The CBN Intervention Fund: The Prospect of Learning Spillovers

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CBN intervention fund: An alternative approach
Efefiom Kofon

When the Governor of the Central Bank of Nigeria, CBN, announced an intervention fund for the expansion of the capacity of indigenous pharmaceutical manufacturers no one questioned why he did not indicate the medicines for expansion. Nevertheless, indigenous pharmaceutical manufacturers praised his quick response in mitigating the impact of the Coronavirus pandemic on the industry’s capability to respond to the imminent medicine shortages. This article explains how the failure of the Central Bank of Nigeria to include feasible production outcomes in specific medicines, as a condition for accessing the intervention fund, may have important implications on both the immediate performance of the intervention fund and capability development of the Nigerian pharmaceutical industry in the long term.

The CBN low-cost intervention fund was in part a reaction to India’s restriction on the export of 26 raw materials, otherwise known as Active Pharmaceutical Ingredients (API), and the finished medicines made from them. This list was however rescinded a month after it took effect, with the exception of paracetamol which was lifted two months later. By restricting the export of these medicines, India had hoped to secure their domestic availability for the treatment of its own COVID-19 cases. 13 of the 26 API’s and their finished formulations were sourced from factories in China’s Hubei province, the epicentre of the coronavirus outbreak.

It was therefore with an eye on this development, in a country that supplies most of Nigeria’s pharmaceutical inputs and finished medicines, that the Governor of the CBN, declared that this had “left Nigeria no choice but to produce the drugs locally”. Again, no one questioned – which drugs? This central question puts into context what I consider to be the most significant challenges facing capability development in Nigeria’s pharmaceutical industry, of which the Central Bank of Nigeria and indigenous manufacturers have ostensibly paid little attention to.

An intervention fund that aims to expand the capacity of indigenous manufacturers should target medicines that are likely to generate the largest learning spillovers. The indiscriminatory allocative rules of the intervention fund suggests perhaps that the CBN has not fully taken into account the technological learning needs of indigenous pharmaceutical firms and the process of learning involved in technological accumulation. Technological learning is here defined as the way in which firms build and complement their knowledge base about technologies, products, processes, and develop the broad skills of its workforce. Without identifying a particular set of capabilities generating advanced medicines and providing learning finance for firms to achieve incremental productivity and quality improvements, the CBN intervention fund will do little to increase indigenous technological capabilities. In the absence of these conditions, even the fundamental monitoring and evaluation of the fund’s performance will be difficult.

There is a widely held assumption that the intervention fund will increase firm level output. The idea that purchasing new machineries/technologies automatically leads to capability development is misleading and ignores the process of technological accumulation. This process involves a continuous, deliberate and intensive effort in undertaking learning. In learning how to learn and how to be receptive to learning. If it were simply a case of acquiring the most advanced technology, without the crucial intensity of effort and time that goes into learning how to operationalise the various aspects of the technology – adapt it to local conditions, train staff on the new technology, experiment with various routines and suppliers of inputs, and build the organisational capabilities to coordinate these processes, then indigenous firms would have achieved global competitiveness in at least some simple generic medicines. The actual outcome is different, and as we see demands time and effort in technological learning.

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Even with domestic market protection in certain simple medicines, low tariffs on inputs, and a highly discouraging registration fee for imported finished medicines, indigenous firms have not been able to build the basic operational capabilities needed to compete internationally in simple medicines. For instance, while the import prohibition policy provided indigenous pharmaceutical firms with extensive domestic market production in 17 simple and matured medicines, it did not target learning support for them to deepen their capabilities base. The consequence of this on the industry is a seemingly perpetual protection policy that since 2005 has provided little incentives for indigenous technological search effort and virtually no compulsions for firms to accumulate technological capabilities and advance beyond these simple protected medicines.

 

The pattern of indigenous technological advancement largely reflects the effectiveness with which indigenous pharmaceutical manufacturers have undertaken learning. In most developing countries, firms that succeeded in climbing the technology ladder and reaching the production efficiency frontier followed similar learning trajectories, through a deliberate and conscious process of learning from international best practices and then cumulatively improving on the technologies it acquired. In the Nigerian pharmaceutical industry, opportunities for learning are very few and far between – in part a consequence of market restrictions on certain medicines – in part because indigenous manufacturers can also import finished medicines that they might have had some capacity to manufacture locally. The technology that flows into the country is low, demonstrated in the contract manufacturing of simple mature medicines for a few pharmaceutical multinationals. The acquisition of advanced technologies by some firms, however, has made little impact because firms have not mastered how to build their organisational capabilities to operate them efficiently.

