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COCOA PROCESSORS, OTHERS SEEK WAY OUT OF CURRENT CHALLENGES

By NBF NEWS
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The once buoyant Nigerian cocoa sector is currently in the throes of death due to a combination of factors, including inadequate attention by the government and alleged international conspiracy against its development. In this piece by SULAIMAN ADENEKAN, concerned stakeholders are proffering solutions to the problems of the sector.

The discovery of oil in Nigeria in the 1950s and the subsequent focus of attention on the exploitation of the black gold have in no small measure contributed to the stunted growth of the nation's agriculture industry, especially the cocoa sector that was once served as the major revenue earner for the government.

The total cocoa output for Nigeria is 200,000 tonnes per annum, out of which about 60,000 tonnes are processed, while the remaining 140,000 tonnes are exported, thus, indicating serious underutilisation of the installed capacities of indigenous processors.

The processors are faced with various challenges ranging from delays in the disbursement of the Export Expansion Grant; imposed duty on processed cocoa by the European Union-Economic Partnership Agreement; high interest rates; underutilisation of installed capacities, poor power supply and the lack of competitiveness of processed cocoa when compared with raw cocoa in the export market.

Highlighting the importance of the cocoa industry to economic development of the country, the Chairman, Cocoa Processors Association of Nigeria, Mr. Akin Olusuyi, emphasises the urgent need to surmount the challenges facing the industry in order for it to remain competitive for the benefit of the country.

According to him, the cocoa industry contributes to the country's foreign exchange earnings, as a tone is currently being sold at the international market for $3,006, thus each factory can earn about $50m per annum on average at current values; while also promoting manufacturing culture and improved technology transfer.

On employment generation, he says each factory employs at least 200 people and provides up to 1,000 indirect jobs, adding that the industry boosts national growth by contributing about 27 per cent of foreign exchange earnings to non-oil export in 2007.

According to him, the multiplier effects of the sector on local industries stimulate local economies of host communities and states, as many of the existing cocoa processing factories are located in rural areas, adding that the industry also enhances local consumption of cocoa-based products and serve as the major supplier to manufacturing companies like Cadbury, Nestle, Promisador, Wamco, Fan Milk and other smaller beverage factories.

He says the processors also increase the technological know-how of factory workers through training and education programmes, as they set and maintain high good manufacturing practice standards in their factories, with some of the factories already certified as meeting the same standards as their European and American competitors, which further enhances the good reputation of Nigeria and its products in the world market.

'Despite all these and more benefits that the nation derives and can derive from our industry, however, we are faced with some challenges, many of which we cannot surmount without the intervention of the relevant agencies,' Olusuyi says.

Speaking on the challenges that have led to the inability of the processors to compete effectively, he says the failure of Nigeria to sign the new EU/EPA agreement has forced the EU to impose duties of 4.2 per cent on butter and 6.1 per cent on liquor/cake with valid GSP on Nigerian processed cocoa products and the removal of duty on raw cocoa beans.

Others challenges include the high cost and inadequate supplies of cocoa beans to local factories; high energy cost with an average expenses of N1bn on fuel per annum by the industry; and high cost of imported machinery spare parts that are not available in Nigeria.

On the EEG, Olusuyi says that the 2008/2009 EEG is yet to be disbursed, and the situation is not helped by the high incidence of re-financing cost due to the elongated EEG processing time, adding that the cumbersome process of the EEG rating and rating guidelines makes efficiency difficult to achieve in the current market scenario.

Funding, according to him, is a major challenge to the industry, which is highly capital intensive, as a medium sized factory requires about N3bn to operate profitably, adding that to purchase thousands of tonnes of cocoa requires huge working capital with high borrowing costs at between 20 to 23 per cent interest rate for working capital, thereby making it tough to operate in such an environment.

On raw material sourcing, Olusuyi says that the quality of the raw cocoa beans in some cases is poor due to lack of policy guidelines to guide the farmers. He notes that the absence of duty on importation of raw beans in Europe is making nonsense of value addition through origin processing; while the activities of foreign cocoa bean buyers and exporters in Nigeria from the farm gates makes it more difficult to buy cocoa beans for processing.

