Comprehensive Review of Legal Instruments affecting Business in Nigeria

Proshare

Monday, March 21, 2016 6.30 PM / EXCLUSIVE Report

A Comprehensive Review of the Institutional, Regulatory, Legislative & Associated  Instruments affecting Business in Nigeria


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This is a final report of the team of consultants appointed by the ENABLE-DFID and GEMS3 programmes, following the comprehensive review of the institutional, regulatory, legislative and associated instruments affecting businesses in Nigeria.

The views expressed in this report are those of the consultants engaged to conduct this assignment and will be considered as submissions to the President of the Senate of the Federal Republic of  Nigeria, Dr. Bukola Saraki.

We (Proshare) have published same on the assumption that it would promote a more robust commentary on a serious and value premised initiative that should ultimately improve business condition in Nigeria.

Introduction

 

The report identifies the significance of Micro, Small and Medium Enterprises (MSMEs) to Nigeria’s economy and the need to amend, repeal or create legislation that would significantly improve the business environment in Nigeria. 

Utilising the Doing Business Report 2016 and a collaborative survey conducted by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) and the National Bureau of Statistics (NBS) in 2013, the consultants have set out a menu of proposals to address the legal and regulatory problems facing micro, small and medium sized businesses in Nigeria.

It outlines necessary reforms for how government operates to support these businesses and to increase growth and prosperity. There is a single objective behind all the proposals: to create an environment where hardworking firms, and not just a select few individuals, can flourish.

The Importance of MSMEs

MSMEs are the engine of job creation in Nigeria. With so much emphasis on Government as panacea to our economic and other difficulties, small businesses are often underestimated because, they are in fact, small. The truth is there is nothing small about the impact they have on the Nigerian economy.  According to the 2013 SMEDAN and NBS collaborative survey, there are over 37 million MSMEs in Nigeria that contribute almost 50% of Gross Domestic Product in nominal terms and account for 84.02% of all Nigerian jobs.[1]

With the decline in oil prices triggering an economic downturn in Nigeria, these are challenging times for small businesses. Many excellent, profitable firms are unable to get the finance they need to continue and to prosper. Now, more than ever, Nigeria needs its small businesses to succeed. This starts with government providing the right environment for small businesses today, and positioning itself for the global economy of the future.

An active government approach must go beyond economy wide policies to improve the conditions for growth, as important as they are. Government must offer clear direction to businesses in individual sectors and across the economy. It must shift from being passive and reactive, to proactive and strategic – and must be wholly supportive of small firms. 

The Legislature has a critical role to play in this regard.  It can exercise its powers to make, amend or repeal the necessary laws that would facilitate the development of small and medium enterprises. It can also use its oversight powers to monitor compliance to extant laws and attitudinal change on the part of government agencies.

Approach of the Consultants

To assist the Government in implementing the suggested reforms, the consultants have rated the Acts/Bills into “High”, “Medium” and “Low” categories. 

A summary of the legislative ratings is shown at the end of this Executive Summary.

Our ratings of the legislation have, in the main, been informed by the 2013 SMEDAN/NBS collaborative survey of MSMEs in Nigeria, Doing Business Report 2016 and the impact of such laws on businesses.  Respondents to the survey identified the main challenges and constraints confronting the operations of MSMEs in Nigeria as lack of access to finance, weak infrastructure, inconsistent government policies, lack of support (business development services), lack of work space, and multiple taxation. 

From experience, the Consultants are also aware that challenges faced by MSMEs include the increasing costs of doing business (e.g. energy), acquiring, retaining and boosting competitiveness and innovation, accessing international markets, economic volatility and compliance issues.

In terms of private sector participation in infrastructure delivery, the consultants identified the legislative gaps/deficiencies in existing laws and proposed bills and made recommendations.

These factors determined the rating of existing and proposed legislation in two ways. 

The initial inquiry was to ascertain whether, if at all, the Law or Bill fell into any of the categories identified above as being problematic for MSMEs. 

The second stage was to determine deficiencies in the legislation that have an adverse impact on either setting up, running, or closing down an MSME. 

For instance, where the Law or Bill is found to discourage investment on account of onerous tax provisions, or impedes MSMEs by ambiguous or conflicting requirements, it will be designated a ‘High’ rating.

Conversely, where legislation falls into any of the identified categories but does not impede the setting up, running, or closing down an MSME, it will be designated a ‘Low’ rating.

The consultants have endeavoured to be objective but recognise that there is some degree of subjectivity in this approach, especially in relation to legal analysis.  Law, unlike science, is not exact.   Unless where field research is carried out to test certain hypothesis, law is not exact. 

The methodology adopted is therefore, doctrinal.  This approach has been occasioned, to a large extent, by the limited time prescribed for this Assignment. 

Key Findings & Recommendations

This Final Report contains a broad range of legislative and policy interventions as progress is required on a broad range of fronts.  They are not an exhaustive list, but each would make a contribution to improving the Business Environment for MSMEs.

