News: Nigeria Economic Follies of Duty Waivers

Africa Granting waivers to a few favoured friends and denying a large number of people who can contribute significantly to the economy is a lesson on how not to develop.

How to Make Depression Great
04-01-2009
By Thompson Ayodele
The world economy is in severe recession. Trade is deteriorating every day. Political pressures demand import restrictions to protect employment. This is what makes a depression great.
The G20 meets in London on Thursday in an attempt to kick-start the world economy. Of course, expectations are high because the stakes are high.
U.N. Secretary General Ban Ki-moon hopes the G20, the group of top industrialized and developing economies, will commit itself “to sustaining an international stimulus package, on top of their own national stimulus packages” or “the economic crisis may soon be compounded by an equally severe crisis of global instability.”
However, unless there is a new direction in global trade, the summit will be just another talking shop.
Everyone claims to recognize trade as the best way out of this recession, but usually on their own terms: Several developed and developing countries have already raised barriers on imports.
Last November, the G20 leaders signed a pledge against protectionism, yet in the second half of 2008, 17 out of the G20 implemented 47 measures that restrict trade, the World Bank says.
These measures will push the world economy further into prolonged contraction.
If all countries go the same way, the global rate of import duty would double and ultimately shrink global trade by 7.7 percent, according to the International Food Policy Research Institute in Washington, D.C.
Already, exports from Chile, South Korea and Taiwan have dropped by about 20 percent, and those from Africa by over 30 percent.
Free trade delivers all-round gains, but protectionists claim to be acting in the national interest and strengthening the state by collecting import taxes.
Although this can show apparent short-term success, protectionism is quickly hijacked by vested interests and cronies while increasing prices for everyone, reducing choice and inviting retaliation from other nations, as Africa has demonstrated so disastrously for decades.
Apostles of import restrictions, such as the pressure group Oxfam, claim they increase exports, minimize imports and yield a trade surplus. They also favor the protection of infant industries, claiming they will create industrialization, because they believe that one nation can only gain at the expense of other nations. In real life, trade requires a willing buyer and a willing seller who both want the transaction.
Many African countries have used these protectionist arguments since independence. Most of their fledgling industries became a drain on the national purse because they were inefficient and expensive ― we Nigerians are still paying for our vainglorious cement factories.
The sad reality is that protectionism doesn’t even protect domestic jobs or industries. It destroys them by harming efficient competition and companies that rely on imported components.
This is why most sub-Saharan Africans are still poor while others have lifted themselves out of poverty in the last 50 years.
But other countries are joining in. Tariff increases comprise only about half of the restrictions introduced so far in the G20. The U.S. government is propping up its auto industry, keeping out efficient competitors and making cars more expensive for Americans.
China is considering subsidies and higher export rebates for its steel. India has banned Chinese toys, China has banned Irish pork, and the EU has new export subsidies for butter, cheese and milk powder. In Britain, jingoists, u nions and the Prime Minister call for “British jobs for British workers.”
Many countries will quietly take less obvious protectionist measures such as health and safety, technical, licensing and certification requirements.
This is “do-it-yourself economics,” devoid of economic analysis or real-world evidence. As always, the poor suffer most.
Between 1986 and 2007, tariffs on goods fell worldwide, from 26 percent to 8.8 percent, boosting the world economy with global trade. It also became more inclusive: Developing countries nearly doubled their share of world exports since 2000 to 37 percent in 2007.
A rise in protectionism would stifle internal and international recovery. It’s economic folly for politicians to opt for trade barriers when jobs and wages are at risk.
G20 countries must follow their own free trade recommendations and persuade all their trading partners to do the same ― singly or collectively. Free trade has worked before, and it works now. But it will work even better if we let it.
Thompson Ayodele is the executive director of Initiative for Public Policy Analysis, a public policy think tank in Lagos, Nigeria. He can be reached at thompson@ippanigeria.org.


For Immediate Release: African think tanks urge G20 Leaders to break down trade barriers
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April 1, 2009 (Lagos, Nigeria and Accra, Ghana): Leaders of G20 meeting in London tomorrow? have been urged to be committed to an open global economy and the rules-based multilateral trading system. Underlying this call is the growing economic pressures in developed and developing countries which is engendering erroneous policy demand for protectionism.
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The Initiative for Public Policy Analysis (IPPA Nigeria) and IMANI Center for Policy and Education, (IMANI Ghana), have called on leaders of the G20 to prevent short term inward-looking policies and promote integration of developing countries into the global trade regime.
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Whilst G20 members have previously committed to deepening trade integration, this has not been translated into action.? According to IPPA Nigeria and IMANI Ghana, in the second half of the year 2008, 17 out of the G20 countries implemented 47 measures that actually restricted cross border trade.
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IPPA Nigeria and IMANI Ghana contend that already, trade barriers erected in developed countries have reduced Africa’s trade volumes by over 30%. They maintain that current calls for protecting one’s turf in favour of creating local champions will further depress trade volumes and further push millions on the continent whose livelihoods depend on food exports into deep poverty.
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“Protectionism is a fire-brigade approach to address this recession. The best it will achieve is to create a conducive atmosphere to be hijacked by vested interests and cronies while increasing prices for everyone, reducing choice and inviting retaliation from other nations,” said Thompson Ayodele Executive director of IPPA Nigeria and Franklin Cudjoe, executive director of IMANI Ghana.
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Trade not Aid
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As capital markets falter, with decrease investments in emerging markets and trade flows wither, Africa faces real challenges. Already there are indications that African leaders will be asking G20 leaders to honour their aid commitments to Africa and further request more financial assistance. This is capable of providing palliative measures in a short run.
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“It is a misnomer for African leaders to request additional aid given the fact that the Western countries that give aid are bearing the brunt of the recession.? The current recession should afford Africa the opportunity to assert herself with the African U nion calling on its members to build effective institutions that support growth and entrepreneurship.
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African governments must agree to deepen intra-regional trade and be innovative about internal revenue generation through sensible taxation policies that rope in the large informal economy.? African governments must also adopt austere fiscal measures, aimed at eliminating waste in the public sector. It is reprehensible to continue creating and maintaining bloated and inefficient regional and national bureaucracies.
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“Ghana’s expected rise in public sector expenditure from 65% in 2008 to nearly 70 percent of tax revenues and 12 percent of GDP in 2009 is clearly not a bold belt-tightening measure, nor is the rampant cases of grand corruption in Nigeria an encouragement for decentralizing power and resources,”? Thompson Ayodele and Franklin Cudjoe said.
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Thompson and Franklin say one of the routes out of the recession is for the G20 leaders to muster courage and commit to opening trade.? Else, as the wave of protectionism continues to surge, it will reverse the gains made through the multilateral trading regime, undermine growth and deepen poverty. Saying no to protectionism should be priority number one on the G20’s menu list, instead of the current fifth place it currently occupies.
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* IPPA (www.ippanigeria.org) and IMANI (www.imanighana.com) were this year named among Africa’s 25 most influential think tanks by Foreign Policy Magazine.? *
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For media enquiries, please contact Thompson Ayodele on +234 80 2302 5079 or thompson-at-ippanigeria.org Franklin Cudjoe on +233 244 638 178 or? franklin-at-imanighana.com and? (Replace –at- with @)

