US embassy cable - 03LAGOS87

UNCLAS SECTION 01 OF 04 LAGOS 000087 
 
SIPDIS 
 
 
STATE FOR EB/TPP AND AF/W 
STATE PASS USTR FOR CMILLER AND PCOLEMAN 
COMMERCE FOR ITA/MAC 
GENEVA PASS USTR FOR TAGLIANI 
 
 
E.O. 12958: N/A 
TAGS: ETRD, EINV, ECON, KTEX, NI 
SUBJECT: AGOA AND NIGERIA: CAN ITS TEXTILE FIRMS STILL 
BENEFIT? 
 
REF: ABUJA 1810 
 
 
1.  Summary.  Textile provisions of the Africa Growth and 
Opportunity Act (AGOA) encourage millions of dollars in 
foreign investment, create thousands of new jobs and boost 
exports across Africa, except in Nigeria.  Sub-Saharan 
Africa's second largest economy has not taken advantage of 
AGOA's duty-free textile opportunities. A key impediment is 
the inadequate safeguards against transshipment by ineligible 
countries.   Legislation to establish an appropriate export 
visa regime remains stalled in the National Assembly.  Even 
if the bill were passed, Nigeria's textile industry would 
still face problems of low productivity and poor 
infrastructure--especially poor transportation links and high 
energy costs. Nigeria could still benefit from AGOA if firms 
were to increase their competitiveness quickly, possibly 
through free trade zones that might encourage local 
industries to pool resources and attract desperately needed 
foreign expertise and capital.  Unless Nigeria moves quickly, 
 it may fall farther  behind as ot 
her African nations race to develop their textile industries 
in anticipation of the January 1, 2004, requirement that 
AGOA-eligible garments be assembled from textiles made in the 
United State or other AGOA countries.  End Summary. 
 
 
------------------------ 
Assembly's Inaction 
------------------------ 
 
 
2. Nigeria is ineligible for AGOA's duty-free textile 
provisions at present because it lacks safeguards against 
transshipment.  A bill providing for the requisite safeguards 
is stalled before the National Assembly.  House Finance 
Committee Chair Mohammed Sanusi Daggash told Emboff early in 
2002 that legislation would be enacted in June 2002 (reftel); 
however, eligibility for the textile provisions has not been 
a priority, partly because members misunderstand AGOA's 
potential benefits.  While industry organizations have often 
expressed their frustration publicly about the legislature's 
inaction, none has engaged in effective lobbying to inform 
and persuade legislators about the missed opportunities. 
 
 
3. Comment. Since 1999, the National Assembly has passed few 
non-budget bills.  The National Assembly has a very limited 
capacity to formulate economic policy owing to lack of 
understanding of basic economic principles and little will to 
legislate serious economic reform. For many members, 
consolidating their gains as parliamentarians and preparing 
for elections have taken precedence over reviving Nigeria's 
stagnant non-oil sector.  Now that the legislators' attention 
is firmly focused on the 2003 elections, it is unlikely a 
bill will be passed until next summer at the earliest.  End 
Comment. 
 
 
--------------------------- 
Problems and Potential 
--------------------------- 
 
 
4. Even if legislation were passed today,  Nigerian firms 
would need help to penetrate the American market. Once a 
significant source of employment and foreign exchange, the 
textile industry is in poor condition.  It suffers from 
decaying manufacturing plants and declining capacity, which 
have driven costs up and competitiveness down.  Nigeria's 
manufacturers must overcome these problems and a 
dysfunctional infrastructure to produce low-cost, 
high-quality goods.  The frequency of Nigeria's power outages 
is the most costly infrastructure problem, forcing firms to 
rely on expensive generators.  This constitutes an enormous 
disadvantage for textile manufacturers who have significantly 
greater demand for electricity than do garment assemblers. 
The apparel sector is nevertheless practically non-existent, 
and the textile industry operates at only thirty- percent 
capacity.  Cheaper imports from China and India have flooded 
the country and driven many Nigerian firms out of business. 
 
 
5. Although the industry is in dire straits, hope is not 
beyond reason.  According to a report published by American 
textile experts (reftel), Nigeria could become a major 
textile and garment exporter under AGOA.  Cotton is grown 
locally and the country has an abundance of cheap labor. 
While apparel manufacturing is merely a cottage industry 
today, new factories could draw on the existing labor pool. 
If textile firms were to become more competitive, they could 
provide inputs not only to domestic firms but also to other 
African countries, especially after 2004 when the AGOA 
provisions allowing less developed countries to use inputs 
from elsewhere expire.  Nigeria's challenge is to transform 
this potential into a vibrant export industry. 
 
