By Mr Elvis Chukwudi Okonji, Chief Executive Officer, GPC Energy and Logistics Limited
The Chief Executive Officer, GPC Energy and Logistics Limited, Mr Elvis Chukwudi Okonji, at the 2021 edition of the Haulage & Logistics Magazine Annual Conference & Exhibition (HAULMACE) called for strong bond among players in the haulage sectors.
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Keynote Speech By Mr. Elvis Chukwudi Okonji, Chief Executive Officer, GPC Energy and Logistics Limited at HAULAGE AND LOGISTICS MAGAZINE ANNUAL CONFERENCE AND EXHIBITION (HAULMACE 2021) 26th October 2021, at The Stable, 41 Bode Thomas Street, Surulere, Lagos, Nigeria
Theme: BUILDING STRONG PARTNERSHIPS
“A winning Strategy in the Haulage and Logistics Value Chain in Nigeria”
1. Introduction
Distinguished Ladies and Gentlemen, it is a great honour and privilege to deliver the keynote speech at this year’s HAULAGE AND LOGISTICS MAGAZINE ANNUAL CONFERENCE AND EXHIBITION.
I welcome you all to this gathering of champions and captains of the Haulage and Logistics industry. I also thank the organizers for according to me the opportunity to deliver the Keynote address at this year’s event.
To enable distinguished participants, appreciate the theme of this year’s event which is Building Strong Partnerships, A Winning Strategy in The Haulage and Logistics Value Chain in Nigeria. In my keynote address, I will attempt to review the industry during and after Covid-19, evaluate the challenges facing the haulage industry in Nigeria, then link these challenges to the lack of collaboration amongst key industry players.
Haulage can be defined as the business of transporting goods by road or rail between suppliers and large consumer outlets, factories, warehouses, or depots. It provides the critical linkage between production and consumption. For this session, our emphasis is on the transportation of goods by road. The importance of the haulage industry in Nigeria cannot be overemphasized. Some of the industries serviced by road haulage and their contributions to GDP in Nigeria.
According to tradingeconomics.com are:
Manufacturing – 1.5 trillion Naira
Construction – 532 billion Naira
Agriculture – 3.96 trillion Naira
Mining – 1.2Trillion Naira
Unfortunately, the haulage industry in Nigeria has not received adequate attention from the government despite its strategic complementary role to economic development and critical economic metrics.
Due to the neglect of the industry by the government, it is important to stress at this event, that haulage expenses feed directly into the distribution costs of manufacturers. Therefore haulage costs directly impact the retail value of consumer goods, and increases in haulage expenses are directly transferred by the manufacturers to consumers via price adjustments. This is reflected in the persistent rise in food inflation in Nigeria to 19.57% % and transportation CPI to 350.4% according to the tradingeconomics.com publication of September 2021.
The Haulage Industry in Nigeria during COVID-19
The advent of COVID-19 in 2020 spurred movement restrictions and lockdowns. The restrictions disrupted supply chains, reduced manufacturers volumes, and tipped the world into a global recession.
While some industries experienced total crises, the haulage industry did not shut down due to the essential nature of haulage services to humanity. You will recall that palliatives and essential commodities needed to reach the vulnerable and haulage facilitated this flow at the peak of the crisis.
On the energy side, the fortunes were mixed. Energy demand and oil prices slumped on the back of Covid-19 to about $19pb and OPEC+ countries had to agree on massive production cuts to stabilize prices. You will recall that crude futures traded at -$37pb during the lockdown.
The misfortunes in the energy market transferred cost advantages through low energy prices to the heavy-duty truck haulage industry. For example, diesel, a major input in the industry sold at about N185.00.
Overall, the industry fared better than a lot of other industries which has triggered discussions and suggestions that it is recession-proof. I am of the view, however, that the level of permeability is relative to the individual company models and their product composition.
For example, industry players whose models centre on alcoholic beverages and construction materials segments suffered a higher level of permeability compared to their industry peers.
The Haulage Industry Post COVID-19
Post COVID-19, the industry has shown signs of recovery, and it is projected to expand at a 4% CAGR by 2024.
The strong cash flows have also enabled industry players to navigate the headwinds posed by the pandemic on debt service and operations. As a fall out the pandemic, industry players must deepen their core competencies, build strategic reserves, diversify their portfolios and focus on risk management to guarantee sustainability. The primary focus for all players now must be sustainability in every aspect of the business, from contracting to sourcing and human resource management.
The industry in Nigeria must also brace up for high energy and input prices stemming from oil prices, inflationary pressures, Naira devaluation, threats associated with insecurity and secessionist activities.
With the permission of this distinguished gathering, I will now delve into the critical issues affecting the haulage industry in Nigeria.