IPPA Comments: Central Bank of Nigeria Effect Policy Changes
February 16, 2009
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Following an op-ed (Blind Optimism Over Intervention in Banks)? authored by two IPPA fellows publishedl ast week? in three major Nigerian newspapers, Kenyan Business Daily and Zimbabwe Telegraph on why government needs not intervene in banks because previous efforts were wasteful and besides banks have perpetually claimed profitability in their annual statements of accounts.
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The Central Bank of Nigeria in an apparent reaction to issues raised in the op-ed is effecting policy changes to unravel whether the profit being declared by banks are genuine or not.?
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In today’s the Guardian newspaper “ the apex bank has dispatched set of its officials known as Income Auditors to all banks in the country to examine banks transactions and match findings with the profits being declared by banks to ensure that no bank is declaring bogus profit”.
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Full story:
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IPPA had in the article raised the argument that if Nigerian banks are in excellent health and profitable as they claimed, why are the CEOs calling for government re-investment and intervention considering their financial statements and claims of profitability churned out annually by the banks.
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It was also argued that the call for government re-investment and intervention banks is economic folly and negates the CBN earlier claim that Nigerian bank are safe as such efforts would merely re-ignite internal squabbles and board room politics and consequently undermined the gains of reforms in the financial sector.?
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Full article is available @:
http://allafrica.com/stories/200902090459.html
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http://www.bdafrica.com/index.php?option=com_content&task;=view&id;=12892&Itemid;=5821
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http://www.zimtelegraph.com/news_article.php?cat=22&id;=184
Thompson Ayodele
Executive Director
Initiative of Public Policy Analysis
P.O Box 6434
Shomolu-Lagos
Nigeria
Website:www.ippanigeria.org
Tel: 01-791-0959
Cell:080-2302-5079


IPPA Among Top-To Go Think-Tank Globally
The Initiative for Public Policy Analysis (IPPA) has been named among the top 25 global top to-go to think tanks in Sub-Sahara Africa. It also ranks among 407 leading and most influential think tanks across the world.
The 2008 Global Survey of think tanks is published by the University of Pennsylvania, Think-Tank and Civil Society Program. The 2008 global survey of think tanks evaluated 5,465 think tanks worldwide.
IPPA was selected in view of its media reputation, the organization’s ability to produce new knowledge or alternative ideas on policy, ability to include new voices in the policymaking process and success in challenging the traditional wisdom of policymakers and the public.
“This recognition accorded IPPA is possible because of teamwork within the organization and its commitment to reiterate that the poor are not the problem but part of solutions to the challenges of economic growth if there are no obstacles on their ways,” said Thompson Ayodele Director of IPPA.
Think tanks are critical to the global ideas industry. They generate and fine-tune solutions to some of the most complex and vexing issues of the day. Leaders around the world need them to provide independent analysis, help set policy agendas, and bridge the gap between knowledge and power.
Think tanks maybe affiliated, independent institutions or structured as permanent bodies. They often act as a bridge between the academic and policymaking communities.
Please see full report:

