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Impact of low oil prices in Nigeria

This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.

Diversifying the economy has always been on the Nigerian governments agenda. With the falling of oil prices and decreased inflow of oil revenues, the need to do so is arriving with a great urgency.

The fall of oil prices has only had an impact on the government revenues. Oil and gas sector was never a major job creator for the economy and the capital generated didn’t stay in the country. The revenues the government generated were not invested in infrastructure but rather consumed. This has had an impact on the industries that are dependent on domestic demand, such as retail and telecoms, but there are no other major challenges to the economy due to the falling oil prices.

Uncertainties with the Naira and oil prices have not changed the investment appetite for Nigeria, it’s changed the activity in investments and approaches to investments. Some investors are taking a “wait and see” stance, while others are exploring other aspects of the economy. There has always been interest in mining and agriculture, but there were plenty of opportunities in oil, so no real considerations were made. Low oil prices have made investors consider these sectors more seriously.

Long term prospects of unconventional sources of oil suggest that prices will likely remain low. Many people view this positive for the country in the long term, there has been a sense of oil being a curse for the country. With the discovery of oil in 1960’s, many of the strong sectors of the economy vanished. Nigeria was once supplying 27% of worlds sun flower oil demand, it was the leading country in sun flower oil exports.

Every poor country in the world that has discovered oil saw an incredible rise in corruption. Every dollar invested in infrastructure has proven to return itself multiple times, yet African countries haven’t been doing that since they were able to simply live off of the oil revenues.

Some African nations are oil importers, such as Ethiopia. With high oil prices, billions of dollars were flowing out of the country. Now this money is staying in the county and is being spend on the country. This puts even more urgency for Nigeria to develop alternative revenues and invest them in the country, to keep up with other African nations in development. The country might, otherwise, see future FDI flow to these oil importing countries that now have the chance to grow their sectors and industries with the money they’re saving on oil.

Low oil prices are of short term benefit to the manufacturing industry – most electricity generators in Nigeria run on diesel. Getting used to cheap diesel to run factories on, is a threat in case the oil prices go back up however, adding risks to investments in the manufacturing sector.

For the natural resources investors, there are over 40 different minerals that can be found in Nigeria, with a number of them potentially commercially viable for extraction.

The future of Nigeria is not in oil, it’s in services, infrastructure and industrialization.

Devaluation

Devaluation remains one of the biggest investor concerns. Naira has seen a lot of fluctuations in 2014 and early 2015. In November 2014 Naira was officially devaluated from 150-160 Naira per USD, to 160-176 Naira per USD.

Naira kept falling versus the dollar throughout 2014. The Central Bank of Nigeria had to spend some of its reserves in early 2015 to protect Naira from a continued fall.

It has now been stable for the last 6 months at around 199 Naira per $1.

Nigeria has one of the strongest currencies of the oil exporting nations.

Buhari has made public statements on international news channels, stating that he doesn’t think it’s healthy for Nigerians if Naira is devaluated and that he won’t let Naira go.

There have been foreign currency trade restrictions in the exchanges, this has been felt by many businesses that use foreign currency to conduct business. For example, some firms are unable to source the dollars they need to pay foreigner suppliers. The logistics industry, combined with other issues the country is facing, such as Boko Haram, is seeing Naira devaluation reflected in their bottom lines, as they need to operate in multiple currencies.

A lot of economists are continuously arguing that Naira should be devaluated as this will increase domestic production. This would also go in hand with other policies the government is implementing, such as high tariffs and import bans, as well as the general perception of the domestic manufacturing and consumption potential. There has, however, historically been a bias towards strong African currencies by the central banks, to keep the currencies up, not to face inflation and civil unrests.

Some have argued that there is no need for devaluation, but rather a stabilization of Naira against major currencies.

Any risk analysis done by investors shall account where Naira will fall out.

Domestic companies are advised to borrow in local currencies.

Conclusions

The short term economic difficulties, such as falling Naira and outflows of foreigner capital, are providing discounted deals in underdeveloped industries and sectors of the economy. Some of these industries are far away from any infrastructure peaks, providing great growth and return potentials for investors. The young, upwardly mobile consumer base is proving the big returns Nigerian industries are seeing to be sustainable for long term returns and growth.