1. Unavailability of Industry Data
Industry data is largely unavailable and conflicting where existing. In an era of big data and artificial intelligence, the haulage industry in Nigeria is still very unscientific despite its increasing level of sophistication and relevance.
Of great concern is the unavailability of industry data from reliable sources such as the National Bureau of Statistics (NBS) and the Central Bank of Nigeria (CBN). The only data available estimates the size of the transport sector at N300billion with aviation, accounting for N190billion. Technically, the other subsectors account for the remaining N110billion.
Although I fault this data, it emanates from one of the most credible data sources, locally. Without reliable data on industry performance, trends and key indices, businesses must learn from experience, which is often a very painful endeavour.
2. Escalating Business Costs
Recently, the industry has witnessed an unprecedented surge in the cost of critical inputs. Practically all operational inputs in the sector are FOREX dependent and as such, Naira devaluation is directly felt by this sector than almost any other sector of the economy. For example, in 2021, the 60% escalation in diesel prices, up from N200 to N320 per litre, translates to about 15%-20% escalation in its share of the revenue. By implication, diesel now accounts for 45% of revenue against an industry standard of 25-30% per cent.
Presently, crude oil trades at $85 per barrel and analysts forecast a further surge in the commodity’s price and by implication, a further escalation of diesel prices locally. Domestically, high energy prices have been buoyed by the gradual exchange rate convergence across markets.
Tyre prices have similarly escalated and with tyres being on the FOREX exclusion list, credit lines are also vanishing. Consequently, suppliers are no longer willing to lock prices for long periods as exchange rates continue to crash.
In addition to the high cost, the required FOREX is largely unavailable. Finding enough FX to fund your imports from whatever market is a serious battle always. This extends order confirmation and fulfilment lead times, causing serious disruptions to supply chains and leading to scarcity of critical stocks. This in turn drives prices higher due to demand exceeding the available stocks.
3. Innovation
The bleak assessment from the analyses of rising business costs, affirms the need for industry collaboration and innovation. The questions before us are:
1. Is the current structure of the industry sustainable?
2. What critical components and elements require re-engineering?
3. What are the industry’s approach and strategy towards re-engineering?
4. What structures will support the re-engineering?
4. Sustainable Funding/Financing
Due to the capital- and labour-intensive nature of the industry, long term funding suitable for truck acquisition and working capital within the industry is unavailable.
The industry relies heavily on commercial banks whose pricing and facility tenures exert liquidity pressure on haulage companies. Depending on the size of the operator, interest rates from these commercial banks range from 18% – 26% while loan tenures are capped at 3 to 5years.
In an interview I granted earlier this year, I envisaged a gradual switch in the industry’s heavy reliance on bank financing to the capital market for sustainability. However, within the alternative debt capital market, transaction fees could range from 2.3% to 4.6%.
The similarity with both markets, however, is an extended processing time which exposes industry players to socio-economic and political vagaries. The monthly operating need for a 100 30tons operation could range from N90million to N100million, while the CAPEX requirement for acquisition could range from N4.5billion to N9.0billion depending on the organization’s sourcing preference.
These are asides significant investments in people, maintenance, and other operating capabilities.
5. Poor Infrastructure
Nigeria with a landmass of 923,769 square kilometres and a population of a 200million, has only 195,000 Kilometres of roads. This is grossly inadequate to support efficiency. Available data suggests that out of the 195,000km of roads, only 60,000km is paved while 25,000 kilometres out of the 60,000 paved kilometres are in a bad state. Also, the rate of repair of the roads is not at par with the annual wear and tear especially during the rainy season
Consequently, the industry is confronted with extended journey times which translates to distribution inefficiency, and a shortfall in revenue projections. The Federal Roads Maintenance Agency (FERMA) has estimated the cost to the Nigerian economy from bad roads and traffic delays at N1.02tn annually.
6. Inconsistent policies and regulations
This is common across all sectors in Nigeria. An example in the transport sector is the reversal of the 2014 National Automotive Policy promoted by the Goodluck Ebele Jonathan administration under the current administration by provisions in the Finance Act 2020.
The National Automotive Design and Development Council (NADDC) announced that automotive manufacturing companies in Nigeria made over N360 billion investments into the country’s economy in the year 2019. This implied that Nigeria’s auto industry could build at least 408,870 vehicles yearly.
However, under the new Finance Bill, the government of Nigeria reduced duties on imported vehicles from 35% to 5% due to the rising cost of transportation. The government also suggested that the action was to enable the country to leverage on the buffers provided by the African Continental Free Trade Area (AfCFTA), with a total market of 1.2 billion people.
Manufacturers have warned, however, that the finance act could signal the extinction of the local manufacturers and their investments. In a recent engagement with our company’s finance partners, we were confronted with the National Courier Regulation 2020.
