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Cablegate: Agoa and Nigeria: Can Its Textile Firms Still

This record is a partial extract of the original cable. The full text of the original cable is not available.

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

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