Other key challenges, according to him, include the total deregulation of the cocoa market and lack of policy framework, resulting in serious distortions that put value addition through processing at a disadvantage in comparison to direct raw beans exportation.

On low capacity utilisation, the CPAN Chairman says the industry has recorded reduced foreign order and low international prices of cocoa products following the global economic meltdown and high incidence of under-absorption of fixed operating costs due to persistent low capacity utilisation, which is putting huge strain on invested capital.

He says that cocoa processing equipment and spare parts are meant to be free of import duty, yet the processors are almost always forced to pay duties when importing, adding that this cannot be contested at the time of clearing the parts as they are urgently required and delays in clearance would invariably cause them to lose more money.

Olusuyi says, 'We feel, however, that most of the above issues can be addressed and resolved if there is the willingness to join hands with us to achieve this objective.'

Speaking on the strategies to adopt to address the competitiveness issue, he says the government should give five per cent compensation on the EU/EPA duty surcharge or EEG rate should be raised to between 35 per cent and 40 per cent for cocoa products.

He suggests the removal of the 0.5 per cent NESS payment on export of cocoa products; zero rate import duty and no Value Added Tax on processing equipment and spare parts; and enforcement of the ban on malt imports to stimulate local cocoa powder consumption.

To address the EEG issue, he canvasses the immediate payment of the accrued 2008/2009 EEG, payment of 60 per cent of the value of the EEG upon acceptance of application, payment of the 40 per cent balance within three months from the date of submission, rationalisation of rating process for the EEG based on current economic realities and the removal of the EEG grant on the export of raw cocoa beans.

'The medium-term objective should be to completely discourage export of cocoa in its raw form as it is being done in other countries like Ghana, Indonesia and Malaysia. While this is being worked out, however, we propose that these immediate measures be put in place,' he says.

Other measures to give the sector a lift, according to him, include giving consideration to the concept of only allowing export of raw cocoa beans by cocoa processing factories, thus helping to ensure adequate supply to all plants, while cocoa bean export licences can also be granted to processing factories based upon factory size in relation to the overall cocoa crop availability.

He also wants the government to prevent overseas cocoa bean buyers from operating outside of the main export centres of Lagos and Calabar; while also considering the concept of export tax on raw cocoa beans to correct the apparent distortion in the market and encourage further investment in manufacturing and processing in Nigeria; and provision of working capital from the Agric Fund for cocoa processing factories.

Others suggestions made by Olusuyi include the provision of subsidised funding for capital investments in cocoa processing plants and facilities; enforcement of the duty-free status of imports of spare parts and machinery by cocoa processing plants, and refund of all duties paid in the last five years as well as putting fiscal, legal and market policy frameworks in place for a more structured and organised cocoa economy.

Olusuyi says, 'It is our sincere and humble belief that if the above prayers can be granted effectively and quickly, the current crisis in our industry can be weathered and the contributions of this very strategic industry to the nation's economy can be fully harnessed and sustained.

'We are ready and willing to meet and work with all relevant agencies of the Federal and state governments as well as other stakeholders to chart the way forward for this industry and avert the destructive impact, which a collapse of this industry will have on the non-oil sector of the national economy.'

The Executive Chairman, Lorneview International Limited, a cocoa processing company, Mr. Abimbola Oladapo, says the delay in the disbursement of the EEG, which is 30 per cent of the invoice value of cocoa meant to be exported, is one of the major challenges confronting cocoa processors.

He says the government should fast track the release of the EEG through the Nigerian Investment Promotion Council, noting that the grant is sometimes delayed for up to two years, whereas under normal circumstances, it is supposed to be released within six months of submitting the necessary documentation.

Oladapao says, 'Processors are not averse to government taking decisions in the overall interest of the country, because Nigeria cannot be a dumping ground. We agree on that and we ask government to take dispassionate decision on that, but where they take decisions that affect processors, we expect that the government will now give something in return to assuage our losses.

'And even where the 30 per cent is given, we expect that the duration period for disbursement should not be more than maximum of six months, but you will discover that sometimes you do not get the grant in one or two years, sometimes three years, which we believe does not augur well for the factories because a lot of money is being borrowed at 30 to 35 per cent interest rate.

