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DEPARTMENT FOR INTERNATIONAL DEVELOPMENT

NIGERIA

Growth & Employment in States (GEMS)

PROGRAMME DOCUMENT

21 May 2009

GEMS Table of Contents

1 Summary 1 2 Programme Details

Programme Description Programme Appraisal Lessons and Evaluation

3 3 11 15

3 Implementation Arrangements 17 4 Risks Assessment 21 5 Conditionality 21 Accompanying Approval Documents 1 Logical Framework 2 Consultation Record 3 Assurance Checklist 4 Environmental Screening Note Annexes A Technical Annex B Political & Institutional Annex C Economic Annex D Social Annex E ToRs - Regulatory Environment TA contract (draft) F ToRs - Construction Value Chain TA contract (draft) G ToRs - Meat & Leather Value Chan TA contract (draft) H ToRs - DFID PSD Advisor Seconded to WB

1. SUMMARY DFID and the World Bank will co-fund the Growth Employment in States (GEMS) programme in partnership with the Federal Government (FGN) and four State Governments in Nigeria. GEMS aims to reduce poverty in Nigeria, Africa’s most populous country. Its goal is increased growth, incomes and jobs in selected states. Though growth has been rapid, the global downturn is causing it to slow, threatening the rate of poverty reduction. Incomes are starting to fall and the economy has not been able to create sufficient jobs: 92% of the work force is informally employed. The proportion of the economically inactive is rising reflecting the lack of attractive employment opportunities. The programme purpose is an improved business environment in selected states. Rapid recovery from the slow down and the ability to create jobs and improve incomes depend crucially on the rate of private investment. GEMS will increase the incentive for, and the returns to, investment by delivering three outputs:

Output 1 - Lower cost and risk of investment in selected states (through improved land and tax administration, investment promotion and support to other reforms). Output 2 - Increased competitiveness and returns to investment in selected industry clusters (through addressing specific bottlenecks to further cluster growth). Output 3 - Dissemination of programme lessons leverages impact.

GEMS will work in four states and industry clusters (six initially) that offer the greatest opportunity for success using the lessons learnt to influence others. It will work flexibly adding regulatory reforms, four more industry clusters and other states, as and when conditions for success prove promising. GEMS builds on solid foundations. The Nigerian economy has reasonably sound macro fundamentals and FGN is addressing Nigeria’s large infrastructure gap, the binding constraint to investment. DFID and the World Bank have successfully piloted regulatory reforms and interventions to improve competitiveness which have directly informed the design of GEMS. The programme will contribute to Nigeria’s growth and poverty reduction strategies which prioritise faster non-oil growth and job creation. GEMS should provide high returns to investment. Even modest increases in growth in the four states attributable to the programme should result in a net present value of US $300 million at a 10% real rate of discount. It should result in the creation of 100,000 jobs directly and improve the incomes of large numbers of farmers and self employed persons. Due attention will be given to promoting social cohesion and to increasing incomes and jobs for young people and women who are especially disadvantaged in finding attractive employment. GEMS is an important element of the Country Partnership Strategy of DFID, the World Bank and USAID with FGN. GEMS is also part of an interlocking suite of DFID state level programmes which aim to make a step change in state government’s planning and delivery of services and an good environment for growth. DFID funds will be used to provide technical assistance, pay for investment in public goods and incentivise businesses to address market failures. DFID will procure

GEMS Programme Memorandum 1

separate technical assistance contracts to deliver output one, interventions in the meat and leather cluster and interventions in the construction industry cluster. In parallel the World Bank will finance the other four clusters and the project management unit required for their operations and overall programme monitoring. It is recommended that DFID approve the sum of £78 million over a five year period to fund its contribution to GEMS. The World Bank will commit a further US$150 million. GEMS has a common logical framework and apex level governance and management arrangements to coordinate interventions funded by DFID and the World Bank in which FGN will play a key role.


2. PROGRAMME DETAILS

2.1 Programme Description 2.1.1 Growth, Incomes & Jobs

Between 1996 and 2004, poverty incidence in Nigeria fell from 66% to 54% because of faster growth1. Recently, growth has accelerated, averaging 6.3% p.a. between 2000 and 2007, raising per capita incomes from US$358 to $850. But, because poverty increased sharply during the 1990s, the rate of poverty reduction needs to more than double to achieve the first Millennium Development Goal (MDG1). Growth needs to be faster, averaging 11-12% p.a. in the non-oil economy between now and 20152. However, instead of growth accelerating, it is expected to slow down due to the global downturn. Most growth forecasts are in the range of 2 - 4% for 20093. Moreover, recently, growth has not benefited large parts of the workforce. Real incomes, which had been rising, are now falling in self and wage employment and agricultural incomes are now tapering off4. Job creation has been low, so wage employment has fallen from 14% to just 8% of the labour force5. Nigeria has one of the highest rates of informal employment in Africa at 54% (2006)6. The lack of attractive employment opportunities is causing inactivity amongst the labour force to rise7. Inactivity is highest amongst the young (50%) and women (43%) who are especially disadvantaged in finding attractive employment. To reduce poverty rapidly8, a strong recovery is needed and growth needs to improve incomes and create jobs more effectively. The economy remains hugely dependent on oil: it contributes 95% of exports and 85% of government revenues. However, the oil industry employs only 0.15% of the work force. Faster growth and job creation depend upon the non-oil economy. 2.1.2 Improving the Business Environment The key to faster growth that creates jobs and improves incomes is greater private investment in the non-oil economy. Private investment has been low, just 11.8% of GDP in 2005. It has risen rapidly lately but remains below the level of comparator countries (c. 20%). Moreover, private investment has been drawn to a few industries only. 75% of FDI in 2005 was in the oil industry. The few non-oil industries that have

