Important lessons from history and the way forward for Nigeria

Earlier this year in June, the Nigerian government regained control of once divested state-owned telecoms giant NITEL, blaming unpaid debt and lost investment. Abuja had sold a 51% stake in this national asset during the tenure of former President OJ Obsanjo in 2006 as part of a massive reform and divestment process. Transcorp, the local company that acquired majority control for a $500 million fee, was accused of defaulting on $60 million in debt and amassed debts totaling 17 billion naira1. NITEL has suffered huge subscriber losses since 2001 for both fixed and mobile services. The development was another shocking national debacle, not only in terms of financial losses but also in terms of official economic policies and administrative foresight. The current government has since signaled the appointment of a technical body to manage NITEL pending new investment.

Judging by the fate of Nigeria Airways, it might be overly optimistic. The national airline’s 35-year-old flagship, with a history of failed mergers and concerns about service security, saw numerous attempts at revival before finally ceasing operations in 2003. The government parried allegations of massive corruption and mismanagement that led to the airline’s bankruptcy and managed to secure Virgin Atlantic Airways as a safe partner for a strategic relaunch. However, Virgin’s recently announced intention to divest its stake in Nigeria Airways may sound the death knell for another miserably failed public company.

For Nigeria, failure is twofold. First, it symbolizes inexcusable mismanagement that leads to the failure of potentially successful ventures. More importantly, it questions the design and implications of Nigeria’s much-vaunted reform process, which ironically was initiated to reverse the very same economic upheavals it appears to be creating.

The fortunes of the economy in general, and big business in particular, have been remarkably disappointing in this petrodollar-rich, sub-Saharan nation of immense natural resources. While decades of political unrest and civil war are partly to blame, rampant corruption and uninclusive politics have summed up to keep Nigeria at the bottom of economic indicators and human development indices. In such a climate, and despite recent shifts in government policy, Nigeria’s Millennium Development Goals and its 2020 target to rank among the world’s top 20 economies pose a daunting challenge.

With the long-term impact and viability of recent oil, steel and port divestments still in question, large companies are clearly not the route to these goals. Adding further strength to this notion is the recent hopeless failure of numerous similar companies in diverse economic environments around the world, from Asia to Alaska. For a nation of 148 million people, more than half of whom live in extreme poverty, the micro, small and medium-sized enterprise (MSME) sector is one that offers enormous promise for sustainable development.

Crucial here is the fact that MSMEs offer a distinct macroeconomic profile and potential and are not just scaled-down versions of larger companies. The financial flexibility, employment potential and innovative capacity of MSMEs have made significant contributions to both developed and developing economies around the world. According to the European Network for Social and Economic Research (ENSR), MSMEs with up to 250 employees have created 68 million jobs in the European Union2. Indeed, Nigeria can look to the African continent itself for similar inspiration. Comparable data for South Africa shows that small businesses accounted for 55% of total employment and 22% of GDP in 2003.

Accounting for local and circumstance variables, MSMEs have shown greater profitability across national barriers due to higher human capital efficiency and product conversion capacity. Although there is no identifiable link between financial structure and profitability, the calculation of gross profit versus capital employed has always worked to the advantage of MSMEs over large companies.

On the other hand, small businesses suffer from two fundamental disadvantages that large companies, by definition, do not have: elevated labor cost rates and working capital requirements. Large companies have lower costs per unit of revenue and much larger cash flow capacities. In addition, MSMEs represent a high risk factor in terms of debt repayment ability, often due to insufficient financial know-how and limited access to guidance and advice. The long-term success of MSMEs also depends on an increased degree of financial flexibility, which enables them to adapt quickly to changing market requirements.

Disappointment with large, capital-intensive and often import-dependent companies had been mounting well before the onset of the current global economic downturn. While Nigeria blames much on itself for its experience with large corporations, reports of their diminishing impact on inclusion Economic growth is unmistakably evident around the world. For example, in the European Union, 99% of its 20 million enterprises are small and medium-sized enterprises, which currently account for two-thirds of total private sector employment3. As new economic realities begin to take hold, the practicalities of mammoth corporations running on gargantuan employee and capital turnover are slowly but surely slipping away.

In contrast, MSMEs offer a variety of short- and long-term benefits that are of particular importance to Nigeria – wider use of natural and human resources, entrepreneurship and rural development, increased savings and greater regional balance. In the context of both immediate and long-term goals, a policy shift in favor of speedily promoting smaller businesses is perhaps the only policy priority standing between Nigeria and a rapidly prosperous economy.

* Certainly there are significant challenges in this direction, none more pressing than the need to transform the mindset on grassroots entrepreneurship among Nigerians. Other practical problems include skills shortages, a worrying corporate mortality rate4 and devastating infrastructural deficiencies, particularly in relation to security, electricity and roads. Improving availability and access to finance and equity remains by far the biggest challenge, in response Abuja initiated a bank consolidation program in 2004 to strengthen financial institutions and improve access to credit for the private sector.

To ensure rapid entrepreneurship development, the Nigerian government must make rapid fiscal, monetary and industrial policy changes to capitalize on its vast MSME potential. Much depends on the effective management of its human capital – its sizable population, which has traditionally depended on extremely small businesses for a living. The fact is, the fate of Nigeria’s ambitious economic aspirations depends largely on its ability to convert that talent into tangible economic growth.