Global Meltdown: Africa Needs Stable Exports
January, 2009
By Olusegun Sotola*
Since September 2008, the World has been gripped with financial crisis that has simply overshadowed the two earlier crises: food and fuel. While the first two crises were caused by persistent rise in cost of oil and food for months, the financial crisis was caused by unsafe exposure of financial institutions to loans that were not well assessed.
The financial crisis has been latent and was just a matter of time following the creation about four years ago, of abundant liquidity and low interest rate by the US Federal Reserve.? In response to this excessive liquidity, banks packaged loans for all sorts of people including those with bad credit records. This created bubble in the credit markets generally including the real estate. Financial Institutions borrowed short and lend long.
An obvious inducement for these sorts of lending is the high interest rate. The first sign of default emerged when, financial services innovators repackaged and securitised these loans and hit exchanges with it. When real estate prices began to fall, the number of defaulters increased. This consequently resulted in the collapse of sub-prime lending (a type of loan that is offered at rate above prime to individuals who do not qualify for prime rate loans).
Though other credit market segments (prime mortgage loans, commercial real estate, leverage loan, etc) also could have been the precipitator, sub-prime collapse was a contagion on them. The attendant results of this scenario are the spiraling problems now called the global financial crisis.
What started as a downturn in US real estate market has now assumed global dimension. Leaders in the developed world have met severally to see how best to lessen the effect and stop the situation from deteriorating. To this end, some policy initiatives have been devolved.
Surprisingly however, African leaders stand aloof and have been behaving as if the continent is immune to the crisis. Official statements confirmed this stance. According to World Bank, the GDP growth projection in developing economies for 2009 is now likely to be 4.5% as against 6.4% earlier projected.? This shows the possibility of the crisis being contagious. Whether the African economy have the capacity and character to absorb the crisis is far from obvious.
Of course there is hardly any domestic mortgage market in Africa to have a sub-prime problem. But there will be both direct and indirect effects. The direct effects will be minimal, while the indirect effect will be colossal. The local economy will be directly affected to the extent of how much of its business capital comes from abroad. For example, financial institutions will be affected to the extent of their exposure to foreign ownership and investment interests.
This is the experience in Latin America where most of its financial institutions are under the control of foreign owners. Foreign owners could withdraw or withhold their investment portfolio to service local economy.
There is also the prospect of reduced private capital flow. Capital outflows have been reported in some emerging markets and IPO worth $30 billion has been cancelled in emerging market in 2008.? Similarly, reversals of capital flows will lead to equity sell-offs and also put an upward pressure on the exchange rate.
The above trend is noticeable already in capital markets around Africa.
Prices of shares have been plummeting, as foreign investors are withdrawing in order to escape with minimal loss. For instance, in Nigeria, the All Share Index (ASI) and the market capitalization have declined inexorably for months now.
In early December 2008, ASI had declined from 66,271 to below 33,025, representing $89.2b and $50.3b in market capitalization respectively. This represents almost a 50% decline.? Though this free-fall in ASI predates the crisis, the crisis further accentuated the loss of confidence which have made many capital market investors to exit, even in loss.
Perhaps, the long-term effect is the meltdown impact on African exports, especially in term of production, employment and revenue accruable.
African economy being monolithic and largely dependent on extractive resources is a sure bet to suffer. Prices of nature-sourced resources are dwindling amidst decreasing demand. Oil prices, for instance have plunged below $40 and still falling, from a record $147 months ago.
The Organization of the Petroleum Exporting Countries (OPEC) has cut output by 1.5 million barrel per day. This has happened at a time when there were cuts in production in countries like Nigeria and Angola due to panic withdrawal by investors and local insurgency. African countries need a good stable export price to keep their import expenditures and export revenues in tandem.
In Platinum market, Lonmin Plc, a major player in Africa, has warned of possible lay-offs of staffers due to decrease in both demand and the prices for its metal. AngloGold Ashanti (third largest producer of gold in the world based in South Africa) planned to quit some of its projects. It will be reviewing its capital expenditures for this year by $400 million .
All these will collectively create domino effect throughout the continent.
As developed countries economy experience recession, loans and grants, which form a sizable chunk of developing world national budgets, will fall. Also, there will be a fall in remittances which have over the years become an important source of foreign exchange earnings for African countries.? Receipts on tourism will reduce. Africa exposure and dependence on foreign funds is large and cannot be a spectator when games like this are on going.
Several African countries are experiencing macroeconomic imbalance. This raises palpable fears of this crisis ending in human tragedy. High food and oil prices have pushed an estimated 100 million people into extreme poverty. More are being added to this number as growth rate decline. If this crisis is not timely addressed, less and less money will be available for education, health and other services.
The concerns on how safe Africa’s foreign reserves are genuine bearing in mind that these reserves are domiciled in some of these banks that have now gone under. In a matter of two weeks between September 10 and October 1, 2008, Nigeria lost about $1.5billion when its foreign reserve fell from $63.5billion to $61.99billion.
Recently, it has dipped further to $55.254billion? and there are no signs that this downward slope will stop soon. Amidst official denials that the global recession would not affect Nigerian economy, the local currency
(Naira) has continued its free-fall in foreign exchange market.
In view of declining crude oil prices, several governments, particularly oil producing countries, might resort to raising all forms of taxes in order to meet the shortfall in revenue. This will be counterproductive in the longer term, as it will lead to more tax evasion rather than the increase in fund being envisaged.
One lesson learnt is for business managers to play less with financial innovation in which the associated risk is not well assessed. Growth aspirations should commensurate with organizational ability. Any defaulting board or management should pay for the risk. This is why they were highly remunerated in the first place.
Government rushing-in with aid to underwrite for mismanaged businesses creates incentives for mismanagement elsewhere. If this is made to continue in like fashion, such government will crash under its weight in no distance time.
Direct state assistance in matter of this nature does two things. First, it uses taxpayer’s money to correct the private mistake of some, and it disincentivised both the management and the shareholders of better-managed firms. Secondly, it creates an impression that some firms are ‘too big to fail’,? and will therefore be bail out by government. This apart from undermining innovativeness, it also surely reduced the pressure to raise fresh capital.
It is economic folly for Africa to continue living in the pre-financial crisis period. Africa’s home grown problems are almost intractable, it will be compounded, if leaders’ response to the global financial crisis remains lukewarm.
The first thing on the agenda is improving the regulatory environment, especially the monetary regulation. In this regard government should do away with restrictive policies and create a favourable environment for entrepreneurship. Large volumes of businesses in Africa are informal. They were forced to this edge by frustrating formalising procedures. That they will not feel the credit crunch is not obvious. Encouraging them to move into formality by eliminating barriers to entry will foster development.
Direct government intervention will create bigger problems in the longer term. The downward trend in the Nigeria capital market is getting worse despite repeated interventions of the Central Bank of Nigeria. The volume of trading activities daily is now a paltry $18.6m as against $69m.
Besides, governments are bad in resources allocations. Apart from corruption and systemic leakages, government considers extraneous factors in determining who gets what.
Economy grows when entrepreneurs innovatively respond to market signals.
Government will do well by removing prohibitive taxes and regulations that distorts this signals.
Where do all these lead us? Fortunately Africa has a lot of untapped resources and arable land to expand their exports base. There is the need to concentrate on how these resources could be harnessed. After decades of failure of foreign aid and loans, relying on the World Bank? $2 billion “interest free loan” to mitigate the effects of the global financial crisis would ultimately kick-start another debt burden. What the continent needs is predictable rules that are business friendly which will in turn to drive up Africans innate entrepreneurial skills.
* Sotola is a Research Fellow with the Initiative for Public Policy Analysis, a public policy think-tank based in Lagos, Nigeria
Thompson Ayodele
Director
Initiative for Public Policy Analysis
P.O.Box 6434
Shomolu,Lagos
Nigeria
Email:thompson@ippanigeria.org
Backup: thompsondele@onebox.com
Website: www.ippanigeria.org
Tel:01-791-0959
Cell:080 2302 5079
*****Good Public Policy is Sound Politics**********


