Many businesses operating in Nigeria have been reeling from the shock of the twin policies of petrol subsidy removal and naira float introduced by the Federal Government in 2023. In this interview, Felix Nwabuko, Managing Director of Presco Plc, a key player in the oil palm industry, speaks to a team of The Nigerian Observer Editors on issues around these policies, the Oil Palm Development Council, what the government should do to make the business environment more enabling, as well as what keeps Presco strong despite the odds. Excerpts:
Before the end of the last administration in 2023, a number of reforms were introduced to encourage the agricultural sector of the Nigerian economy. Could you tell us the impact of those reforms on your operations?
The agriculture sector is one of those sectors where the government has always come up with policies from time to time. We have had several policies, especially when there were changes in government. For instance, we had the Green Revolution, Operation Feed the Nation, among others. But another thing is the sustainability of the reforms and the policies. Regarding your question about what happened towards the end of the last government and the beginning of this new government, two very important policies or reforms come into play. You have the NATIP, which is the National Agricultural Technology and Innovation Policy, which they rolled out, and then you also have the latest policy where, in order to be able to support agriculture, there was a 50 per cent rebate that was going to be given to farmers of inputs. So, all that comes together to affect agriculture.
So, what’s my view on those economic reforms? My view on those economic reforms is that when you read through those reforms, they sound very good. As a matter of fact, in some of those reforms, when you read through them, they are very well thought out. I think where the problem lies is in the area of implementation. This not only affects agriculture alone but all the sectors of the Nigerian economy.
I give my kudos and endorsement to those reforms, especially the very last two that are the latest in the series of policies and reforms that have taken place. If we implement them the way they are supposed stick to the spirit of those reforms, the agriculture sector will move progressively on but what we have to look at as a matter of fact, and which is what makes it look as if nothing is happening, is in the implementation, and there are so many reasons why implementation is not flowing the way it should.
We have spoken so many times about data. How do you capture the data of the persons or people or organizations or groups within the sector to whom to channel the points of these policies who can best make use of them to produce the desired results? What is the element of politics that is in it when it comes to distributing the benefits in these reforms? Such are the things that really water down the impact, or the capacity for these reforms and policies to deliver the desired impact. I support those reforms. It is said that in life, two things are the real permanent things: death and taxes. What that means is that change is a necessary part of life. So, those reforms and policies, the very first thing that triggers them is that a government sits back and says: OK, we have been doing this, we are here now, what do we need to tweak? What do we need to change? What new things do we need to introduce? What do we need to reassess that used to work but is no longer working? After those thought processes, a reform is brought forward, a policy is brought forward.
So, that process is good, and the intention of those policies and reforms are really good, but we fail at the implementation stage. The execution capacity is the problem that we have. The capacity to execute as intended, that’s where the problem is.
The new government at the centre last year implemented two specific policies that have had a significant impact on businesses: the removal of petrol subsidy and the free float of the naira. As a business operating in the agribusiness sector, how have you coped with the challenges thrown up by these policies?
We have felt excruciating pain and there is no doubt about that. I don’t know anybody or any business in Nigeria today that the “removal” of petroleum subsidy and the free float of the naira have not hurt. Maybe those who trade in forex have made more profit or less profit or whatever, I don’t know but for businesses including agric and particularly oil palm, we have felt the pain. On the impact of fuel subsidy, we have seen a serious escalation in costs and cost of living and cost of doing business. We spent a good part of this year, which is one full month and 26 days in the second month, doing nothing but attending to agitations from our service providers for an increase in rates, up to hotel businesses. We are a company that uses a lot of transportation, whether it is for the delivery of finished products or the movement of our fresh fruit bunches from the field to the mill or the transportation of our workers. We invest a lot in transportation costs, whether it is in land preparation where we have to pay for the hire of bulldozers as heavy-duty equipment. For the greater part of this one month plus, we have been investing in reviewing rates.
Meanwhile, your capacity to increase your prices is limited. It is not such that you can overnight translate to an increase in your unit selling prices because your off-takers, a majority of our off-takers, up to 95 per cent of them, are manufacturers. This is a raw material for them, and so they will take this raw material back to their own production processes. Our capacity to transfer this rising cost to them is obstructed by their own capacity to be able to offload such price increases on the consumers. So, what is happening is that businesses are struggling and for those who are perhaps down the line, if they cannot offload it, the business shrinks. There are no two ways about it.
Now, if we speak to the floating of the naira, I’m one of those who will hold my hands up and say that if you are talking of what should it be, what it should be is that it should be a free market economy. That is what economic theory says. In Nigeria today, I classify it as theory. Why do I classify it as theory? It is because when there is a free float of the naira, you are simply saying that the naira should find its price in comparison to other currencies. What is it in elementary economics that determines price? It is the equilibrium of supply and demand. It is as simple as that, which means that the interplay of the forces of supply and demand is what should be able to help you decide your market price. For this particular commodity called forex in Nigeria, the supply is woeful, the demand is huge. It does not help because we do not have what is required as fundamentals in our national productive capacity to generate, other than from oil, the forex that is required in this nation. And, of course, the one we generate from oil, if we go by what we read in the press, a huge chunk of it is into debt servicing.
