Automotive policy and the prohibitive cost of vehicles: Need for urgent review

0

By Muda Yusuf

A review the Automotive Policy which was decreed by the Jonathan Administration in 2013 is long overdue.  Six years after, the 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.  It has caused massive trade diversion to neighboring countries.  High compliance cost has put enormous pressure on firms moving them into uncompetitive positions in the face of weak institutional capacity to enforce the extant tariff regime.

The cost of vehicles had risen beyond the reach of most citizens and corporate bodies.  The impact has been negative with far reaching consequences.  The automobile sector was hit by the double shock of currency depreciation (of over 80%) over the last six years and an import duty hike to 70% on new cars and 35% on used vehicles and commercial vehicles.

The auto policy was an import substitution industrialization strategy to reduce importation of vehicles and incentivize domestic vehicle assembly.  However, import substitution strategy would only thrive 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, economic inclusion, multiplier effects, conservation of foreign exchange, job creation and reduction of import bills.  The automotive policy, in its current form is 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 industrialization.  Six 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 assembly of new cars in 2017 and 2018 were estimated at less than 10,000 units.

The truth is that, the high cost of vehicles has taken a severe toll on the economy, from a logistics cost and welfare point of view.  Practically all aspects of our economic and social lives had been negatively impacted by the situation.  This is because over 90% 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 organizations have drastically cut down on their fleet etc.  Vehicle 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. This underscores the strategic importance of road transportation to domestic economic integration and connectivity.

The economy has witnessed an increase in the price of vehicles by between 200 to 400% over the last five years.  Not many investors and the citizens have the capacity to pay these outrageous prices.  Even prosperous corporate organizations are now buying used vehicles for official use.  The implication of the scenario for operational costs of organizations 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 the prohibitive cost of vehicles largely because of the high import tariff and sharp currency depreciation.
  • Increase in smuggling resulting from the high import duty and levy as well as the huge duty differential with our neighboring countries.
  • Huge loss of customs revenue as vehicle imports from official channels drop and smuggling increases.
  • Huge loss of revenue by the Nigeria Ports Authority.
  • Considerable loss of maritime sector business to neighboring 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 because of the prohibitive replacement cost.

Recommendation

  • The automotive policy should be immediately reviewed in the light of its copious shortcomings.
  • Import tax (duty and levy) of 70% on new vehicles should be reduced to 35%.
  • Import tax (duty and levy) of 35% on commercial vehicles should be reviewed downwards to 25%.
  • Import tax (duty and levy) on used cars should be reviewed from current 35% to 25%
  • Government should give further tax concessions to the assembly plants. SKD should all attract 5% duty while CKD should attract zero import 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 in line with the Presidential Executive Order on patronage of made in Nigeria products.
  • Vehicle purchase finance facility at single digit should be put in place to boost demand for automobiles. The automotive fund should be used to support this initiative.
  • 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; maritime sector activities will be boosted; car assembly plant will be better off with a five percent duty on SKD and zero percent duty on CKD; 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 utilized for better revenue performance; and customs revenue from vehicle imports will improve considerably.  The proposition of a review of the automotive policy fits very well into the Ease of Doing Business Policy of the government.

*Muda Yusuf is the Director General of the Lagos Chamber of Commerce and Industry.

Send your news, press releases/articles to augustinenwadinamuo@yahoo.com. Also, follow us on Twitter @ptreporters and on Facebook on facebook.com/primetimereporters or call the editor on 07030661526, 08053908817.

Share.

Leave A Reply