 
------------------------ 
Government Efforts 
------------------------ 
 
 
6. While Nigeria's public and private sectors constantly 
bemoan the industry's decline, both have done relatively 
little to address the structural deficiencies that make 
Nigerian firms non-competitive.  Beyond the marginal 
improvement in power generation since 1999, the only tangible 
action the government has taken has been to erect barriers to 
trade.  In 2002, in response to pleas by textile unions and 
manufacturers, the government imposed a temporary import ban 
on printed fabric (since replaced by quality and price 
controls).  Beyond protectionism, government efforts have 
produced many reports but few results. 
 
 
7.  In late 2002, President Obasanjo established a committee 
to revive the textile industry.  The committee's mandate 
called for a "blue-print" to restore the position the 
industry held during the mid-1980s.  The committee comprised 
representatives from federal ministries, state governments, 
professional associations, unions, a few private 
manufacturers, and the United Nations Industrial Development 
Organization (UNIDO).  In its final report released in 
October 2002 the committee recommended ways of boosting 
exports to Europe and the United States, all with a view to 
meeting Obasanjo's goal of exporting one billion USD worth of 
textiles a year by 2006.  Its recommendations called for a 
tightening up of import restrictions and penalties to curb 
illegal imports, as well as measures to increase cotton 
production and improve the infrastructure. 
 
 
8. Nigeria's Ministry of Commerce, in cooperation with the 
United States-Nigerian Development Institution (to which 
USAID has provided funding), has initiated the Nigerian 
Apparel and Footwear Project, which aims to bring the 
operations of selected Nigerian manufacturers to 
international standards.  The initiative is an element of the 
GON's overall effort to increase non-oil exports to 500 
million USD by the end of 2003. The Ministry of Industry is 
working with UNIDO on a "blue-print" to restructure and 
rehabilitate the textile and garment industry, with a 
specific focus on AGOA to stimulate production.  UNIDO 
expects to complete the project by the end of 2003, at which 
time it hopes to provide the GON follow-up assistance to 
implement specific recommendations. 
 
 
-------------------------- 
Private Sector Efforts 
-------------------------- 
 
 
9. In terms of resuscitating the ailing textile industry, the 
private sector has done no 
better a job than the government.  Private sector awareness 
is high, as evidenced by the frequent mention of AGOA at 
business seminars and in the media, but few firms understand 
the nuts and bolts of exporting under its provisions.  To 
enlighten them, the Nigerian-American Chamber of Commerce 
will soon publish a "how to" manual outlining all the 
necessary steps for accessing the US market.  However, while 
a few large firms (mainly subsidiaries of international 
conglomerates) have expressed serious 
interest in AGOA, many smaller firms are pessimistic about 
Nigeria's chances of becoming competitive and thus have shown 
little initiative to grasp the opportunities available. 
 
 
10. An assertion by J.P. Olarewaju, Executive Director of the 
Nigerian Textile Manufacturers Association (NTMA), is a good 
example of the latter attitude.  Olarewaju told Econoff in 
December that although AGOA seems like a great deal, most of 
NTMA's members believe that they cannot manufacture high 
quality textiles or assemble garments to compete with other 
AGOA suppliers. Olarewaju said the major impediment to 
restructuring the industry is lack of capital since firms 
desperately need to upgrade and replace old machinery. 
 
 
11. Econoff asked Olarewaju if Nigerian firms had approached 
Lebanese, Chinese or Indians investors already active in 
Africa for capital and expertise. Olarewaju replied 
derisively that these Asian businessmen are "merely traders" 
only interested in dumping textile products and hurting local 
firms.  The NTMA recommends that Nigeria's government provide 
capital or lease machinery to private firms through the Bank 
of Industry.  Olarewaju hopes that Nigerian firms will pool 
their resources and form cooperatives, and believes the 
government should spearhead such an initiative.  He also 
hopes the government will perform market research so firms 
might have a better idea of the American market.  (NOTE: 
USTR, PAS and ECON invited U.S. purchasing reps to tour 
Nigeria in 2000 and 2001.  FCS, ECON and others have sent 
Nigerian delegations to the States as well.  Purchasers 
(usually for deparment stores and chains that control 90 
percent of the garment trade) can tell suppliers how to make 
desired products.) 
 
