Where Should You Put Your Money In Nigeria?

Disclosure: This article is written as part of work I am doing for the company in question. I have been paid for this work.

You are a Nigerian and you live in Nigeria. By that geographical arrangement alone, your investment opportunities are mostly restricted to what is immediately available in the country. Thus, the investment portfolio of someone who has $1m will look quite different depending on whether the person is in America or Nigeria. In Nigeria, you might just be restricted to real estate but in America you might be able to put money in the hottest startup in Silicon Valley among many others.
So what are the options available to Nigerians? You need to ensure you don’t lose your hard earned money. You also need to ensure that the money will be available to you in the future when you need it. And of course you need to ensure that the investment is yielding enough returns such that, in reality, your N100,000 has not turned into N50,000 after 10 years. It is this question that Investment One, an asset management and investment firm in Nigeria, have tried to answer with a new report titled Investment One Top 10: A 2018 report on 10 great places to invest in Nigeria.

Treasury Bills
I’m usually the first person to mock Nigerian banks for their love of Shashe Banking. But the facts of life are that they are not doing anything illegal and the opportunity is available to anyone who wants it, not just the banks. So Treasury Bills, short term lending to the government, is number one on the list. It is remarkable that an investment that carries zero risk can pay up to 22 percent as they did in 2017 but that is the reality. These days t-bills pay around 15 percent so if you are looking for a worry free place to park your money that meets all the investment criteria listed above, then they are your best bet.

Commercial Paper
Once you leave t-bills, there is no other option that is 100 percent safe. So everything else comes down to how much risk you are willing to take with your money. Sometimes, taking more risks brings more returns. It could also be that you take high risks and all your money ends up in smoke. Next on the list is Commercial Papers (CP) — essentially lending to Nigerian companies (including banks). The data compiled by Investment One shows that in 2017, the CP with the highest yield was by FSDH Merchant Bank at 21.84 percent. Dufil Prima Foods Plc also issued a CP in December 2017 with a yield of 17.50 percent. Both of these examples were for nine months.

Government and State Bonds
Next up is government and state bonds. But wait, if t-bills are issued by the government and carry no risk, why are government bonds, issued by the same government, also not risk free? The simple answer is that even though the same government cannot default on bonds, this type of investment, because it lasts for longer than one year, carries interest rate risk. That is, even though they are currently paying up to 17 percent, there is no guarantee that they won’t pay less in say two or five years time.
Things can change in the economy — inflation might come down sharply, meaning interest rates will also likely come down meaning you earn less on your investment in government bonds. But of course, if anything can go down, it can also go up.

Corporate Bonds
Things are getting riskier. We now come to Corporate Bonds brought to you by the same people who brought you CPs but this time for longer. Because they are issued for longer durations, the chance that a company can go bankrupt and the bond you bought turns to smoke is higher than with CPs.
Which is why the credit rating of the issuing company plays an important part in deciding whether or not to invest. According to a sample of recent corporate bonds from Investment One’s research, Lafarge Africa Plc issued a 3 year bond in June 2016 with a coupon (interest rate) of 14.25 percent. It is rated at A+ which sort of says Lafarge has a good chance of surviving until June 2019 when you will be able to get your investment back plus the interest you’ve earned. Fidelity Bank, rated BBB, also issued a 7 year bond in 2015 with a coupon of 16.48 percent. BBB is a higher risk than A+ but then, the riskier one pays more. Your choice.

Eurobonds
Then there’s Eurobonds. Beyond the government, Nigerian companies also issue them, too. Now, in addition to interest rate risk and the risk of the issuing company (or government) going bankrupt, you now have the additional risk of foreign exchange as eurobonds are issued in dollars. But the flip side is that, if the naira suffers another devaluation, your investments in dollars will protect you against that loss.
At the moment, Fidelity, Zenith, GTbank, Diamond and First Bank have outstanding eurobonds all issued in 2013 and 2014 and to mature between 2018 and 2020. The coupon rates vary from 6 percent (GTbank) to 8.75 percent (Diamond). These bonds are traded publicly which means you can still buy into them with the understanding that, depending on the price you pay for them today, you will almost certainly get a different yield from the coupon rates listed above.

Equities
Next we come to equities, or ‘shares’ as we like to call them in Nigeria. The best argument for equities is also the biggest risk about them — in 2017, the Nigerian equities market returned 42.30 percent. So what is it going to return in 2018? If I knew the answer to that, I won’t be typing this article. I will sell everything I own (including one of my kidneys) to invest in Nigerian equities. This is the biggest risk with equities — just because it did well this year is no guarantee that it will do well next year. Indeed, in the 3 years before 2017, Nigerian equities delivered negative returns according to Investment One.
So the solution to this is to always take a long term view when investing in equities. Over time, you’ll likely make money once the good and bad years are taken together. But if you’re looking for something short term, then t-bills remain your best. Don’t put your school fees money in equities. Please.

Mutual Funds
What if you can’t make up your mind about all the different options so far because you like equities, corporate bonds, CPs and other types of assets? If you are in that position, mutual funds make plenty of sense. With mutual funds, the investment company takes money from many different people and then some smart guy working there decides on what percentage to allocate to different assets. You, as the investor, don’t have to worry about this decision making process — you leave it to that smart guy but you have to pay him for this work out of your returns.
Now if the guy turns out to be not as smart as advertised, you may end up paying him most of your returns as fees. According to Investment One, Vantage Balanced Fund, which invests in bonds, real estate and equities, delivered a net 25.06 percent return in 2017. Another fund, Vantage Guaranteed Income, delivered gross 18.41 percent also in 2017. So what does it mean when one fund’s return is stated as gross and another as net. This is an important thing to pay attention to — net is what you get after the smart guy has taken his fees. Gross is before fees have been deducted. To simplify — if you put N100 in a fund and it returns 25 percent gross, you are not going to get N125 at the end of the year. You will get N125 minus whatever the fees for the smart guys are. So always check whether returns are stated gross or net and if they are stated as gross, find out what the fees are.

Real Estate and Venture Capital
Finally, we have Real Estate and Venture Capital. The report does not say how much these returned in 2017 probably because they are so hard to measure. In the case of real estate, there are many different ways to invest in it. Someone might build a few shops in front of his house in Amuwo Odofin and rent them out. Real estate noni. Or someone who made money from oil and gas might build luxury flats in Ikoyi and sell them. Real estate noni. Or a company might set up a Real Estate Investment Trust (REIT) and, just like with mutual funds, take money from many different investors and invest in real estate.
One way to access this type of investment might be through mutual funds. So if you like the idea of investing in real estate but without the stress of chasing tenants all over the place, ask your mutual fund if they invest in real estate. As for venture capital, please I’m not on seat. Only invest in this with money you’re prepared to lose. You can make 800 percent and you can make minus 100 percent.

There you have it. As I said earlier, what you can invest in is determined a lot by where you live. These are some of your best options if you are in Nigeria. The reason why you should invest is because the future will eventually arrive even if you stand still. Investing means you can send your money ahead of you so you are not broke when the future inevitably arrives.
Investment One will like you to make your investments through their firm. By opening an account with them, you can invest in most of the options listed above. Or if you are not yet sure, send them an email to ask questions.
Always remember — just because something returned 25 percent last year does not mean it will do the same this year. It can do more, it can do less. But with any type of investing, it is always better to have a long term view. After all, you are a Nigerian and you live in Nigeria. Neither of you is running away any time soon.
FF

By Feyi Fawehinmi

First published on his blog Aguntasolo.co

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Posted in Finance, Government and State bonds, Investments, Nigeria, Treasury Bills | Leave a comment

The content of Nigeria’s foreign exchange reserves

On Monday 20 March 2018, The Guardian Newspapers published an article by Contributor Feyi Fawehinmi titled, “What’s Inside Nigeria’s Foreign Exchange Reserves”. In this article, the writer describes and discusses his perceived rationales for the increase in the country’s Foreign Exchange (FX) reserves. Familiar with the writers mindset on such matters as they have been fairly widely canvassed lately one was inclined to ignore but we all have a shared responsibility to ensure that Nigerians are well informed particularly knowing the penchant of compatriots to latch on and celebrate such rabble rousing writings with radical bent, it behoves all concerned with a better representative perspectives to stand up to be counted by sharing such views for better enlightenment of all. We must not and cannot dismiss Mr. Fawehinmi’s brilliance in using half-truths, veiled innuendos, and outright misinformation to convince fair-minded and well-meaning Nigerians that he knows what he is talking about. That is the reason why a response is imperative for as Edmund Burke once observed, “The only thing necessary for evil to thrive is for good men to do nothing”.

