Doing Business In Lagos: The Burden And The Reward

Eighty percent of registered businesses in Lagos, Nigeria, as at 2011, were not in existence 20years ago, this is according to officials of the Corporate Affairs Commissions (CAC). It therefore implies that in spite of the harsh operating environment, more people are still seeking investment opportunities in the country, especially in Lagos, the nation’s commercial capital and home to over 20million inhabitants.

The National Bureau of Statistics this year stated that Lagos State contributes 20.27% to the nominal gross domestic product (GDP), the highest state contributor in Nigeria. It further noted that Lagos host the largest number of Micro, Small and Medium Enterprises (MSMEs); 20% of total MSMEs in the country. Lagos has business establishments representing all the sectors of the economy, ranging from oil & gas, finance, manufacturing, education, transportation, etc.

Recent efforts of the Lagos State government in ensuring the state become more business friendly through construction of roads, collection of appropriate taxes, reduction of traffic congestion, and its application to get electricity generation licence from the federal government could also prompt the establishment of more businesses in the state.

Lagos State is running a N492billion budget for this fiscal year, and State Governor Babatunde Fashola, in July, said that the State’s 2012 budget has recorded 75% cumulative half-year performance.

However, some business operators say despite efforts by the state government to make business environment conducive, the huge infrastructural deficit in the state and in the whole country still hampers growth performance of most businesses, either in the small/medium enterprises or large corporations.

In the World Bank’s 2012 ‘Ranking on the Ease of Doing Business’ in 183 economies, Nigeria came 133rd, the same position it was in 2011, and ranking behind other African countries like Mauritius -23rd, South Africa -35th, Rwanda -45th, Tunisia -46th, Botswana -54th, and Ghana -63th. Meanwhile, in 2010 report, Nigeria was in 125th position, falling from its 120th position in 2009.

Singapore topped the ranking for the sixth year, followed by Hong Kong, New Zealand and the United States.

The World Bank based its ranking on how regulations in different countries affect 11 areas of a business life, which are: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency (formerly closing a business) and employing workers.

Of these 11 identified areas, Nigeria only got two pass marks; one in ‘trade across border’ due to the nation’s approach in ‘using risk-based inspections,’ and the other in ‘enforcement of contracts’ because Nigeria ‘makes judgments publicly available.’

Power generation

Chinwe Abraham, the managing director of a Lagos-based hotel, De-Home Hotel, said, “It is difficult to do business in Nigeria, especially Lagos where you have more companies.” Mrs. Abraham said inadequate power supply, which is common in all the states of the federation, is the major cause for the harsh business environment in Lagos.

She said, “The power transmitted here in Lagos is not enough for all the businesses; so it cannot go round without it partly distributed. We run our generator 24 hours of the day and that is very expensive. We have to estimate that in the cost of doing business since we can’t cry about it all the time. If you want to do business here, you just have to live with these challenges.”

It has been estimated that Nigeria needs an average of $10billion investments annually in the power sector for it to realise its potential. The nation currently generates less than 4,000 megawatts against the demand for 10,000MW.

Mrs. Abraham said her Hotel had to devise other means of improving its profitability by organising events for fun seekers, featuring top music and comedy stars. “It is now part of our hotel business. We give entertainment value by selling excitement to fun seekers in Lagos and environs.”

However, she said for Nigeria to be more business friendly, investors in any part of the country “would love to see stable power supply. We believe that by being a law abiding organisation and paying the taxes that are due to the authorities, those funds will be used for the quick provision of power and other basis infrastructure which would enhance business and investments opportunities in the country.”

In March 2012, the Nigerian Electricity Regulatory Commission (NERC) announced the deregulation of electricity generation and distribution. The Chairman of the NERC, Dr. Sam Amadi, said, “States like Lagos, Bauchi and Delta have applied to get electricity generation licences from the Commission.” NERC had said that states, local governments and communities with financial capability could generate and distribute electricity within their areas.

Gbolade Adegboyega, the country Manager of Novas Systems Ltd, a network solution provider, said with the success some indigenous companies have recorded over the past years, Nigeria can boast of big businesses that can compete globally. He however said the country is yet to be independent of the western world because of the enormous problem associated with doing business in Nigeria,” adding that “if you are not importing, then you will need expatriate solution.”