1 Nigeria Poverty Assessment, Ojowu O, Bulus H & Omonona B , August 2007 2 World Bank Estimate. For a fuller treatment of growth and poverty reduction in Nigeria, see Economic Annex. 3 This range includes (EIU) 2.7%, (WB) 2.9%, (2010 4.2%), (S&P) 1.5%, (ADB) 4% and (Std Chartered) 4.2%. IMF forecasts have softened to 2.9% growth in 2009 and 2.6% in 2010. The NBS persists with a 5.8% outlook. 4 The main source of growth has been agriculture but the most rapid growth has come from services. Real incomes increased between 1999 and 2004, especially incomes from agriculture. See Employment, Unemployment, Joblessness and Incomes in Nigeria: 1999-2006, Luke Haywood and Francis Teal 5 Employment, Unemployment, Joblessness and Incomes in Nigeria: 1999-2006, Luke Haywood and Francis Teal, 6 Nigeria: Employment & Growth study, World Bank. Unpublished draft 2009. 7 In 2004, 25.7% of the labour force was economically inactive. By 2006, this had risen to 28.5%. As there is no social protection, those with low income earning opportunities remain inactive rather than unemployed 8 Given the current downturn, achieving MDG 1 looks unlikely.


attracted private investment have grown strongly, but they are capital intensive so do not create many jobs (see figure 1)9. The positive relationship between a better investment climate and higher levels of private investment is well established in Africa10. Nigeria’s investment climate is poor11. The regulatory environment is also poor: Nigeria ranks 118 of 181 in the World Bank’s Doing Business index. Returns to investment are depressed by low competitiveness, reflected in Nigeria ranking 94 of 134 in the World Economic Forum’s competitiveness index.

Figure 1 - Industry Concentration of Lending

Source: JP Morgan 2007 Data

Improving the investment climate will enable private investment in industries with high growth and employment potential. The immediate binding constraints to investment are infrastructure and access to finance12. Government is investing heavily in infrastructure, supported by development partners, though it will be several years before any results are seen13. Access to finance has improved14 and development partners are assisting the Central Bank of Nigeria develop a strategy for further financial deepening15. With infrastructure and access to finance being addressed through other government and donor programmes, the purpose of GEMS is an improved business environment16 in selected states. GEMS will improve the incentive to invest and the returns to investment through three outputs:

Output 1 - Lower cost and risk of investment in selected states (through improved land and tax administration, investment promotion and support to other reforms). Output 2 - Increased competitiveness and returns to investment in selected industry clusters (through addressing specific bottlenecks to further cluster growth). Output 3 - Dissemination of programme lessons leverages impact.

Output 1 will focus on four states Kano, Kaduna, Lagos and Cross River. Output 2 will focus on six industry clusters initially. GEMS will work flexibly. Additional regulatory reforms, states and industry clusters will be added when conditions are favourable. As 9 i.e. Telecommunications, finance and large scale food processing. 10 The Investment Climate in Africa from the Perspective of Private Investors, World Bank Paper (2007) 11 Nigeria Investment Climate Assessment. World Bank, 2008. 12 Infrastructure and access to finance were found to be the biding constraints to investment in Nigeria: Growth & Competitiveness, World Bank Country Economic Memorandum, 2006. 13 FGN has invested $18 billion in power. The World Bank is providing technical assistance and credit lines. DFID has launched the Nigerian Infrastructure Advisory Facility. 14 The ratio of private credit/GDP reached 28.9 percent by end 2008 from 12.8 percent in 2004, an increase of 226 percent in four years. However, there has been a sharp contraction in early 2009 (Source: IMF data). 15 The World Bank is providing technical assistance to help CBN refine its Financial Sector Strategy 2020.DFID has launched the Enhancing Financial Innovation and Access (EFInA) project. 16The business environment includes the laws and regulations governing business activity (e.g. tax, land, business licensing, courts etc) and the administrative, policy and institutional arrangements that influence the way key actors operate – Donor Guidance on Business Environment Reform, DCED, 2008.


a growth pole for the South East zone, Anambra State is likely to be included once the programme develops the capacity for expansion. 2.1.3 Output 1: Lower Cost and Risk of Investment The cost and risk of investment is increased by the burden of compliance with cumbersome and un-transparent business regulation. Nigeria scores particularly poorly in the Doing Business index with respect to four indicators: registering property (176); obtaining construction permits (151); trading across borders (144); and paying taxes (120). DFID and the World Bank are piloting reforms of land and tax administration under the Investment Climate Programme (ICP) which covers all four GEMS states. GEMS will consolidate and deepen ICP progress as follows. Land: Access to land was ranked highest of the business environment constraints in the Nigeria Investment Climate Assessment (ICA)17. The low availability of land and buildings restricts investment. Nigeria is one of the slowest and most expensive places to register property in the world. A study of eleven states18 showed that, on average, it took 4 months and cost 16% of the property value compared to China (3%), South Africa (8%) and India (9%) (see figure 2). The ICP has developed a strategy to address the causes of low investment in land development19 and formulated action plans20. There is tremendous appetite for reform as agencies stand to earn higher fees from a greater volume of land transactions. GEMS will provide the technical and financial assistance required: 1. Design and install an effective system for making serviced land available for

development. This will include improving land planning, greater use of public-private partnerships to develop land and introducing auctioned, rather than only administered, allocation of land.

2. Develop more simple and transparent procedures for investors to acquire secure title to property and reduce the cost of land transactions. Secure title exists for just 3% of land21, preventing the poor and businesses from using it to raise finance22. Surveys reveal tremendous variation between states in the time and cost of registering property suggesting scope for huge improvement23. It is planned to reduce the number of procedures, increase delegation of authority and establish electronic registries for all property records.

