Fertilizer Constraint PDF Print E-mail
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Monday, 17 December 2012 18:59

 THE POTENTIALS AND CONSTRAINTS OF FERTILIZER IMPORTATION AND DISTRIBUTION BY PRIVATE SECTOR AND A SUGGESTED MARKET FRIENDLY ALTERNATIVE TO SUBSIDY DELIVERY IN NIGERIA[1]

BY

ALHAJI SANI DANGOTE

PRESIDENT-FEPSAN

 

Introduction:

 

Nigeria has a population of over 130 million people, about 70% of which are engaged in agricultural activities, cultivating an area of about 56,261 square kilometers (5,626,100 Hectares) and producing an annual average of 35-38 million metric tons sorghum grain equivalent food, thus contributing over 40% of the Gross Domestic Product (GDP). Agriculture also contributes 90% of non-oil exports compared with only 12% contributed by petroleum. It also provides the raw materials for agro-industrial development.

 

Agriculture therefore occupies a central, multidimensional and very important role in the social and economic life of Nigeria and for the unforeseeable future it will remain so.

 

At the current population growth rate of 3%, the population will increase to about 240 million by the year 2030 thus almost doubling the food demand. Presently, Nigeria imports substantial amount of food to meet its food deficit. Food imports bills have increased at average rate of 13% per annum since 1990. Today Nigeria’s food import bills stand at a staggering N200 - N250 billion per annum!!!

Nigeria is blessed with abundant potentials for agricultural production. These include very vast land, geographical location, topography, climate, soils and vegetation. It has many distinct and diverse ecological zones from the southern mangrove swamps through the high rainfall forests to the guinea and Sahel savannas of the north. These diverse ecologies make possible the production of a variety of agricultural commodities for both domestic consumption and exports.

 

 

 Regrettably, since the mid 1970s the agricultural sector has suffered serious neglect from both the public and private sectors. The result is that, today agriculture has failed to keep pace with the country’s basic needs for sufficient food and ample raw materials for industry. Two main factors are responsible for this, (i) inappropriate and inconsistent public policies and programmes; and (ii) lack of critical investments for agricultural growth from both the public and private sectors. Consequently, Nigerian agriculture has remained subsistence, low input and low technology use, and the resultant low productivity.

 

To keep pace, Nigeria requires a high investment/high growth rate policy for the agricultural sector. Investments need to be made in agricultural research, extension, education, transportation and rural infrastructure. There is need for appropriate input and product price and trade policies. These together will give rise to a substantial increase in agricultural productivity, growth and production. A key element in a high investment /high growth rate agricultural strategy is an efficiently functioning fertilizer sub sector complimented of course,


by massive use of improved seeds and proper applications of  crop protection products. Fertilizer consumption has been on the decline. It has dropped from over 1million tons average per annum in the late 1980s to mid 1990s to about 500,000 mt per annum in recent years. The average nutrient consumption is only 7 kg per hectare compared to 22 kg in Africa and 100kg per hectare world average.

 

The Fertilizer Supply Scenario in Nigeria:

 

Nigeria has great potentials to produce substantial quantities of its fertilizer requirements. The basic fertilizer raw materials are obtained from natural sources. The abundant natural gas most of which is presently flared and quantities yet un-explored, can be harnessed and used for the production of nitrogenous fertilizers such as ammonia, urea and ammonium sulphate. Rock phosphate a major source of phosphorus for the production of mono and diammonium phosphate (MAP & DAP) and single or triple superphoshate (SSP & TSP) is available in commercial quantities around the Sokoto/Zamfara geological formation. There are no known commercial potash deposits in Nigeria-which could be used for the manufacture of Muriate of Potash (MOP). This product has to be imported for along time to come

 

The two fertilizer manufacturing plants-Federal Superphosphate Fertilizer Company (FSFC) established in 1976 with installed capacity of 100,000 metric tons SSP and National Fertilizer Company of Nigeria (NAFCON) which started production in July 1988 with combined ammonia, urea and NPK installed capacity of about 1,000,000 metric tons are both virtually closed down in the last four (4) years.