A.      Passage of the Reform Bills:

 

Findings:

With the reform of key sectors of the economy, there is a critical need to facilitate an enabling environment for private sector participation.  There are Bills pending before the National Assembly that are of priority importance to doing business and overall private sector development in Nigeria, especially in infrastructure delivery.

 

Recommendation:

If no other recommendation in this Report is implemented, the enactment of the following Bills would be a major achievement of the 8th National Assembly.

1.       Federal Competition and Consumer Protection Bill, 2015.

2.      Federal Roads Authority Bill, 2015.

3.      National Inland Waterways Authority Bill, 2015.

4.      National Roads Funds Bill, 2015.

5.      National Transport Commission Bill, 2015.

6.      Nigerian Ports & Harbours Authority Bill, 2015.

7.      Nigerian Postal Commission Bill, 2015.

8.     Nigerian Railway Authority Bill, 2015.

In addition to the Reform Bills, review and re-enactment of the following acts should be given priority:

9.      Companies and Allied Matters Act (CAMA)

10.  Investment and Securities Act (ISA)

 

B.      Access to Finance & Property:

 

Access to Finance

 

Findings:

Access to finance and land are major challenges to MSMEs.  Data from the SMEDAN and NBS collaborative survey revealed that of a total of 80,312 Small and Medium Enterprises, only 13,031 (representing 17%) listed their source of capital as a loan. As it concerned Micro Enterprises, only 3% of the surveyed Enterprises listed their source of capital as a loan.  Early-stage start-ups often do not have the collateral or assets requested by banks before they will administer a loan, making it difficult to obtain a loan.

 

Recommendation:

The under listed Bills also merit priority attention as their passage would ensure that businesses, especially SMEs, have access to different avenues of financing at reasonable interest rate.

11.   Independent Warehouse Regulatory Agency Bill

12.  Secured Transactions in Movable Assets Bill

13.  National Development Bank of Nigeria Bill

The Independent Warehouse Regulatory Agency Bill holds the potential of solving the challenge of collateral by allowing businesses to securitise their commercial warehouse receipts. Likewise, the Secured Transactions in Movable Assets Bill proposes to establish a National Collateral Registry. This Bill will give creditors an effective way to discover whether the potential borrower has already granted a security interest in the collateral and, if so, what priority those rights have.

If properly implemented (with all identified deficiencies addressed), both of these Bills could improve access to finance for MSMEs.

The National Development Bank of Nigeria Bill which seeks to consolidate the operations of development finance institutions (Bank of Industry, Bank of Commerce & Industry and National Economic Reconstruction Fund) is important to the business environment in Nigeria.

 

Access to Property

 

Findings:

The majority of MSMEs also identified lack of work space as being a significant problem.  The requirement to obtain Governor consent to property transfer remains the largest bottleneck in Nigeria.

There are several laws in the housing sector including the Federal Housing Authority Act, the National Housing Fund Act, the Federal Government Housing Act, the Federal Mortgage Bank Act, the Urban and Regional Planning Act and Mortgage Institutions Act.

 All these enactments constitute regulatory challenges.

 

Recommendation:

Eliminating the requirement for Governor’s consent would significantly speed up the total time required to register property across the country. Alternatively, delegating the power to grant consent will significantly decrease the waiting time.

We have also recommended the ‘liberalization’ of land holding and allocation as well as the review of planning laws, environmental laws, among others.

 

C.      Improving Commercial Dispute Resolution:

Findings:

On average, it takes 509 days to enforce a contract in Nigeria.  High Courts do not have minimum thresholds and litigants commonly choose to file in the High Court even small claims falling within the competence of the Magistrates’ Courts. This results in an inconsistent judicial map, with civil and commercial litigation being obsolete in certain Magistrates’ Courts.  The Constitution vests in the Chief Judge of each State, the power to regulate practice and procedure in their respective High Courts. Reform in this sector must, therefore, be State driven. However, because the National Assembly legislates for the Federal Capital Territory, a benchmark could be set for the respective States to follow.

Recommendation:

The draft Federal Arbitration and Conciliation Bill, 2007 should be updated to repeal and re-enact the Arbitration and Conciliation Act, while other states should emulate Lagos State and pass the Arbitration and Conciliation Bill, 2007 into law.

Some states already have the Multi-Door Courthouses.  This should be replicated in all states so that all Alternative Dispute Resolution (ADR) processes are available in all states.

The Federal Capital Territory and other States of the Federation should follow the example set by Lagos State by introducing specialized Commercial Courts, with judges assigned solely for hearing commercial matters.

 

D.     Simplifying the Payment of Taxes:

 

Findings:

Under the current system, businesses pay similar taxes on the same or substantially similar tax base. For instance, Companies Income Tax, Information Technology Tax (NITDA Levy), Education Tax, Nigerian Content Development Levy are all based on income or profits. Multiple taxation increases the number of payments businesses must make, the frequency of the said payments and the compliance time.  

 

Recommendation:

The Legislature should consider enacting legislation to streamline tax payments by introducing one tax for each tax base (e.g. a single tax based on income of profits).