3. Simplify and streamline the procedures for obtaining planning consent and construction permits to allow investors to develop land quicker and at a lower administrative cost. The time and cost of obtaining construction permits and utility connections is huge, delaying land development. Most states perform poorly so

17 Investment in land and buildings represents just 12%-14% of gross capital formation. 18 Doing Business in Nigeria: Comparing Regulations in 10 states and Abuja, World Bank & IFC, 2008. 19 This builds on the successful land administration modernisation work of DFID’s Security, Justice & Growth Project. 20 Actions plans have been agreed for Kano and Lagos . They will be developed for other states. 21 Nigeria: CIA Factbook 22 See for instance, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, Hernando De Soto, 2000. 23 Doing Business in Nigeria shows that in Kano, it takes on average 38 days to register property, in Kaduna 130 days. The

administrative cost of registering property amounts to 11.9% of its value in Kano, 22.2% in Lagos.


there is room for improvement in all24. This can be addressed by simpler, more transparent procedures and better planning.

Figure 3 - Hours p.a. to fill in all tax forms Fig 2 - Land registration costs as % property value

0

200

400

600

800

1,000

1,200

Nigeria China Kenya S.Africa India

Source: Nigeria Investment Climate Assessment, 2008, World Bank

Tax: Complying with a multitude of un-transparent taxes in Nigeria is costly25 compared to other countries (see figure 3). Tax evasion is widespread reducing the tax base and constraining government investment in public goods. The ICP’s pilot work has revealed that GEMS can improve tax administration substantially through:

• Improved capacity and incentives for boards of internal revenue (BIRs): GEMS will train officials in tax assessment and administration and explore ways of improving the remuneration of tax officials.

• Establishment of better systems of tax administration: GEMS will support BIRs to improve the efficiency and transparency of tax administration by computerising tax assessment, payment and the issuance of tax clearance certificates.

• Reducing multiple-taxation: State and local government areas (LGAs) may attempt to collect over 150 taxes and levies26. Many are without legislative backing and do not generate much revenue. GEMS will provide technical assistance to focus states and LGAs on a fewer number of easily administered taxes.

• Tax payer education: GEMS will help increase information available to tax payers by assisting BIRs to establish centres for tax payer queries and complaints.

24 Kaduna performs best requiring 61 days and 141% of income per capita compared to 350 days and 1,016% of income in Lagos, the worst. There is much scope for improvement even in Kaduna 25 A typical Nigerian business takes 1120 hours per annum to comply with 35 tax payments. 26 This is the case in Kano.


Investment Promotion & Facilitation: The discovery of new opportunities for investment is undermined by information failures. The states wish to establish investment promotion agencies27 but lack the know-how to do so. The process of obtaining the approvals, licenses and permits businesses needed to operate is not transparent and can take many months, adding to the cost and risk of investment. At Federal level, the Nigeria Investment Promotion Commission (NIPC) has established a One Stop Investment Centre (OSIC), bringing agencies together to process investor applications. This has reduced the time taken considerably. The main bottleneck now is at state level where the investor may need to obtain approvals from a plethora of agencies. The states are keen to establish OSICs but have very limited experience. GEMS will provide the technical assistance required to establish effective investment promotion agencies and OSICs in the four states. It will support the federal OSIC to undertake a process of further simplifying procedures for the agencies involved. Peer Learning & Flexible Facility: Reform activities will be accompanied by peer learning to strengthen demand for reforms and promote good practice at the federal and state levels. For example, lessons learned from improving tax administration in the four states will be shared through the Joint Tax Board28. Other state and federal reforms could also make a valuable contribution to improving the business environment. Reforming customs is an obvious example: the time and cost of clearing shipments through Nigeria’s ports is amongst the highest in Africa, contributing to poor competitiveness of all industries. Also, opportunities may arise to support analytical work in support of growth or build capacity amongst agencies that may wish to undertake business environment reforms for example the Free Trade Zone in Lagos. To respond to new opportunities, GEMS will provide a pool of unassigned funds. When needs arise, and conditions for success are favourable, it will allocate resources from its pool to address them.

27 The Nigerian Investment Promotion Commission (NIPC) is responsible for investment promotion federally. It is not able to reflect the opportunities and priorities of individual states to attract investment. Cross River has already established its own investment promotion agency and the other states are at various stages of planning. 28 Joint Tax Board brings together state boards of internal revenue and the Federal Inland Revenue Service (FIRS).


2.1.4 Output 2: Increased Competitiveness of Industry Clusters Nigeria is not competitive in many industries as evidenced by the negligible share of non-oil exports29. Poor competitiveness is caused by government failures, notably poor policies and institutions and lack of investment in public goods. And, by market failures of information and coordination that result in a low correlation between market share and efficiency30. In addition, productivity per worker is low because of poor management and business models31. The lack of competitiveness reduces the return to investment and its productivity in terms of growth and jobs32.

Figure 4 - % Growth by Industry 2005 - 6

Nonetheless, there are industries which have grown much faster than GDP (figure 4), and are leading economic transformation33. Studies34 have identified clusters in industries that: i) have the potential for sustained rapid growth, improve incomes or create jobs; ii) are able to close the competitiveness gap; iii) have important spillovers in terms of competitiveness of other sectors; iv) offer favourable conditions for success35.