A recent development in the Nigerian fertilizer production scenario is the installation of bulk blending plants which started from 1989. Today there are well over 20 such plants (public and private) throughout the country with a total combined capacity of about

1,500,000 metric tons per annum. These plants have adversely been affected by the closure of NAFCON from where they sourced most of their raw materials.

 

Despite the huge fertilizer demand potential of 7 – 10 million metric tons per annum and availability of natural gas, the major ingredient for the production of nitrogenous fertilizers and phosphate rock deposits in commercial quantities, there is virtually no fertilizer manufacturing in Nigeria today. Almost all fertilizers used in Nigeria

are imported (either for direct application or blending). The lack of national capacity to manufacture fertilizers which may persist for some years to come will definitely impact on the quantity of fertilizes available to Nigerian agriculture. The existing capacity for fertilizer production in Nigeria is presented in the table below:


FERTILIER PRODUCTION UNITS, PRODUCT RANGE, CAPACITY AND LOCATIONS

S/N

FERTILIZER PROD. UNIT

RANGE

INSTALLED CAPACITY

 

LOCATION

1.     

Federal Super phosphate Fertilizer

Company (FSFC)**

SSP

100,000

Kaduna

2.     

National Fertilizer Company of

Nigeria (NAFCON) **

Ammonia

Urea

NPK

200,000

550,000

250,000

Onne,

Port-Harcourt

3.     

Fertilizers & Chemicals Co

NPK Grades

200,000

Kaduna

4.     

Morris Nigeria Ltd.

NPK Grades

200,000

Minna

5.     

Agro-Nutrients & Chemicals Co. Ltd.

NPK

Products

300,000

Kano

6.     

Kano Agricultural Supply

Company (KASCO)

NPK

100,000

Kano

7.     

Golden Fertilizer Company Ltd.

NPK

200,000

Lagos

8.     

Zungeru Fertilizer Company*

NA

20,000

Niger State

9.     

Funtua Fertilizer Company*

-do-

100,000

Katsina

10.   

Bauchi Fertilizer Company*

NPK

121,000

Bauchi

11.   

Gombe Fertilizer Company*

NPK

96,000

Gombe

12.   

Borno Fertilizer company*

NA

120,000

Borno

13.   

Edo Blending Plant*

NA

40,000

Edo

14.   

Zamfara Blending Plant*

NPK

84,000

Gusau

15.   

Samrock Blending Plant*

NA

30,000

Sokoto

16.   

Kebbi Blending Plant*

-

NA

Kebbi

17.   

Adamawa Blending Plant*

-do-

-do-

Yola

18.   

Crystal Fertilizer Blending Plan*

-do-

100,00

Kagara

19.   

Scentum Al fertilizers*

NA

NA

Enugu

20.   

Gaskiya Fertilizer Co*

NPK

54,000

Kano

21.   

Sasisa Fertilizer Co*

-do-

20,000

Kano

22.   

Morgan Int. Ltd.

-do-

60,000

Lagos

23.   

Jimco Nig. Ltd.

-do-

 

Lagos

24.   

Yobe  Fertilizer Co.

 

 

Damatoro

25.   

Pacesetter Organic Fertilizer  Co. Ltd.

Organic Fertilizer

NA

Ibadan

26.   

Cybernetics Nig. Ltd.

Micro Nutrients

 

Kaduna

27.   

Albarka Agro Allied & Chemical  Nig. Ltd.

 

 

Kano

28.   

Aweba  (Nassarawa) Fertilizer Co.

 

 

Nasarrawa

29.   

Plateau Fertilizer & chemicals Co.

 

 

Jos/ Bocos

30.   

Ebonyi State Fertilizer & Chemicals Co.

 

 

Abakaliki

31.   

West African Fertilizer Co.

 

 

Okpella

32.   

Bauchi Kaolin Industry

 

 

Bauchi

 

TOTAL

2,945,000

 

 

Source: Various FFD and IFDC Reports

·         Details are not available

**   Manufacturing plants, currently not in production.


The Potentials for Fertilizer Importation:

The greatest incentive for fertilizer importation in Nigeria lies in the fact that there is no local manufacturing/production capacity. All fertilizers used in the country are virtually imported. Other factors that can encourage importation are:-

 

a)      The large demand potential of 7 – 10 million metric tons and the      large expanse of varied ecologies that is conducive to          cultivation of variety of crops.

