CBN intervention fund: An alternative approach

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CBN intervention fund:  An alternative approach
Efefiom Kofon

The Nigerian pharmaceutical industry consists of the manufacturing and importation of finished medicines. Pharmaceutical manufacturing in Nigeria largely involves simple preparations of non-complex and high-volume essential medicines and is mainly carried out by indigenous manufacturers, with some production by Indian pharmaceutical firms.

Indigenous and foreign pharmaceutical manufacturers, as well as import trading organisations are involved in the importation of finished medicines.  There are over 120 pharmaceutical firms in Nigeria. The degree to which many of these firms are involved in manufacturing is not certain, given that the industry is constrained by infrastructural deficits, high costs of finance, obsolete technology, and competition from cheaper imported medicines.

Data on the medicines imported and manufactured by indigenous manufacturers is opaque, and this is because of the unique nature of global pharmaceutical manufacturing, where the packaging of finished medicines is also considered as an aspect of manufacturing. Only a few pharmaceutical firms have been able to maintain some significant presence.

 

Financial intervention

On 25 March 2020, the Central Bank of Nigeria (CBN) introduced a NGN100 billion credit support intervention for indigenous pharmaceutical manufacturers and healthcare operators to build or expand their capacity. This was largely a preemptive response to the impending drug shortages occasioned by the Coronavirus pandemic.

However, two immediate questions arise here: (a) Expansion of capacity to produce what? (b) Is the fund exclusively for the manufacturing of finished medicines, or could it also be used to import finished medicines?

Without the CBN policy identifying specific medicines and associating conditions for access to the low-cost funds to specific production outcomes, the monitoring and evaluation of the beneficiaries become difficult – given that indigenous manufacturers are also involved in importation. For instance, in response to the Coronavirus pandemic, the Indian government initiated a $1.8billion fund for the establishment of three manufacturing hubs to produce APIs for 53 identified essential medicines.

The constraints to capability development in the pharmaceutical industry are well known. However, a specific policy cannot address all these constraints to capability development in the industry. This is because specific constraints require specific policy instruments to address them. For instance, high cost of finance requires a policy instrument such as low-cost finance; and addressing competition from cheap imported medicines may require a policy response that either imposes high tariffs on certain medicines or the banning of certain medicines from importation.

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High interest rates on commercial bank loans and competition from cheaper imported medicines significantly impacts on the capability development and the competitiveness of pharmaceutical firms. However, previous low-cost finance provided by the CBN to pharmaceutical firms largely failed to expand the capacity of firms.

The import prohibition policy of 2005, which effectually banned the importation of medicines that local manufacturers were deemed to have sufficient capacity to produce to meet local demands, resulted in diverging outcomes. While it ostensibly led to the success of a few firms in particular medicines, the industry has not been able to move on from the older and the increasingly obsolete medicines to more complex formulations.

The absence of good road network and an erratic power supply considerably impacts the production capacity and, in turn, the competitiveness of firms. However, this does not explain why the industry remains concentrated in the low end of pharmaceutical products. The argument on infrastructural deficits as an obstacle to capacity development in Nigeria’s pharmaceutical industry does not explain why firms still produce older versions of certain medicines and have not been able to produce technologically advanced versions.

 

Core Issues

As a starting point, the CBN intervention fund has to identify and prioritise the most important underlying constraints to pharmaceutical firms expanding their capacity.

The most important constraints to capability development in the pharmaceutical industry are those affecting the process of learning how to use new technologies. Learning is defined here as the process of learning by doing, required for building the relevant organisational capabilities so that economic organisations can become competitive in using newly acquired technologies.

A puzzle in the pharmaceutical industry is that if firms can buy new technology and employ people to operate it, then why are manufacturers not competitive and producing high quality medicine? This is because firms do not possess the organisational capabilities that might lead to an increase in their technological capabilities.

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Organisational capabilities describe how firms organise production competitively. It is the knowledge that a large number of individuals have about how to effectively cooperate and coordinate with each other within an organisation, and in ways that can achieve competitiveness. To put it simply, it is the ability of managers and workers to use machines and technology properly.

This know-how type of knowledge or skill differs from formal skills acquired through education. Otherwise referred to as tacit knowledge, this is acquired through practical demonstration and participation in activities such as apprenticeships, technical and vocational training programmes, or on-the-job training. It requires that, at the minimum, given the firm’s technologies of production, organisational structure and the characteristics of other individuals in the firm, all the members of the firms know their part of the organisational routines to enable the firm to operate optimally.

The CBN should first identify the existing level of technological and organisational capabilities of firms – their ability to adapt and adopt new technology, and the particular challenges faced by firms in adopting new technology to local context. This should also include the constraints of managers and workers to effectively coordinate and cooperate with each other and within the firm, incentive structure, and the existing collective learning process of firms to transmit tacit knowledge.

Identifying the collective knowledge within a firm would help in the design of conditions that compels firms to put in high levels of effort in the learning process to rapidly achieve competitiveness. For instance, the CBN could require that firms specifically use the funds for overseas training of staff with credible foreign firms in particular technologies used in particular medicines.

 

Deeper reality

The NGN100 billion intervention fund is perhaps insignificant, when measured against the myriad of obstacles faced by pharmaceutical firms. The fund could specifically target a few firms, based on their existing capabilities in the identified medicines.

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For indigenous pharmaceutical manufacturers, the selection of certain pharmaceutical firms by the CBN might be difficult to accept for an industry that has for over 20 years continued to receive domestic market protection for certain medicines, even when the policy is now largely unproductive and has failed to incentivise firms to move up the value chain to more complex medicines. This would be a test of the organisational power and capability of the Pharmaceutical Manufacturers Group of the Manufacturers Association of Nigeria (PMG-MAN) to compel its members to see that an increase in the technological and organisational capabilities of a few firms in using new technologies efficiently would ultimately spill over to other pharmaceutical firms, and in turn, have an impact on the competitiveness of the industry.

Without a deliberate policy that incentivises and compels firms to devote a high level of effort in learning how to use new technology, even when infrastructural constraints have been addressed, firms would still find that they can only break into the intensely competitive and saturated lowest end of the quality chain.

For the CBN, a policy that supports learning could be easily implemented in the short term, compared to trying to build a good road network or fixing the issue of power supply. Identifying specific medicines for expansion and linking it to specified production outcomes is essential, as long as it is not Paracetamol, cough and cold medicines, or blood tonics –  medicines produced by every indigenous pharmaceutical manufacturer. Anti-malarial medicines may be a good place to start.

Efefiom Kofon is a doctoral Candidate at the Centre for International Studies and Diplomacy (CISD). School of Oriental and African Studies (SOAS), University of London. Email: 666765@soas.ac.uk

 

 

 

 

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