 

E.      Establishment of a Federal Legislative Clearinghouse:

 

Findings:

A number of legislative instruments from the National Assembly lack cohesion and consistency.  This has resulted in a lack of clearly defined mandates for government agencies.  For instance:

                                                      

·        The relationship between the Bureau of Public Procurement (BPP) established under the Public Procurement Act 2007 and the Infrastructure Concession Regulatory Commission (ICRC) established ICRC Act 2005 is unclear.  Essentially the mandate of the BPP is an overview of procurement of works, goods and services.  There is also uncertainty as to whether Public Private Partnership (PPP) transactions, including concession agreements, are governed by the Public Procurement Act or the ICRC Act.  Similarly, some of the public enterprises listed for either privatization or commercialization in the Public Enterprises (Privatization and Commercialization) Act, 2004 are also listed in the ICRC Act for PPP transactions, including concessions.  Thus it is unclear whether it is the Bureau of Public Enterprises (BPE) established under the Public Enterprises (Privatization and Commercialization) Act or the ICRC that handles PPP transactions.

                                                           

·         There is a conflict between the powers conferred on the Nigerian Ports Authority by virtue of the provisions in sections 7, 8 and 30 of the Nigerian Ports Authority Act 2004 and sections 8, 9 and 11 of the Nigerian Inland Waterways Authority Act, 2004.

                                                                                

·         The relationship between the Consumer Protection Act (and the Council established under it) and other laws with consumer protection provisions is not defined.    Such other laws include the Nigerian Communications Commission Act, 2003; the Electric Power Sector Reform Act, 2005; the Standards Organisation of Nigeria Act; Nigerian Civil Aviation Authority Act, etc.

 

·         The Supreme Court has declared that the National Tourism Development Corporation Act violates the Constitutional powers of the States in some respects.  Unfortunately, the proposed Bill to amend this Act seems not to have taken the Supreme Court judgement into account.  

                                                                

·         The jurisdiction of the Tax Appeal Tribunal (TAT) established under the Federal Inland Revenue Service Act, 2007 has been declared unconstitutional as it conflicts with section 251 of the 1999 Constitution (as amended) dealing with the jurisdiction of the Federal High Court.  The importance of the TAT in revenue generation and disputes arising therefrom cannot be over-emphasised.

 

The problem emanates from replicative Bills before the Senate and House of Representatives.  A good example of this is the Federal Competition Bill and the Federal Competition and Consumer Bill.  Likewise, there is the Commercial Agriculture Credit Scheme Bill, 2015 and the Agricultural Credit Guarantee Scheme Fund Act (Amendment) Bill, 2015.  There is currently no mechanism in place to harmonise these Bills.  It is inefficient to wait till public hearing before the fact that similar or conflicting  Bills are pending in the National Assembly is known.

 

Recommendation:

We recommend the establishment of a Federal Legislative Clearing house to scrutinise and review Bills before presentation to the respective Chambers for first reading.  The Clearing house could be established within the National Assembly’s Directorate of Legal Services or within the National Institute of Legislative Studies. Consequential amendments to the Senate and House Standing Rules will be required to establish the Clearing house and set out the review procedure.

 

One principle we believe should guide the National Assembly in considering the Bills before it is the need to avoid the setting up of multiple agencies with overlapping or conflicting mandates. Consequently, there is need to follow a cost-benefit approach in deciding when and where a new agency is required. 

 

F.      Establishment of a National Legislative Forum:

 

Findings:

Generally, Nigerian Federal Laws are fairly consistent with international best practices. However, we need to improve on our regulatory framework, procedures and practices at Federal and State levels. 

 

Indeed, in 2016, Nigeria is ranked 169 out of 189 economies in the World Bank Doing Business (DB) Report.  The Consultants reviewed the Report extensively and identified the deficiencies in the Nigerian system that led to the low ranking and made specific recommendations.  Be that as it may, Nigeria’s DB 2016 ranking is based on regulatory processes, procedures and practices at State level, in this case, Lagos and Kano States.  Collaboration between the Federal and State Governments is imperative to improve the Business Environment in Nigeria and also Nigeria’s ranking in DB Report.

 

Recommendation:

The National Assembly should facilitate dialogue between the Federal and State Governments, and between the State Governments inter se, with a view to modernising and harmonising laws, regulations and practices affecting the Business Environment.  This dialogue could be implemented through the establishment of a National Legislative Forum (modelled upon the Nigerian Governors Forum).  The Forum will set out minimum standards in the law making process and in the oversight functions to ensure that the relevant government agencies at the Federal and State levels improve on their practices and procedures.

 

The specific recommendations made by the Consultants in respect of DB Report can be discussed at such Forum.


Watch out for the table…………….. 

Related News

1.       Summary of Legislation by Priority Ranking – Proshare – Mar 21, 2016
2.      NASS, NESG and Development Partners hold crucial Business Environment Roundtable
3.      The 30 Bills Nigeria's Senate expects will form the Template for a new Nigeria
4.      National Assembly Takes Steps On Improving Ease of Doing Business in Nigeria

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