 

b)      The liberalization policy of the government. Government is no          longer involved in the direct importation of fertilizers.

 

c)      The government’s economic recovery policy of putting the      private sector in the fore front in undertaking all economic              activities, while the government will ensure the provision of the enabling environment and quality control and regulations.

 

d)      The existence of democratic governance and a freer market   economy.

 

e)           The recent emergence of the Fertilizer Producers and Suppliers Association of Nigeria (FEPSAN) which has brought the fertilizer suppliers under one body to address the fertilizer supply and distribution problems in the country.

With these conditions in place, the potentials for fertilizer importation in Nigeria by the private sector are very great.

 

Since the liberalization of fertilizer importation and distribution in 1997, the private sector has taken the challenge as can be seen in the table below:

 

Fertilizer Imports by Private Sector (1997 – 2003):

 

S/N

YEAR

TOTAL

1.    

1997

56,708

2.    

1998

239,916

3.    

1999

252,861

4.    

2000

437,320

5.    

2001

615,000

6.    

2002

340,746

7.    

2003

511,841

 

It was in the last quarter of 19997 that the liberalization of the fertilizer supply and distribution was announced. A big vacuum was created by

the sudden policy change; the private sector was taken unawares. There was little or no time for the private sector participants to prepare and process fertilizer importation. The total import of 56,708 that year was mainly raw materials by blending plants.

 

However, by 1998 a large number of private sector participants moved into the importation and marketing of fertilizers in the country.

Over 20 companies were recorded. The import that year jumped to 239,916 mt. At the same time over 40 fertilizer depots were established by these companies throughout the country.

 

While the private sector was geared up for the challenge, the Federal Government in 1999 announced the restoration of fertilizer subsidy and direct procurement and distribution of some quantities. This resulted in the dual market prices and created a lot of uncertainties on the part of the private operators. Importation that year almost stagnated at 252,861 mt. The private sector became suspicious and uneasy.

 

However, in 2000 the Federal Government again discontinued the fertilizer subsidy and distribution and abolished import duty on fertilizers. This greatly encouraged the private sector and in that year import jumped to 437,320 mt. and up again to 615,000 mt in the year 2001.

 

Regrettably, though done with good intentions, the Federal Government again started procuring and subsidizing fertilizers in year 2001. This was compounded by some trade malpractices including  abuse of the abolished 10% duty and round tripping in foreign exchange that were beginning to be perpetrated by some of the fertilizer

companies. This resulted in Government’s clamp down and consequent penalties meted out to many companies involved in these malpractices in the year 2002. These developments might have caused the declines in import in 2002. In spite of these uncertainties the private sector still continued to be importing and distributing fertilizers in the country. The quantum of import increased to 511,941 mt in 2003. It is projected that about 750,000 mt will be imported in 2004. As at 5th August, 2004 a total of 426,365 mt have been imported by the private sector.

 

Constraints to Fertilizer Importation and Distribution:

For a long time to come importation of fertilizers will continue because of inadequate local production capacity. However, there are several factors militating against efficient importation and distribution of fertilizers in Nigeria. These include:-


1.      Capital-intensive nature of fertilizer business:

          Production/importation and distribution require high levels of   financial investments. Substantial funds are needed to pay the    cost of the production, freight, port handling and clearing   charges,    insurance, storage, transportation, etc.

2.      Inland Transportation:

          All imported fertilizers have to be transported to the hinterland          where the major consumers reside.  With low performance of          the railway system and lack of inland waterways most haulage   in       the    country is by road. The condition of the roads and cost of        vehicles and spare parts make cost of transportation by road in           Nigeria to be one of the highest in the world. It is estimated      that the total transportation and distribution costs to retail areas           range between 25-35% of product cost, depending on distance     from the ports.