The low oil prices have made a shift from oil based economy to a diversified economy. This has shifted focus to underdeveloped industries within the Nigerian economy full of opportunities. Some industries that are just now starting in Nigeria, such as mobile advertising, real estate and technology are bond by the macro threats the economy is facing to a limited extend, decreasing the associated risks with Nigeria while returning the expected frontier market returns.

 

Nigeria’s import tariffs

This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.

Nigeria imports most of the foods it could be producing domestically. The success of the domestic cement industry is considered a result of non-issuing cement import licenses, resulting in the country wishing to extend the cement industries success to other sectors. The most talked about import tariff is the rice tariff. Nigeria is one of the world’s biggest rice importers. Most of the rice come from Thailand where it can be produced two times cheaper than in Nigeria and the Thai rice is considered better tasting than Nigerian rice.

Tariffs have proven to be very successful with the automobiles industry, where a 70% import tariff was introduced for companies without assembly plants in the country. Companies with assembly plants had a zero duty on imported Completely Knocked Down (CKD) vehicles. This resulted in the car manufacturers opening their assemblies locally.

There is the obvious macro-economic question of protectionism versus free trade, that the Nigerian government might be forced to officially address soon, due to Nigeria’s involvement in Economic Community of West African States (ECOWAS).

ECOWAS has been discussing a deal with the EU for liberalisation of 75% of goods and service over the next 20 years, while the EU would provide a duty-free access and €6.5bn in development programmes between 2015 and 2019 to support capacity development. Nigerian government however has raised concerns about this deal jeopardizing efforts at industrialization and protection of local industries. Other peer ECOWAS countries have given support for these concerns.

Potential for big, international trade duty free deals make some industries volatile, especially considering the political uncertainty. If an ideological party supporting free-trade was to evolve, one election could evolve multiple industries dependent on the high import tariff policies.

Nigeria remains the biggest tariff imposer between the ECOWAS countries. Nigeria has flat out bans on 24 product categories.

ECOWAS is agreeing on a common external tariffs for product groups for all of the countries in the bloc. ECOWAS inner trading is quite low, around 10% of the total trading the bloc sees. This indicates that the bloc is to function as an international bloc than anything else. There have also been talks about a common currency.

The international stance and plans of ECOWAS, is taking away some of the control Nigeria needs to develop its domestic industries based on the protectionism policies. It could be argued that the investment opportunities based on these tariffs, such as rice mills, have even more added risks than the regular investment opportunities in Nigeria.

The tariffs have made the multi nationals that manufacture locally to look for sourcing locally, as they can potentially face big import tariffs for their inputs. Their main concern is if they can achieve the same level of product quality by sourcing locally.

Nigeria also has to tackle some of the issues associated with introduction of high import tariffs, such as increased smuggling, increased informal market activity, expected relations with the importing countries, economic difficulties for import driven companies and there is also the risk of inefficient development of the domestic industries, as witnessed in the Kenya’s sugar industry.

The short term success of these tariffs will be dependent on how successful the government is with governing its borders and effectively tackling smuggling.

Nigeria’s economy by numbers and the elements

This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.

Economy by numbers

Area – 923,768 km2
Coastline – 853 km
Agricultural land – 78%
Arable land – 37.3%

Population – 181,562,056
Population growth rate – 2.45%
Urban – 47.8%
Urbanization rate – 4.66%
Labour force – 54,970,000
Unemployment rate – 23.9%
Population below poverty line – 70%

GDP (nominal) – $573,652 billion
Rebasing exercise – GDP increase by 89% in April 2014
GDP per capita – $6,000
$1 – NGN199.35

Debt – $22.01 billion
October 2015.

Source: The CIA World Factbook

Informal sector

Research has been conducted that indicates that Nigeria might have one of the world biggest informal economies yet to be accounted for in the GDP.

The informal sector is the biggest job creator in Nigeria and Africa generally, with 80% of the labour force in Sub-Saharan Africa being employed by the informal sector and contributing around 55% of the GDP. Informal sector jobs are attractive to the young and women.

The informal sector is considered a growth opportunity for the Nigerian economy, as it can be formalized to gain taxes and be better accounted for in terms of the GDP growth. Formalizing the informal sector also increases available domestic capital, due to 7% contribution to the pension fund.

Decreases in informal market activity are linked to decreases in poverty.

