Doing Business in Nigeria

1. Doing Business in Nigeria Presentation By Mr Larry E Ettah GMD/CEO UAC of Nigeria PLC To Tiger Brands South Africa Thursday, 4th August 2011

2. Presentation Outline • Introduction • Nigerian Economic Overview • Business Environment Challenges • The Art and Science of Succeeding in Nigeria • About UACN • Conclusions

3. Introduction • In this presentation, I will give an overview of the Nigerian economy and business environment; highlight the socio-economic and political challenges of doing business in Nigeria; and offer my prescriptions on the “art and science” of succeeding in the Nigerian business environment.

4. Nigerian Economic Overview • Nigeria is Africa’s second largest economy in terms of GDP ($194Bn as at 2010) second only to South Africa. • GDP growth has averaged 6-7% since 2003. • The country is the largest in terms of population in Africa (20%), with population estimates now approaching 158 million people! • The population distribution is weighted in favour of younger citizens with 52% nineteen years and below; and over 80% below 40 years of age.

5. REVISED 2011 PROJECTIONS

6. GDP Structure Crude petroleum & Natural Gas-15.7% Agriculture-42.32% Wholesale & Retail Trade-16.19% Finance & Insurance-4.16% Manufacturing-3.93% Telecommunications & Post-4.79% Real Estate-1.89% Building and Construction-2.01% Solid Minerals-0.35% Hotel & Restaurants-0.51%

7. GDP Structure (contd.) • Three sectors make up 75% of Nigeria’s domestic production and output:- • Crude Petroleum & Gas -15.70% • Agriculture -42.32% • Wholesale & Retail Trade -16.19% TOTAL - 74.21% • Those 3 sectors, as currently structured have minimal domestic linkages and minimally affect poverty and unemployment

8. GDP Structure (contd.) • Crude Petroleum and Gas • Limited Domestic Refining • Non-leverage of petro-chemical resources • Sub-optimising vast gas resources • Industry largely crude extraction and export • Agriculture • Sub-modern and dependent on rainfall patterns: • Given our resource endowment, we should be Africa’s bread basket but now a basket case that can no longer feed itself. 2010, we spent $1 billion importing 10 year old rice from Indian grain reserves while as with most crops, 40% of domestic production lost at post harvest due to poor road infrastructure and lack of processing capacity. • Wholesale and Retail Trade • Mostly imported goods • High import content of manufactured goods • Low domestic value addition

9. GDP Sectoral Growth Rates Telecommunications & Post-33.74% Hotel & Restaurants-12.10% Building & Construction-12% Solid Minerals-11.85% Wholesale & Retail Trade-11.40% Business & Other Services-10.65% Real Estate-10.48% Manufacturing-7.35% Agriculture-5.84% Finance & Insurance-4.28% Crude Petroleum & Natural Gas-3.96%

10. Nigerian Economic Overview (contd.) • Nigerians are entrepreneurial, dynamic and amenable to global lifestyles and consumption-oriented. • Per capita GDP has improved from under $700 in 2004 to $1,229 by December 2010 reflecting economic growth, but wealth distribution is heavily skewed with 54% of the population classified as living below the poverty line. • Telecommunications has experienced a revolution with tele-density at 64.7%; 103.3million mobile/GSM; 11.8million mobile/CDMA and 2.16million land lines as at April 2011, from just 400,000 total lines in 2001. One million Nigerians have Blackberries.

11. Tele-Communications Sector Indicators

12. Nigerian Economic Overview (contd.) • Nigeria has experienced its longest period of uninterrupted civilian rule after independence in 1960 since 1999 even though there are questions about the quality of the electoral process, especially after the 2003 and 2007 elections. • The recent 2011 General Elections were however largely perceived as credible, and the national electoral body appears to have recovered a lot of credibility. Local and international observers agree that the elections reflected the will of the electorate • There has also been various economic reforms since 1999, particularly between 2003 and 2007 in telecommunications, banking, pensions, insurance, downstream petroleum, mines and minerals etc. • The current president appears to be resuming reforms suspended by his late predecessor, particularly the power sector privatisations which is now proceeding under a re-invigorated power sector road map.

13. Nigerian Economic Overview (contd.) • But the macroeconomic picture is weakened by a dependency on oil ($40 billion revenue per annum) which provides over 75% of the national budget and over 90% of export earnings. Sadly ¾ of government budget goes to recurrent expenditure leaving little for capital investment in infrastructure. • In addition GDP growth is disproportionately based on oil export; un-modernised agriculture and trading; with manufacturing now contributing less than 4% of national output. De-industrialisation has hit quite hard in recent years (textile, tanneries, tyre industry, vehicle assembly etc.). • The major constraint to manufacturing is power-national power generation is around 3,700 MW versus possible demand in excess of 20,000 MW (including suppressed demand)