F

GEMS will support the improvement of competitiveness in six such industries. During implementation, GEMS will identify four more industries to support. In each industry, GEMS will use the Making Markets Work Better for the Poor Framework (M4P) (figure 4). M4P brings about sustainable improvements in market outcomes by altering the

29 Prices of goods and services are frequently higher thanValue Chains for Cross River, Kaduna, Kano and Lagos 30 Nigeria Investment Climate Assessment, World Bank, 231 The ICA reports low Total Factor Productivity comparare 60%-80% more competitive than the worst. 32 The cost of creating 1 job in a large business averages $33 These are mainly service industries whose growth is reNigeria’s service sector accounts for only 32% of GDP, m34 See Identifying Growth Pole Value Chains for Cross Ri(2008) and “Product Value Chain Analysis in Nigeria CoWholesale Markets and Meat and Leather”, Consilium In35 These include pressing issues which stakeholders wish manageable and there are capable private actors able to ad

GEMS Programme Memorandum

igure 5 – The M4P Framework

Demand SupplyCORE

Structure

Capabilities

The Market SystemEnabling Environment

International Markets

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Infrastructure Information Knowledge

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iesInstitutions &Governance Informal Rules

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GOVERNMENTCIVIL

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international markets. See Identifying Growth Pole States, Nathan EME, May 2008 for DFID & WB 008.

ed to other countries but notes that better managed firms

100,000 in Nigeria, several times the East Asia figure. ducing the country’s reliance on primary industries. uch lower than comparator countries.

ver, Kaduna, Kano and Lagos States, Nathan EME vering: Real Estate and Construction, Retail and ternational Inc for DFID & World Bank Group, 2009. to address, potential resistance to policy change is dress market failures.

8

incentives that the market as a system provides to participants. It addresses major government and market failures thus bringing about systemic change. Interventions will comprise:

ICT has been growing at over 30 % p.a. in Nigeria attracting, $ 3-4 billion investment annually. Growth is assured by strong demand for new products. The industry is already a major job creator36. Developing labour intensive IT enabled services (ITES), such as call centres and software services, could substantially increase employment in well paid jobs. The industry’s spillover improves productivity across the economy.

GEMS will address key bottlenecks to further growth by improving: i) broadband connectivity increasing access to IT services and returns to investment in ITES; ii) management and vocational skills; iii) access to finance; iv) incubation and cluster development services through ICT parks.

Entertainment: Nollywood is the world’s third largest film industry producing 40 films a week worth $250 million annually. The music industry is of similar size. Strong demand domestically, from consumers in Sub-Saharan Africa and the large African diaspora is driving growth. Employment is estimated at 350,000 formally and a much larger number informally. Growth would be much faster if the $ 500 million of revenue lost annually to piracy can be addressed. GEMS will: i) streamline registration of intellectual property rights and improve enforcement; ii) strengthen formal marketing and distribution channels; ii) increase access to equity and loan finance; iii) improve management and skills training; iv) develop leasing and equipment hire services; v) develop the national film institute to serve as a centre of excellence.

Wholesale & Retail Trade is the major service industry accounting for 17% of GDP. It is growing at 13% p.a. It employs 300,000 formally and 2-3 million informally in the four states. Growth and incomes earned would increase substantially if high levels of waste37and inefficiency in the industry were reduced. GEMS will: i) reduce waste by promoting investment in better storage and distribution systems and markets; ii) promote better business models to reduce transaction costs and strengthen supply chain linkages between the emerging modern retailing system and small suppliers; iii) improve the enforcement of weights and measures, food safety and product standards to increase consumer confidence; iv) strengthen processes for policy reform. Kano and Lagos contain West Africa’s largest markets, and there are significant clusters in Kaduna and Cross River that GEMS will work in. Improving the incomes of women traders will be an explicit target.

Construction & Real Estate: An under developed industry but growing at 12% p.a. The demand for housing, commercial property and civic infrastructure has been

36 It has been creating 150,000 jobs per annum, 10,000 of which are new IT graduates. 37 Estimated at 30%-40% for perishable and 20% for non-perishable products


buoyant. Growth could be strengthened by increasing the supply of land for development. The industry is labour intensive employing some 1 million people directly. Addressing skill shortages that are causing the industry to import labour would provide better job opportunities38. GEMS will address; i) access to serviced land; ii) project management and vocational skills; iii) access to finance; iv) construction permits and standards; v) trade policy with respect to construction raw materials. The largest cluster is in Lagos but the other three focal states also have significant construction industries.

Hospitality: The hotels and restaurants sector is growing at 11% p.a. In the domestic market, business travel is booming and a leisure travel market emerging. In the international market, visitor numbers are amongst the highest in Africa though most are business travellers39. The fast food industry is growing at 40% p.a. from a low base. The industry currently employs 150,000 formally but several times that number informally. GEMS will address i) access to land; ii) investment in visitor attractions to increase length of stay and visitor expenditure; iii) skills in designing and operating accommodation, attraction and catering establishments; iii) effective institutions for marketing destinations and attractions; iv) develop more efficient and inclusive supply chains. GEMS will focus on Lagos, Kano and Cross River, recognised growth poles for the industry40. Targets have been set for the proportion of young people and women benefiting from training provided and jobs created.

Meat & Leather: Meat consumption is growing at 6-7% annually and would grow faster if its high cost could be reduced41. About 1 million households keep livestock in Kano and Kaduna. Incomes earned by farmers are low because of poor animal husbandry and a hugely inefficient supply chain that transports animals, not meat, to the South. The leather industry is Nigeria’s largest source of non-oil exports. GEMS will: i) support investment in abattoirs in the North to supply meat to the South ii) improve animal health and nutrition by training private sector para-veterinarians; iii) support feed suppliers to develop a market for feeding ruminants; iv) improve food safety throughout the meat chain. The development of better abattoirs in the North will increase the supply of skins to the Nigerian leather industry addressing the main constraint to growth. The important clusters are in Kano, Kaduna and Lagos. Ensuring that women benefit will form an explicit target for this intervention.