The government needs to make a rethink here, in my opinion. There should be a rethink. We should go back to the drawing board. It might be a good economic theory, but is it right for us at this material point in time? And if it is not right for us, we should say what then can work because it’s all about us all.
Stakeholders in the oil palm value chain have been fighting adulteration and some of them are even canvassing the setting up of the Oil Palm Development Council. What is your take on this?
I am a very strong advocate of having a Nigerian Oil Palm Council. It is the good way to go. If you look at nations like Indonesia, they have oil palm councils. What will the oil palm council do? Yes, the issue of adulteration might come in, but it is not the major reason for having an oil palm council. The greatest reason for having an oil palm council is to have a body that is populated by, number one, the people that have a very high interest in that sector, that have the knowledge and the capacity to govern that space or drive what is required to take the business of that sector progressively from point A to B to C to D. The body can act as a good adviser to the government, and as a good partner to businesses, investors in that space to be able to drive the business off that space. That is principally what the council will be doing – regulations, monitoring and all those things and, of course, in-house capacity development to assist investors to tackle the challenges that are in that sector successfully, rather than everybody fighting from their own corner and not achieving anything.
Now coming to what it can do in terms of adulteration and smuggling; in terms of adulteration, what it can do is to work with government agencies that should be doing that, partner with them, have an understanding of how this monitoring will be done to check adulteration. So, that would be a bit of what should go on because it is a development council. But then, when it comes to the area of smuggling, its activity in the area of smuggling will be higher than its activity in the area of adulteration. Adulteration can happen at the backyard of one man in one village but smuggling is across the borders and smuggling will be very visible because as a council, it will have the statistics that is required to be able to check things like that. Check internal production, check national consumption, and then be able to interrogate where the extra is coming from. Wherever the extra is coming from, if it is not a total ban, how has it come in? Did it come in correctly? Work with customs and all that. So, I am a strong advocate of that council for these purposes.
Apart from the development council, are there specific policies that you would recommend that the government implement to further help the agriculture sector, specifically the oil palm segment?
It is well known today that the barriers to entry into the oil palm business are high. It is not an industry where you wake up in the morning and then say, I will set up a stall and I go into it. What are those things that make the barriers to entry very high? One is finance. But in talking about finance in this industry, you are talking about the right type of financing, both in terms of tenor and cost. If you look at that, not just in the very recent past, the central bank came up with the initiative to make available some financing, intervention funds for oil palm. The initiative had its own challenges also. One of those challenges was accessibility. If you want to lend money to somebody, you have to check out the capacity to repay. So that was why not every player in the oil palm industry was able to access, but at least the policy was there and the policy was meant to address the right type of financing. It was the first time such happened in Nigeria through the central bank. There are questions as to whether it is the role of the central bank or not. So, that is a discussion for another day.
But what it means is that the central bank realizes that there is a need for that kind of financing. One of the things that is expected in this industry is that we should not remove our eyes from the truth that there is a need for that type of financing. Then, the government, the development banks, whose mandate it should be to make available those kinds of financing should be strengthened and should be made to take it up, whether you talk of the Bank of Industry or Bank of Agriculture, and the likes, they should be strengthened. We should make it possible for them to perform in that area. Oil palm is special. There are other special areas also because in oil palm, before you can get your first bunch, you would have invested for about five years. People think that when I plant my oil palm, given the types of seedlings we have today, that after three years, I will begin to harvest, but you do not remember that before I planted, I had been nursing these seedlings for a minimum of 18 months. So that makes it four and a half years. So, I have five years of burying money before I start to see some flower, and then even when I start to see that flower, my break-even point, depending on your size and your farming practices, is not earlier than eight years. So, if you are not fully well established to be having cash flow and you want to borrow money to start today, you and the lender must understand that the money I’m giving you today, I shouldn’t be asking you to return it in 24 months’ time. So, we need to work out the right type of funding. The same thing goes for cost. Any double-digit interest rate is injurious. okay, the development banks do 10 per cent, CBN was doing at 9 per cent. In the COVID days, they did 5 per cent and all that. So that’s one.
Two is inputs. If government wants to encourage people to come into this sector, I think government should be looking at the availability of inputs. We can even have companies empowered that their role goes across the value chain if the demand is stimulated and all that, that they invest in the production of seedlings for other persons to take to go to plant. These companies should be specialists in producing the right types of seedlings and the prices should be affordable so that people who want to go into the agro scheme of one hectare or two hectares or thereabouts can afford them.
So, what are we looking at here? We’re looking at things that can make it possible that more people can get into this sector. These inputs, the financing must have some form of encouragement to lower the entry barriers into the industry.
Then you talk about land. You and I know that land is such a serious thing. You can buy land and before you can complete all the processes, it can be long. So, if you take an example for what is happening in this state, for instance, through the Edo State Oil Palm Programme (ESOPP), where the government has taken it upon themselves to have an agency that will help investors in the industry to overcome these challenges of land acquisition, in traction with communities, to sort things out, do your free prior and informed consent processes so that at least you could move into the real business as quickly and harmlessly as possible. What the government does in land acquisition and all that to encourage the investor is also an important thing.