14. Federation Account: Composition of Revenue (N‘Bn)

15. BUSINESS ENVIRONMENT CHALLENGESSOCIAL • Corruption!! • Crime and Insecurity • Armed Robbery and Kidnapping in Eastern Nigeria appears to have clearly trended downwards • Militancy in the Niger-Delta has subsided based on an “amnesty” programme • Religious and sectarian crisis in parts of Northern Nigeria is however increasing especially with “BokoHaram” and post-election violence (our Pakistan?) • Education and Health Services suffered from under-investment during military rule • Absence of social protections • An underlying problem is the high and rising unemployment, believed by most analysts to be higher than the official statistics revealed on the next slide :-

16. Demography and Unemployment

17. Political • The 2011 elections re-emphasised regional and religious fault lines especially in the presidential elections. • Post-election violence in parts of the North may (at least partly) reflect Northern resentment at victory of a Southern Christian • Slow pace of governance and manifest official fidgeting • Regional and ethnic tensions associated with power rotation • Political Corruption • Multiple Taxes, Charges and Levies from Federal, State and Local Governments and Agencies: A universe of red tape engulfs the economy leading to rent seeking, State siege, and policy capture by cronies. Each regulation is an opportunity for bribes and policy another avenue for corruption. • Nigeria ranks 178th out of 183 countries when it comes to transferring property.

18. Economic • Weak Infrastructure, particularly power and transportation • Businesses have to provide alternatives to public services:- • Alternative Power Generation (Nigeria is the world’s biggest market for private generators). • Security Services • Courier and Postal Deliveries • Water Boreholes • Problems associated with export and import logistics-ports; customs; inspection services; etc

19. Economic (contd.) • Mostly Imported Inputs • Exchange Rate Risk • In December 2008, the Naira was devalued from N117/$ to N150/$ • With Falling External Reserves, further devaluation is a possibility and the Naira is clearly under pressure. • A gap (of N15-18) has re-emerged between official rates and the parallel markets where the $ now exchanges for N165-170 • High Interest Rates (Prime Lending Rates around 18%) • Unstable and Volatile Inflation oscillating between 10 and 15% (10.2% as at June 2011) • Strained Financial and Capital Markets • Capital market has not recovered from 2008 collapse • The fate of 8 banks taken over by the CBN remains unresolved • Indicators for private sector credit aggregates remain sub-optimal

20. Doing Business in Nigeria% of sales, additional costs from :

21. NIGERIAN COMPETITIVENESS

22. NIGERIAN COMPETITIVENESS (CONTD.)

23. NIGERIAN COMPETITIVENESS (CONTD.)

24. NIGERIAN COMPETITIVENESS (CONTD.)

25. OPPORTUNITIES • It goes without argument that one major attraction of Nigeria to investors has been her huge and growing population which represents a big market for any manufacturer especially of FMCG products. • It is estimated that Nigeria’s population is currently in excess of 160 million and growing at an estimated rate of about 2% per annum. • With growing urbanization and growing middle class, this translates to a very big and potential market for manufacturers and service providers. • The experience of those that entered the market when the telecoms sector was liberalized about 11 years ago attests to this fact.

26. OPPORTUNITIES • Other areas currently attracting attention for the inflow of FDI into Nigeria include the following: • Agriculture: Nigeria has huge arable land unused; meanwhile food import annually has risen to as high as N1 trillion. We import mainly grains (maize, rice, wheat) and processed food items (tomato paste, cooking oil of all description, chocolate, etc.) • Agro-Allied: These are activities for the processing of agricultural products into semi- or finished food items. • Power Generation and Distribution: Government is working out the details for the implementation of the Power Sector Road Map that will guide investment in this sector.

27. OPPORTUNITIES • Petroleum and Petrochemicals: There is still a huge opportunity most especially in the downstream sub-sector and petrochemicals. It is expected that the passage of the pending PIB will further spur activities in the sector. • Mining: The country is endowed with a wide array of minerals some of which are currently not being exploited. In some instances, some locals in areas where these minerals are already known to exist have been helping themselves to it, sometimes to the detriment of their health. • Building and Construction: particularly of affordable housing for the teeming population.

28. OPPORTUNITIES • Manufacturing: Here we are talking of not only consumer goods, but also of intermediate and heavy industrial manufacturing. The iron and steel industry is largely undeveloped as well as vehicle manufacturing, boat construction, etc. • FMCG: The FMCG market is big and expanding and provide unique opportunity for firms with good quality products and brands to thrive.