 

3.      High Financial Cost:

          It is very difficult to borrow in Nigeria because of the very high          cost of finance. Commercial lending rates range between 25-    35% per annum. Fertilizer business is highly voluminous with        very narrow margins. The cost of borrowing is therefore a great          disincentive for entrepreneurs in the fertilizer business.  Foreign exchange fluctuations are another contributory factor to           this   problem. A sudden change in foreign exchange can cause         disaster to importers.


4.      Inconsistent Policies:

           As mentioned earlier inconsistent polices and interventions at         Federal and State levels in the fertilizer marketing are causing   and slow growth in quantum and timeliness of fertilizer supply         in       the country.

 

5.      High landing and Port charges:

          Nigeria has one of the highest port services charges. This is   compounded by landing costs such as ship and cargo charges,      5% duty,    maritime levies, clearing charges, within port     transportation, etc. These costs alone account for about 30% of           the product cost.          These are further compounded by the lack of           warehousing facilities that could assist in timely cargo discharge      and  interim storage before the product is hauled to the    hinterland.

                      

6.      Government Procurement:

          Federal and State governments procurements are not properly        organized. Most times pricing is arbitrary, orders are placed late       and payments are delayed for fertilizers supplied. There is also   problems of cumbersome distribution arrangements which         make the exercise expensive and therefore not achieving the          subsidy objectives

 

7.      Lack of monitoring and quality control:

          Lack of monitoring and quality control in the fertilizer supply and       distribution chain allows for production, trade and marketing    malpractices.


The Way Forward:

          In order to encourage importation of sufficient quantities of      fertilizers (either for direct application or blending) the following    suggestions are pertinent:

 

a)      Provision of conducive and favorable environment for the emergence of a free and competitive market that is investment friendly. This will require withdrawal of government from direct interventions in the sourcing and marketing of fertilizers.

 

b)           There is need to put in place sustainable policies to        address:

          i)        High interest rates and provision of soft loans.

ii)            Fluctuations in the foreign exchange rates.

iii)          High landing costs.

iv)          High port charges.

 

c)           Government should focus its activities on quality control                      and monitoring to effectively regulate the fertilizer sector                           and protect the interests of producers, importers, suppliers,            the farmers and other users and the environment.

                                             

d)           Government should improve transportation and     marketing infrastructure. Resuscitation and expansion of   the rail system and dredging of the rivers Niger and   Benue        to open inland waterways will greatly reduce the cost ofinland transportation of fertilizers and other goods. There is       need to continue the on-going road rehabilitation works     nation wide and to open more areas, especially more State          roads need to be built. Port infrastructure such as off-loading           and warehousing facilities need to be provided.

 

A Suggested Market Friendly Alternative to Direct Subsidy Administration –Use of Vouchers.

 

In the last section I suggested withdrawal of government from direct intervention in fertilizer supply and marketing activities. This does not mean government should discontinue providing subsidies to farmers. Government has responsibility to support farmers and to ensure that our agricultural products are competitive in the

regional and world markets. There are many other justifications for subsidy which include:-

*             To encourage and stimulate the adoption of new        beneficial farm technologies or practices.

*             To encourage long term capital investment.

*             To stabilize and build confidence in the agricultural industry and agri- business.

*             To ameliorate adverse effects of local and or imported inflationary pressures on farmers and farm businesses.

*             To transfer incomes from non-farm to farming sector.

*             To compensate farmers for unfavorable and or macro-economic distortions.

*             To promote institutional development in support of agriculture.

 

Subsidy per se has no serious negative problems or opposition. However in Nigeria over the years its administration to achieve the maximum results has been seriously questioned. It is generally  believed that the subsidy does not reach the intended beneficiaries. Most of the opposition against it is based on the widespread abuses in its administration which results in its being high jacked by unintended beneficiaries and thereby making the exercise worthless.

Nigeria has over the years been spending substantial amounts on fertilizers subsidies. The table below shows the cost of fertilizer subsidies from1976-1994. From this table it can be seen that quantum subsidy has been on the increase annually.