Measures to improve job creation, incomes of women and young people and promoting social cohesion will be built into each intervention. They will address the main impediments to increasing wage employment which include: i) policy stability ii)

38 Up to 35% of skilled labour in Lagos is made up of foreigners as local labour lacks skills 39 The country attracts over 3 million international visitors, largely business visitors from neighbouring countries and the Nigerian diaspora visiting friends and relatives 40 The country’s Tourism Master Plan prioritises the three states. 41 Meat consumption per capita is lower than neighbouring countries.


investment in labour intensive industries; iii) productivity of the work force; and iv) skills development.42 2.1.5 Output 3: Dissemination to Leverage Impacts In a large country with a federal structure, reforms need to be proven in a few states and clusters where conditions for success are favourable to deliver tangible results. This will demonstrate how reforms can deliver results. The lesson learned will be disseminated widely to influence other states and industries. 2.1.6 Programme Beneficiaries The direct beneficiaries of the programme will be the 1 million households in Kano and Kaduna states who keep livestock, the 2-3 million self employed in the wholesale and retail trade, the majority of whom are women43, and those who fill the 100,000 jobs that GEMS is expected to create. Many of these will be young people and women whom it will train to acquire marketable skills. The private sector will benefit from the improved business environment. Indirectly, all the 30 million people living in the four states should benefit to some extent as a result of faster growth. 2.2 Appraisal 2.2.1 Background FGN and the four state governments have requested DFID and the World Bank to support their efforts in promoting growth and employment. GEMS has been designed with the involvement of credible and capable actors in the public and private sector who have helped to develop its activities44. GEMS is aligned to Nigeria’s growth strategy, as set out in the President’s 7-point agenda, and related state level multi-point agendas45. Growth and employment are central to the National Development Plan being developed by the Federal Government. DFID and the World Bank’s strong partnership harmonises their assistance to support these strategies. In consultation with FGN, and with USAID, they have developed a Country Partnership Strategy (CPS) which seeks to establish platforms in support of programmes such as GEMS. 42 For an analysis of the impediments to job creation, see Economic Annex. 43 In the North, men dominate the wholesale & retail trade. In the South, where participation is greatest, women dominate the industry. Many informal retailers are poor and have seen their incomes fall in real terms 44 Technical Committees, overseeing the land and tax reforms ICP is undertaking, have been actively engaged in the design of GEMS. Cluster Stakeholder Groups have been formed for the ICT and Entertainment industry clusters and they have developed the activities that GEMS will undertake in support of these industries. 45 For details, see Technical Annex.


2.2.2 Approach Working on a few reforms at the state level in Output 1 makes sense because these are the most important regulatory constraints and state governments are responsible for them. GEMS is part of a suite of interlocking state level DFID programmes in three of the states selected. This will help GEMS succeed, through influence with state governments and synergy between programmes, especially those which will improve governance and voice46. Broader, less focused reforms at state and Federal levels were considered too high risk47. Working in selected industry clusters under output 2 is appropriate because they provide favourable conditions for success and strong returns in terms of growth and employment. They provide a defined space to address government and market failures and deliver tangible outcomes and impacts. Undertaking industry interventions across Nigeria is likely to prove a high risk undertaking. The downside is that outcomes and impacts are limited to a few states and industry clusters. However, experience in Nigeria shows that the demonstration effect of interventions is powerful, especially if they are backed by solid evidence and communicated widely as this programme’s aims to deliver under output 3. 2.2.3 Economic Appraisal The $265 million invested in GEMS’ will deliver faster growth through greater and more productive private investment. Cross country studies, and Nigeria’s own experience from promoting macro stability, shows that private investment can increase by 5%-7% of GDP48 if the investment climate improves significantly49. So, it is reasonable to assume that, together with wider investment climate reforms, GEMS will boost private investment by 3% of GDP in the targeted states. Greater private investment is likely to increase growth substantially. A 5% of GDP increase in private investment boosted Nigeria’s growth rate by 4% p.a. from the early 2000s to currently50. Assuming that a 3% increase in private investment would boost growth in the focal states by 2% p.a. appears reasonable, especially as investment will be drawn to non-oil industries with high incremental capital ratios. Worldwide, improving the regulatory environment alone adds 2.25% to growth51. A 2% increase in growth, compared to the without programme case, would result in benefits of $ 600 million annually by the end of GEMS’s 5 year life52. This should result in very high returns to the programme even if the proportion of benefits attributed to GEMS is modest (table 1 below). The net present value of investment would be nearly $300 million at a 10% real rate of discount.

46 The suite of programmes covers health systems (PATHS) and education systems (ESSPIN). The GEMS output 1 service provider is expected to collaborate in particular with the SPARC programme which addresses governance, including over public financial management and SAVI which promotes voice and accountability. 47 The Institutional Annex considers issues of political economy. 48 The Investment Climate In Africa From The Perspective Of Private Investors. G. Iarossi, World Bank, 2007. 49 Private investment increased from under 9% in the late 1990s to 13.2% in 2004 in Nigeria as a result of greater macro stability. 50 Growth was 2-3% p.a. in the early 2000s but had increased to between 6%-7% between 2005 and 2008. 51 Regulation & Growth, Djankov, S., McLeish, C., Ramalho, World Bank Institute, March 17, 2006. 52 The four focal states have a combined GDP of approximately $ 30 billion, roughly 25% of the country’s GDP.


Table 1 - Returns to GEMS (NPV in $ million) Incremental Growth of 2% discounted @ ….