29. THE NIGERIAN MARKET & DISTRIBUTION • Distribution channel is broadly classified into two • BTC – Business to Consumer • BTB – Business to Business • BTC flow through company nominated Mega/ Key Distributors to Sub-Distributors/ retailers who operate mainly in the open market and neighbourhood shops • BTC constitute 95% of distribution efforts • BTB channel covers institutional customer/ formal supermarkets. Medium to large Shopping Malls have evolved slowly over the years. 29

30. CONSUMERS’ BUYING PSYCHE • There is penchant for imported brands • The premium outlets like shopping mall confer on shoppers some perception of quality and convenience though at relatively extra cost • Increasing health consciousness of the consumers • Children take preference in consumer spending • Food is top on family budget allocation while communication ranks second 30

31. The Art and Science of Succeeding in Nigeria • Business success in Nigeria requires a level of resourcefulness that is likely to be in excess of that required in other markets!!! MTN Experience: equip each mast with generator, a back up generator, a fuel tank, guards to protect the fuel and a lorry to deliver. Operating cost thus 3 times that of South Africa. • As pointed out earlier, entrepreneurs and managers in Nigeria must acquire some municipal competences:- • Alternative power generation • Postal and courier deliveries • Security • Water and boreholes

32. The Art and Science (contd.) • Businesses must also develop unique skills at managing the three different levels of governments:- • Local governments demanding radio, television and computer licenses; tenement rates; and other multiple charges • State governments imposing employee taxes; levies on mobile advertisements, bill boards, corporate signages; authorising building constructions; regulating environmental and other standards etc. • And federal ministries and agencies imposing multiple taxes-corporate, education, etc; granting “expatriate quotas” and resident permits; operating ports and customs services; approving technical partnerships and technology transfers; approving trademarks, patents, company incorporations; and doing many of the same things replicated at the state levels-e.g. food and drug advertisement; environmental issues. • Corruption, capriciousness and an overlap of regulatory coverage makes this particular issue a matter requiring dexterity, diplomacy and in some cases willingness to resort to playing hardball!

33. Comparison *costs incl average demurrage/storage/documentary demurrage documentary charges etc. Source: Manufacturers' Association of Nigeria

34. The Art and Science (contd.) • Poor infrastructure, weak public service delivery and disregard for customer service, corruption and eroding societal value systems introduces a “scientific” principle-things will not proceed the way you want, except you constantly monitor the process! • Unfortunately this does not apply ONLY to the public services! The decline in quality of human capital produced through our public education system means firms must almost totally re-educate fresh hires through expensive management trainee programmes in some cases including basic mathematics and education!

35. The Art and Science (contd.) • Fortunately for those willing and able to overcome these “slight” obstacles, the rewards can be substantial! • There are many successful foreign firms who have mastered the Nigerian environment, usually in concert with local investors who know the terrain and are accustomed to the peculiar demands of the Nigerian market. • The combination of a large and youthful population; a consumerist orientation and global lifestyle; and developing markets means opportunities are vast and potential is huge.

36. The Big Picture for FMCG Positive outlook over the medium to long term. Growth may be moderate though in short term resulting from infrastructure induced inefficiencies. A robust medium to long term growth is most likely outcome due to:- increase in consumption of food and consumer products as disposable income rises in tandem with GDP growth. increasing supportive business environment/climate from reforms and new government policies. Demography dividend – a population of 158 million with an average age of 18 years. improvement in manufacturing and distribution as infrastructure deficit reduces.

37. uac of nigeriaplc

39. uac - a history of mergers, acquisitions and restructuring • 1672 – Royal Niger Company obtained a charter to administer a territory later known as Nigeria • 1879 – United Africa Company formed from merger of Alexander Miller Bros & Co, Central African Trading Co. Ltd, West African Trading Co. Ltd and James Pinnock • 1880 – National African Co. Ltd floated to take over assets of UAC • 1886 – Name change to Royal Niger Co. Chartered and Limited • 1892 – Royal Niger Company recruited Captain Lugard to protect her interests in the territory; he later became Lord Lugard, Governor General of Nigeria • 1900 –Name change to The Niger Co. Ltd following revocation of charter

40. uac contd.history …..the story continues • 1919 – The Niger Co. Ltd was bought by Lever Brothers Ltd • 1931 – Company incorporated in Nigeria as Nigerian Motors Limited, a subsidiary of Lever Brothers • 1943 – Name change to United Africa Company Nigeria Ltd • 1973 – Name change to UAC of Nigeria Ltd • 1974 – Unilever sold 40% equity to Nigerians pursuant to a decree • 1977– Unilever sold a further 20% equity to Nigerians • 1993 – Chief Ernest Shonekan, UAC Group MD appointed Interim President of Nigeria • 1994 – Unilever sold its remaining equity holding to the public • 2004 – Actis, a private equity firm acquired 20% stake in UAC • 2009 – Actis completed its divestment from UAC in line with plan • 2011 – Tiger Brands comes into partnership with UAC in respect of 3 business units

41. Vision ‘To be Number One in our Chosen markets, providing exceptional value to our customers’

42. Our Values DESIRED OUTCOME Adding value to lives of our stakeholders

43. GROUP STRUCTURE -today

44. Our categories

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46. SWAN AND WSWNL SWAN is the pioneer bottled water brand in Nigeria 46

49. leading integrated Supply Chain Solutions provider in Nigeria over 200 warehouses in 47 cities

50. The West African technological licensee of AkzoNobel for the production and marketing of Dulux – the world’s Number 1 Paint. No.1 in Nigeria by Revenue and Profit. 9