Smuggling: Driven by Policies that Stifle Entrepreneurial Initiatives
Being the Welcome Remarks by Thompson Ayodele, Executive Director, Initiative for Public Policy Analysis (IPPA) during the workshop on Economic Costs of Illicit Trade and Trade Concessions organised by Initiative for Public Policy Analysis (IPPA) and Commerce and Industry Correspondents Association of Nigeria (CICAN).
October 23, 2008
Ladies and Gentlemen
As you all know, trade is an activity that is as old as human race. Many once poor countries have used trade to slice the number of poor people.
Today, effective trade either with our neighboring countries or outside the continent still remains a critical way to re-position Nigeria in terms of creating wealth and achieving economic prosperity. This is because trade has brought about unprecedented improvement in the lives of the people particularly in poor countries across the world. Poor countries that are connected to other countries through trade and investment stand the chance of experiencing growth.
We all probably know the significant contribution trade plays in economic development. However, trade becomes illicit when some people subvert the legal process in other to make profit. In this sense, trade becomes counter-productive and all stakeholders are affected.
Just as smuggling is detrimental to any meaningful development, trade concession that benefit few individuals will obviously distort the price of local products and becomes a political weapon to reward lackeys and punish opponents. Aside from that, those who are privileged to get those concessions may tend to use it to import items that do not contribute any meaningful development. At best it will be another drainpipe on the economy.
Smuggling is not only detrimental to the national growth but also constitutes a health hazard particularly when goods involved are consumables such as essential medicines, wine and spirits, software and household items. In many respects, smuggling undermined intellectual property and consequently discouraged innovation.
The economic impact of smuggling is huge: Local industries suffer huge economic loss as they lose a tremendous percentage of market shares to smuggled products. Government also suffers because smugglers naturally evade tax.? Border security competes for financial allocation with other social services. Workers face job loss and legitimate manufacturers face huge economic disincentives.
A lot of sub-standard pharmaceutical products are smuggled. Many of them find their way into the market and ultimately to patients. Many household items also find their ways into several homes with huge health consequences. Many pirated copies of software find themselves into the market with huge financial loss on the innovators. What is most striking is that smugglers do not conform to local regulations, standards and health warnings and deprive others the fruits of their labor.
For instance, before 2004 in Nigeria, the incidence of counterfeit cigarettes was over 50%. Smugglers largely served the local market. With combined efforts of local manufacturers, regulators and enforcement of standards, smuggling in the industry has been reduced to 10%. That is why the current campaign to disrupt the activities of local manufacturers would end up reverting the gains already made in reducing smuggled cigarettes and ultimately allow smugglers to fill the vacuum that will be left.
Smuggling is a big business. Yes it is because it is driven by policies that make it difficult for people to set up business, the ever-higher taxes, particularly when taxes and prices in neighboring countries are much lower.? Weak criminal penalties, poor border controls, low arrest rates and corruption are reasons smuggling thrives. It is important that governments harmonise the exiting tax regimes and embark on economic policies that do not create conditions for illicit trade to thrive.
A corollary of this is arbitrary concessions that have done damages to local manufacturing sector. Between 2003 and 2007 about $2.2 billion was lost as a result of arbitrary granting of concessions to certain individuals and companies. It is noteworthy that the concessions were used
to import items which did not contribute to economic development.??
Sadly, most of the items imported through concessions and waivers contributed little or nothing to Nigeria economic development. In actual fact, it created a disincentive to local manufacturers and government was short-changed in the whole deal.
While we agree that concerted effort is needed to address illicit trade, eliminating what give incentive to smugglers is a sure way to start with.
Smuggling survives on negative incentives created by prohibitive tariffs and unfavorable business environment which kill industries. Efforts made by regulatory agencies will achieve little if the business climate still stifles genuine manufacturers.
We very much hope that the discussion in this forum would be helpful in highlighting that a country prospers through policies that enhance trade, investments and reward innovators, not through policies that reward government cronies and stifle individual’s entrepreneurial initiatives.
Once again we thank you for your attendance.
Thank you.
Thompson Ayodele
Director
Initiative for Public Policy Analysis
P.O.Box 6434
Shomolu,Lagos
Nigeria
Email:thompson@ippanigeria.org
Backup: thompsondele@onebox.com
Website: www.ippanigeria.org
*****Good Public Policy is Sound Politics**********
Tel:01-791-0959
Cell:080 2302 5079