Before we outline the real reasons for the rise in Nigeria’s FX Reserves, let us first highlight why Mr. Fawehinmi’s writing contains many misleading explanations.
First, although he correctly explains how proceeds from the Federal Government’s Eurobond issuances could help boost our FX Reserves, he ominously omits the fact that it is from the same FX Reserves that the CBN supplies FX to the market throughout the year. This is a significant omission. While it is true that the CBN has received US$7.3 billion worth of Eurobond issuances since February 2017, we are aware that the Bank has also supplied US$24.3 billion to the FX Market over the same period. This amount includes sales in the interbank spot market, FX supplies for invisibles/services, clearing of maturing forward positions, weekly sales to Bureau De Changes (BDCs), and sales to small end-users for travel allowances, medical bills, schools fees, and the like. How then can someone’s savings account grow if he receives US$7.3 billion but spends US$24.3 billion?

Second, the attribution of swaps by Nigerian Banks as accountable for the growth in our FX reserves ignores the fact that swaps are part of the FX Reserves of all Central Bank, and therefore Central Bank of Nigeria cannot bulk this reality even when the Reserves were as high as US$23 billion in October 2016. Therefore, the notion that it is a new phenomenon is incorrect and the subtle chastisement of Nigerian banks for engaging in swaps reveals the author’s lack of requisite knowledge of this generally-acceptable worldwide banking practice. It is also curious to note that his computation of the size of swaps by Nigerian banks is higher than what has been published by the International Monetary Fund (IMF), as contained in their latest report on Nigeria, which was published few days ago. Is it rational to expect that the writer has better information on CBN swaps than the IMF?
Third, and in usual confused manner, the author suggests that all the FX inflows into the Investors and Exporters (I & E) Window go into the Reserves. Contrary to this, we are aware that the I & E window operates as a free “willing buyer, willing seller” market, which explains why its operational exchange rate (about N360/US$1) is higher than those of other segments. A significant portion of the inflows into this market do not get to the CBN because they are bought by willing importers who operate in that market. The CBN operates in that market as a “residual” participant: buying excesses and supplying shortfalls, as the case may be. It is therefore not correct to ascribe the total inflows into this market to the country’s FX Reserves.
So, what is really inside Nigeria’s Foreign Exchange Reserves? We are aware that there are three main reasons for the sustained rise in the Reserves. Perhaps, the most significant one has been the sharp decline in the country’s import bill, as a direct result of the June 2015 CBN’s policy to restrict FX access to items which could be produced locally: the so-called “41-items policy”. Despite the initial pushbacks against this policy, it has no doubt heralded significant benefits for the country. Aside from the rebound in local production of affected products and associated boost in employment generation, it has been reported that the country’s monthly import bill fell from an average of about US$5.5 billion in 2014 to US$3.58 in 2015, and about US$2.3 billion in 2017. A linear approximation would imply that the country’s FX Reserves have saved about US$38.35 billion if we use the 2014 import bill or US$15.33 billion if you use the 2015 import bill.
The second reason for the rise in our FX Reserves is simply due to the gradual, albeit persistent, recovery in oil prices. From a low of US$45.5 per barrel as of 23 June 2017, the price of Bonny Light Crude Oil has risen to US$69.6 per barrel as at 21 March 2018. To the extent that Nigeria’s daily oil production has remained stable, one does not have to be a brain surgeon to calculate how much more FX inflows our country’s FX Reserves have enjoyed over this period.
On Monday 20 March 2018, The Guardian Newspapers published an article by Contributor Feyi Fawehinmi titled, “What’s Inside Nigeria’s Foreign Exchange Reserves”. In this article, the writer describes and discusses his perceived rationales for the increase in the country’s Foreign Exchange (FX) reserves. Familiar with the writers mindset on such matters as they have been fairly widely canvassed lately one was inclined to ignore but we all have a shared responsibility to ensure that Nigerians are well informed particularly knowing the penchant of compatriots to latch on and celebrate such rabble rousing writings with radical bent, it behoves all concerned with a better representative perspectives to stand up to be counted by sharing such views for better enlightenment of all. We must not and cannot dismiss Mr. Fawehinmi’s brilliance in using half-truths, veiled innuendos, and outright misinformation to convince fair-minded and well-meaning Nigerians that he knows what he is talking about. That is the reason why a response is imperative for as Edmund Burke once observed, “The only thing necessary for evil to thrive is for good men to do nothing”.
Read More: What’s inside Nigeria’s foreign reserves?
Before we outline the real reasons for the rise in Nigeria’s FX Reserves, let us first highlight why Mr. Fawehinmi’s writing contains many misleading explanations.
First, although he correctly explains how proceeds from the Federal Government’s Eurobond issuances could help boost our FX Reserves, he ominously omits the fact that it is from the same FX Reserves that the CBN supplies FX to the market throughout the year. This is a significant omission. While it is true that the CBN has received US$7.3 billion worth of Eurobond issuances since February 2017, we are aware that the Bank has also supplied US$24.3 billion to the FX Market over the same period. This amount includes sales in the interbank spot market, FX supplies for invisibles/services, clearing of maturing forward positions, weekly sales to Bureau De Changes (BDCs), and sales to small end-users for travel allowances, medical bills, schools fees, and the like. How then can someone’s savings account grow if he receives US$7.3 billion but spends US$24.3 billion?

Second, the attribution of swaps by Nigerian Banks as accountable for the growth in our FX reserves ignores the fact that swaps are part of the FX Reserves of all Central Bank, and therefore Central Bank of Nigeria cannot bulk this reality even when the Reserves were as high as US$23 billion in October 2016. Therefore, the notion that it is a new phenomenon is incorrect and the subtle chastisement of Nigerian banks for engaging in swaps reveals the author’s lack of requisite knowledge of this generally-acceptable worldwide banking practice. It is also curious to note that his computation of the size of swaps by Nigerian banks is higher than what has been published by the International Monetary Fund (IMF), as contained in their latest report on Nigeria, which was published few days ago. Is it rational to expect that the writer has better information on CBN swaps than the IMF?
Third, and in usual confused manner, the author suggests that all the FX inflows into the Investors and Exporters (I & E) Window go into the Reserves. Contrary to this, we are aware that the I & E window operates as a free “willing buyer, willing seller” market, which explains why its operational exchange rate (about N360/US$1) is higher than those of other segments. A significant portion of the inflows into this market do not get to the CBN because they are bought by willing importers who operate in that market. The CBN operates in that market as a “residual” participant: buying excesses and supplying shortfalls, as the case may be. It is therefore not correct to ascribe the total inflows into this market to the country’s FX Reserves.
So, what is really inside Nigeria’s Foreign Exchange Reserves? We are aware that there are three main reasons for the sustained rise in the Reserves. Perhaps, the most significant one has been the sharp decline in the country’s import bill, as a direct result of the June 2015 CBN’s policy to restrict FX access to items which could be produced locally: the so-called “41-items policy”. Despite the initial pushbacks against this policy, it has no doubt heralded significant benefits for the country. Aside from the rebound in local production of affected products and associated boost in employment generation, it has been reported that the country’s monthly import bill fell from an average of about US$5.5 billion in 2014 to US$3.58 in 2015, and about US$2.3 billion in 2017. A linear approximation would imply that the country’s FX Reserves have saved about US$38.35 billion if we use the 2014 import bill or US$15.33 billion if you use the 2015 import bill.
The second reason for the rise in our FX Reserves is simply due to the gradual, albeit persistent, recovery in oil prices. From a low of US$45.5 per barrel as of 23 June 2017, the price of Bonny Light Crude Oil has risen to US$69.6 per barrel as at 21 March 2018. To the extent that Nigeria’s daily oil production has remained stable, one does not have to be a brain surgeon to calculate how much more FX inflows our country’s FX Reserves have enjoyed over this period.