Discount Rates-> 6% 10% 15% IRR 20% 287.4 200.4 126.9 41%

25% 412.7 297.3 198.5 54% % Attributable to GEMS

30% 538.1 394.2 270.2 67%

This result is substantiated by analysing the returns to investment in selected industry clusters. By the end of the programme, the incremental value added in the six industry clusters should exceed $600 million, confirming their potential contribution to growth (table 2).

Table 2 – Growth, Jobs & Income Impacts of Selected Value Chains Industry Cluster Total cost ($

million) Incremental Growth Impact Yr 5 ($ million)

Jobs Created Income Impacts

ICT 30 50 15,000 n/a

Construction 20 50 20,000 n/a

Meat & Leather 10 100 5,000 +20% incomes from livestock

Entertainment 15 150 50,000 n/a

Hospitality 15 50 10,000 n/a

Wholesale/retail 30 400 5,000 +10%

GEMS should have a significant impact on job creation, indirectly through higher investment, and directly through cluster interventions. Across the six industries, it should help to create an additional 100,000 jobs at a cost of just $ 1,000 per job. This compares well with the cost of job creation in Nigeria53. In addition, GEMS will boost the incomes of large numbers of rural households who keep livestock by 20% and huge numbers employed in wholesale retail trade by 10%. 2.2.4 Social Appraisal Promoting social cohesion and helping to increase access to markets for the disadvantaged will be integral to all GEMS interventions54. The programme’s governing body will include leading experts on social development. All interventions will need to develop plans that meet targets for social development and report on the social outcomes of their interventions so that they can be held to account. The M&E

53Studies show that the cost per job in Nigeria can be as low as $1,000 in micro firms and as high as $100,000 in large businesses (over 20 employees). The GEMS figure is thus at the lower end of the cost per job in Nigeria. 54 The programme design has been informed by extensive use of action research. Stakeholder consultation has been carried out unemployed youth, casual female labourers, employees in the targeted industries, CEOs of businesses, unions, community based organisations and departmental heads within the civil service


function of the programme will monitor progress against log frame indicators and use participatory approaches to assess the views of beneficiaries on the social impacts of the programme. The GEMS programme triggers social issues and most are expected to lead to favourable outcomes, principally: (i) Reforms will reduce the disadvantage women face in securing title to land and

paying taxes. Release of land for development will be accompanied by effective resettlement schemes for the displaced;

(ii) Poor women and the young will be given priority in skill training so that they may avail jobs created by cluster interventions. This will address a major cause of crime and violence which threatens social cohesion in Nigeria;

(iii) The poor will be able to improve incomes from wholesale/retail trade, rearing livestock and by finding employment in construction and the hospitality industries;

(iv) Interventions will take account of cultural traditions and the relationships between ethnic groups thus preventing the social dislocation and potential ethnic conflict that may arise if economic development takes precedence over social development;

(v) Health and safety and core labour standards will be promoted in the work place by demonstrating the benefits they provide to employers and employees;

(vi) Improvement in food hygiene in the meat and wholesale/retail industries will reduce health hazards for consumers;

(vii) The programme will use culturally appropriate media to ensure that all parts of society are made aware of the opportunities provided by the programme.

2.2.5 Institutional Appraisal Experience from pilot projects has provided valuable lesson that have informed the institutional arrangements for GEMS55. ICP has formed effective Technical Committees in the four states that will evolve into the State GEMS Committees, the governing bodies for Output 1. Aligning with other DFID state programmes, the State GEMS Committees will have the authority of the Executive Committees56 of each state to implement regulatory reforms. GEMS has already established effective Cluster Stakeholder Groups in the ICT and Entertainment industries and will establish similar governing bodies for other cluster interventions. This will ensure that cluster interventions are locally owned, stakeholders are empowered to provide strategic leadership and can hold to account service providers appointed by GEMS. A National Steering Committee (NSC) that includes the relevant ministries and stakeholders will give the programme the authority it will need. The GEMS Programme Management Unit (PMU) will be located in the Federal Ministry of Commerce giving it influence over trade and industrial policy. The procurement and financial management

55 See Institutional Annex for details. 56 This is the highest policy making body in each state.


procedures trialled at the NIPC57 will be streamlined making it possible for GEMS to deliver more timely and relevant assistance than the World Bank’s successful MSME Project. 2.2.6 Political Appraisal GEMS’s close alignment to Nigeria’s growth and poverty reduction strategies has resulted in strong support at the Federal and state levels. Its goal of increased growth, incomes and jobs is widely supported by politicians of all parties. In Nigeria’s patronage based political economy, vested interests vie with each other for influence, governance is weak and rent seeking is common, so resistance to change from entrenched vested interest is always likely. Experience shows that, when reforms are championed by powerful leaders, and are likely to benefit implementing agencies, resistance to change can be overcome58. This condition holds for all GEMS interventions. Where resistance is likely, interventions will promote private public dialogue and strengthen the voice of reformers by backing it with evidence59. 2.2.7 Environmental Appraisal GEMS presents many opportunities to improve environmental stewardship60. Better land administration should improve urban planning which causes land degradation, over burdens systems of solid waste disposal and sanitation and leads to excessive use of transport. Energy conservation measures that benefit businesses and the environment will be promoted in all industries. GEMS will also address a set of industry specific issues:

• Waste recycling schemes will feature prominently in developing wholesale/retail clusters;

• Cost effective ways of improving the treatment of effluents will be given special emphasis in the leather and hospitality industries;

Land conservation and improved disposal of excess soil and construction waste will be incorporated in the assistance given to the construction industry;

• Sustainable use of grazing lands and greater use of nitrogen fixing crops to provide fodder in the meat industry will help to increase soil fertility.