A detailed review revealed that some of the contents of the regulation were very impracticable and lacked industry input. For example, the regulation’s proposal to pay a 2% annual fee from the turnover of haulage companies, is in bad faith. It demonstrates a lack of market understanding by
its proponents given the thin and shrinking margins within the industry associated with spiralling inflation, rising energy costs, double-digit interest rates, local currency devaluation, paucity of foreign exchange for raw material imports, congested ports, high incidence of touting, and double taxation.
7. Insecurity
Insecurity arising from escalating unemployment, poverty and misery index, terrorist, and separatists’ activities, has rendered certain routes impassable. We are all familiar with current events in the eastern parts of the country. The sit at home order of the Independent People of Biafra (IPOB) has resulted in a 50-100% increase in journey turn-around-time (TAT).
The global terrorism index for the Country has been steadily rising from 6.13 in 2011 to 8.31 in 2020. With the activities of herdsmen, bandits and unknown gunmen remaining unchecked, this index may not improve in the short to medium term.
NOW, LOOKING AHEAD, How can the industry leverage collaborations develop winning strategies?
Verily, I say to this gathering, that collaboration is the key to a sustainable haulage industry in Nigeria.
I define industry collaboration as the practice where companies of similar structures work together for a common purpose to achieve business benefits.
An example of a collaborative industry is the downstream oil and gas sector in Nigeria. Through associations like Independent Petroleum Marketers Associations (IPMAN), Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), National Union of Petroleum and Natural Gas Workers (NUPENG) and so on, the industry has reaped benefits along
1. Standardized prices, products, and processes, made possible by standardized industry templates
2. Competition on quality, capacity, and innovation
3. Reduced cost of production and operation due to the easy replication of proven business models
4. Data Gathering and Processing within this industry
5. Talent attraction, talent engagement, and talent retention
Recently, collaboration, made it possible for The National Union of Petroleum and Natural Gas Workers (NUPENG) through its Petroleum Tanker Drivers (PTD) to threaten strike action to bring the deplorable state of the nation’s highways and other issues to the attention of the federal government.
Subsequently, the NNPC committed to spending N621billion to rehabilitate 16 roads through the Road Infrastructure Tax Credit Scheme in collaboration with the Federal Ministry of Works and Housing, and the Federal Inland Revenue Service (FIRS).
Bringing it home, I will create linkages between the industry’s issues and collaboration as a winning strategy for the industry.
Regarding data paucity, an association of key industry players has become a necessity.
The industry can collaborate to establish an industry statistics bureau charged with the responsibility to mine and process data into robust, factual, and verifiable statistics through its secretariat.
Big data and artificial intelligence (AI) are modern-day sustainability tools and as such data gathering and sharing will create access to verifiable information which will position the industry as structured and forward-looking. Processing the data will:
1. Highlight the attractiveness of the industry
2. Enhance industry perception and credibility
3. Establish industry norms and benchmarks
4. Foster sustainability through accurate planning and forecasting
5. Enhance the valuation of haulage firms because critical valuation parameters like
levered beta, average debt/equity ratio of the industry, will be relatively accurate and reliable. I envisage an EBITDA multiplier of 10X; a levered beta of 1.5; and an industry D/E ratio of 2.5 to 1.
On innovation, an interesting exposé during COVID-19 was that while investments in oil and gas fell steeply, investments in renewable energy soared supported by a rise in green bonds.
Industry collaboration will cause adequate resources to be expended on extensive research into renewable energy as a game-changer regards escalating and uncontrolled business costs.
Already, truck manufacturers such as Mercedes Benz and MAN have made giant strides into the research, design, and development of electric vehicles. One notable breakthrough in the short truck segment is the development of a 400km range battery pack. That is the equivalent distance from Lagos to Delta state on a single charge. I envisage that the replacement of batteries will rank relatively cheaper in comparison to instability in prices of fossil fuels and 3,000 engine parts in the long term. It will also rank consistent with industry environmental goals on carbon and noise level reduction.
The collaboration will also trigger the commitment of joint resources into the evelopment of the critical infrastructure required to power this transformation.
On security, collaboration with regional security outfits like Amotekun, the Nigerian Police Force, and the Nigerian Communication Satellite Limited leveraging the Industrial Internet of Things (IIoT) will enhance security through live video imaging, drone tracking and communication on journey routes. This will also result in operational efficiency and cost optimization arising from improved surveillance.
A model similar to the Rapid Response Squad (RRS) in Lagos funded through the Lagos State Security Trust Fund (LSSTF) through the donations and contributions from Organizations and well-meaning individuals may advance the interest of the industry regarding security.
