How Nigerian State Governments Can Generate Revenue From Exportation

Our dear nation, Nigeria is currently in a state of economic downturn with a number of states unable to pay the salaries of their workers. This is primarily due to the fact that the states have mainly focussed on the allocations due to them from the federal government. This poses a great concentration risk that have recently crystallised into a major chaotic situation in which many of them are now owning several months of salaries and also unable to meet other obligations.

In response this problem, the states are now planning to diversify their economies and focus on other sources of generating revenue. However, they seem to be focussing more on taxes and levies from populace who do not even have enough to take care of themselves and their families. 

The aim of this article therefore is to demonstrate how the Nigerian states can effectively generate revenue on foreign exchange directly from exporting farm produce and commodities from their states. 

The Structure

This will involve a public private partnership arrangement that involves the state government, a private organisation and the farmers in the state. In this arrangement, the state government forms a trading company (in which she owns the majority shares). This company will buy the agricultural commodities from the farmers, prepares them for export, negotiates the export contract, ship the goods to the final destination and presents document to the importer's bank for payment. The farmers form themselves into small groups of cooperatives registered with the state, cultivate the commodities needed for export, deliver them to the designated collection centre and sell them to the trading company. The state government provides lands for the farmers, train the farmers in good agricultural practices, provides seedlings and give the farmers, agree a buying price with them (through the trading company) and issue a payment guarantee (that assures the farmers of payment within about 120 to 180days after delivery to the designated collection centre

The Dynamics

The step by step processes are as follows:

• The state government determines the commodity to be exported based on employment generation, profitability, export market demand and potential to produce locally in the state
• The state government partner with farmers and consultants to train the farmers and monitor the practices on the farm
• The state government partners with a private organisation to form a trading company 
• The state government facilitates the aggregation of intending and existing farmers into cooperatives
• The state government engage a consultant to train the farmers in global good agricultural practices (Global GAP)
• The state government provides seedlings for the farmers and all other farm inputs 
• The state government company issues a purchase order to the farmers stating that payment will be made within 120days after delivery to the designated collection centre
• The state government issues request for the issuance of a payment guarantee from a commercial bank in favour of the farmers
• The trading company look for buyers, negotiates and signs the export contract
• The trading company receives, reviews and accept the terms of the letter of credit
• The farmers cultivates the crop and delivers the harvested commodities to the designated collection centre
• The trading company prepares the goods for export, do all the pre export documentations and deliver the goods to the shipping line
• The trading company ship the goods and deliver this shipping document to the local bank
• The local bank sends the documents to the importer's bank abroad for payment based on the terms of the letter of credit
• The importer's bank effects payment within the period stipulated in the letter of credit
• The local bank receives payment and credit the account of the trading company. 
• The state government sells the foreign exchange to the local bank to get Naira
• The state government pays all the cooperatives that supply the commodities based on the agreed price in the purchase order
• The state government pays the private organisation in line with the shares it holds in the trading company  
• The state government can then utilise the balance to funds her budget

Kindly note that some of the roles apportioned to the state government in this dynamic can be done through the trading company setup by the government 

The Impacts

The impact of the suggested model for a state government goes beyond the generation of revenue via export, it has an humongous impact on employment generation and increased economic activities in the state. This in my opinion is a more effective, efficient and enduring model for diversifying the economy of any state in Nigeria. This model can also be replicated by the federal government at the federal level especially for the exportation of solid minerals.

Finally, if we want to diversify our economy to create enduring wealth for our children, If we want to diversify our economy to create extensive wealth for the country, If we want to diversify our economy to create everlasting wealth for the continent of Africa, aggressive drive for non-oil export by both the federal and state government is the best way to go

For questions on this thought, you can reach me via email to bayemibo@3timpex.com

Global GAP Training for Farmers and Exporters

FG Issues Guidelines On Wood Exports

THE Federal Government has issued guidelines on the felling of trees and exportation of wood.

