 Average duration of power outage 260 272 252 239 248 230 (hrs) % of firms with gen 87 92 76 88 88 87 % of electricity from gen 74 N/A 69 N/A Average duration to obtain an 20 23 19 15 18 13 electric connection (days) Finances % of working capital financed by 74 73 75 69 70 68 internal funds/returns earnings % of firms with overdraft 19 20 18 19 16 21 % of firms currently have either line 24 19 28 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 92 N/A 70 N/A by road Average duration to ship inputs to 13 N/A 8 N/A the establishment (hrs) % of firms using own transport 48 N/A 53 N/A % of shipment value transported by 34 N/A 69 N/A own transportation Losses due to transportation 1.9 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 82 81 82 72 70 74 % of firms visited by tax officials 94 95 94 82 82 82 Average number of visits 4 5 3 3 3 3 % of visits with informal payments 54 49 57 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 1.4 1.0 1.7 1.0 0.7 1.3 % of firms paying for security 76 77 76 78 75 80 Cost of security in % of sales 1.1 1.5 0.8 1.5 1.3 1.8 Corruption % annual sales on bribes 0.6 0.6 0.6 3.2 3.2 3.3 ANNEX 24 State of Taraba The most important obstacles perceived by �rms located in the State of Taraba include electricity, reported by 67% of �rms as a top constraint, followed by the access to �nance, and transportation, cited by 58%, and 41% of �rms, respectively, as illustrated in Figure A.24.1. Problems with the power supply were more acutely felt by manu- facturers than service sector �rms. The same was true for the access to �nance, which twice as many manufacturing �rms reported as a severe constraint. However, transportation issues were felt more strongly in the service sector. Electricity was perceived as a severe constraint in the State of Taraba and was also reported to represent a signi�cant source of indirect costs. In fact, the losses due to power outages represented 5.0% of total sales. Moreover, the power outages lasted on average 275 hours and 94% of �rms (100% of service sector �rms) owned their own generator. For manu- facturing companies, these generators supplied 88% of electricity used. Firms in the state of Taraba are facing tremendous �nancing challenges. The access to credit is very poor, especially for manufacturing �rms, where no �rms had access to either a line of credit or loans or overdraft facilities. Losses due to transportation are very low (1% of sales) compared to the national average (2.4%). The payment of bribes in the state represented 3.3% of total sales. Approximately 85% of the total sales were reported for tax purposes and tax of�cials visited 92% of �rms, on average 3 times a year. Moreover, 46% of �rms declared that informal payments/gifts were expected/required during visits from tax of�cials. 174 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.24.1 Top Three Ranked Perceived Constraints – All Formal Sectors 80% 70% 76% 72% 60% 67% 62% 50% 58% 40% 45% 38% 41% 30% 37% 20% 10% 0% Electricity Access to finance Transportation (e.g. collateral) Total Manufacturing Services Table A.24.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Electricity 67 72 62 59 60 75 Access to finance 58 76 38 41 69 41 (e.g. collateral) Transportation 41 37 45 62 47 30 Figure A.24.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.5 1.0 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Taraba 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 24 – State of Taraba 175 Table A.24.2 Selected Indicators – All Formal Sectors Taraba Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 5.0 3.2 6.9 5.3 4.3 6.3 Average duration of power outage 275 364 174 239 248 230 (hrs) % of firms with gen 94 91 100 88 88 87 % of electricity from gen 88 N/A 69 N/A Average duration to obtain an 9 14 9 15 18 13 electric connection (days) Finances % of working capital financed by 77 87 66 69 70 68 internal funds/returns earnings % of firms with overdraft 6 0 13 19 16 21 % of firms currently have either line 9 0 19 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 100 N/A 70 N/A by road Average duration to ship inputs to 9 N/A 8 N/A the establishment (hrs) % of firms using