Nigeria Autos Report Q1 2009

BMI's latest Nigeria Automotives Report casts doubt on the government's ability and commitment to the revival of the country's automotive industry following a series of revelations that most allocated funds are allegedly not being disbursed to domestic producers. The fate of the automotive industry is symptomatic of the deeper problems of corruption, mismanagement, poor transparency and lack of adequate infrastructure.

A fund worth NGN60bn (US$450mn) accumulated from a 2% duty on imported automotive parts since 1993 and intended for investment in the automotive industry continues to sit idle in the Bank of Industry and is yet to be allocated, according to a Nigerian industrialist recently. Meanwhile, it was revealed in July 2008 that NGN3.72bn (US$27mn) of the NGN6.9bn (US$50.6mn) of funds officially intended to support the automotive industry had been loaned instead to the National Fertiliser Company of Nigeria (NAFCON). The loan had never been repaid back to the Automotive Development Fund (ADF) and NAFCON has since been privatised. The misallocation of a large portion of the ADF's funds suggests that state support for the automotive industry is susceptible to the alleged corruption seen in other areas of government. Moreover, the revelations show that the persistent lack of funds for capital investment in the industry ahead of privatisation, as a result of the misappropriation of funds, has delayed the rehabilitation of the industry.

Even when funds are disbursed, they have a limited impact on a company's commercial viability.

Although Dunlop Nigeria was provided with NGN1.47bn - the second largest disbursement from the fund - as part of a loan facility for its All Steel Radial Truck tyre plant, it announced in December 2008 that it would cease tyre production due to poor operating conditions, particularly frequent power cuts. The tyre-maker has frequently complained of the 'epileptic' electricity supply and the deterioration in gas supply. Infrastructural restraints on production are coupled with the manipulation of tariffs on tyres by importers, leading to an influx of under-priced, poor quality tyres on the market that are undermining the industry.

BMI expects a moderation in automotive sales growth due to declining economic growth and reduced bank lending. Gross fixed capital formation will be particularly affected, with BMI forecasting an 8.2% contraction in 2009. Added to this is the lifting of price controls on fuel from January 2009. These factors will have a particularly negative effect on the commercial vehicle market, which will see haulage operators holding back investment in new vehicles. Car sales will grow by 7.7% while commercial vehicle sales will decline by 1.1%, bringing total automotive sales to just under 100,000 units. However, a strong revival should ensure automotive sales of around 170,500 units by 2013, an 81.6% rise over 2008 estimates.

Nigeria scores 40.6 points (out of a theoretical maximum of 100) in the BMI automotive business environment rating this quarter, putting it in last place and 4.8 points behind Iran. The lack of transparency underscores that private businesses need to remain very careful in their dealings in the Nigerian market, even after all the progress that has been made in recent years. Contradictory policy courses, as well as reversals, remain all too common, with bureaucratic red tape adding a big premium to the cost of doing business in the country, relative to many North African and Middle Eastern peers.