'If government should give guarantee that they will pay the EEG in six months, you will see so many factories springing up. The business of cocoa processing when you work it out on the face value comes up with losses; these losses are being assuaged by the EEG that the processors get. So, if you get it within six months, it will reduce the effects of the loss and cocoa processing is very capital and labour intensive with so many other effects.'

He says the 30 per cent EEG is okay for now, urging the government to be prompt in disbursing it for the benefit of the cocoa processors and the economy in general.

Oladapo says most cocoa processing factories are operating below 50 per cent of their installed capacities, whereas they can operate at 80 per cent, adding that if they should operate presently at 80 per cent, the losses will be reduced.

He says most of the processors prefer to operate below their installed capacities rather than stop processing operations completely because the cost of keeping the factories working after halting operations for a while is quite exorbitant, which is why most processors are still in business today.

Speaking on the EU-EPA issue, Oladapo says, 'The EU wants their cocoa factories to be operational at the expense of our own, and it is unfortunate that Nigeria is not looking at it from that perspective, they now put tax on our processed cocoa and they do not put tax on raw cocoa, they encourage you to export cocoa. If we ship 100 per cent of cocoa that is being planted in Nigeria, it means the processing factories will close down operations and there won't be work for Nigerian.

'So, if the government wants to reverse the trend, it should sit down with the cocoa processors and see how to change the situation by ensuring that they release the EEG on time so that factories can work at maximal capacities and there will be quick turnaround. If the government sees the impact, then they can now increase the EEG grant.'

The Chairman, Alternative Uses of Cocoa, a sub-committee of the National Cocoa Development Committee, Mrs. Olusola Obada, says there is a need for political will to engender the development of cocoa processing companies for the benefit of the economy.

She says there is the need to review the cocoa policy due to the product's enormous nutritional value, as it is also a natural food that prevents diabetes, high blood pressure and malaria thereby, contributing to the healthiness of mankind.

Obada, who is also the Deputy Governor of Osun State says, 'I believe that we should be looking into commercial cocoa farming instead of subsistence one. In Nigeria, there are 400,000 family units in the cocoa industry and about five million lives revolve around cocoa, including farmers, exporters, brokers, transporters, bankers and processors among others. It is a very big industry that deserves adequate concentration.

'We will ensure that our farmers comply with the new regulation on cocoa quality so that our cocoa will be acceptable in the European Union; and if our cocoa is acceptable there, then we should be able to consume it here in Nigeria. If it is good for them there, it should also be good for us here. This is the message we are passing. They are buying our raw beans but they are not buying our processed beans.

'If we can look inward and consume our beans and the processed ones, then we will be earning more money from our cocoa. We can also create employment for our young ones if we engage in commercial cocoa farming, and we believe that small and medium-scale enterprises can spring up from cocoa. The opportunities are limitless and I urge Nigeria to utilise these opportunities.'

According to her, cocoa is the highest non-oil revenue earner, coming after oil, adding that now is the time to promote cocoa and other cash crops, as there is the need to diversify the economy of the country and ensure that cocoa is not pushed aside.

Obada says that the free education policy of the late Chief Obafemi Awolowo in the old Western Region was funded by revenue from cocoa, in addition to many other projects like the Western Nigerian Television and Cocoa House, which were equally financed from cocoa revenue, noting that if Awolowo could achieve that much with cocoa revenue, then there is nothing stopping cocoa from being given more prominence than it is now.

She emphasises the need to celebrate cocoa because it has done a lot for the people, urging Nigeria to learn from the recent economic meltdown and the drop in the prices of crude oil and quota given by the Organisation of Petroleum Exporting Countries, and embrace the necessary reforms to move the cocoa industry forward.

Obada says, 'Right now, I don't think that the processors are happy because many of them have their warehouses filled with processed goods that they cannot sell at the moment because foreign processors buy raw beans only.

'That is the reason why we are canvassing for increased local consumption so that we won't be at the mercy of these people any more. Over there, they eat what they do not produce, while we produce what we do not eat here.'

She says that manufacturers can also suggest policies that will help the government in fighting products smuggling through the mandated agency, the Nigeria Customs Service.