Importation Of Cement: A Solution? (1)
04 Feb 2008
By Damilola Olajide

The news filtered around recently that the Federal Government in consultation with the industry operators has lifted the ban on importation of bagged cement. As usual, the major reasons adduced include bridging the huge demand-supply gap, enhancing greater market competition, encouraging new investments, and stemming the continuous increase in cement prices. The familiar tunes!
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The latest move is an implicit acceptance of the gross failure of the 2001 policy of national self-sufficiency in cement production. The policy failed because it provided perverse incentives to the industry operators. The government banned importation of bagged cement, only to grant quota-based importation licences for eight metric tonnes of bulk cement.
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However, the major beneficiaries of the import licenses were the existing cement companies. Largely because these were largely the companies with idle production capacities, they merely substitute bagging bulk cement for local production. By 2007, nothing has changed as the shortage of cement persisted with attendant high prices.
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The Nigerian cement industry has potentials to contribute to the Economy in various ways. As a major input provider, it provides linkages to other sectors of the economy, especially building and construction. Such linkages enhance physical and infrastructural development. The cement industry is a major regional employer of labour and contributes significantly to the country’s Gross Domestic Product (GDP).
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During (1981-1997), for example, about 27 per cent of the total contribution of the manufacturing sector to the GDP was attributed to the cement industry, and this increased at a rate of 2 per cent on average per year, compared to only 1 per cent by the entire manufacturing sector.
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The above potentials had been far from obvious in recent years. The privatisation exercise which affected most of the cement firms in Nigeria has not had the desired effects, despite the huge concessions made by The government to the new private investors. It is now obvious that the promises of ‘new investments’ are nothing other than expansion exercises to facilitate cement packaging. For example, the total industry installed capacity increased by only 3 per cent (5.0m to 5.15m). One of the buyers actually turned a production plant into a warehouse for packaging imported bulk cement.
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In effect, local production has remained at less than 50 per cent of total installed capacity, which largely concentrates in just two plants. The result has been output restriction and collusive pricing. The price of cement has increased by more than 300% since 1999. At present, the demand-supply gap is estimated at 11.5m tonnes. Is lifting the ban on imported bagged cement the solution to these problems?
Since commencement of local production of cement in Nigeria in 1957, local production has never been able to meet demand, even in the mid-1980s when demand for cement was declining. Demand for cement is closely associated with variations in a country’s economy.
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The modest but continuous growth in the Nigerian economy in recent years is a prospect for the cement plants to increase local production, other things being equal. However, the extent to which they can do so efficiently depends largely on the incentives underlying government policies as they affect local production, distribution and pricing.
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Firstly, access to funds is important for the cement industry. Cement production requires long-term capital and efficient operation requires continuous investment in maintenance. High cost of capital exemplified by high interest rates on loans constrains their ability to secure funding. Only a couple of the cement firms listed on the stock exchange are able to raise funds from the public, but then such funds are often insufficient to meet the level of investments needed. The result is that most of the plants are still producing (if at all), using obsolete, inefficient technologies installed over three decades ago.
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Secondly, because cement production is energy intensive, the extent to which a cement plant can operate efficiently depends critically on uninterrupted supply of energy. The Bureau of Public Enterprises estimates that the manufacturing sector alone loses about US$440m annually due to inadequate energy supply. A marginal change in energy costs has a significant impact on production costs or cost efficiency. However, these very important inputs are persistently in short supply to the Nigerian cement industry.
The Cement Manufacturing Association of Nigeria estimates that operating cement Kilns, the major equipment cement production, require 36 tankers of fuel to maintain production at about 50 per cent capacity utilisation. Due to shortage of fuel, the average daily supply to the industry is seven tankers, representing only 21 per cent of the daily total fuel requirement.
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Technically, cement Kilns need to run non-stop except for cleaning. Power outages damage Kilns. Each power outage necessitates rekindling the Kiln. Frequent rekindling causes damage to Kiln linings, which require relining. Overtime, frequent relining requires a complete overhaul of the entire Kiln system. In the presence of highly erratic electricity supply, cement firms have to expend additional capital in self-generation of power in order to keep the plants running. Nevertheless, the power generators also rely heavily on fuel to run. These additional costs are effectively passed on to the consumer in the form of high prices.
http://www.independentngonline.com/?c=125&a;=10191

Importation Of Cement: A Solution? (2)
By Damilola Olajideilola Olajide
05 Feb 2008
Continued from Monday
Thirdly, efficiency in the cement supply chain depends critically on the presence of a well functional national infrastructural network (e.g. transportation). Cement is a bulky product. The efficient level of inland transportation is limited to 200-300 Kilometers , depending on the road
condition.
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Thus, the bulky nature of the cement is a source of high distribution costs. This makes the rail system the most efficient distribution system to transport cement. However, what can be considered a functioning rail system in Nigeria today is cheer imagination.
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In effect, cement companies have had to seek alternative, but highly inefficient methods of allocation of cement to distributors. In addition to passing such high costs onto the customer, the nature of the cement product also creates non-competitive regional markets and generates collusive pricing.
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There is little incentive for competition as huge distribution costs encourages regional monopolies. Each cement company has a monopoly of its area of location. Consequently, the price of cement from other regions and/or imports is reached in tacit or explicit collusion with regional monopolies.
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As in the failed 2001 policy, the new policy may actually work against itself. Theoretically import penetration should provide a competitive environment where local producers compete with importers. However, a quota-based cement importation (bagged or bulk) is inconsistent with
competition. This is because restriction by licensing does not provide a free trade, therefore can not be expected to provide appropriate pricing signal in the market.
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Given the inefficiencies associated with energy costs, one might expect that imported cement should be relatively cheaper than locally produced cement. However, there is little incentive for price differentials since both incur similar inefficient distribution costs, which are passed on to the consumer. Also, because the main beneficiaries of the import licenses are largely the local producers, there is little incentive to compete and lower prices. Rather, they have greater incentive to jointly maximize profits through tacit collusion. This takes the form of restricting local output that implicitly substitutes imports for local production. Output restriction will require more import licences, just as it happened under the 2001 policy.
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The brief exposition above shows what may happen when government policies affecting an industry are inappropriate and inconsistent with underlying problems. High opportunity costs of capital will crowd out new investments. The government policy incentives for funding the manufacturing sector are unknown. That these cement firms now operate in the private sector post-privatisation does not imply that government cannot also assist them with funds. The difference is that the private sector is able to utilise such funds more efficiently. This is what public-private partnership is all about.
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License-or quota-based importation in whatever form effectively limits the powers of the market to operate efficiently. It creates distortions and diverts resources allocation. Resources that could be used to enhance local output are diverted into political patronage to compete for import licenses. Lifting the ban on bagged cement is at best a short-term remedy, not a long-term measure that can potentially achieve competition and lower prices. Indeed, the history of cement importation in Nigeria suggests that the latest is a familiar tune to reward political patronage…not yet the solution.
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The long-term solution lies in providing appropriate financial and infrastructural incentives that support efficient local production.
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Without such incentives, there is a limit to which local producers could be compelled to increase production beyond the price that their supply curves indicate. If the government must maintain a policy of cement importation, then it should be a free trade. Free-trade guarantees competition and put a downward pressure on prices.
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•Dr. Olajide is a Fellow of Initiative of Public Policy Analysis based in Lagos
http://www.independentngonline.com/?c=125&a;=10236