Poverty and unemployment

Poverty levels (people living on 1.25$ and under a day) have increased over the last decade to 70% of the Nigerian population in 2015.

The average 7% a year economy growth of 2001-2010, has been captured by the top 5%-10% of the country, not particularly the masses, they’re left behind.

There is 23.9% unemployment rate and 1.8 million youths enter the labour force every year. The sectors that creates jobs, such as agriculture, education, public and social administration are growing slowly, not at the pace of demand for jobs.

There are plans and programmes by the government to create 17 million jobs by 2020 by increasing supply-chain linkages between SMEs and large firms.

The youth unemployment rate is at 56%, this is resulting in social unrests led by the 16 to 24 age group.

Population

Nigeria has the biggest population in Africa and the 7th in the world at 181.5 million citizens. 62.5% of the population is under the age of 25 and the median age is 18.2.

47.8% of the population live in urban areas, it’s projected that this will increase to 65% by 2020. An urbanization rate of 4.66% is considered to be one of the GDP growth drivers.

The middle class consists of 23% of Nigerians, there are 8 million households in Nigeria earning over $7,500 a year.

Taxes

The tax revenues are 4% of Nigeria’s GDP, this is lower than most peer African economies. The government lacks income streams, most businesses taxed are the big corporates focused on exports. Personal income tax is considered irrelevant to the average Nigerian.

Government officials have made public statements, estimating that 75% of registered businesses do not pay taxes and that taxes won’t be increased but rather the collection of taxes will be improved. The government is looking to increase Government Revenue Generation by using e-payment system services.

Formalizing the informal market is considered an alternative to increasing taxes. It remains to be seen if this can be done successfully, since only a small portion of the population has a bank account – everything is in cash in Nigeria and Africa generally.

If the country is able to tackle corruption, it might be able to spend its budget more efficiently.

Privatization

The country has seen a lot of privatization happen in the power sector – selling successor generation and distribution companies to private investors, while retaining state control of grid transmission. This has been done to finance capacity of the power generators, as there is huge demand and not enough funds for the government to finance it.

The major motivation for privatization in Nigeria is to limit government’s intervention in the management of the economy. This has been seen in a lot of the infrastructure sectors. In railroads a new railway bill has passed through the senate to remove the monopoly privileges of state owned Nigerian Railway Corporation.

Privatization across Africa is one of the biggest opportunities for investors.

Drivers of Nigeria’s economy

This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.

Economic growth drivers

The economic growth is driven by the services sector of the economy as well as rapid urbanization. Nigerian people have a very entrepreneurial spirit – 38% of the middle class that work in the private sector run their own business. The government is promoting entrepreneurship and information is increasingly becoming available.

There are initiatives by the government to increase domestic production, such as one-digit interest rates offered by the Bank of Industry, as opposed to two digit interest rates offered by the commercial banks.

Historically, Nigeria has never had as much educated people as it has now. There are also more financial sources to tap into, there’s plenty of room with debt being only around 22% of the GDP.

Lagos state has successfully introduced efficient tax collection, the internal revenues are now bigger than the federal allocation. This is money that can be invested in the state and it also helps the state with issuing state bonds. The Lagos taxation model can be copied and applied in other states, bringing economic growth in other states of the nation.

Across the industries, there have been Private Public Partnerships that have resulted in new foreigner capital flowing in the nation. This model has proven to be successful, attracting capital and creating local jobs and economic growth.

There is an urgency to diversify the economy – it’s is imposed by the low oil prices and efforts are made to diversify away from oil. Diversification will continue the economic growth the country has seen over the last decade.

Nigeria is still dependent on foreigner aid and assistance as a driver of economic activity, however, the age of aid is ending and the only aid left is aid for business.

Growth limiting factors

It’s very common for developing nations to grow until they run out of the infrastructure to carry on their growth. This usually leads to economic growth stagnation. Lack of infrastructure is one of the main drivers for increasing food imports and as Aliko Dangote puts it – “If we import, we import poverty and export jobs”.

It’s not just that the infrastructure is needed to be build, it’s also necessary to maintain and increase capacity of the existing and to be built infrastructure. This remains a concern for the future of the economy and it remains to be seen if Nigeria can develop a maintenance culture.