 

                                   COST OF FERTILIZER SUBSIDY

YEAR

COST OF SUBSIDY (N)

1976

23,727,000.00

1977

19,057,000.00

1978

19,270,000.00

1979

39,812,000.00

1980

35,467,000.00

1981

48,758,000.00

1982

68,136,000.00

1983

55,135,000.00

1984

42,655,000.00

1985

61,860,000.00

1986

260,552,000.00

1987

440,323,000.00

1988

694,493,000.00

1989

725,697,000.00

1990

1,999,979,000.00

1991

2,202,253,000.00

1992

6,826,277,000.00

1993

7,220,264,000.00

1994

8,917,725,000.00


 

(Source: Adapted from Economic and financial weekly, CBN (1991) and FPDD Reports (various years)


Fertilizer subsidies also have an impact on the national, state and local government budgets. Money spent on subsidy is money that can not be spent on other government programmes or debt servicing. Therefore there is all the need and responsibility on behalf of government to ensure transparent use of these huge resources. The following table presents the fertilizer subsidies 1990-2001 in relation to the national and agricultural budgets.

 

Nigerian National and Agricultural Budgets and Fertilizer Subsidy Costs, 1990-2001

 

 

 

 

 

 

YEAR

 

 

Nigerian

National

Budget

(1)

 

 

Nigerian

Agricultural

Budget

(2)

 

 

Fertilizer

Subsidy

Cost

(3)

 

 

Agriculture

Budget as %

Cost

(4)

 

Fertilizer

Subsidy as %

 

Of National

 

Budget a

(5)

Fertilizer

Subsidy as

%  of

Agriculture

Budget

(6)

 

(2001 constraint N billion)

%

%

%

1990

164.333

23.022

30.416

14.0

18.5

132

1991

152.492

       6.428

25.662

4.2

16..8

399

1992

127.074

 6.069

54.294

4.8

42.7

895

1993

93.023

 9.168

36.371

9.8

38.8

397

1994

106.389

      9.609

30.606

9.0

28.8

319

1995

89.023

 9.374

28.979

10.5

32.6

309

1996

73.552

 5.965

17.711

8.1

24.1

297

1997

162.823

 8.793

0

5.4

-

-

1998

245.456

11.754

0

4.8

-

-

1999

179.599

  9.064

0.968

5.0

0.5

10.7

2000

348.854

11.269

0

3.2

-

0.0

2001

496.659

10.595

0.890

2.1

0.2

8.4

 

a:  The fertilizer budget came from special account and was not part of the FMARD  budget.

Source: Budgets from Central Bank of Nigeria (CBN, various years).

 

From the table it can be seen that the fertilizer subsidy in 1992 was 8.9 times the agriculture budget. The agriculture budget in 2001 was only 2.1% of the national budget.


In order to ensure the subsidy reaches the intended beneficiaries in a market friendly way, I am proposing adoption of voucher system as an alternative subsidy delivery mechanism.  The next few pages outline the ideas of the voucher system I have in mind.

 

Modalities of the Voucher System:

 

The system will start by the Federal Government deciding on how much it intends to spend on fertilizer subsidy in any given year. The Federal Ministry of Agriculture will allocate the amounts (in paper) to the States and local governments as usual. This will form the frame work for the printing of vouchers. The Federal Ministry of Agriculture will identify commercial banks to be used in each state for the scheme. The amounts will be released to the branches of the banks in the States and local governments, once the scheme modalities and logistics have been finalized and agreed, and proper agreements entered with the banks.

 

The vouchers will be security printed with coded electronic numbers and sensors such that they can not be forged /duplicated. The vouchers are then distributed to the States as per the allocation frame worked out by the FMARD.

 

The States will distribute the vouchers to the local governments who will in turn distribute to the farmers. The distribution to farmers will be done publicly in front of the ward/village/community leader’s residence in the presence of the local government, security and traditional leader representatives. The farmers will then take their vouchers to any authorized dealers nearest to them and pay the difference and collect their fertilizers.

 

On the fertilizer supply arrangement, with the formation of the Fertilizer Producers & Suppliers Association of Nigeria (FEPSAN) all suppliers will be encouraged to establish depots in their areas of operation from where the dealers can take deliveries. The States will be encouraged to set-up trained dealer networks following the IFDC-DAIMINA Project model. These dealers will be all over the country selling fertilizers supplied by FEPSAN members.