The third reason for the improved fortunes on our FX Reserves is truly attributable to the I & E window. Recall the explanation above that the CBN is a residual participant in the market. Given that the amount of inflows in that window have frankly exceeded many people’s expectations and willing buyers have been unable to pick up all the supply, the CBN has bought more dollars in that segment than it has sold. So the Bank’s participation in that market has been a net positive to the FX Reserves.
We do understand the penchant for cynicism about reported progress in any and every sphere of our national life but that does not mean that real progress is not being made, however few and far between. For example, Mr. Fawehinmi dismisses the notion that significantly higher FX Reserves should be highlighted as an accomplishment. Yet, it is not an easy feat, because the higher they are, the more tools and flexibility a Central is able to deploy in times of need. This is analogous to basically having more saving in your bank account which overall should positively impact the country’s credit rating. It is also a matter for the records that the Governor was called all manner of unprintable names during the period of cascading rate of exchange. it is only fair and should be expected that he receives all the plundits as we experience a rebound.
So, while concerned particularly with the benefit of hindsight applaud the CBN for putting in place policies like those on “41-items” and the “I & E” window, which have helped stabilize the exchange rate, improve FX supply, create jobs, and boost economic activities, those with inadequate knowledge should avoid throwing shades on such laudable achievements.

 

By Boniface Chizea

First Published on The Guardian.

Posted in Africa, Finance, Foreign Exchange Reserves, Foreign Reserves, Governance, Leadership, Nigeria | Leave a comment

What’s the fuss about foreign exchange reserves?

Earlier in March 2018, the Central Bank of Nigeria (CBN) announced that the country’s foreign currency reserves were steadily growing and that the reserves stood at $43 billion. This represented almost 100 percent increase from about $23 billion recorded in October 2016 when Nigeria was in a recession. The last time the FX reserves hit the $40 billion mark was in January 2014, five months before global oil prices began to fall in mid-2014. Subsequent to the apex bank’s announcement, the reserves reached $45.3 billion as of 21st March, 2018.

To the current administration of President Muhammadu Buhari and the CBN, the accretion in FX reserves is hardly about economics. They consider it as a tool for wielding political clout. However, many Nigerians have different opinions about the rise in FX reserves. Some people also wonder why the government is accumulating debt at a time its FX reserves are growing. While some of these concerns may have validity, the government needs to educate the citizens on the economic benefits of foreign currency reserves. The man in the street wants to know the importance of foreign currency savings to his wellbeing.

There are even some misconceptions that the Nigerian government’s maintenance of FX reserves is a recent phenomenon. Nigeria has had foreign reserves since the 1960s. According to available data, the country’s foreign exchange reserves averaged $10.9 billion over the last 57 years, reaching an all-time high of $62 billion in September 2008, and a record low of $63.22 million in June 1968.

So, what are foreign currency reserves? Why does Nigeria need them? What’s their impact on the economy? How do they affect the common man? And how much of FX reserves is enough?

In the 5th edition of its Balance of Payments Manual, the International Monetary Fund (IMF) describes foreign reserves as “consisting of official public sector foreign assets that are readily available to, and controlled by the monetary authorities, for direct financing of payment imbalances, and directly regulating the magnitude of such imbalances, through the intervention in the exchange markets to affect the currency exchange rate and /or other purposes.”

Contrary to the misperception that not all reserves are assets, foreign exchange reserves are classified as assets in the balance of payments (BoP) of a country. FX reserves are located in the capital account section of the BoP, which includes foreign direct investment (FDI), portfolio and other investments. These show that reserves are an important element of a country’s international position.

According to some literature, there are seven major reasons a country maintains foreign currency reserves. First, FX reserves are used to maintain a fixed exchange rate for a domestic currency. In a fixed exchange rate regime, the value of the local currency is tied or pegged to some other widely-used commodity or currency. This helps to remove volatile currency movements and provide some level of currency stability. In such a regime, central banks usually commit to buying and selling forex to forestall sudden changes in the exchange rate that might discourage trade and investment.

The second rationale for a country to want to use FX reserves is to keep the value of its currency lower, relative to major trading partners. This is to make its exports relatively cheaper. A third reason is to maintain liquidity in the case of an economic crisis. Foreign exchange reserves enable countries to coordinate trade policy and participate in international trade, which is dominated by the U.S. dollars.

Fourthly, FX reserves provide confidence and assurance to investors, thereby preventing capital flight. Having a currency’s value backed by reserves in stronger currencies shores up confidence in the local currency. A fifth reason for maintaining FX reserves is to meet external obligations such as financing of imports.

A country may use FX reserves to fund critical sectors. China has used this strategy to invest in infrastructure. Finally, a country would want to use its FX reserves to earn returns through diversified portfolios.

While other currencies like the British pound sterling, the Eurozone’s euro, the Chinese yuan and the Japanese yen are common foreign exchange currencies, most global FX assets have been held in U.S. dollars since the collapse of the Bretton Woods system, which lasted between 1944 and 1971, during which time gold was the primary currency reserve for most countries.

To be sure, FX reserves serve different purposes to different countries, depending on the individual nation’s foreign exchange policy as well as other economic factors. Japan purports to have a floating foreign exchange system. However, the country holds the second largest foreign reserves stockpile, after China, the world’s largest holder of FX reserves. China’s reserves (mostly in U.S. dollars) reached $3.16 trillion in January 2018.

In principle, a floating exchange rate regime does not need forex reserves to back the value of the domestic currency’s value. The balance between the supply of and demand for forex should determine the exchange rate. But in practice, countries that claim to allow their currencies to free-float actually don’t. That is why they hold foreign exchange reserves in the event they need to use them to stabilise the exchange rate, apart from using them as savings during potentially future crisis.

In Nigeria’s case, the country moved from a fixed exchange rate system in June 2016, to what is technically referred to as a “managed” or flexible exchange rate regime. This move was expedient in terms of boosting supply of FX in domestic market, stabilising the FX market and gaining the confidence of foreign investors. The Nigerian equities market has since been the darling of global investors. And with the recovery in oil prices, the country’s foreign reserves have had to reverse their depletion course.

So how much reserves are enough? Several years ago, it was enough for a country to have forex reserves enough to cover three to six months of imports. Not anymore. In December 2016, Nigeria’s reserves were enough to cover 12.6 months of imports. For a country like Nigeria, what should be enough is a very subjective question. It would sometimes depend on the policies being pursued by the central bank and also the structure and vibrancy of the economy. Other contingent factors would also include the share in GDP of the traded and non-traded sectors, the level and rate of capital inflows and outflows, as well as commodity prices.

In 2011, the IMF proposed new metrics for assessing reserves adequacy. The metrics involve taking into consideration the probability of tail events, among other factors. Other guidelines involve benchmarks like percentage of reserves to short-term debt, ratio of reserves to GDP. In 2015, Greece did not have enough reserves to cover the country’s debt payments and current account deficits for the next 12 months. It ended up falling into crisis.

There’s no doubt that foreign currency reserves have far-reaching positive implications for the economy. In a paper by Olayinka Akinlo, titled “Impact of Foreign Exchange Reserves on Nigerian Stock Market,” published in the International Journal of Business and Financial Research, it was established that the relationship between foreign reserves and the stock market has significant policy implications. According to the paper, “Foreign reserves have a positive effect on stock market growth.”

It is instructive to note that while FX reserves are very important to the Nigerian economy, as long as poverty and lack of basic infrastructures continue to ravage the country, the debate on the rationale for accumulating foreign reserves will not abate.

Therefore, the government should refrain from seeking to gain political capital from the accretion of Nigeria’s FX reserves. The reserves should continue to be strictly an economic policy tool. As the country continues to grow its reserves, care must be taken to ensure that mistakes of the past – when reserves were frittered away into private pockets – are not repeated. More importantly, information on the deployment of the FX reserves – as well as the general principles used in managing the reserves – should not be shrouded in secrecy.

Finally, the monetary authorities should know when the level of FX reserves is enough. Stockpiling reserves just for the sake of it could be counterproductive to the economy. Keeping reserves in a foreign land helps to develop that country. We cannot continue to beg and borrow funds to develop the country when we have funds stashed away. The CBN and the Ministry of Finance should devise a means of calculating exactly how much reserves we need at every particular period in time. That way, we would not keep stashing away funds needed to develop our own economy.