The difficulty of technological accumulation is that indigenous firms need to first obtain some initial capabilities in using simple technologies, and then continuously seek knowledge and opportunities to acquire more knowledge. Firms have to then apply that knowledge in technological activities that further expand their knowledge and capacity to generate and manage changes in the technologies used in production. This process is cumulative and path dependent and to an extent depends on both policymakers and indigenous manufacturers. For policymakers, this requires creating an institutional framework that increases opportunities for learning and incentivises firms to invest in their learning capabilities, while also ensuring that firms put in a high degree of effort in the learning process. For indigenous manufacturers, whom for the most part have focused on learning how to survive rather than learning how to be competitive, this demands that they find ways to improve efficiency in converting inputs into outputs – putting it simply, how to be better at things.

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Given that inputs do not transform themselves into outputs, indigenous firms have to invest in human capital and its stock of knowledge – technological and organisational. This, however, possess the most significant obstacle to the accumulation of knowledge in Nigeria’s pharmaceutical industry, and is a point that has to be emphasised. To explain this, I provide a brief illustration.

A businessman decides to expand his production line to include an advanced medicine that is new to the market. He faces various challenges, rampant in most developing countries. The businessman may find it difficult to secure a commercial bank loan because the banks do not have enough information on him to make a firm decision especially as he is venturing into a new market. He is also apprehensive of investing in the costly, unpredictable and relatively risky process of training staff on how to use the new machineries and organising production with new inputs. This is because there is a strong possibility that he may not be able capture the full benefits of his investments. Other competing firms may approach his staff after they have been trained or erode his market share by beginning to manufacture similar medicine on noticing that he is making some profit. An intervention fund can address this by providing learning rents for firms as they go through the learning period. In the eventuality that certain staff migrate to other firms after the costly training, there is an increased likelihood that the spillover of the workforce will be beneficial to the industry, and the initial firms would have been compensated by the learning finance from the intervention fund.

The challenge for policy makers is to identify and support new technologies/medicines that could likely generate the largest learning spillovers across the industry, and some competitiveness in advanced and high value medicines. The design of such a policy has to consider the initial capabilities of firms, and the constraints they face in technological accumulation. The wider the gap between the initial capabilities of indigenous firms and global best practice firms in the same market, the more time and effort will be required to close the gap. For instance, an intervention fund that incentivises firms to go into the production of certain advanced medicines will most certainly result in unlikely outcomes, given that the skills base and organisational arrangements required for a new technology has to be acquired through a process of leaning by doing, experimenting, adapting and improving it to fit local conditions. This is also applicable to firms that are simply expanding capacity in producing the same medicine, given that the learning mechanisms are the same – an expansion would perhaps require more advance machineries which staff will have to be trained and managerial skills altered to reorganise production.

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It is both beneficial and desirable for indigenous firms to competitively produce certain advanced medicines. Advanced medicines have a higher selling power and, to an extent allow a higher profit to mark up and high wages. Simple and matured medicines, on the other hand, and especially some of the medicines provided with domestic market protection in Nigeria, are increasingly becoming obsolete, because of an improvement in hygiene conditions and the availability of more complex medicines. Given that most simple medicines are entry points for countries or firms that attempt to break into global production, the market is saturated and offer little room for accumulating advanced technology.

Conclusion

A country or firm is what it produces, and this reflects the depth of its capabilities base. In this respect, the Nigerian pharmaceutical industry can perhaps be best described as the Paracetamol industry. In considering the medicines that India restricted from export, for instance, Paracetamol, made up 60% of indigenous production activities with virtually no indigenous manufacturing activity in the more advanced medicines like Ornidazole, Progesterone, and Acyclovir. The movement from paracetamol to, say, Ornidazole, is uncertain and very risky. It requires technological and organisational capabilities that are uniquely different. The cost of technology transfer will be much higher, and the time and effort involved in learning more intense. This is largely because of the low level of indigenous technological capabilities. The appropriate intervention design has to take this into consideration.

However, while indigenous firms may or may not become competitive in the manufacturing of Ornidazole, they would likely have been a great deal of learning and an increase in learning capabilities. Firms and individuals in learning interactions with each other and foreign technical partners would have acquired new skills on how to organise investment plans in identifying and obtaining new technologies or a combination of technologies, and how to adapt it to suit local conditions. They also would have developed some experience on how to improve machineries, conduct preventive maintenance, troubleshooting, repairing equipment, quality control, design of the plant layout in ways that increase efficiency, and the overall organisational capability necessary to put this all together.

The learning spillovers generated here will certainly have an effect on the technological and organisational capabilities of indigenous firms, which in turn may increase its competitiveness in some other advanced medicines or even simple medicines. Such fortuitous spillovers are possible but takes time and most importantly effort on both the CBN and firms. It is important that the intervention is selective, granting support only to firms that have demonstrated some learning potential, productivity efficiency and quality improvements in production. However, and most crucial, is that the support is withdrawn if indigenous firms, after a period, are still very far from any production efficiency frontier.

 

 

 

 

2 COMMENTS

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