2.3 Lessons & Evaluation Learning from the ICP experience, GEMS will ensure that agencies implementing regulatory reforms are held to account by the leadership of the state, take greater

57 The NIPC is the Executing Agency of the World Bank’s successful MSME Project. The Federal Ministry of Commerce is the NIPC’s parent ministry. 58 For instance, land registration reforms in Lagos and Kano undertaken by the DFID Security, Justice & Growth programme succeeded because they brought in increased revenue. 59 This is discussed further in the Institutional Annex. 60 See Environmental Screening Note for more details.


ownership of the reform process and receive more intensive technical, financial and capacity building assistance from the Output 1 service provider. Learning from previous interventions61, GEMS will ensure greater local ownership of cluster interventions, empower credible stakeholders to provide strategic leadership and ensure that there is sufficient incentive for capable businesses to change market outcomes in favour of the poor. The logical framework for GEMS provides measurable targets for growth, employment and incomes and quantified indicators of the business environment. If they are met, the programme will achieve its intended goal and purpose. Each service provider will be held to milestones set in the log frame.

61 For example DFID’s Promoting Pro-Poor Opportunities in Commodity & Service Markets (PrOpCom), the investment climate and value chain components of the World Bank’s MSME Project and the jointly funded ICP.


3. IMPLEMENTATION ARRANGEMENTS

GEMS is a unified programme with a common logical framework and governance and management arrangements to ensure coordination across interventions supported by DFID and the World Bank (see Institutional Annex). The management arrangements for individual interventions are designed to ensure timely and relevant assistance drawing on the strengths of both organisations. 3.1 Programme Governance & Management Figure 6 below sets out the structure for implementing the programme.

State GEMS Committees will ensure state level ownership and coordination. They will comprise representatives from the public and private sectors and will ensure that state specific work plans are agreed and delivered in a timely fashion, are coordinated with the policy thrust of the state government and meet the evolving needs of the private sector. They will report through the PMU to the National Steering Committee. GEMS is an important element of the set of inter-locking state level programmes implemented by DFID. All these programmes will derive their authority from and report to the State Steering Committee comprised of the Executive Committee62 of the state and donors. The State GEMS Committee will coordinate all activities related to growth63. Coordination between the various DFID state level programmes has bee built into the terms of reference of all service providers. Cluster Stakeholder Groups will serve as the governing body of individual cluster interventions. They will comprise credible and committed representatives from the

62 This is essential the State Cabinet, the highest policy making body in each state. 63 The architecture of the state level programmes consist of programmes reporting to a State Technical Working Group which reports to a State Technical Executive for the thematic area (growth, governance, etc) and the State Steering Committee comprised of the State Executive Committee and donor partners. See Institutional Annex.


public and private sectors. They will be empowered to provide strategic leadership, and oversee resource deployment and the work of service providers. Strategic leadership and oversight will be provided by a National Steering Committee (NSC) of representatives of the Ministries of Finance and Commerce, National Planning Commission, state governments, eminent persons from the private sector and civil society and DFID and the World Bank. The NSC will set policy, deploy resources to their most productive use and ensure the program is coordinated with other government interventions. It will have the delegated authority to take decisions on behalf of all stakeholders. Supporting the NSC will be a DFID Private Sector Development Adviser who will be seconded to the World Bank with the sole purpose of ensuring the success of GEMS. S/he will support the NSC and State GEMS Committees in exercising strategic oversight and will oversee the planning, monitoring, coordination, communicating and relationship building functions of GEMS64. The NSC will be serviced by a Programme Management Unit (PMU), a lean secretariat responsible for co-ordinating work programmes and providing M&E, lesson learning and communications functions. It will procure service providers and process payments for GEMS activities financed by the World Bank and support monitoring of all components. All GEMS service providers will report to the PMU. The PMU will work with the Ministry of Commerce which will serve as FGN’s Executing Agency. 3.2 The Complementary Roles of DFID and the World Bank

y Based on the complementary strengths of DFID and the World Bank, responsibilities for the delivery of GEMS will be divided per figure 7. DFID will establish effective State GEMS Committees drawing on its experience of supporting state level programmes. DFID will appoint the service providers for Output 1 and the meat & leather and construction clusters. Its grant instrument, flexible procurement and resource use are well suited to the unpredictable process of supporting policy change. The World Bank has experience of establishing effective NSC’s and PMUs. Its expertise in the ICT, entertainenable it to appoint high quality serviceappropriate as these industries require la 3.3 Timing The programme will commence in early 2extension for up to two years thereafter.

64 Terms of reference for the GEMS Adviser are set ou

GEMS Programme Memorandum

Figure 7 - The Division of Responsibilit

ment, wholesale & retail and hospitality will provider. Its loan instrument is particularly rge scale investment in market infrastructure.

010 and will run for five years with a possible

t in the Institutional Annex

18

3.4 Funding Arrangements The GEMS budget is $ 265 million65. DFID will contribute £78 million (c.$115 million): $85 million for Output 1 and $30 million for the meat & leather and construction industries. The World Bank will contribute $ 150 million: $ 140 million to support up to 8 industries and $10 million to establish the PMU (table 3).

Table 3. GEMS Budget (US$ million) Total DFID IDARegulatory Reform 85 85Land 40 40Tax 20 20Investment promotion 5 5Flexible facility 20 20 Industry clusters 170 30 140ICT 30 30Construction 20 20 0Meat & Leather 10 10 0Entertainment 15 15Hospitality 15 15Wholesale/retail 30 30Others 50 50 PMU 10 10 Total 265 115 150

DFID’s funding will cover technical assistance, capital investment to provide public goods and performance grants to incentivise businesses to address market failures (see table 4).