@jideolutuyi

Posted in Africa, Finance, Foreign Exchange Reserves, Foreign Reserves, Governance, Nigeria, Politics- | Leave a comment

Konga and Nigeria’s e-commerce industry

 

In my column of last month, I wrote about Nigeria’s retail industry and its potential to become the country’s next big industry. I also touched briefly on the gains made by the domestic e-commerce sector. Unfortunately, soon after the column was published, one of Nigeria’s top e-commerce companies, Konga, was acquired by Zinox Technologies Limited, an integrated information and communication technology (ICT) solutions conglomerate.

The deal to purchase Konga was reportedly worth a paltry $10 million. Furthermore, OLX – a leading global online classified advertising platform owned by South Africa’s Naspers, which also owned a majority stake in Konga – announced it was shutting down its Nigeria office. Nevertheless, OLX said its platform will continue to operate in Nigeria, although without an office.

I was jolted by these two news items. I also received a couple of emails from friends asking if I still believed the Nigerian e-commerce industry could survive the tough business environment.

Available details on the Konga deal indicate that Zinox Group, which is also an Original Equipment Manufacturer (OEM), would take over Konga.com, Konga’s e-commerce platform; KOS-Express, the logistics arm of the company; and KongaPay, its integrated mobile money payment channel. Some industry watchers and analysts have flayed the acquisition fee for Konga as being too low.

Some people have claimed Konga was mismanaged. Others say there is a flaw in the e-commerce company’s business model. Still, there are some who think e-commerce cannot thrive in the current Nigerian marketplace. While we cannot confirm the mismanagement charge, the issues regarding the business model and whether or not the Nigerian economy is ready for e-commerce are subjects for rigorous debates.

To put things in proper perspective, let’s take a look at Konga’s funding over the years. After its launch in 2012, the company raised $3.5 million in seed investment from Kinnevik AB, a Swedish investment company. In 2013 the company raised $10 million from another round of fundraising from Kinnevik AB and Naspers. Over a five-year period, Kinnevik AB reportedly invested a total of $36.1 million in Konga, while Naspers invested $91.2 million. All in all, Konga was estimated to be valued at $200 million.

If there is any veracity to the $10 million acquisition fee by Zinox, it would mean Konga lost 95% of its valuation. This is why some commentators have viewed the diminishing fortunes of Konga as a bad omen for Nigerian technology startups. How can a company, once referred to as a giant in the e-commerce sector, a few years ago be sold for a measly sum in 2018? There is a lot for industry watchers and technology entreprenuers to be concerned about.

Konga has been a beacon of hope in the Nigerian e-commerce ecosystem. Today, I can attribute my first e-commerce experience in Nigeria to Konga. Last year was the first time I shopped on Konga when our office furniture was ordered on the e-commerce platform. The transaction was seamless and the items were satisfactorily delivered.

Apart from the harsh operating environment in Nigeria, Konga’s ever-changing policies could also have been responsible for its challenges. For instance, the stoppage of the company’s pay-on-delivery system, among other frequent changes, could have irked many customers and merchants alike. Moreover, it was a surprising disclosure that Konga had an active customer base of 184,000, according to Kinnevik AB’s 2016 second quarter report. This customer base is less than 1% of Nigeria’s population. This is disappointing not just for Konga as an e-commerce company, but also for the Nigerian e-commerce market.

Like every other SME, Konga must have faced challenges. But some of the challenges peculiar to the e-commerce sector include poor road infrastructure, weak electronic payment infrastructure, inadequate power supply and broadband internet, inefficient postal service, and security challenges. Given all these factors that pose a definite growth challenge for technology startups in the country, internet businesses need to come up with solid business models that will stand the test of time. Such companies should also realize that financial success will not come immediately.

Just last year, Kinnevik AB said in its report that Konga was just on its way to profitability, after years of losses. Konga’s rival, Jumia, posted a net loss of about $61 million during the same period. Meanwhile, Yudala, also a large e-commerce platform, doesn’t see much profitability until 2020.

Despite the Konga sale, the e-commerce sector in Nigeria is not bereft of great potential. According to Gabriella Mulligan, Co-founder of Disrupt Africa – an online portal providing news and information on Africa’s tech start-up landscape – Nigeria’s dominance of the African e-commerce landscape is one of the most exciting findings in its report, Afri-shopping: Exploring the African E-commerce Start-up Ecosystem 2017. According to Mulligan, “for the first time, we have clear evidence of the outstanding trajectory of the country’s e-commerce space as being driven by entrepreneurs. While South Africa and Kenya have typically stolen the limelight hitherto in conversations about tech entrepreneurship, this research makes it clear Nigeria is on the brink of huge e-commerce success – and will become the first African country to truly take retail online at a similar scale to Western markets.”

Just over a year ago, DealDey – another online business founded by Sim Shagaya who is also the founder of Konga – was acquired by Ringier Africa Deals Group, a joint venture between Swiss-owned Ringier Africa AG & South Africa-based Silvertree Internet Holdings. This is an indication that investors are still betting on Nigeria’s online businesses.

What is evident from the foregoing is that the absence of a sound business model or the efficient execution thereof, doesn’t equate to the absence of opportunity. Konga’s predicament should be a wakeup call to the rest of the pack in the tech startup ecosystem. They need to review their business models, ensuring they are sound and sustainable. Each of them must eliminate waste and focus on their individual competitive advantage.

Another major challenge in the Nigerian emerging e-commerce sector is trust deficit. Customers are still not able to transact with online businesses, especially where they are required to provide their personal information such as credit or bank card details. Confidence and trust is an essential requirement for acceptance of electronic trading. Designers of online marketplaces have to tackle these challenges and find ways to build enough trust to facilitate transactions between strangers. Trust deficit is the reason over 90% of e-commerce transactions happen through pay-on-delivery.

Online businesses have an obligation to come together to find a solution to this common problem. Without a lasting solution, the online business community may take longer to realise expected success. One way to resolve this could be through regulation. A strong advocacy could begin for the establishment of a separate regulator for the online marketplace and other internet businesses. This regulator could help put in place mechanisms to promote trust among customers and businesses.

As for the new e-commerce startups warming up to hit the market, it must ensure that it has developed a long-term strategy, which will include alternative ways of raising financing pending when their businesses attain critical mass. If you cannot run warehouses and manage inventory, simply opt for an online marketplace that connects buyers and sellers. Ensure your business idea solves a problem; ensure it eases a pain; if it doesn’t do either of these, it’s not sustainable. Start with a moderate-scale model as you continue to finetune and perfect it from there.

From financial fraud, flawed business idea, bad execution of a good idea, and lack of capital, we have had hundreds of very costly startup failures. Some of these are Kozmo.com, which raised $256 million in funding; Boo.com, after raising $135million in funding; and many more. Some of Nigeria’s failed startups include Easy taxi and efritin.com. While many of these companies failed totally, same cannot be said of Konga, given the lifeline it has received through the recent acquisition by Zinox.

It remains to be seen what Zinox will do with Konga. There have been insinuations that the acquisition could lead to the integration of Konga and Yudala, owned by the son of the founder of Zinox, Leo-Stan Ekeh. Regardless of how Konga might thrive as a subsidiary of Zinox, I am still very optimistic of Nigeria’s e-commerce business landscape. The failures of Myspace, Orkut, Friendster, and Hi5 didn’t stop the success of LinkedIn, Facebook, Instagram and Snapchat.

Financial experts have estimated that Nigeria’s e-commerce industry could be valued at $50 billion over the next decade. With mobile telephone coverage currently at 77% of the 185 million Nigerians and internet penetration rate of 50%, the opportunities are enormous.

While it will be foolhardy to downplay the difficulties in creating a very successful e-commerce business, it will be unwise to overlook the enormous opportunities. Indeed, valuable lessons can be learnt from Konga’s situation.

 

@jideolutuyi

 

Posted in Africa, E-Commerce, Entrepreneurship, Innovation, Nigeria, Technology | Tagged , , , , , | Leave a comment

Is the retail sector Nigeria’s next big industry?

delta city mall

Nigeria’s population of 186 million people and the country’s rapid urbanisation present a huge opportunity for global retailers. Moreover, its fast-growing middle class makes Nigeria a formidable consumer market in Africa. However, the key to making the retail sector more competitive and contributing more to Gross Domestic Product (GDP) lies in the government’s ability to formalise the sector.