 

Government will support initial procurement of security detecting machines that will be given to the dealers. These machines will be used in checking vouchers presented by farmers for genuineness before the fertilizers are sold to them.

 

The dealers after selling the fertilizers using the voucher system will on weekly basis submit their vouchers to the authorized bank branch in their local government area and redeem their money.

The proposed schematic diagram of the voucher system is represented in the figure below:



PROPOSED SCHEMTIC DIAGRAM OF THE VOUCHER SYSTEM

 

 

 

 
 

FMARD

Decides on Amounts to spend on Fertilizer subsidy

 

 

 

 

 

                                                                       

                                    

Monitoring

 

                                                                                        

 

                                                                                                    

                                                                       

 

               
   
 

Fertilizer Supply

 
   

Allocation to States

 
       

Print vouchers

 
 
 

 

 

 

                                                             

                                           

 

           
   
 
     

Distribute to States

 
 
 

 

 

 

 

 

                          

 

State Branches

 

States Monitoringunit

 
                                                                                   

 

                                                                                                       

 

               
   

Distribute to LGAs

 
     
 

Dealers in LGAs

 
 
 
 

 

 

 

 

LGA Branches

 

                                                                                     

 

 

       
 
   
 

 

 

 

                   

 

Vouchers Distributed to villages /communities

 

                                   

 

 

           
   
 
   
 

Retailers Shops in villages

 
 

 

 

 

 

 

 

                                                                                                                            

 

       
 
   
 

 

 

 

 

                                                                                                

Advantages:

 

The likely advantages of the proposed vouchers system include:-

*              Government will continue to provide support/subsidy to the farmers.

*              Subsidy will reach intended beneficiaries.

*              There will be control-monitoring will be built in the system.

*              There will be only one price in the market. No dual pricing (Subsidized and open market).

*              Private sector will be encouraged to import/produce more fertilizers.

*              Network of depots and dealers will emerge nationwide.

*              For each voucher to be paid, fertilizer must have changed hands.

*              There will be increased fertilizer use and consequently agricultural production.

*              Funds saved from direct procurement can be made available for application in other areas of agriculture budget such as research, extension and training or in providing other services.

         

This precisely is the concept I have in mind but it surely requires a lot of refinement before it can be adopted by the government. A lot of consultations will be required before it can finally evolve. But I believe something can be done before the next rainfed season to start the system even if on pilot basis. To achieve this it is highly suggested that a committee comprising the Federal Fertilizer Department, IFDC-DAIMINA, FEPSAN and other stakeholders be constituted to develop the idea.


Conclusion:

Nigeria has great potentials to become an agricultural exporting country, but unfortunately over the years agricultural development has been neglected by both the public and private sectors. Agriculture has failed to meet the expected needs of sufficient food for the teaming population and vital raw materials for its agro industrial development. Nigeria presently imports food worth N200 – N250 billion annually. Fertilizer which is a vital input for agricultural production is not manufactured in Nigeria inspite of abundant raw materials in the natural gas and rock phosphate deposits. Nigeria relies solely on imports for its fertilizer requirements. Although there are great potentials for fertilizer importation it is also constrained by inconsistent public policies, inadequate financing and logistics. Another element constraining the quantum of fertilizer supply is the government intervention in the supply and marketing system in an effort to provide subsidy to farmers. The high degree of variability in the levels of subsidy and the mode of its administration and implementation are causing a lot of confusion and distortions in the fertilizer market. The private sector remains apprehensive in committing more resources to the business because of the apparent uncertainties in the present arrangement where a sudden shift in policy could cause financial disaster to private investors.

In order to ameliorate the situation a suggested alternative that is market friendly and ensures delivery of subsidy to the intended beneficiaries is proposed.  This entails the use of a voucher system. A lot of consultations will be required before it can finally evolve. I have given the rough outline of the idea and I urge the participants in this workshop to discuss and contribute to the evolution of a viable voucher system for fertilizer (and possibly other inputs) subsidy delivery mechanism to be adopted by government.

 

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