There is an increasing wealth gap between the South and the North, the inequality in the country is increasing. The main causes are structural imbalances, education gaps, poor infrastructure, corruption and political instability. Overdependence on the oil sector is one of the main roots of these problems.

It’s not just that the country has to diversify its economy and attract foreigner direct investment, it also has to find a way to transform these dividends into education and health care – things that will decrease the inequality of the country.

Another major problem the Nigerian economy is facing is financing the sectors of the economy. The domestic investors, such as pension funds and banks, find it hard to beat the two digit interest rates the federal government bonds offer, in the developing and capital demanding sectors of the economy.

Increased US interest rates remains a concern for the Nigerian economy. Simple announcements of increases in 2013 saw an outflow of capital across the developing economies, including Africa. This is not so much the case with Nigeria and Africa however, as it is with other continents. It does remain a concern though – when the investment appetite driving factors, such as low interest rates in the developed countries and high oil prices, disappear, so do the foreigner investment inflows.

The country is adding back to its reserves after spending in 2014 and early 2015. It’s important that the nation keeps its reserves, otherwise it’s more vulnerable to financial crises and might not be able to protect the Naira when the time comes.

Transportation sector in Nigeria

This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.

Nigeria’s government is facing a lot of pressing matters in its economy, there is a need to free-up resources. This has led to privatization of the transportation assets. These assets are expensive to maintain, the Federal Ministry of Transportation has estimated the costs at N500bn ($2.5bn at the current rate) annually to reconstruct or build the road network to international standards. Investors can make returns by tolling the roads as there is a demand for well-maintained roads, considering the domestic logistics industry.

The roads and road networks face multiple challenges however, as there are 36+1 states, with each state entitled to their own transportation ministry and policies. There have also been records of disputes between state and federal governments on who owns a specific road.

There is a pressing need to link up the regions of the country by roads. Most of the agricultural production happens in the North. Around half of the tomato produce spoils before it gets delivered to the markets and the roads have unpredictable delivery times. This has led to increased importation levels for many products that can be domestically produced. There is a lot of talk from the government for regional connectivity, but not much has been done and there are no main directions agreed upon.

Each transportation type has a different governing body and different regulations and agendas. This is leading to un-even developments of the different types of transportation, such as roads, rails, ports and others. The effect of such an un-even development is well seen in ports, where the gate volumes have increased, but the roads outside of the ports have not, resulting in a never ending traffic jam.

The government is looking to put everything under one body, but this plan is just in the development. There are also agencies whose sole purpose is to remove government from being involved in the given sector in any way. There is a strong understanding in the governing bodies of Nigeria that the way forward with infrastructure is with Public Private Partnerships.

Roads

Nigeria’s roads measure at 200,000km – the largest in West Africa and it’s a burden to maintain. There is pressure by the growing population to develop and build new roads.

Types of roads:

Federal – 17.6% of the roads, estimated asset value – $15bn*;
State – 15.7% of the roads, estimated asset value – $8.7bn*;
Local and rural – 66.7% of the roads, estimated asset value – $7.5bn*.

* – the figures are estimates, as they might not reflect the Naira fluctuations in 2014 and 2015

The federal roads carries 70% of cargo volumes and 90% of the socio-economic activities of the nation. The railways are not maintained well, the volume of cargo on the railway is decreasing yearly, resulting in more trucks on the roads, as roads are the alterative to railways.

There is a Federal Roads Maintenance Agency (FERMA), it was established in November 30, 2002. The agency started operation in 2003, the mandate of the agency is to ensure efficient and effective maintenance of all federal trunk roads nation-wide.

For investors in road projects, it’s important to recognize and understand the disputes between state and federal government’s on road ownership, the different legislative bodies and all the different state transportation ministries. Recognising the common transit destinations and analysing them based on the overlaps will indicate great opportunities for investments in roads for tolling.

Railways

The colonial powers relayed on railways to transport goods between their European bases and the African colonies. This resulted in long, multi-national railways. Nigeria hasn’t done anything with its rail system since independence in 1960. The lack of maintenance has led to decreased activity of the railways. In the 1960’s 11 million passengers were carried yearly, this figure had decreased to 2 million in 2008. The same period has seen a decrease of 3 million tonnes to 150,000 in the cargo volumes.