Some of the bottlenecks that policymakers must address include improving the level of physical infrastructure, reducing the high unemployment rate, and boosting GDP per capita to support consumer spending growth. The demographic advantage, high population growth rate, and rising urbanisation will not automatically translate to high consumer spending. But a formal retail industry has the potential to employ millions of Nigeria’s teeming youths and improve incomes.

In my November 2017 column in Financial Nigeria, I cited a 2013 report by McKinsey and Company, entitled “Africa’s growing giant: Nigeria’s new retail economy.” The report estimates that from 2008 to 2020, there is a $40 billion growth opportunity in food and consumer goods in Nigeria. But despite this positive forecast and the highly favourable fundamentals, the projection would not be realised without the necessary policy measures put in place to tackle the challenges impeding the sector’s growth.

Nigeria’s retail sector remains relatively under-developed. Over 80% of the shopping is still carried out at the traditional shops such as corner shops, kiosks, local markets and also from street vendors. Notwithstanding, the sector is seeing a shift towards modernisation as the economy grows and diversifies. The trend towards modernisation will continue as the rate at which the population is shifting from rural to urban areas continues. According to the McKinsey report, Nigeria’s rate of urbanisation is one of the fastest in the world, with ongoing urbanisation rate estimated at 4 per cent per annum.

According to the International Labour Organization (ILO), at least 142 million people work in the retail sector in developing countries. Retail employment accounts for an average of 10 to 15 per cent of the job market in any given country. Seeing that the retail industry is very vital to a nation’s economy, the Nigerian market holds significant opportunities for retailers (local and international), real estate investors as well as the Nigerian people in terms of job opportunities.

But investors have noted that although Nigeria offers a potentially massive consumer market, the country’s opportunities are not without high risks and a challenging business environment. Notwithstanding these risks and challenges, the Nigerian retail market – which currently accounts for about 16.4 per cent of total GDP – remains a gold mine. With the right policies and government support, the retail sector could be the nation’s next growth frontier.

Retail space in Nigeria reached 326,958 (sqm) in 2017, compared to 30,000 sqm in 2005. From only two shopping malls – The Palms Lekki Mall in Lagos and Ceddi Plaza in Abuja – 13 years ago, the country now has several malls such as the Jabi Lake Mall in Abuja, Ikeja City Mall and Maryland Mall in Lagos, among others in Port Harcourt, Ilorin, Owerri, and Onitsha.

The retail space in Nigeria is still miniscule when compared to the other markets such as South Africa, Africa’s most developed retail economy, which boasts of 23 million sqm of retail space. Despite its maturity, South Africa was ranked 26th in the 2017 Global Retail Development Index (GRDI), published by A.T. Kearny. The GRDI ranks 20 developing economies for retail investment, identifying not just the most attractive market today, but also those that offer the most potential in the future. Nigeria is ranked 27th, and also behind Tunisia (24th) and Kenya (25th). While India tops the ranking with rapidly expanding consumer spending, followed by China and Malaysia, the highest ranked African retail market in the 2017 GRDI is Cote d’Ivoire at 17th position, for its high economic growth rate – making it an attractive target for retailers.

South Africa’s retail market is relatively modern, with around 80 per cent of sales in formal outlets. The country has a well-developed retail sector including a number of major domestic players, which include Steinhoff International, Pick n Pay, Shoprite, Woolworths, Spar, Truworths, and Holdsport. The 12 largest retailers in the country account for nearly R600 billion (or $50.6 billion) in annual sales.

But in terms of the growth of consumer spending in Africa, Oxford Business Group (OBG), a global consultancy group, said last year that the average value of consumer spending in Kenya has risen by as much as 67 per cent over the past five years, making the country Africa’s fastest-growing retail market. The formal retail sector in Kenya accounts for between 30 and 40 per cent of the total retail market.

In recent years we have seen the expansion of foreign retailers into Nigeria, especially from South Africa, and there are still more waiting to come. Nigeria’s retail industry needs all the support required to take it to the next level. But like other sectors, the lack of infrastructure has impeded the development of the industry. Without infrastructure, formal retailers will be tentative about entering the market.

Public-Private-Partnership is a good model to help the development of the sector like we have seen happen between Greenfield Assets Limited and the Abia State government, who are currently developing the first purpose-built smart mall in the world. It will also be the largest mall in Africa, located in Osisioma Ngwa Local Government Area of the state. The mall will have a 280,000 sqm retail space, and able to accommodate about 5,830 shops. The N50 billion mall will also include a games arcade, petrol stations, climate-controlled warehouse and a state-of-the-art cinema. While this is commendable, the country could do better with more of such retail projects.

More local investors should be encouraged to invest in both real estate projects as well as establish retail brands. Apart from the dominant foreign brands in the local retail sector, Nigeria needs local brands to take the lead in the country’s emerging retail sector. This would be a more sustainable approach to formalising retail experience in the country.

The formalisation of this sector has several benefits to the economy, apart from the increase in employment, increase in revenue to the government, modernisation of the environment, it also gives consumers more choices and drives down prices. A study in 2010 found that consumers in Poland, Bulgaria and Romania preferred modern retailers for their groceries. The reasons for their choice included competitive prices, better variety and higher quality. Modern retailers invest in technologies and processes that enable them to achieve greater economies of scale and drive down costs, contributing to lower prices for consumers.

The entry of modern retailers and the formalisation of the industry will also drive developments in other industrial value chains, such as agriculture and manufacturing. Most of these retailers will buy a large portion of their products from local farmers and manufacturing companies in Nigeria. We have seen this play out with Shoprite, where most of the outlet’s supplies are sourced locally, especially its food supplies.

Online retailing is still at its infancy in Nigeria. Therefore, it does not yet pose a threat to the brick and mortar retailers. We have seen some successes with Jumia and Konga, the two largest online retail platforms. With growing internet penetration and increased adoption of smartphones, consumers may slowly move towards online retailing. Nevertheless, as many Nigerians still want the mall experience, patronage for formal retail outlets would not slow down.

In order to fully harness the vast opportunities – including favourable return on investment (ROI), job creation, development of cottage industries, infrastructure development, contribution to GDP growth – the challenges of harsh business environment, political instability, insecurity, poor infrastructure and high financing cost must be properly addressed. Nevertheless, the economic impact of the formalisation of the Nigeria’s retail industry cannot be overemphasized. According to McKinsey and Company, “Nigeria’s retail market is both capturable and too large to ignore.”

@jideolutuyi

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The Age of Shame

There’s an epidemic of massive proportion moving across this country at the speed of light. It has swept up the high and mighty – politicians, actors, corporate chieftains and many a lesser soul. Careers have been ruined and reputations destroyed. Why? All because of a pattern of bad behavior that is no longer being tolerated in today’s society. Claims of sexual assault, sexual harassment and racism are reaching a crescendo with no sign of abatement. We have officially entered the Age of Shame.
Entrepreneurs need to pay particular attention to this trend. We have an opportunity to do great things, but we can easily be derailed by our own actions. This is really very simple. We must be respectful of others at all times – period. We don’t make inappropriate comments to or advances on anyone else. We don’t take actions that could be construed as discriminatory of others. We treat others as we would want to be treated.
There’s a dangerous downside to the Age of Shame. The frenzy of accusations has created a lynch mob mentality. No longer are we innocent until proven guilty. Now, convictions are swift in the court of social media. There are no trials in the current “me too” environment. We can easily become ensnared in this cycle unless we take extra care to avoid it.
Harvey Weinstein, Al Franken, Kevin Spacey, Roy Moore, Mark Halperin, Bill O’Reilly and Matt Lauer all have something in common. It’s called arrogance. These men thought their station in life entitled them to boorishness and worse. This sense of entitlement led them to become arrogant and fostered a belief that they were bulletproof. As entrepreneurs we may realize a great deal of success. The best way to inoculate ourselves from arrogance is to remember this. The more successful we become the more humble we should become. It’s easy to develop “swagger” with success. I’m not a fan of swagger. It’s too easy for it to become an in-your-face gesture which in turn can lead to the arrogance we must guard against.
We can avoid the Age of Shame and its corresponding pain, and replace it with our own Age of Gain. We have much to gain if we do it right. We can display the highest level of integrity and model the type of behavior that others can admire. We are color-blind, gender-blind, sexual-preference-blind and national-origin-blind. Our objective is to focus on pursuing our mission and vision utilizing all of the talent that we have available. Once again the simple calculus is that we are respectful of others at all times.
The notion of respect is easy to understand. When our team members, our customers and our vendors feel respected, they are much less likely to take offense at something we might say or do that could be misconstrued. In other words, we buy goodwill that allows us the benefit of the doubt. Harvey Weinstein didn’t get the benefit of the doubt because he was such a tyrant. On the other hand, if everyone we know sees our motives as pure, an unintentional faux pas may be overlooked.
Character really counts these days. Rightly or wrongly there’s a lot of judging going on. Walking the straight and narrow truly matters. Being completely honest isn’t just a hallmark – it’s absolutely necessary to survive in the current environment. Keeping our reputation intact is essential to navigating the minefield of shameful accusations and hyper-reactions that we are witnessing daily.
When we are respectful of others at all times, we are less likely to be a casualty in the culture war that is raging. In so doing, we can sleep at night without worrying about the consequences that we might otherwise face.