On poor transport infrastructure, the industry can establish a sinking fund from the pre-tax profits of key players. Contributions into the sinking fund will be utilized pre-commencement of the rains to rehabilitate critical routes in collaboration with the Federal Roads Maintenance Agency (FERMA) and their state versions like the Lagos State Public Works Corporation (LSPWC), the Ogun State Road Maintenance Agency (OGROMA) and so on. Although these rehabilitation works may not be long-term, they will provide succour on those routes by facilitating the free flow of traffic and preserving the industry’s core value proposition of speedy, and efficient distribution of goods.
Subsequently, we will jointly approach the government for tax waivers and other benefits arising from the collaborative repairs. Although, a lot of attention is being given to road reconstruction and rehabilitation countrywide utilizing proceeds from N669billion SUKUK bonds. The industry must take the bull by its horn to collaborate and complement the efforts of the federal and state governments given the burden placed on roads by the haulage industry.
With the advent of Infrastructure Company of Nigeria (InfraCo), Nigeria’s proposed N15trillion infrastructure development company, industry collaboration will present the industry an opportunity to control critical road and transport infrastructure under a public-private partnership.
On financing, permit me to add that the haulage and logistics value chain is expansive. Consequently, the industry is rife for a closed value chain which will facilitate the direct extension of credit amongst industry players. For example, any of the major players can acquire trucks directly from a local manufacturer under a 7year hire purchase or operating lease arrangement. This will minimize the industry’s dependence on banks and unfavourable loan conditions while deepening the capacity of the local truck supplier. This will also reduce industry leverage and default risk. Note that the enhanced trucking and manufacturing capacity will spill over to other inputs and subsequently increase industry working capital and liquidity.
On Manpower development, the collaboration will help to standardize the manpower needs and skillset within the industry. The increasing sophistication of the industry also requires standardized recruitment criteria for drivers and technicians. The antecedents and excesses of drivers and technicians will also be checked through the establishment of a Driver’s Registry. This will borrow a leaf from the Credit Reporting and Management System (CRMS) obtainable in the financial services sector for borrowers.
To achieve this, Information such as BVN and NIN must be mandatory recruitment provisions for drivers and their guarantors as an industry risk mitigant. Collaboration can also enhance our capacity to engage law enforcement agencies to seek redress against erring drivers and technicians. The industry is also ripe for a jointly owned and managed training and skill development centre to improve its human capacity
On inconsistent policies and regulations, the collaboration will cause regulators to consult the industry before enacting regulations. It will also afford the industry a voice and an avenue to partake in the formulation of policies and regulations that affect the industry at large. Through collaboration between truck manufacturers and haulage companies in Nigeria, the industry can derive competitive and comparative advantages from the reversal of the automotive policy leveraging the African Continental Free Trade Agreement.
Intra-Africa trade is currently estimated at 15%. This indicates a very weak intra-regional value chain when compared to Asia, where it is at 80%. With the introduction of the African Continental Free Trade Agreement (AfCFTA), which is the world’s largest free trade zone signed by 54 countries, Nigeria now has free access to the entire African market, which will improve the trade between the neighbouring countries and impact the logistics sector in the future.
Also, industry collaboration with the Joint Tax Board (JTB), touting and the impact of touts and various state revenue collecting agencies will be minimized thereby enabling the industry to standardize and streamline government taxes and levies.
Regarding escalating business costs, aside from the Subsidy Reinvestment and Empowerment Program (SURE-P) under the Goodluck Ebele Jonathan administration, there has been no other direct intervention targeting the haulage industry in Nigeria. I am an advocate of a transport bank to support the sector with tailored financing solutions for transport and transport infrastructure. The transport bank should be capitalized from the N15trn Infrastructure Company of Nigeria seed capital.
The industry should collaborate to advocate for a transport bank that will isolate the industry to accommodate the direct transmission of economic subsidies such as discounted interest rates and exchange rates, as well as forex availability.
Distinguished ladies and gentlemen, in closing, I say to you, that a voiceless and non-collaborating industry will witness the extinction of several big and small industry players within a short time.
Collaboration will therefore serve as a tool for business analysis and decision making to avert chaos or collapse. Most importantly, the collaboration will trigger a reflective price regime and convergence within the industry thereby disrupting exploitation and rent-seeking by buyers. Pricing convergence will, in turn, de-emphasize price wars within the industry and foster competition on quality and innovation
I want to commend the work that the Haulage and Logistics Magazine has been doing for the haulage industry in Nigeria since its inception. The annual HAULAMCE programme is today the best opportunity for key industry stakeholders in the country to come together and interact and I look forward to attending each year. An annual forum like this, however, is not sufficient to push real change and transformation as there is a lot that the industry can achieve together under a common forum and I sincerely hope that at the end of this event, there will be a deliberate call to action towards collaboration by industry players and watchers.
Thank you for your attention.