This Article is published in today’s Nation. The URL is not up yet . It is only available in hard copy. All the same we would like to share it with you.
February 1, 2008
Perverse Incentives Cripple Local Production of Cement
By Damilola Olajide*
The news filter around recently that the Federal Government in consultation with the industry operators has lifted the ban on importation of bagged cement. As usual, the major reasons adduced including bridging the huge demand-supply gap, enhancing greater market competition, encouraging new investments, and stemming the continuous increase in cement prices. The familiar tunes!
The latest move is an implicit acceptance of the gross failure of the 2001 policy of national self-sufficiency in cement production. The policy failed because it provided perverse incentives to the industry operators. The government banned importation of bagged cement, only to and granted quota-based importation licenses for 8metric tonnes of bulk cement. However, the major beneficiaries of the import licenses were the existing cement companies. Largely because these were largely the companies with idle production capacities, they merely substitute bagging bulk cement for local production. By 2007, nothing has changed as the shortage of cement persisted with attendant high prices.
The Nigerian cement industry has potentials to contribute to the economy in various ways. As a major input provider, it provides linkages to other sectors of the economy, especially the building and construction.? Such linkages enhance the physical and infrastructural development. The cement industry is a major regional employer of labour and contributes significantly to the country’s Gross Domestic Product (GDP). During (1981-1997) for example, about 27% of the total contribution of the manufacturing sector to the GDP was attributed to the cement industry, and this increased at a rate of 2% on average per year, compared to only 1% by the entire manufacturing sector.
The above potentials had been far from obvious in recent years. The privatisation exercise which affected most of the cement firms in Nigeria has not had the desired effects, despite the huge concessions made by the government to the new private investors. It is now obvious that the promises of ‘new investments’ are nothing other than expansion exercises to facilitate cement packaging. For example, the total industry installed capacity increased by only 3% (5.0m to 5.15m). One of the buyers actually turned a production plant into a warehouse for packaging imported bulk cement.
In effect, local production has remained at less than 50% of total installed capacity, which largely concentrates in just two plants. The result has been output restriction and collusive pricing. The price of cement has increased by more than 300% since 1999. At present, the demand-supply gap is estimated at 11.5m tonnes. Is lifting the ban on imported bagged cement the solution to these problems??
Since commencement of local production of cement in Nigeria in 1957, local production has never been able to meet demand, even in the mid-1980s when demand for cement was declining. Demand for cement is closely associated with variations in a country’s economy. The modest but continuous growth in the Nigerian economy in recent years is a prospect for the cement plants to increase local production, other things being equal. However, the extent to which they can do so efficiently depends largely on the incentives underlying government policies as they affect local production, distribution and pricing.?
Firstly, access to funds is important for the cement industry. Cement production requires long-term capital and efficient operation requires continuous investment in maintenance. High cost of capital exemplified by high interest rates on loans constrains their ability to secure funding. Only a couple of the cement firms listed on the stock exchange is able to raise funds from the public, but then such funds are often insufficient to meet the level of investments needed. The result is that most of the plants are still producing (if at all), using obsolete, inefficient technologies installed over three decades ago.?
Secondly, because cement production is energy intensive, the extent to which a cement plant can operate efficiently depends critically on uninterrupted supply of energy. The Bureau of Public Enterprises estimates that the manufacturing sector alone loses about US$440m annually due to inadequate energy supply. A marginal change in energy costs has a significant impact on production costs or cost efficiency. However, these very important inputs are persistently in short supply to the Nigerian cement industry.
The Cement Manufacturing Association of Nigeria estimates that operating cement Kilns, the major equipment cement production, require 36 tankers of fuel to maintain production at about 50% capacity utilisation. Due to shortage of fuel, the average daily supply to the industry is seven tankers, representing only 21 % of the daily total fuel requirement.
Technically, cement Kilns need to run non-stop except for cleaning. Power outages damage Kilns. Each power outage necessitates rekindling the Kiln. Frequent rekindling causes damage to Kiln linings, which require relining. Overtime, frequent reclining requires a complete overhaul of the entire Kiln system. In the presence of highly erratic electricity supply, cement firms have to expend additional capital in self-generation of power in order to keep the plants running. Nevertheless, the power generators also rely heavily on fuel to run. These additional costs are effectively passed on to the consumer in the form of high prices.
Thirdly, efficiency in the cement supply chain depends critically on the presence of a well functional national infrastructural network (eg. transportation). Cement is a bulky product. The efficient level of inland transportation is limited to 200-300 Kilometers , depending on the road condition. Thus, the bulky nature of the cement is a source of high distribution costs. This makes the rail system the most efficient distribution system to transport cement. However, what can be considered a functioning rail system in Nigeria today is cheer imagination.
In effect, cement companies have had to seek alternative, but highly inefficient methods of allocation of cement to distributors. In addition to passing such high costs onto the customer, the nature of the cement product also creates non-competitive regional markets and generates collusive pricing. There is little incentive for competition as huge distribution costs encourages regional monopolies. Each cement company has a monopoly of its area of location. Consequently, the price of cement from other regions and/or imports is reached in tacit or explicit collusion with regional monopolies.?
As in the failed 2001 policy, the new policy may actually work against itself. Theoretically import penetration should provide a competitive environment where local producers compete with importers. However, a quota-based cement importation (bagged or bulk) is inconsistent with competition. This is because restriction by licensing does not provide a free trade, therefore can not be expected to provide appropriate pricing signal in the market.
Given the inefficiencies associated with energy costs, one might expect that imported cement should be relatively cheaper than locally produced cement. However, there is little incentive for price differentials since both incur similar inefficient distribution costs, which are passed on to the consumer. Also, because the main beneficiaries of the import licenses are largely the local producers, there is little incentive to compete and lower prices. Rather, they have greater incentive to jointly maximise profits through tacit collusion. This takes the form of restricting local output that implicitly substitutes imports for local production. Output restriction will require more import licences, just as it happened under the 2001 policy.
The brief exposition above shows what may happen when government policies affecting an industry are inappropriate and inconsistent with underlying problems. High opportunity costs of capital will crowd out new investments. The government policy incentives for funding the manufacturing sector are unknown. That these cement firms now operate in the private sector post-privatisation does not imply that government cannot also assist them with funds. The difference is that the private sector is able to utilise such funds more efficiently. This is what public-private partnership is all about.
License-or quota-based importation in whatever form effectively limits the powers of the market to operate efficiently. It creates distortions and diverts resources allocation. Resources that could be used to enhance local output are diverted into political patronage to compete for import licenses. Lifting the ban on bagged cement is at best a short-term remedy, not a long-term measure that can potentially achieve competition and lower prices. Indeed, the history of cement importation in Nigeria suggests that the latest is a familiar tune to reward political patronage…not yet the solution.
The long-term solution lies in providing appropriate financial and infrastructural incentives that support efficient local production. Without such incentives, there is a limit to which local producers could be compelled to increase production beyond the price that their supply curves indicate. If the government must maintain a policy of cement importation, then it should be a free trade. Free-trade guarantees competition and put a downward pressure on prices.
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Dr.Damilola Olajide is a Fellow of Initiative of Public Policy Analysis based in Lagos
Thompson Ayodele
Executive Director
Initiative of Public Policy Analysis
P.O Box 6434
Shomolu-Lagos
Nigeria
Website:www.ippanigeria.org
Tel: 01-791-0959
Cell:080-2302-5079