By R . Lee Harris

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Budget 2018: Buhari should implement bold fiscal reforms

On November 7, 2017, President Muhammadu Buhari presented the 2018 budget to a joint session of the National Assembly. The N8.6 trillion budget proposal was tagged, “Budget of Consolidation.” While it is commendable that the administration presented the budget earlier than when it presented its previous two budgets, my take is that the budget is not expansionary enough and it indicates a lack of visionary leadership.

Before I continue, let me quickly make a full disclosure. Prior to the 2015 elections, I was one of those who supported President Buhari. He appeared to be a man of great courage and that was one of the qualities that endeared him to me. It was the thinking of most of his supporters, including me, that his antecedents, as a former military head of state, would enable him have the strong political will required to accomplish big things for the country. As my mentor and expert in leadership, John Maxwell, said, “Everything rises and falls on leadership.”

Regardless of my disappointment in the current administration, I am, nevertheless, not giving up on the president. I still believe that with courage and strong political will, President Buhari has what it takes to make a great impact before the end of his tenure.

That Nigeria will be presenting a N8.6 trillion ($23 billion) budget for 2018 is not only shameful but one that indicates a lack of courage in leadership.For Nigeria to realise its full potential that has been talked about for decades, the government cannot afford to be conservative or pull punches with fiscal policy. From transport to healthcare; from education to national security, there are dilapidated infrastructures staring us in the face.

The International Monetary Fund (IMF), as well as various commentators and economists have argued that Nigeria’s rising debt profile is worrisome. Part of the concern over the country’s debt situation is with the ratio of available revenue that is being used to service the debt. The Ministry of Finance has come up with some initiatives, such as the Voluntary Asset and Income Declaration Scheme (VAIDS), which I wrote about in the August edition of Financial Nigeria. However, these initiatives are drops in the ocean. Common sense dictates that if public debt is rising, government revenue has to increase.

Perhaps the ambitious development projects that Nigeria needs to significantly improve the living conditions of the people and substantially increase economic output are not being considered because of insufficient revenue. Angola, with a population of about 29 million, earmarked about $44.22 billion as its budget for 2017. South Africa, a country of about 56 million people, budgeted about $115 billion this year. Despite having the largest population and the biggest economy in Africa, Nigeria’s 2017 budget is the equivalent of $23 billion.

The reason is not far-fetched. According to the Collaborative Africa Budget Reform Initiative (CABRI), general government total expenditure in 2016, as a percentage of GDP was 9.26% for Nigeria. The data for South Africa was 32.96%, while Angola’s government’s expenditure, as a percentage of GDP was 23.72%. Also in 2016, Nigeria’s general government revenue as a percentage of GDP was 4.83%. The data for South Africa was 29.43%, while that of Angola was 19.59%.

These indicators show where some of the problems lie: Too little revenue, too little expenditures. It was my expectation that this administration would use the opportunity of decreased oil prices to introduce bold reforms that would not only quicken economic growth, but would also increase the non-oil revenue base. The government has an ambitious projection to triple non-oil revenue to N4.2 trillion in 2018. While this is impressive, experts have argued that this projection is unrealistic, citing the revenue underperformance in previous budgets. The federal government’s share of the companies’ income tax and Value Added Tax (VAT) are projected to contribute about a quarter of the non-oil revenue forecast for next year.

It is not going to be an easy task. But the Buhari administration needs to critically look at more innovative ways to increase revenues. One of the surest ways of doing this is to increase the VAT and also raise taxes on the rich. Indeed, the Minister of Finance, Kemi Adeosun, did say the government plans on increasing tax-to-GDP ratio from 6% to 18% by 2020, and improving compliance with existing tax laws. And I did argue in my August column that expanding the tax net, which currently has about 14 million people out of a taxable class of about 69 million people, will go a long way to increase non-oil revenue.

The tax rate also needs to increase on certain types of taxes. A look at the percentage of VAT across the globe shows that Nigeria’s VAT, at 5%, is one of the lowest in the world. Australia is currently at 10%, Chile 19%, Brazil 12%, Denmark 25%, Germany 19%, Ghana 15%, and Mexico 16%. Canada has a federal GST of 5% with that of the provinces ranging from between 8-10%, increasing the total to almost 15%, depending on the province.

As South Africa struggled with slow economic growth, the government introduced some measures to increase revenue this year. One of such measures was to increase the dividend withholding tax rate from 15% to 20%. A new income tax rate of 45% was also introduced for those with taxable income above R1.5 million. Fuel levy was increased by 30c/litre, road accident fund was increased by 9c/litre. Excise duties for alcohol and tobacco saw increases of between 6% and 10%, all in the bid to raise additional R28 billion in tax revenues. Meanwhile, VAT in the country remained unchanged at 14%. In the country’s 2017 budget, relief was provided for the low-income segment through an affordable housing programme, increase in allowance for tax-free savings accounts, increase in medical tax credit as well as increase in child support grant.

Good and responsible governance is required to achieve a sustainably growing economy that benefits all, including the vulnerable in society. In Canada, the IMF has recommended that the country spends $8 billion a year over 11 years to provide affordable child care services for parents. This will enable educated mothers who are stay-at-home parents to re-enter the workforce. The IMF sees this as one of the most effective ways to increase productivity, grow the Canadian economy, while reducing the national average for child care fees by about 40%. In its opinion, the spending would be recovered when more parents work and pay taxes.

The importance of political will, which the Buhari administration has yet to bring to bear in the area of revenue generation, cannot be overemphasized. India’s Prime Minister, Narendra Modi, said, “For achieving good governance political will is necessary. Good governance is a political process. Though role of civil society is critical, without political will and political process, sustainable good governance cannot be achieved.”

During the great depression Herbert Hoover, America’s 31st President, a great believer in balanced budget avoided budget deficit by greatly increasing tax rates on the wealthy. To pay for government programs and to make up for revenue lost during the depression, Hoover signed the Revenue Act of 1932. The Act increased taxes for the rich to about 63% on their net income up from 25% when he took office. Under Hoover, a check tax of 2cents on all bank checks was also introduced.

George Washington, America’s first president appointed Alexander Hamilton another founding father as the first Secretary of Treasury. Hamilton embarked on an ambitious plan of economic nationalism. From 1790 Hamilton began series presentations of his bold reforms and plans to Congress. His plan contained seven central elements. These are payment of foreign debts (owed to mainly France, Netherlands and Spain), repayment of all domestic debts, the takeover of states’ debts by the federal government, Taxation (which recommended increase in tariffs), establishment of the bank of United States, establishment of the mint and lastly promotion of manufacturing. In 1793, under Hamilton’s tax regime, the federal government collected enough revenue to pay off interest on debts ($2.8million in 1793), fund the army and navy (over $1million in 1792) and still balance the federal budget
It is instructive to note that not all these policies or reforms where not popular at the time they were introduced, but if leaders rely on the popularity of their reforms at the time of introduction, nothing significant will be achieved

Bold reforms do not come easy. Visionary leaders and leaders who don’t care about the next elections, but whose preoccupation is the next generation have been known to take bold initiatives to put their countries on the right path. President Buhari should do the right thing. He should not be too mindful of the opposition. As Seneca said, “the pressure of adversity does not affect the mind of the brave man.” The Buhari administration needs to come up with ambitious plans that are achievable. And strong political will must also underlie these plans.