own transport 65 N/A 53 N/A % of shipment value transported by 84 N/A 69 N/A own transportation Losses due to transportation 1.0 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 85 88 81 72 70 74 % of firms visited by tax officials 92 100 83 82 82 82 Average number of visits 3 3 2 3 3 3 % of visits with informal payments 46 59 29 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 0.7 0.0 1.5 1.0 0.7 1.3 % of firms paying for security 81 91 70 78 75 80 Cost of security in % of sales 1.3 0.6 2.0 1.5 1.3 1.8 Corruption % annual sales on bribes 3.3 3.6 3.0 3.2 3.2 3.3 ANNEX 25 State of Yobe The most important obstacles perceived by �rms located in the State of Yobe include access to �nance, reported by 63% of �rms as a severe constraint, followed by electricity, and transportation, cited by 58%, and 44% of �rms, respectively, as illustrated in Figure A.25.1. Almost all manufacturing �rms (98%) mentioned access to �nance as a major constraint, compared to 33% of service sector �rms. It is impor- tant to note that this obstacle overtakes electricity (cited as number one constraint for almost all other states). Transportation seemed to represent a severe obstacle for manufacturers, particularly those that experienced high employment growth rates. Access to credit is surprisingly high for service sector �rms, especially when compared to manufacturing �rms (44% vs 2% of �rms had a line of credit or loans; 30% of service sector �rms had overdraft facilities compared to only 5% for manufacturers). Consequently, manufactur- ers �nanced three quarters of their working capital by internal funds while service sector �rms �nanced less than half of their working capital through internal funds. Electricity was perceived as a severe constraint in the State of Yobe, and it was also a signi�cant source of indirect costs. Losses due to power outages represented 5.6% of total sales. Moreover, the power outages lasted on average 309 hours and 97% of �rms (100% of manufacturing �rms) owned their own generator which supplied 83% of manufacturing companies’ electricity. Transportation is perceived as an important obstacle by almost three quarter of manufacturers. On the other hand, the losses due to transpor- tation represented only 0.5% of sales. Although not mentioned in the top 3, corruption was also a major source of indirect costs. The payment of bribes represented 5% of total sales. Tax of�cials visited almost nine �rms out of ten (100% of manufac- turing �rms), on average 5 times a year. Close to three-quarters of �rms (73%) declared that informal payments/gifts were expected/required during visits from tax of�cials. 178 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.25.1 Top Three Ranked Perceived Constraints – All Formal Sectors 120% 100% 98% 80% 75% 74% 60% 63% 58% 40% 43% 44% 20% 33% 16% 0% Access to finance Electricity Transportation (e.g. collateral) Total Manufacturing Services Table A.25.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Access to finance 63 98 33 22 58 73 (e.g. collateral) Electricity 58 75 43 35 57 63 Transportation 44 74 16 7 41 51 Figure A.25.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.5 1.0 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Yobe 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 25 – State of Yobe 179 Table A.25.2 Selected Indicators – All Formal Sectors Yobe Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 5.6 1.2 9.6 5.3 4.3 6.3 Average duration of power outage 309 437 184 239 248 230 (hrs) % of firms with gen 97 100 89 88 88 87 % of electricity from gen 83 N/A 69 N/A Average duration to obtain an 20 13 23 15 18 13 electric connection (days) Finances % of working capital financed by 61 75 48 69 70 68 internal funds/returns earnings % of firms with overdraft 18 5 30 19 16 21 % of firms currently have either line 24 2 44 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 1 N/A 70 N/A by road Average duration to ship inputs to 4 N/A 8 N/A the establishment (hrs) % of firms using own transport 78 N/A 53 N/A % of shipment value transported by 85 N/A 69 N/A own transportation Losses due to transportation 0.5 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 