The Manufacturers Association of Nigeria (MAN) told us last month that 767 companies folded up in 2023, with 335 others distressed and obviously in danger of going down too. If the group were to update their report today, the story would likely be grimmer. More firms would have become distressed and many among the sick ones would have hit the rocks.
While we mourn the demise of existing firms amid dire economic challenges, there is a growing concern that the same forces are threatening the birth of new ones, ready to choke them to death at the point of delivery. Entrepreneurs in Nigeria, especially new ones, are having it tough to get their ideas for investment in the real sector off the ground.
From the dearth of infrastructure to the high cost of materials to government officials’ overbearing influence, our entrepreneurs face discouraging daily experiences. They have to provide the basic materials that ordinarily should be provided by the state and be paid for. How can this economy grow?
This is the case of someone I know, who has just taken it upon himself to raise a small firm, a place where people can go in to refresh themselves and refill their stomachs whenever the need arises. But this guy is not finding it easy. It’s not just the normal challenge that business people face; not the troubles that entrepreneurs are expected to face in the ordinary course of doing business in a normal environment.
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Rather, Nigerian entrepreneurs are like people who have chosen the hard way of life. I have read the history of businesses rising from the ruins of major economic catastrophes, including the Great Depression of the 1930s and the Great Recession of 2007-09. Yes, those happened perhaps because the challenges were defined and everyone knew what they were and what could be done. But what is happening in our business environment currently defies definition.
This guy has to provide practically everything to run the business. He has contributed to the purchase of a transformer in the neighbourhood where his business is situated. After the equipment was bought the community had to sign it off to the power company. Now he has to run a special cable to connect his premises to the power supply.
But getting a power supply to the place is a different thing. The birth of his venture coincided with the demarcation of power consumers into Bands A to E. Now, the area where he operates receives about four hours of electricity in the day, broken into two, two-hour sets of power supply. The rest of the power supply in the area is delivered at night. How does he run the business, which operates more in the day with a few hours into the evening?
The answer is to get a power generator. To power the place effectively, he needs not just any generator, but specifically a diesel generator that can easily power the entire equipment.
The cost estimates for this generator run into millions of naira, beyond what he earlier budgeted for, even for a tokunbo that is a second-hand diesel generator. This budding entrepreneur now has to scout for extra money to procure this equipment so that the business can operate. After this, he now has to be ready for the daily task of fuelling or running it. The running expenses are an entirely cash flow projection.
Of course, given the current diesel price, the reader knows what it means to run such a generator at about N1,257 per litre.
This investor has to provide virtually everything. He has to sink a borehole so the operation can run smoothly. Without water in such a place to ensure a steady supply of water, there will be a disaster because the place will stink from refuse and waste to be generated. But there is no water supply from the public water works that is even being paid for. The death of public goods is one of the biggest challenges of both individual and corporate existence in Nigeria.
All these involve cash. Investing in the real sector now, which involves laying out cash and physical assets, has become quite tasking in Nigeria, which is the reason many people now prefer to put their funds in other forms of investment. It is costly and comes at a high opportunity cost. Even if this investor is drawing from his savings it is a lot of cost to him, given the current interest rate prevailing in the market. With an MPR of 24.75 per cent, effective interest rates that banks charge their prime customers now hover about 30 per cent and above. Now the inflation rate has risen to 33.2 per cent, so if the CBN raises its MPR further, it means the rate charged by banks would still rise.
Such a high-interest rate regime would be strong enough to attract investors into the financial markets to put their millions of naira into fixed accounts and reduce their exposure to the risk in the real sector. The current high interest rate, created in part by the pursuit of the CBN for a positive real interest rate could work against the interest of the real sector. Should this continue, many people would consider it an unnecessary risk to borrow at such rates to invest in long-term projects, which is the nature of the real sector.
Despite all the additional burdens that our daring entrepreneurs bear, they are daily inundated with demands for one permit or payment by state officials. This is not to say that states do not have the right to demand permits from people who wish to engage in economic activities, but sometimes the demands go beyond the official limits. And in some cases, cases that could be handled by one department of the government are split, with different agencies handling them, all for no genuine reason.
Our entrepreneurs also have to contend with theft in the organisations, which is becoming a major threat to enterprise success and viability. Many employees have perfected the art of stealing. For this fellow here, he has chosen to be, in addition to other things, the procurement manager.
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