The Director of Forestry, Federal Ministry of Environment, Phillip Bankole, made this known recently while announcing the suspension of the ban on wood exports.

Some of the guidelines include the issuance of a new international trade certification for wood exports and the cut-one-tree-and-plant-five policy with a view to arresting deforestation as well as preserving the environment.

Bankole said that the government was concerned about the degradation of the environment due the activities of wood exporters that cut down trees without re-planting.

He, however, said the lifting of the ban was partial after which government would further review the situation and know what next to do with regard to wood exportation.

He explained that the forest was being conserved not only for wood exportation, but for other purposes, adding that Nigeria had fallen short of reserving about 25 per cent of its land for afforestation currently at less than five per cent.

“The solution to this problem is to plant more trees. Those of you that are involved in the wood export business will know that there are some species of woods that have gone into extinction.

“Iroko, Obeche, mahogany and ebony trees have all disappeared. So much is being taken from the forest and little or nothing is being ploughed back into it,” Bankole said.

He lamented the exportation of wood in its raw form without the addition of any value, stressing that so many jobs had been lost as a result.

He said, “Only processed or semi-processed woods will be allowed for export. There is a need to add value at every stage of processing these woods for export, so that we can create labour and reduce poverty.

“Any consignment for export that is not accompanied by certification will be confiscated by the destination country,” Bankole warned.

The President of the Tropical Wood Exporters Association of Nigeria, Mr. Tayo Omotoye, said the preservation of the environment was not negotiable in the wood export business.

 http://punchng.com/fg-issues-guidelines-wood-exports/

Peanut Grade Chart

States can be self-sufficient via non-oil export: Nasarawa as case study

One of the most blessed states in Nigeria is Nasarawa because it combines a unique potential for both agriculture and solid minerals. Its appellation as “Home of Solid Minerals” is, indeed, true because this is the most endowed state in Nigeria in terms of deposits of economically and commercially viable natural resources.

The report of the 2013 National Survey on Agricultural Exportable Commodities done through the collaboration of Central Bank of Nigeria, National Bureau of Statistics, Federal Ministry of Agriculture and Federal Ministry of Trade & Investments revealed that Nasarawa State has great potential for the production and exportation of sesame seeds, ginger and sugarcane.

According to the report of BudgIT on the revenue and expenditure of the Nigerian states from January to last July, Nasarawa was the fourth on the list of states that with huge deficit. Despite the huge potential of this state, it has not met its recurrent expenditure due to over-dependence on federal allocation.

This report is aimed at showing the government of Nasarawa State that it can truly diversify the economy of this state by making some deliberate effort to increase the farming of the sesame seeds, ginger and sugarcane in the state. The government should encourage citizens to undertake farming of exportable product by forming cooperatives in different parts of the state, train citizens in the farming of one of these commodities, provide them with improved variety of seedlings, agree a price to buy the harvested crop from them and then give them bank guarantee to buy the harvested crops from them at a collection point and pay them back within a stipulated period.

This means the state will partner with trading firms to coordinate the exportation of the commodity and earn  foreign exchange afterwards. The state can then pay the farmers from the export proceeds upon conversion to Naira. This model has a humongous potential not just to generate revenue for the government, but also to create unprecedented job opportunities for the citizen of this state.

In this article, I will be considering the potential of farming and exporting sesame seed as a very viable and sustainable means of revenue generation for Nasarawa. Let me also point out that the facts raised in this paper are based on the data obtained from different research done by Central Bank of Nigeria, National Bureau of Statistics, Ministry of Agriculture and some universities in Nigeria.