 
--------------------------------------------- ---------- 
Comment: Are AGOA Benefits out of Reach? 
--------------------------------------------- ---------- 
 
 
12. The problems of Nigeria's existing textile and garment 
industry are evident.  The high cost of business associated 
with Nigeria's poor infrastructure,  outdated technology, and 
stiff competition from cheap imports has propelled the 
industry into steep decline.  While industry analysts agree 
on the problems, few offer feasible solutions or demonstrate 
leadership to implement them. At the moment, only a handful 
of manufacturers assemble apparel.  Existing textile firms, 
which produce low quality African design prints, need to 
switch operations or upgrade existing machinery to produce 
inputs for world markets. Nigerian firms need to find ways to 
ship goods out in a timely manner.  They must also achieve a 
reasonable cost structure, which should not be extremely 
difficult.  To become globally competitive, Nigeria needs 
leadership to coordinate the industry's public and private 
sector activities in order to move forward. 
 
 
13. The government has not demonstrated that it can devise 
and implement a plan that might make Nigeria more competitive 
for AGOA textiles. In general, Government action tends to 
hurt, not help, the manufacturing sector.  Politicians spend 
more time squabbling over their own or their constituencies' 
access to easy oil money, than over ways to improve the 
infrastructure and create a good investment climate.  State 
and local authorities impose heavy tax burdens on textile 
firms, as they are easier targets than the multitude of 
importers who sell goods from the privacy of their homes. 
While tariffs (the second largest source of revenue behind 
oil taxes and royalties is the preferred policy tool) offer 
little effective protection, tariffs encourage smuggling 
across Nigeria's porous borders, often through the complicity 
of corrupt customs officials. 
 
 
14.  Nigeria's government still has an indispensable role to 
play establishing the groundwork to sustain a successful 
domestic textile and apparel manufacturing industry.  It 
needs to improve utilities, roads and ports.  The government 
must change its policy direction and invest in economic 
reform.  Having said this, private sector initiative is the 
key factor determining whether or not Nigeria will benefit 
from AGOA's textile provisions.  As Nigeria falls farther and 
farther behind its African competitors, appropriate 
corrective government action becomes increasingly important. 
But groups like the NTMA must not wait for the government to 
do all the work. 
 
 
15. Several Nigerian firms have links to international 
conglomerates and a few Nigerian entrepreneurs could compete 
in the American market under the right conditions.  The most 
important would be a reduction in the cost of doing business, 
especially high production costs associated with the 
procurement of power generating, water provisioning, and 
telecommunications equipment to neutralize outages when 
public services fail.  In the short term, companies can share 
utility costs by clustering in industrial parks or free trade 
zone (FTZ) like the existing site in Calabar and the planned 
site in Lagos.  An FTZ offers added benefit in that zone 
administrators have authority to issue regulations 
independent of the federal government.  By joining forces, 
firms could lobby FTZ authorities to quickly implement 
polices to help firms produce and ship products at a cost low 
enough to be competitive.   Streamlined shipping and customs 
procedures could reduce the opportunities for corruption. 
 
 
16. Many domestic firms claim that the highest cost is not 
associated with inadequate infrastructure but access to 
capital.  However, according to the International Finance 
Corporation, the private sector arm of the World Bank, equity 
and debt financing is available in Nigeria.  To be sure, the 
equity market is thin and debt financing is costly. But an 
equally important problem is that few entrepreneurs have 
sound business plans.  By seeking help abroad, domestic firms 
could find not only much needed expertise for textile and 
apparel production but also additional sources of capital. 
 
 
 
 
17. Nigeria's longstanding dependence on oil has drawn 
resources and energy away from the non-oil sector, rendering 
much of the manufacturing sector idle.  The elite who have 
enjoyed easy access to oil revenue have had little incentive 
to plow resources into the non-oil sector.  Nigeria has yet 
to orient itself to the global economy.  Few firms or 
politicians understand the opportunities that exist or have 
demonstrated initiative to attract foreign direct investment. 
 Nigeria might still benefit from AGOA, however, if the 
private sector quickly finds ways to improve its 
competitiveness by clustering and establishing ties with 
foreign investors.  But if Nigeria's firms continue to sit 
back and wait for government action, AGOA's textile benefits 
will increasingly fall beyond their reach.  End Comment. 
HINSON-JONES