86 92 80 72 70 74 % of firms visited by tax officials 88 100 78 82 82 82 Average number of visits 5 5 5 3 3 3 % of visits with informal payments 73 93 49 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 0.5 0.0 0.9 1.0 0.7 1.3 % of firms paying for security 80 100 62 78 75 80 Cost of security in % of sales 1.0 0.3 1.6 1.5 1.3 1.8 Corruption % annual sales on bribes 5.0 5.4 4.7 3.2 3.2 3.3 ANNEX 26 State of Zamfara The most important obstacles perceived by �rms located in the State of Zamfara include access to �nance and electricity, reported by 73% and 71% of �rms as a top constraint, followed by tax rates cited by 34% of �rms, as illustrated in Figure A.26.1. Each of the most frequently cited top constraints was perceived to be more severe for manufacturers than for service sector �rms. Here again, access to �nance was a greater obstacle than electricity. In the State of Zamfara, access to �nance is not easy: only 15% of �rms were able to bene�t from an overdraft facility, while 11% of �rms had a line of credit or a loan facility. Electricity was perceived as a severe constraint in the State of Zamfara. Power outages lasted on average 165 hours, the losses of which represented 6.6% of total sales. Service sector �rms lost up to 10.6% of their sales. Over three-quarters (76%) of �rms owned a generator; these supplied 54% of the electricity needs for manufacturing companies. Although corruption was not cited, it is also a major source of indirect costs. The payment of bribes represented 5.3% of total sales. Tax of�cials visited 85% of �rms (97% of manufacturing �rms), an average of 2 times a year. On a positive note, however, only 4% of �rms declared that informal payments/gifts were expected/required during visits from tax of�cials. 182 Nigeria 2011: An Assessment of the Investment Climate in 26 States Figure A.26.1 Top Three Ranked Perceived Constraints – All Formal Sectors 100% 90% 80% 86% 70% 73% 71% 74% 69% 60% 63% 50% 40% 47% 30% 34% 20% 22% 10% 0% Access to finance Electricity Tax rates (e.g. collateral) Total Manufacturing Services Table A.26.1 Top Three Ranked Perceived Constraints – All Formal Sectors (%) Industry Employment growth Negative Slow High Total Manufacturing Services growth growth growth Access to finance 73 86 63 67 80 62 (e.g. collateral) Electricity 71 74 69 71 68 81 Tax rates 34 47 22 42 40 22 Figure A.26.2 Major Perceived Constraints – Visual Comparison State/Country Electricity 3.5 3.0 Tax administration 2.5 Access to finance 2.0 1.5 1.0 0.5 Transportation 0 Macroeconomic environment Corruption Tax rates Cost of finance Nigeria Zamfara 0 = No obstacle, 1 = Minor obstacle, 2 = Moderate obstacle, 3 = Major obstacle, 4 = Very severe obstacle Annex 26 – State of Zamfara 183 Table A.26.2 Selected Indicators – All Formal Sectors Zamfara Nigeria Manu- Manu- Total facturing Services Total facturing Services Electricity Losses due to electricity (% of sales) 6.6 1.5 10.6 5.3 4.3 6.3 Average duration of power outage 165 129 194 239 248 230 (hrs) % of firms with gen 76 73 80 88 88 87 % of electricity from gen 54 N/A 69 N/A Average duration to obtain an 18 23 18 15 18 13 electric connection (days) Finances % of working capital financed by 67 62 70 69 70 68 internal funds/returns earnings % of firms with overdraft 15 17 14 19 16 21 % of firms currently have either line 11 6 14 15 12 19 of credit, loans or both Transportation % of firms with inputs delivered 97 N/A 70 N/A by road Average duration to ship inputs to 3 N/A 8 N/A the establishment (hrs) % of firms using own transport 32 N/A 53 N/A % of shipment value transported by 71 N/A 69 N/A own transportation Losses due to transportation 0.4 N/A 2.4 N/A (% of sales) Tax % of sales reported for tax purpose 73 66 78 72 70 74 % of firms visited by tax officials 85 97 75 82 82 82 Average number of visits 2 2 2 3 3 3 % of visits with informal payments 4 0 9 34 33 34 expected/required Crime and Theft Losses due to theft in % of sales 1.1 0.0 1.9 1.0 0.7 1.3 % of firms paying for security 72 74 70 78 75 80 Cost of security in % of sales 1.7 1.1 2.2 1.5 1.3 1.8 Corruption % annual sales on bribes 5.3 5.5 5.1 3.2 3.2 3.3 THE WORLD BANK