Meanwhile, Mr. Adegboyega believes that with time Nigeria and Africa as a whole “would catch up with the rest of the world.” He said, “About three years ago, I joined the network operation platform in Ghana, and I can say we are doing well. Although the fact that the continent is doing well does not really mean that we are there yet; because to be honest, the competition in the other parts of the world is healthier than in Africa.”

An economist and lecturer at the Obafemi Awolowo University, Biodun Adegboye, is of the opinion that despite Nigeria’s poor performance in the World Bank ranking, most foreigners still find Nigeria friendly for business due to the opportunity to evade tax payment. “You can see that doing business is also in commensurate with corruption level. It is bad for the country’s economy but good for the players,” he said.

John Chiokwe, technical sales executive at Current-Link Systems, a solution provider in the hospitality industry, said notwithstanding the corruption and greed that besieged the nation, “more businesses will continue to spring up in Lagos and environs because that is where they get the money. We have population with high purchase and spending power.”

Lagos and world cities

When business activities in Lagos, the commercial hub of Nigeria and Africa, is compared with the likes of Accra, Ghana; Johannesburg, South Africa; and London, the largest metropolitan area in the United Kingdom, it becomes obvious that Nigeria needs to do more in ensuring regulations affect major areas of a business life, as identified by the World Bank.

Accra, the capital and largest city of Ghana, has an urban population of 2.3million. In 2008, the World Bank estimated that Accra's economy constituted around 10% of Ghana's total GDP, or around $3billion.

Apart from its major cocoa produce, economic activities in Accra include the financial and agricultural sectors, Atlantic fishing, and the manufacture of processed food, lumber, plywood, textiles, clothing and chemicals.

According to the World Bank, Ghana recently increased the cost to start a business by 70%. Consequently, Ghana which in 2009 ranked 87th economy by the World Bank became 92nd in 2010, 60th in 2011, and fell in 2012 to 63rd position.

In the latest ranking of best countries for business by Forbes, Ghana came 72nd, better than Nigeria which ranked 101st amongst 134 countries.  Peter Allum, the International Monetary Fund’s mission chief to Ghana, said Ghana’s 72nd position made it ranked ninth on the list of the world's worst economies, adding that “Ghana’s problems are mostly home grown.” According to Forbes ranking, Ghana is a typical example of the world's worst-managed economies: “It's a country that shouldn't be poor, but it is.”

Johannesburg is the largest city in South Africa, by population. Johannesburg is the provincial capital of Gauteng, the wealthiest province in South Africa, having the largest economy of any metropolitan region in Sub-Saharan Africa.

While Johannesburg is not one of South Africa's three capital cities, it is the source of a large-scale gold and diamond trade. Johannesburg is one of the world's leading financial centres and it is the economic and financial hub of South Africa, producing 16% of South Africa's GDP, and accounts for 40% of Gauteng's economic activity.

In the World Bank 2012 ranking on the ease of doing business, South Africa ranked 35th position, from its 36th position in 2011. It had in 2009 ranked 32nd in the world, before slipping to 34th in 2010.

According to the World Bank, South Africa moved a step forward in the latest ranking because of the following achievements: South Africa made starting a business easier by implementing its new company law, which eliminated the requirement to reserve a company name and simplified the incorporation documents; it made transferring property less costly and more efficient by reducing the transfer duty and introducing electronic filing; the country also introduced a new reorganisation process to facilitate the rehabilitation of financially distressed companies.

London is the world's leading financial centre alongside New York City. It generates approximately 20% of the UK's GDP. London's largest industry is finance, and has over 480 overseas banks, more than any other city in the world.

London as a part of the United Kingdom is rated 9th most conducive place to do business in the world. In 2005–10, the UK in a program reduced the burden of regulatory compliance on businesses by 25% according to the government; this amounted to an equivalent £3.5billion savings for companies.

In the World Bank’s 2012 economy ranking, the UK was 4th in position, the same position it was in 2011. It had ranked 6th in 2009 and 5th in 2010. Among meeting other requirements, the UK retained the 4th position because it is easy to start a business in the country without minimum capital requirement; it easy to register property using an electronic database for encumbrances; it easy to pay taxes; and investors’ protection is guaranteed among other enablers.