@jideolutuyi

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Making the economic republic of Lagos great

During my recent visit to Lagos, not unlike the previous ones, I had the opportunity to observe and scrutinize the energetic metropolis. This often required me to take off my Nigerian lenses and put on the lenses of a tourist, an investor, or an expatriate. With these different critical lenses, I was able to assess, without bias, the real situation of things.

My conclusion during this last visit confirmed what is already known: Lagos is far ahead of all the other sub-national units in virtually all aspects of development, including the civil service. Indeed, Lagos is now an economic republic on its own.

Welcome to the ‘Economic Republic’ of Lagos

According to the 2016 edition of Demographia World Urban Areas, published by NewGeography.com, Lagos is ranked the 24th largest city in terms of population within the recognised metro area. From the mainland to the island, every corner of the sprawling state is economically vibrant. Yet, there are untapped opportunities and unrealized potentials lurking everywhere.

It is a well-known fact that since the 19th century, Lagos has been a melting pot of Africans and Europeans. The barber who cut my hair in Lekki, the lady who gave me a nice pedicure in Ikeja, and one Uber driver and another Taxify driver were all foreigners who had come into Lagos from neighbouring African countries as economic immigrants. Taken as a country, Lagos is the 5th largest economy in Africa.

Despite the lack of government’s support and paucity of basic infrastructure, the Lagos entrepreneurial spirit is not dampened. CNN’s Anthony Bourdain noticed this during his recent visit for his popular travel and food TV show, Parts Unknown. “I have never been in any place where I’ve seen such wild, entrepreneurial, positive thinking, a go-go, unrestrained capitalism completely out of the purview of control of government,” the American chef and television personality said. The Rockefeller Foundation listed the state among the 100 most resilient cities in the world.

Development experts have pointed out that a city’s performance reflects the strength of its economy, social conditions and the environment. Regardless of its economic achievement thus far, Lagos’ urban development requires smart thinking and global best practices in urban planning to make the city sustainable and also feature in the best cities rankings. Singapore rose from a colonial harbour to a world-class city-state in just a few decades. In its report “How to make a city great,” McKinsey and Company warns that, “Economic growth, however, does not automatically deliver a better quality of life for citizens and can often harm the environment. Indeed, many cities find they have to take expensive remedial action to fix problems caused by growth itself. It is better, then, not to assume that all growth is good, but to learn what smart growth looks like.”

Making Lagos great

As it grapples with the challenges of urbanisation, there are critical sectors that the government must pay close attention to and provide necessary interventions in. Lagos is the commercial, cultural and entertainment capital of Nigeria. It is home to the nation’s major ports, and the Nigerian Stock Exchange (NSE); the headquarters of virtually all the banks are in the city. Most of the country’s manufacturing industries, multinationals and oil companies are based in Lagos. This explains why there is a high incidence of migration from less economically active sub-national units to the state. People who are seeking employment opportunities throng to Lagos, hoping  to improve their living conditions.

Lagos is the capital of Nollywood, the metonymy for the Nigerian movie industry. The industry’s major distribution centres are located in Idumota Market on Lagos Island and Alaba International Market in Ojo. This billion-dollar sector with huge potential to support other value chains of the Lagos economy remains poorly regulated. This is stifling the potential of the industry. Practitioners and consumers alike are dissatisfied with the performances of the key regulatory bodies, Nigerian Film Corporation (NFC) and National Film and Video Censors Board (NFVCB). These bodies have not been able to fulfil their mandates to provide an enabling environment for the growth of the film industry. The industry is still bedeviled by piracy and weak distribution infrastructure to ensure videos and DVDs get access to the market.

With its many private beaches and resorts, Lagos can easily be one of the leading tourism destinations in Africa. It is surprising that I have never come across an advert in an international tourism magazine that tells the international community about the culture and tourism potentials of Lagos. Although some steps have been taken by the government to revive a number of cultural festivals, and there are plans to build six theaters across Lagos, these would not be enough.

The culture and tourism sectors require massive and focused investments both by the public and private sectors. Seoul, the world’s 5th largest city, is home to 115 museums. The South Korean capital also has the world’s largest indoor amusement park, Lotte World.

Traditionally, the physical elements of a city are its road networks, buildings and the open spaces. Although Lagos has one of the largest and most extensive road networks in West Africa, the transportation networks are sorely inadequate to meet the demands of the vast and growing population. Road congestion at peak hours remains a perennial feature of the state. Although its BRT system is functional, it is not extensive. A rail system that runs across the city is still under construction, while its water resources are underutilized. A total reform of the transportation system is required if the state intends to prepare for the future.

Other areas that need urgent attention include power, water supply, broadband, waste management, and affordable housing. Improvements in these areas will attract foreign investors and help small and medium scale businesses thrive, thereby helping to increase tax revenue for the state. During my last visit, I saw a lot of small and medium-scale businesses operating independently of state-provided support or public infrastructure. This kind of situation does not motivate business owners to pay their taxes.

The government also needs to pay attention to the retail industry. Analysts have forecasted that the next frontier of middle-class growth will be in the retail sector. McKinsey and Company’s report, “Africa’s growing giant: Nigeria’s new retail economy,” estimates that between 2008 to 2020, there is a $40 billion growth opportunity in food and consumer goods in Nigeria. Lagos will attract a major part of this. A well-thought-out retail building policy will help to attract the right retailers.

In all this, the government needs to collaborate with the private sector to achieve its programmes. Under the privately-run park system in Tokyo, parks are developed and managed by the private sector. Hope SF, a partnership between the city of San Francisco and private developers, is transforming distressed public housing units on five sites into thriving, mixed-income communities with more than 50,000 housing units.

Promoting inclusivity

As Lagos continues its rapid urbanization process, it will be foolhardy to leave behind the vulnerable residents of the state. Social issues need to be taken seriously. Mayor of Boston, Thomas Menino, intoned an inclusive vision when he said: “My job is to make sure that everybody has an opportunity in Boston. More than 50 percent of our population is made up of different minorities. We have to look out for everyone. This includes good education, good schools, and good services.”

A well-drafted social entrepreneurship framework can help in addressing social issues, while creating jobs and reducing unemployment. The value proposition of great cities is not limited to economic development; they offer opportunities to all residents, reduce inequalities and protect the vulnerable.

The late American urban planner, Kevin Lynch, prescribed the five basic dimensions of a city’s performance as: vitality, sensibility, fit, accessibility, and control. According to Lynch, a vital city successfully fulfils the biological needs of its inhabitants, and provides a safe environment for their activities. A sensible city is organized so that its residents can perceive and understand the city’s form and function. A city with good fit provides the buildings, spaces, and networks required for its residents to pursue their projects successfully.

An accessible city allows people of all ages and background to gain the activities, resources, services, and information that they need. A city with good control is arranged so that its citizens have a say in the management of the spaces in which they work and reside. Until Lagos meets the above criteria, its mega-city status will remain a mirage and questionable.