Nasarawa produced about 40,000 metric tonnes of Sesame seeds in 2012. Using the national average of about 38 per cent, this state has arable land that is about 1,041,292.80 hectares of lands. We have made some reasonable and very conservative assumptions in this analysis and these include:

• The state is using just 20 per cent (260,323.20hectare) of this land for the farming of sesame seed -the yield per hectare of sesame is two metric tonnes per hectare (even though, there are varieties that can yield more than this) this yield was used to make provisions for losses that might occur during harvest -the unit price of sesame seed is $1,200 per metric tonnes FOB Lagos (even though it can be as high as $1,500.
• Cost of farming was put at N122, 000 per hectare based on some research works-cost of exporting per metric tonne was put at N25, 000 based on the export projects I have handled in the past.

With a yield of 2MT per hectare, this means that the state can produce 520,646.40MT of sesame seeds on the land size stated in the assumptions above. If this sesame seed is exported at a free on board (FOB) price of $1,200/MT, the total proceeds will be $624,775,680.00. Using a conversion rate of N280 to $1, this amount to N174, 937,190,400. The unit cost of farming sesame seeds and exporting are N130, 000 per hectare and N35, 000 per MT respectively. The total cost of farming plus 30 per cent profit on the sales to the government (or to the trading company engaged by the government) comes to N43,994,620,800 and the total cost exporting (transport, documentation, freight forwarding etc) comes to N18,222,624,000. The total project cost (farming and exportation) will be about N62, 217,244,800. The estimated profit that can accrue to the state on this project comes to about N112, 719,945,600.

According to data obtained from government sources, the IGR of the state for the year 2014 was about N4, 085,127,585. From the analysis we have done on farming and exportation of sesame seed, the state could grow her internally generated revenue by about 2,759% from this source alone.

We strongly believe that if the government of Nasarawa can adopt this commodity as a means of revenue and implement the strategies suggested in this report, the state can be repositioned on the path to prosperity and greatness within few years.

For questions on this thought, you can reach me via email to bayemibo@3timpex.com

Lagos Business School's Export Management Programme

Join me in August as I speak on Export Documentation at the Lagos Business School (LBS)'s Export Management Programme organised in conjunction with Fidelity Bank Plc and Nigerian Export Promotion Council.

Starting & Managing Export Business In Nigeria- Holding In Abuja

Handling the Critical 5Ps of Export Business Success-Part-5 (The Payment)

 

The purpose of a Business is solve problems and thereby creating value while the he goal of a business is to make a profit. This therefore makes this last factor very critical to the success of any export business. The payment factor in this series focuses on how to source for funds from banks to pay for products or raw materials procured from the local suppliers and how to get payment for the exported goods from the buyers abroad. 

The business plan of a new exporter should answer the following questions about payment, both to local supplier and the receipt of inflow from the buyers abroad. These questions include the following: What are the payment methods available in export trade? Where is the place of valid export contract in export financing? When is ordinary letter of credit not reliable as a payment security? Who are those that are eligible to access export finance products? Why are some payment methods not attractive to banks and is there a way to make them acceptable? Which instrument can give banks comfort when financing local supply? How can an exporter mitigate the risk of non-payment?

The first question states that, what are the payment method available in export trade? This is a very crucial question that is also grossly misunderstood by many exporters and sometimes bankers. The payment methods in an export trade transactions include Open Account (Cash against documents), Bill for Collection, Letter of Credit, Advance Payment and recently, a new one was developed called the Bank Payment Obligations. Under open account transactions, the export ship the goods and send documents directly to the buyer who then clears the goods and pay the exporter at a later date like 60days or 90days after shipment. Bill for collection is another payment method and it involves the transmission of documents through both buyer and seller's banks and collection of payment through the same channel. The banks do not have obligations to pay in this arrangement. The import can pay at the sight of document or at a later. If the importer fails the pay, the exporter will be at loss. Letter of credit will be treated under the third question. Advance payment is the most secured method for the exporter because Payment is made before shipment is done. Bank payment obligations is not yet in operation in Nigeria. It is a technologically driven payment method that combines the simplicity of Open Account and the security of Letter of Credit.