The other thing is what I call the level playing field. Today, we talked about smuggling and so on. I will give you an example. I think it was in 2016 when 41 items were banned and then two were added. There was a lot of hue and cry as well as debates for and against, etc. Now, the way some of us looked at it is this. Why was the ban made in the first place? It was made in order to encourage local industries and local production. When you go through that list, you will see that, indeed, these are things where we can really achieve this encouragement. It is because we are used to what I call “cash and carry economy”. But at that same time coincided with the time the CBN came up with the oil palm development intervention fund and I remember that in some of the meetings that we had, we did say to the CBN leadership that those moves were necessary, otherwise you would not be able to recover the loans. If you lend me money to produce more and at the same time, I am facing the challenge of flooding from nations that are producing more than us, and even cheaper than us, the ultimate outcome is that I will not be able to sell or sell well and so if I don’t sell well, I’m not going to be able to repay your money. In other words, level playing ground is important.
Beyond the smuggling itself is that in-country, there is an unlevel playing ground to which attention must be paid. We have free trade zones. If you are operating in a free trade zone, the law regards you as a foreign operator. So, you enjoy a lot of incentives, including tax incentives, and you are not supposed to sell your products in the local market and if you want to sell your products in the local market you must pay duty, but from experience, we see that it is not so. Companies who operate in the free trade zones have enjoyed all these benefits that bring down their costs of production and still sell in the local market with those who do not enjoy the kinds of privileges they enjoy.
Could this be why stakeholders in this sector are not happy with the way the Federal Government grants waivers to some importers in the oil palm value chain?
Of course, would you be happy when you compare it to what you have? This company pays billions in taxes every year because of the financial results. If you even give us some tax incentive and not just limited to the pioneer period that has been over for many years, that same money will be reinvested in this business and expand it to give the same government benefits through employment generation, payment of additional taxes, and benefits to the host communities. If I am not getting that and you are granting waivers for whatever reason and somebody goes to you and says, my capacity is low if I don’t fill it, your citizens will lose their jobs, and so on. We will not be happy because it’s not a level playing field.
In the midst of all these challenges, Presco still managed to record an impressive performance last year. What did you do differently?
We are not doing anything differently as in to say there is some trick in the box that you go and pull out. I would like everybody to understand that Presco started business in 1991. If you have the benefit of the history, you will see what was the state of Presco from then to a certain point in time and when it did start to go up and then begin to have multiplier effects. What you are seeing now is the multiplying effect of the benefits of hard work that has been consistently put in previous years. That’s what you are seeing.
The other important thing is, what do you prioritize in your business? You must understand what is important in your business to drive growth and success. In this business, size is important; expertise is important. So every additional expansion in Presco today will bring more than normal returns by reason of the fundamentals that are on ground, as long as you continue to apply expert management techniques to it. This is why the government needs to encourage new entrants because they also must go through that process that Presco went through from 1991 through all these years. So, it is simply the outcome of consistently doing the right thing over a long period.
Many years ago, Presco took a loan of N1 billion to build waste to power plant to bypass the issue of erratic power supply. What is the state of that plant?
It is doing very well. The loan was from one of those government intervention funds in the power sector. That was the facility we accessed to build our biomechanisation plant where you convert your main effluents to methane gas which you send back as energy. So, it is there and it is working very well. The status today is that in terms of energy generation and energy usage, on the average annually, Presco generates 80 per cent of the energy that it uses, worst case scenario 75 per cent. That particular plant that you mentioned saves us about two million litres of diesel every year. Imagine now that the cost of a litre of diesel is N1,800, multiple that by 2 million.
What is the outlook for the oil palm industry in 2024?
The outlook is bright, but there are factors within the economy that need to be paid attention to. We are building a new mill which we have started work on because come 2025, our present mill which is 90 tons per hour cannot cope with the quantity of fruits that we will harvest from our plantations, so a new mill is necessary. We evaluated the cost of that mill in foreign currency. It will be built outside Nigeria, there is no doubt about, which means you need foreign exchange to do it. Today, we are scratching our heads because our original evaluation of how much it will cost us in naira will not be able to build that mill.
So, the outlook in terms of the need for the output of the industry is very bright. For some years now, the deficit between what is produced locally in terms of palm oil and what is consumed has remained consistently around 800,000 metric tons and one million metric tons per annum. So, for a business that has developed the fundamentals and can continue to produce, it is bright. For those who have entered and are now able to continue and survive their business, the outlook is bright. Even if it is one person that has no money to build small mills, your fresh fruit bunches are marketable; they will sell. And when you look at the fact that population is still increasing in Nigeria, and you look at the per capita consumption of palm oil, it means that the quantity required will continue to grow. So, there is no fear that the business of this industry will go down. The only thing that it needs to cope with and where there are challenges are these external factors.
