Connect with us

Chinaza Onuzo: Zombie Industrial Policy


Chinaza Onuzo: Zombie Industrial Policy

by Chinaza Onuzo

For most of the latter part of the 20th century, Industrial Policy was a dirty phrase in mainstream economics circles. The government’s role was to create an enabling environment for all industry, not to go around picking which sectors to single out for special treatment. The markets would decide which sectors a nation had comparative advantage in, and if everything else was in place, those would be the sectors that developed naturally.  In those days the only thing Industrial Policy created were Zombie companies that could only exist because of the Policy: remove the policy and the company dies.

However primarily due to the success of the East Asian Tigers and China, Industrial Policy has experienced something of a rebirth. The conventional wisdom now is that judiciously applied Industrial Policy can be effective in developing and improving sectors of the economy.

However the key phrase is “judiciously applied,” as the risk of creating Zombie companies remains. Countries are supposed to design Industrial Policies that develop the Industry and allow the companies to compete around the world. Nigeria seems to ignore this new conventional wisdom, and tends to choose the types of Industrial Policy that leads directly to Zombie Companies.

The three types of Industrial Policy outlined below are the ones most commonly employed by the Nigerian government to create Zombie Companies.

First up is the “Here, take some free government money” Zombie creation policy.  This is the one where the government assumes all the risks, but pays the company some margin as profit. The most famous example of this is the petroleum subsidy scheme.

In this scheme, the government assumes all the risks of importation and for the honour of being on the list the “marketer” earns a margin of about 10%. After the subsidy scandal, the PPPRA recently whittled down its import list from 120 to 32, with plans to go down to 20. How many of the 88 companies that were struck off the list are expected to survive past 2013? Thankfully this is the rarest of the policies because even the government generally balks at giving away its money.

Next is the “Here, have a sector, go nuts” Zombie creation policy. This is the most popular of all the policies. This is the one where the government decides that Nigeria should be producing something or another, and then bans all foreign imports of that product.

It is hard to decipher how the government chooses these strategic industries but it does have the air of being ad-hoc. The companies in question are assuming some execution risk, after all they have to produce in the banned industry to make money. The government just guarantees a market for them.

The most recently famous example of this policy is the cement industry. Nigeria pays about twice the international price of cement because we have decided that we must produce it in the country. Dangote is the biggest beneficiary of this policy because he makes 50% profit margins. However WAPCO with its 14% margins and the others are the true zombie companies, because if the policy was removed today they are more likely to go out of business.

This policy is in a way more egregious than the earlier one. In the earlier one the companies take the money from government, in this one the government is taking the money from citizens of Nigeria. There is the argument that the government is only doing this to develop the sector. However take fruit juice that has been banned for close to ten years now. Chivita and co have developed very well, if you try and remove the ban today, they will say you are trying to kill their business. At least they unbanned textiles, so Nigerians no longer have to choose between being smugglers and going naked.

The last Zombie Creation Policy, and a pretty popular one at that, is the: “Here is a customer or two, enjoy.” This is where the government decides that a company has to source a product locally. This is not exactly the same as the previous example because in this case there are only a few potential consumers of the product. The obvious example of this is in our oil and gas industry.

Our government in its infinite wisdom has decided to increase the local content in oil and gas. One of the ways this laudable goal occurs is to ensure that all procurement of a certain value is handled by Nigerian owned and registered companies. Normally this should mean that oil and gas companies have to buy made in Nigeria products. However what it means in practice is that oil and gas companies have to get Nigerian companies to go abroad and buy products made in other countries.  As you can imagine the sector is quite competitive since the only barriers to entry in this business are a phone, access to quote lists and the number of a reputable courier.

However a better example of this is the recharge card industry. In 2004 it was mandated that telecoms companies in Nigeria have to buy locally produced recharge cards. There are only 5 – 10 potential purchasers of recharge cards; MTN et al.

The business was good in the early years as the early movers made a significant killing. However as the already low barriers to entry got lower due to technology, and the introduction of vouchers in addition to cards, there was a massive rush into the business. Now a quick Google search of “how to make money doing recharge card business” will acquaint you with many of the scammers seeking to fleece the gullible looking for the path to quick riches. The fate of the recharge card sector is also instructive for another reason: sometimes governments cannot mandate against technological change no matter what they chose to ban. The increased adoption of virtual top-up will eventually wipe out the recharge card business as card printing becomes irrelevant.

Industrial Policy can be a good thing, and there are many policies the Nigerian government can put in place to spur growth and development in various sectors of the economy. However they seem to be mostly doing the wrong things. The decision makers need to learn the difference between creating successful companies, and creating companies that have rich owners. Nigeria does too much of the latter and not enough of the former. Until we realise that the goal of Industrial Policy is to do the opposite, we will continue to create Zombie Companies that are waiting to be killed by a shift in government policy or technology.

P.S. If any decision maker wants a guide as to what type of Industrial Policy to pursue. If it falls under the category mentioned above, do not pursue it.

Twitter: @IamSnazz

Click to comment
To Top