The next question states that, where is the place of valid export contract in export financing? A bank needs to see and review the export contract before financing an export transaction. This is because, the contract forms the premise for the loan request. It helps the banker to know when the preparation for the production and sourcing of products for shipment should commence. It helps the bank to monitor the planning of the shipment with the shipping line. It shows the bank what, where, when, who and how the payment on shipment will be made. It informs the financiers the agreed price of sales for the goods. It also helps the banker to know how best to package the loan facility. Through the contract, the bank is also able to know the liabilities and responsibilities of the exporters. It helps the banker to envisage the likely challenges of the transaction and put in place the mitigants.

The third question is very pivotal and it states that, when is ordinary letter of credit not reliable as a payment security? First of all let me define letter of credit. This is the undertaken of the buyer's bank (issuing bank) to the exporter to make payment when the shipment is made and all the documents that complies with the terms of the letter of credit are presented. However, if the letter of credit is coming from a bank in a jurisdiction that is facing a sovereign risk (political and economic risk) or if the issuing bank ranking by rating agencies is very low, then an exporter might need another bank in another country to give an additional undertaken. This concept is called confirmed letter of credit. So, an ordinary letter of credit here is the unconfirmed letter of credit. Even though it has the force of a bank's undertaken to pay however, it becomes unreliable for payment when the issuing bank is exposed to sovereign risks.

Not all exporters are eligible for export financing and that is why the next question is, who are those that are eligible to access export finance products? Before an exporter can be considered to be eligible for export financing, the exporter will need to provide the following information with documentary evidence.  History of performance- from the Bill of lading records. Export volume per annum- from the Commercial Invoice and the Bill of lading records. Frequency of shipment- from the Bill of lading records. Payment Methods- from the Sales Contract. Terms of Payment- from the Sales Contract. Product Sourcing strategy and risk mitigants- from the business plan/ Proposal. Availability of the products-from the business plan Proposal and investigation. Product destination- from the Sales Contract. Transaction cycle- from the date of Sales contract to the date of receipt of export proceeds for previous shipments. Buyer’s payment History- from the exporter’s  Statement of Account. Making these information and documents available to able gives the credibility that will make them to consider your loan application for export business. 

The next and the fifth question states that, why are some payment methods not attractive to banks and is there a way to make them acceptable? The two payment methods that can make a bank to decline funding an export transaction include Open Account (Cash against documents) and Bill for Collection. However, if an open account transaction can be backed by either a standby letter of credit or payment guarantee, it still retains its simplicity but also becomes attractive for banks to fund. On the other hand, if a buyer's bank under a Bill for collection transaction availises (guarantees) the accepted Bill of exchange, this makes the transaction to become attractive to banks for funding. 

The second to the last question states that, which instruments can give banks comfort when financing local supply? In country like Nigeria, where most of the exportable items are hard and soft commodities, in an environment that is largely unstructured, banks need comfort in order to be involve in pre-export financing. This therefore means that any exporter that wants the bank to finance the procurement of the commodities from their local supplier must be ready to work with people that will secure the bank's funds through Advance Payment Guarantee (if they need the bank to advance funds ahead of delivery). On the other hand, if the supplier have the goods but needs assurance of payment, a payment guarantee from the bank will ensure that he only gets paid after the goods have delivered and the quality and quantity ascertained. 

The last question that is also most important for an exporter is, how can an exporter mitigate the risk of non-payment? This is a major risk for all exporters around the world. The first mitigant that comes to mind is the use of letter of credit and confirmed letter of credit. However, where this is not possible, standby letter of credit and availization can help to secure payment under Open account and Bill for collection respectively. If these mitigants cannot be obtained, then a representative in form of an export agent or export management company at the destination country will be necessary to secure payment. The representative can follow up on payment, monitor delivery and inspection and source for another buyer if the initial one fails to pay.

In conclusion, I will like to say that if anyone intending to go into export business can take time to research and get more information about the questions addressed in these series of articles, he would have successfully created a viable business plan that will make the export business a success. 

For questions on this thought, you can reach me via email to bayemibo@3timpex.com