@jideolutuyi

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6 Cool Tech Jobs of the Future (That You Probably Haven’t Heard of)

What the experts are saying is true – the highest demand jobs of the future will be in STEM fields! Not all STEM fields are created equal, however; as it turns out, the majority of high-paying STEM jobs are in computing. This is great news for you and your young Tynkerer, who’s getting a head-start on computing skills and principles! So what are some of these tech jobs that are on the table for your child – and more importantly, which are the jobs they’ll get excited about? We’ve outlined six of the coolest tech jobs of the future, because it’s never too early to get inspired!
1. Blockchain engineer
If you’re following the ascent of cryptocurrency, you’ve probably heard of bitcoin – but do you have any idea about the technology behind the digital currency? The blockchain, the core tech behind bitcoin, has the potential to be applied to everything from ID cards to trading platforms. While the tech behind blockchains isn’t necessarily difficult to understand, it’s niche enough that finding good blockchain engineers is proving difficult for employers. For those willing to put in the time to learn the necessary algorithms and cryptography, becoming a blockchain engineer places you at the center of a dynamic new field!
2. Commercial civilian drone operator
From use in infrastructure inspections to delivery services like Amazon Prime Air, drones are the future. With the implementation of drones comes a need for those who can adeptly control commercial drones. Want your kids to get an early start? See our drone courses and let your kids program and fly their own drone!
3. Avatar manager
For a fascinating convergence of art and tech, look to this career of the future! An avatar manager is responsible for designing and managing virtual holograms of people. It seems more far-out than it is – in fact, many bands and artists already use holograms, so one can only imagine all the other handy applications of having a hologram of yourself on hand!
4. Digital artisan
A career as a digital artisan is ideal for out-of-the-box thinkers who’d like to combine IT skills with art and design to create amazing products and ideas. An interest in programming paired with a keen sense of creativity composes the perfect profile of a future digital artisan. Get your child ready by encouraging them to create independent projects in Tynker!
5. Virtual habitat designer
As more and more learning, working, and overall living moves into the virtual realm, someone has to make it navigable and comfortable! That’s where virtual habitat designers come in. Their role is like that of an urban planner – but of the digital world. Skills like art, design, and, of course, coding come together in this a fascinating career that appeals to many different types of people!
6. VR engineer
VR isn’t just for gaming anymore – it’s being used to bring people around the globe together through immersive news stories, academic collaboration, improved health care, and more. With so many divergent uses for VR on the rise, we’ll need lots of smart engineers to make it all happen! Your child’s dedication to learning a new realm of technology and a strong sense of innovation just might land your child an exciting job as a VR engineer down the line.

When asked what they want to be when they grow up, kids don’t always have a clear vision – as many kids we’ve spoken with have noted, most of the careers they’ll enter haven’t even been created yet! At the root of it all, the workplace of our changing world depends on creative problem solving. When kids code, they acquire these problem-solving skills as they learn the technical skill of coding. There’s no better way to prepare for the future!

 

By: Tynker

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The case for imposing broad-based sales taxes in the states

The Nigerian sub-national economies have always had cashflow problems, which have become acute in the last two years. With very few exceptions, the states are finding it difficult to pay workers and pensioners. Between four to 12 months’ – or more in some cases – salaries and pensions are being owed by the states. This is an absurdity.

Over the last two years, the federal government has bailed out the states more than once to enable them meet their payroll obligations. It is true that even in times of high oil revenue, some of these states owed salaries. The fall in oil revenue has made the situation worse.

The gatherings of states’ commissioners at the federal capital to receive statutory allocations every month is not only anti-development; it is an unfortunate practice in a federalism. It could also be likened to gathering of welfare recipients, receiving their monthly welfare benefits. It is high time states began to tap their human and natural resources to increase their revenue and improve the wellbeing of their people.

One of the most common avenues that sub-national governments in other climes use to generate revenues is by imposing sales taxes. A sales tax is a tax levied on the sale of goods or services. It is usually proportional to the price of the goods and services sold.

The sales tax has a fascinating history and it is believed to have been around for a long time. In 415 BC, during the auction of slaves in Piraeus, Greece, a sales tax of 1% was imposed. The Roman emperor Augustus also collected a 1% general sales tax, known as the centesima rerum venalium (hundredth of the value of everything sold), which he used to fund his military.

The first broad-based general sales tax in the United States was introduced by the state of Mississippi in 1930. Twenty-four other states introduced theirs in the late 1930s, followed by six states in the 1940s, five in the 1950s and 11 in the 1960s. Vermont was the last state to enact its sales tax in 1969. Five states (Alaska, Delaware, Montana, New Hampshire and Oregon) do not impose state-wide sales taxes. For some of these states without state-wide taxes, they have excise taxes, municipal sales taxes, gasoline taxes, as well as cigarette and alcohol taxes.

Basically, there are two types of sales taxes, one is a consumption tax or retail tax, which is a straight percentage tax placed on the sale of goods. It is considered the traditional type of sales tax. The second is the value added tax (VAT). The VAT is distinctly different from the consumption tax. It is an indirect tax designed as a final tax liability on the final consumption of goods or services. Currently, VAT is the only sales tax operated in Nigeria and it is collected by the federal government.

VAT was established in Nigeria on August 24, 1993 under the Value Added Tax Act 1993. It replaced the sales tax, which had operated under Decree No. 7 of 1986. The old sales tax was deemed to insufficiently cover the growing consumption industry, hence the need for its replacement.

I am not under the illusion that implementing sales taxes in the states in the current dispensation is going to be a soft sell, especially given the lack of trust in the leadership at every level. But despite the mistrust by the citizens, there needs to be more ways of generating funds to provide basic amenities. The onus is now on the leaders to prove that funds collected will be appropriately utilized.

As a country, both the citizens and their leaders are quick to compare Nigeria to the developed nations. But the reality is that development doesn’t come cheap. It comes when the leaders do what is right and the citizens pay their fair share and demand accountability from the leaders.

The fact is the revenue to meet the obligations of states has to come from somewhere. In my opinion, the sales tax remains one of the best options for the states to increase their revenue and invest in infrastructural development.

In an internal report by the economists at the Organisation for Economic Co-operation and Development (OECD) on the effects of various types of taxes on the economic growth of developed nations within the OECD, it was found that sales taxes are some of the least harmful taxes for growth. They are also economically efficient in collecting per dollar of revenue spent.

In a 2002 study conducted by the Fraser Institute on taxation in Canada, and focused on the marginal efficiency cost of various taxes in the country, it was found that per dollar collected, corporate income taxes did $1.55 in damage to the economy. Income taxes were found to be somewhat more efficient, doing only $0.56 economic damage per dollar collected; while sales tax came out on top with only $0.17 in economic damage per dollar collected.

A sales tax is considered a regressive tax. What this means is that the rate does not change based on a person’s income or wealth. Those against sales tax are quick to point out its regressive nature as the reason it does not favour the low-income earners. While this is correct, states who have implemented sales taxes mitigate the negative effect on low-income earners by excluding some goods and services such as rent, electricity, food, clothing and medications.

In a country with a very large informal economy and low tax-to-GDP ratio, the sales tax remains the most effective tool that can raise money from the informal sector, including the underground economy. Consider an example of a drug dealer who does not pay income tax. But he would have no choice but to pay taxes under the state’s sales tax whenever he purchases goods and services.

It is also evident that despite the high poverty rate in Nigeria, the country still ranks high in the purchase of exotic and luxury items like wines, designer clothes, cars and many others. These are potential sales tax items.

As stated earlier, selling a sales tax policy will be a hard sell. Taxpayers would need to be convincingly reassured that funds generated would be utilized for the benefit of the citizens. Some of the steps the government must take to reassure the people is to cut waste and show more seriousness in fighting corruption.

The states’ sales tax may not be a permanent tax in some cases, similar to what we have seen in the case of the province of Alberta in Canada. In Canada, the federal government operates a value added tax, called the Goods and Services Tax (GST), while most of the provinces operate the Provincial Sales Tax (PST). The federal GST rate is 5% while the PST rates vary from province to province. Only the province of Alberta and the territories of Yukon, Northwest territories and Nunavut have no sales taxes.

While Alberta is without a provincial tax or harmonized tax, it was the first province to impose a sale tax back in 1936-1937 during the Great Depression. The province, rich in natural resources, has gone 80 years without a sales tax.

Enacting and implementing the sales tax is a herculean task. But it is not unsurmountable. Any state that intends to implement a sales tax must be ready to back it up with technological support and innovation. Each state must also be aware that in implementing a sales tax, it needs to pay attention to the sales tax, if any, in the neighbouring state. If taxpayers see that it’s cheaper for them to cross the border to the next state to purchase an item just to evade a sale tax, they will do so.

For instance, the state of Texas doesn’t impose income tax. This makes it very attractive to corporate executives. But property and sales taxes in Texas are high. One study found that the bottom 20 percent of the Texan population pays 12 percent of their income in state and local taxes.

While the sales tax may not be a one-size-fits-all approach to solving the perennial cashflow problems of Nigerian states, each state would have to dig deep and decide on what is best for its populace.

@jideolutuyi

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