Anti-graft: effective institutions matter
25/1/2008
By Thompson Ayodele
Corruption is one of the banes of development across the world. It accounts for the failure of government to provide adequate security. It accounts for the weakness of the rule of law.? In Nigeria it has dwindled economic growth and prosperity. For many non-Nigerians, it is hard to believe that the country is poor considering the country’s huge oil proceeds alone. Until recent time, corruption rating in Nigeria had been unimpressive. This prompted the last administration to set up the Economic and Financial Crime Commission (EFCC) to combat the menace.
The EFCC under the chairmanship of Alhaji Nuhu Ribadu did excellently well even among politicians. When some bank directors were investigated and made to cough out some of the funds fraudulently acquired while at the helms, the commission received a pat on the back. For that and similar feats, the EFCC was praised to high heaven. The real challenge for the commission began when it decided to take on politicians, particularly the so-called sacred cows. At a point, efforts were made to whittle down the power of the Commission. The most critical period for the commission was shortly before last year’s general elections.? Opponents were so vehement that the Commission was used by the administration then to settle political scores.
Whether the accusation over the conduct of the EFCC against political opponents is correct or otherwise is subject to debate. Whatever might be the shortcomings of the EFCC, the commission has exhibited strong commitment to the war against graft. It has investigated a vast number of people, including political leaders and private individuals. The fight against corruption would remain elusive if those who are well connected, including those who can use the proceeds of their ill-gotten wealth escape justice.
With more than 56 convictions on corruption, money laundering, oil pipeline vandalisms and related offences, assets well over $5 billion have been frozen and seized from corrupt officials, their agents and cronies. The fight against advance fee fraud (419) which has given many innocent Nigerians a bad name has been doggedly pursued, leading to the prosecution and conviction of kingpins, including the celebrated $242 million case involving a Brazilian bank. The EFCC also recovered and returned the sum of $4 million to a victim of advance fee fraud in Hong Kong and has seized and returned over $ 500,000 to sundry US citizens. These are no mean feat.
It would be wrong to personalise the war against graft. Although Nuhu Ribadu’s name has become synonymous with the EFCC, this is not surprising considering the public hue and cry that attend his consideration for further courses.? What should be the concern of everyone is that the war on corruption should never be let down when Ribadu is no more in charge. This is what the public expected.
Rather than personifying the war of corruption, it is imperative to build effective institutions that would expose corrupt individuals and ensure that they do not escape justice.? The difference between a country where there is a low level of corruption and a country where corruption constitutes huge problem can be explained by the quality of the shared rules and the institutions which coordinate individuals. Some countries adhere to rules which engender trust among public office holders and provide the incentive to perform.?
Others have rules system that allow officials to milk public purse and further deprive their citizens the fruits of risk taking efforts. Human beings anywhere depend on the right kind of institutional system.
Part of the reasons the public are not comfortable with the proposed course for Ribadu is the fear that the commission’s power could be eroded. Of course, they have reasons for such fears. Aside from the reported underground moves to hedge out the EFCC boss, the open confrontation between the Attorney General of the Federation and the EFCC with respect to the latter seeking permission from the former before prosecuting indicted individuals is still fresh in mind. This is seen as an attempt to reduce the powers of the anti-graft commission.
The question on everyone’s lip is after the exit of Ribadu, would the EFCC have the same clout to arrest and even prosecute the so-called big fish? There are many interpretations to the proposed course for Ribadu at NIPSS. The one that has gained wide currency is the arrest of one of the governors who was reported to have bankrolled the election of President Yar’Adua. Many are of the view that there could be a connection between the arrest of the former governor and part of a grand design to sideline the EFCC boss. Be that as it may, the burden, of course, is on this administration to prove the public wrong.
The present administration needs to show strong commitment both in words and actions that the war on graft is waxing stronger. Should there be any indication that the administration is backing down, it would reverse whatever gains the nation has made in the anti-corruption war. It would further worsen the nation’s rating.
In case Nuhu Ribadu’s exist is finally pushed through and the war on graft is at low ebb, it would translate into a very huge negative local and international image for this administration. It would further lend credence to the allegation that this government is running the gauntlet amid public disbelief and astonishment at the direction in which some powerful minority policy architects have steered the boat of public leadership.
The truth remains that although Ribadu is widely seen as a hero in the anti-corruption war, it does not mean that he is the only one who can prosecute the war on corruption with the zeal with which it is being done. There are several Nigerians who can do the same. But the present administration should be mindful of the fact that if Ribadu is removed the power of the commission must be strengthened. This would re-assure everyone that the anti-corruption campaign is alive and kicking. To do otherwise would further attract local and international opprobrium.
• Ayodele is the Executive Director of Initiative for Public Policy Analysis, a non-governmental organisation based in Lagos.


