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Need for urgent review of auto policy

auto policy
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Five years after, the automotive policy has not only failed to achieve the desired outcomes, it has adversely impacted the cost of doing business, welfare of the people, government revenue and the capacity of the economy to create jobs. The policy has also penalised stakeholders in the sector that are compliant with extant rules, taxes and tariffs applicable to the automobile sector.

The costs of vehicles have risen beyond the reach of most citizens and corporate bodies. The impact has been largely negative with far-reaching consequences. The automobile sector was hit by the double shock of over 100 percent currency depreciation over the last five years and an import levy of 50 percent on new cars and 25 percent on used vehicles and commercial vehicles. This is in addition to the import duty of 20 percent on new cars and 10 percent on used vehicles and commercial vehicles.

The auto policy was an import-substitution industrialisation strategy to reduce importation of vehicles and incentivise domestic vehicle assembly. However, import-substitution strategy thrives in the context of high domestic value-addition. It is within such a framework that the economy could benefit from the inherent values of import-substitution which includes backward integration, multiplier effects, conservation of foreign exchange, job creation and reduction of import bills. The automotive policy, in its current form, is not sustainable. It is also not in consonance with the Nigeria Industrial Revolution Plan (NIRP), which is the main industrial policy document of the current administration. The NIRP espouses the strategy of resource-based industrialisation. Five years into the implementation of the auto policy, not much progress has been made, even though over 50 vehicle assembly plants licenses have been issued. Total annual sales of new cars in 2017 and 2018 were estimated at less than 10,000 units.

The truth is that high cost of vehicles has taken a toll on the economy, from a logistics point of view. Practically, all aspects of our economic and social lives have been negatively impacted by the situation. This is because over 90 percent of the country’s freight and human movements are done by road, which implies heavy dependence on cars, commercial buses and trucks.

Manufacturers and other real sector investors suffer from high cost of delivery vehicles, sharp increases in haulage cost because of the high cost of trucks. School buses have become unaffordable by many institutions; many hospitals cannot afford ambulances; many corporate organisations have drastically cut down on their fleet. Car ownership is now completely beyond most of the middle class. These unintended consequences and collateral harmful effects on the economy and welfare of citizens are incalculable.

We have witnessed an increase in the price of vehicles by between 200 to 400 percent over the last five years Not many investors and the citizens have the capacity to pay these outrageous prices. Even prosperous corporate organisations are now buying used vehicles for official use. The implication of the scenario for operational costs of organisations is worrisome. The auto policy in its present form is most inappropriate for an economy that is heavily dependent on road transportation. Other implications of the Auto Policy for the economy include the following:

• High transportation cost resulting from prohibitive cost of vehicles largely because of the high import tariff and levy.

• Increase in smuggling resulting from the high import duty and levy as well as the huge duty differential with our neighbouring countries.

• Huge loss of customs revenue as vehicle imports from official channels drop and smuggling increases.

• Huge loss of revenue by the Nigerian Ports Authority.

• Considerable loss of maritime sector business to neighbouring countries as more vehicle imports are diverted to neighboring countries.

• Severe adverse effect on automobile dealers in Nigeria as high cost of vehicles creates affordability problems, low sales and massive erosion of profit margins.

• Loss of jobs in the nation’s maritime and allied sector following the sharp drop in vehicle imports

• Creation of opportunities for corruption and extortion by agencies of government because of compliance issues and the massive incentives for smuggling.

• High cost of transportation resulting from high cost of passenger cars and buses.

• High road safety risk because of the high vehicle replacement cost and affordability issues. There are too many rickety vehicles on the roads.

Recommendation

• The auto policy should be immediately reviewed in the light of its copious shortcomings.

• Import levy of 50 percent on new vehicles should be reduced to 15 percent. This will be in addition to the 20 percent import duty.

• Import levy of 25 percent on commercial vehicles should be reviewed downwards to 15 percent, in addition to the 10 percent import duty.

• Import levy on used cars should be reviewed from current 25 percent to 15 percent.

• Government should give further tax concessions and waivers to the assembly plants in the spirit of the auto policy. Semi knocked-downs should all attract five percent duty to incentivize domestic vehicle assembly.

• Other incentives for assembly plants and tyre industries for acquisition of machineries and equipment should be retained as contained in the automotive policy.

• Similar incentives should be extended to the local production of vehicle spare parts.

• Patronage of locally assembled vehicles by the government and its agencies should be more rigorously encouraged and enforced.

• Vehicle purchase finance facility at single digit should be put in place to boost demand for automobiles.

• Age limit of used vehicles should be reduced gradually over time to lessen road safety risks.

If these recommendations are adopted, there would be a great relief to the private sector from the logistics perspective. More jobs will be restored in the automobile business sector; smuggling will reduce, and maritime sector activities will be boosted. Car assembly plant will be better off with a five percent duty on SKD; the welfare effect on citizens will be positive; vehicle affordability by the middle class will improve; the transportation sector will benefit tremendously; smuggling of vehicles will reduce drastically; NPA and ports terminals facilities will be more optimally utilised for better revenue performance; and customs revenue from vehicle imports will improve considerably.

 

Muda Yusuf

Muda Yusuf, DG, Lagos Chamber of Commerce and Industry (edited by Odinaka Anudu)

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