Table 4: Breakdown of DFID Contribution (in US$ million)

Component Capital Investment

Performance Grants

Technical Assistance Total

Output 1 – (Land, tax, investment facilitation) 55 0 10 (incl. $20m

flexible facility) 85

Construction 10 (vocational training) 5 5 20

Meat & Leather 3 2 5 10

Total 68 7 20 115

The timing of expenditure will be as follows:

65 DFID’s allocation and funding commitments will be denominated in £ sterling. For ease of aggregation of DFID and World Bank support, the total project budget is calculated in US$. DFID’s share of $115m at the £:$ 1.48 exchange rate at 5 April 2009 is £77.7m rounded to £78m.


Table 5 - GEMS Cash Flow: Costs (US$ million) 2010 2011 2012 2013 2014 Total Total program 5 25 75 100 60 265

DFID 3 15 35 50 12 115

3.5 Procurement & Contracting DFID will contract 3 service providers through an open tender process. Separate specialist service providers will be appointed to deliver output 1, the construction value chain and the meat and leather value chain. Service providers will be appointed for a term of five years extendable for a further two years by mutual consent. The value of contracts signed will cover only the technical assistance element. Service providers will need to seek approval of expenditure on capital investment and performance grants from their respective governing bodies. Procurement of capital expenditure will be carried out by the DFID procurement agent handling the procurement core country agreement for Nigeria. 3.6 Accounting and Audit All GEMS funds will be used for Technical Assistance with no funds in Financial Aid. Each service provider will prepare accounts and have them audited annually. 3.7 Monitoring and Reporting Service providers will develop annual work plans setting out how they will deliver milestones in the log frame and against which they will report progress achieved. The PMU will collate these plans and monitor progress so that the NSC can hold interventions to account. This internal system will be validated by external assessments that will focus on progress against log frame targets. DFID intends to appoint an external service provider that will monitor progress across all state level programmes, including GEMS. In addition, the PMU will commission baseline and periodic surveys to monitor progress. These surveys will also assess the extent to which implementation risks set out below have materialised thereby triggering the need for actions to mitigate them. The surveys will be timed to feed into a joint Mid-Term Review in 2012 and a Project Completion Review at the end of the programme.


4. RISK ASSESSMENT Nigeria is noted for relatively poor governance and GEMS will start implementation during the run-up to the Nigerian general elections and at a time of global economic uncertainty. This make GEMS a high risk undertaking. Nonetheless it is possible to anticipate and mitigate the most significant risks as set out in Table 6 below. Furthermore the overall high external environment is counterbalanced by the following circumstances: 1. FGN has made some progress in improving governance over the last decade and

a strong consensus in favour of policies to sustain growth is in place. With healthy reserves and macro-stability the country is reasonably well placed to weather the current global down turn66;

2. Returns to GEMS depend upon incremental increases in growth over the without programme case. So, even if global economic conditions cause growth to fall, provided GEMS is able to achieve its purpose, it will still be able to provide attractive returns.

3. The industries selected have been growing rapidly despite the binding constraints of infrastructure and access to finance. Even if current initiatives to reduce these constraints fail, strong demand for their products should enable the industries to continue to grow.

5. CONDITIONALITY All support under this programme will be delivered through Technical Assistance. There is NO conditionality under this programme.

66 The Economic Annex shows why Nigeria is considered one of the better placed countries in the world to weather the global economic crisis.


Table 6 - Risk Matrix

Risk Probability Impact Monitoring/Effect Mitigation

Political Risks

1. FGN and state governments withdraw support for GEMS.

Low

High

FGN fails to abide by terms of IDA credit. State govts do not commit their agencies to reform.

Continuous engagement with policy makers including regular dialogue on progress made & bottlenecks

2. FGN and state governments reduce investment in infrastructure or investment is ineffective.

High Medium ICAs reveal electricity & roads remain binding constraints to investment.

State GEMS Committees maintain pressure on govts to honour commitments.

Continued DFID and WB support for investment in infrastructure.

Economic Risks

3. Global economic trends cause a severe recession in Nigeria reducing investment & growth.

Low

Medium

Rate of growth falls sharply.

Ensure GEMS increases amount & productivity of investment to deliver incremental gains over “without programme” levels.

4. Nigeria’s financial system is destabilised causing private credit to fall reducing ability to invest.

Medium High Private credit as % of GDP falls & ICAs reveal access to finance is a binding constraint to investment.

DFID and World Bank support FSS 2020 and aligned programmes.

Governance Risks

5. Increased crime & corruption reduce the willingness to invest.

6. Poor financial controls lead to mismanagement of GEMS resources.

Medium

Low

Medium

Medium

Levels of investment. ICA surveys.

IDA funds cannot be accounted for.

Support governance reforms, empower private sector to hold government to account via DFID’s ENABLE and SAVI projects.

Improve financial management at Federal Ministry Commerce.

Implementation Risks

7. GEMS National Steering Committee (NSC) fails to exercise effective oversight and governance.

8. Business environment reforms fail to materialise because agencies are not committed to the reform agenda or incapable of implementing them.

9. Stakeholder groups prefer to serve their own narrow interest rather than improve industry performance.

Low

Medium

Medium

Medium

Medium

High

GEMS funds are not deployed to best effect and progress is slow, caused by poor accountability for performance.

Sub-national Doing Business indicators reveal lack of progress focal states.

The M&E system shows that GEMS funds are benefiting only a few firms.

Careful selection of GEMS NSC focuses programme resources where greatest reform momentum emerges.

Ensure State Committees maintain pressure on agencies to deliver reforms.

Careful selection of stakeholder groups and monitoring of their allocation of resources by service providers and the PMU.