Economic Follies of Duty Waivers

By Thompson Ayodele
01.13.2008

Nigerian government has vigorously pursued economic policies aimed at liberalising the economy, promoting competition and investments.?? These are done through a lot of policy reforms. While some of these reforms have been carefully adhered to, others got derailed midway or pursued half-heartedly.

The last administration embarked on ambitious reforms. Initially they were meant to inject life into the Nigeria ’s comatose economy. However, this administration at inception, opened a can of worms, which revealed that close friends and business associates of the last administration must have benefited more from these reforms than? majority of Nigerians who the reforms widely proclaimed, were meant to ameliorate their level of poverty.

Last year, the Federal Government came with a bombshell. It suspended various exemptions from duties and tariffs granted certain individuals, organisations and governments. Initially, the intention of granting those concessions was primarily to encourage local manufacturers who cannot cope with the increase in? number of imported goods.

Rather than helping the so-called local industries, the concession was used at the detriment of the economy in general. Between 2003 and 2007, about N258 billion was lost to the concessions, which did not either increase? capacity of local industries or improve the quality of goods that were produced, a key reason the concession was granted in the first place. If carefully used for the purpose it was meant, for instance, duty waiver for farming machineries would go? a long way in improving agricultural outputs.

Again, duty waiver on imported building materials would help in reducing? problems of shelter and housing. The selective issuance of waivers has greatly hindered competition, a vital component for which the reforms were embarked on. How many firms would be able to compete with companies that enjoy waivers on? imported items?

The results are predictable: In the first place, the market economy that? government is trying to build would be distorted and bastardised. Secondly,? benefits that consumers are expected to enjoy, as a result of competitive economy would be denied. At best, consumers will be left at the mercy of the monopolists and various cartels, thereby creating rooms for uneven and unfriendly condition.
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According to Aliko Dangote, President of Dangote Group, import waivers granted by the previous administration were used to import items sell and not for? projects for which they were specifically meant.

What this implies is that the waivers were fraudulently used. No economy would develop when there is a specific policy for certain categories of people. In fact, it is double jeopardy for some firms, who after paying all the necessary duties,? are still faced with multiple taxes and crippling infrastructure.

What is more worrisome is that the waivers benefited few people whose activities did not contribute in anyway to the economy. What the concession simply did is to further endanger the momentum towards a more competitive economy. No doubt the waivers have been grossly misplaced and abused by the “bigmen in the system .

What can be deduced from the granting of the waivers is that duties, levies and tariffs are unnecessarily high. If they are low, then there will be no need for anyone to swing his links and contacts to seek for waivers.

The public policy implication of high duties and tariffs is that it would encourage those well connected to seek one form of waiver or the other. This no doubt calls for the need to review the current duties and tariffs.

The advantage of low duties is of three folds. First, it would discourage importers from seeking of concessions. Secondly, it would stem under-invoicing that has clearly characterised imported items and discourage smuggling, which is so prevalent within our land borders.
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It is not enough for the present administration to simply order the suspension of the duties waiver, in as much as those who benefited from the concession do not contribute meaningfully to the economy, they would be treated as economic saboteurs and be made to refund the revenue they illegally siphoned out of the national purse.

We might risk a repeat of the illegal action, if those responsible are not sanctioned. The first step towards this is that the beneficiaries’ accounts must be audited, to actually determine the amount they would refund. It is a misnomer if policy-makers think that the best way to revive local industries is through granting of waivers and other forms of concession.
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The urgent item that needs critical attention is the need to ensure that? deteriorating infrastructure are fixed in all the local industries across the land.? On the long run, this will give them room to showcase their capabilities of propelling the economy to a sustainable height.
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However, as long as local industries pay for their security, water supply and power generation, no amount of protection or concession can enable them to compete favourably with their foreign counterparts, in terms of producing cheap and quality products and services.
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Granting waivers to a few favoured friends and denying a large number of people who can contribute significantly to the economy is a lesson on how not to develop. Obviously, this should not be the habit of a country like Nigeria, which aspires to meet the MDGs. The long-term implication is that it would further distort economic performance. Many companies, rather than being innovative and alert to other economic opportunities,? prefered one form of protection and other inward looking policies.?
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*Thompson Ayodele is the Executive Director of the Initiative for? Public Policy
Thompson Ayodele
Executive Director
Initiative of Public Policy Analysis
P.O Box 6434
Shomolu-Lagos
Nigeria
Website:www.ippanigeria.org
Tel: 01-791-0959
Cell:080-2302-5079

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