There is a Nigerian Railway Corporation, founded in 1995. It invested $10bn in the rails between 2007 and 2013. A railway bill has passed through the senate to remove the NRC from running the rails, as it has a monopoly. The bill suggests NRC as a technical regulator and for the existing assets to be sold. The bill is on hold due to delays in converting it to law. The bill is also considered highly generic, it might not be implemented any time soon. The instability with this bill will likely result in short term stagnation of the railway development.

There is a 25 year rail system masterplan, with the goal to establish a high-speed railway system. The master plan will find a lot of challenges, due to the nature of railway development – the rolling stock and gauge often needs to be ordered years in advance. With the instability the country is perceived to have, it might be challenging to find suppliers.

With increasing urbanization rates, the demand for short distance transit lines is increasing. Such lines have a predictable and stable commuter bases and fall under one state, providing a safe investment opportunity.

Ports and rivers

There is competition between West African nations to establish a regional leader in port capacity, this is driving the development plans for ports – there are 7 new proposed port plans at the construction stage.

The development of bigger ports is viewed as good for the logistics industry – costs can be saved due to fuel economies of the bigger ships. The savings can go toward expenses of private road tolls, encouraging new roads to be built around the port to service the freight leaving the ports. The ports are also important for positive logistics industry evolutions on other aspects – at the moment, many of the shipments to the country are made inland through the neighbours.

Overall, in the last decade there have been a lot improvement with the ports. Yard management has improved greatly due to better use of physical space. There are issues with congestion on the roads around ports.

There are great developments with free zones. Nigeria has 11 operating free zones, 9 under construction and 4 declared. 16 out of the total 25 free zones are either privately owned or a PPP deal.

Thanks to the River Niger and other rivers, there is potential for inland river transfers. River transfers have limited capacity, but they are considered to ease the burden on land networks. River transfers are fast and cost-effective solutions, they’re less capital intensive than traditional infrastructure.

There are great opportunities in ferries for urban transfers. Ferry transportation is a part of Lagos transportation masterplan. Ferries are recognized as a great way to transfer commuters from the islands to mainland.

Conclusions

The Nigerian transportation terrain is complicated, with many government agencies, overlapping state and government interests, bills and upcoming regulations. The PPP’s provide many opportunities for firms and investors in the transportation infrastructure.

The market is full of opportunities, from small distribution companies developing warehouse networks for bridging the infrastructure deficits, to free zone port project worth hundreds of millions.

Nigeria’s infrastructure and energy

This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.

Nigeria should have a world class infrastructure considering how much oil revenues it has had. This is not the case however, Nigeria has the lowest energy per capita production of any of the frontier markets. The roads are facing maintenance problems, railways see very little commercial volume due to their bad condition and the electricity shortages have become a part of daily life.

With the income of oil, there never was any real initiative to address these issues with an urgency. The urgency is now coming, there is a national infrastructure master plan that has private investment as one of the keys for addressing the infrastructure problems the country faces. There is no doubt there will be a huge opportunity for foreigner investors in the infrastructure sector. There is a lot of talk about how one of the opportunities in the capital debt markets will be the infrastructure bonds and if this is to be the case, the infrastructure investments might even see some levels of liquidity.

With increasing population and increased usage volumes for the infrastructure, the maintenance fees are increasing yearly. It’s also common to work at increasing the capacity of the infrastructure, as well to adjust to technical growth. Some of the inflation the country sees is due to the infrastructure expenses, as there are no real incomes apart from oil, taxing the big companies and in some instances the import tariffs, resorting to printing out more money to address the infrastructure costs. These expenses are a burden to the government, creating an urgency to advance with the infrastructure plans.

Nigeria is expected to grow from spending $23bn on infrastructure in 2013 to $77bn in 2025 according to a PwC report. These are high cost and long term investments that are essential to the economic development of Nigeria. Many industries depend on infrastructure development – there is a lot of late stage manufacturing potential in Nigeria as well as agriculture potential, but it cannot be fulfilled at the moment due to the low levels of infrastructure. Infrastructure development is also considered a job creating exercise by the federal government.

Most of the domestic capital consists of pension funds and banks, they are invested in the two digit percent inflation beating federal bonds and it’s generally assumed that there is not enough domestic capital to finance the infrastructure, so the outlook is abroad. The capital that is required simply cannot be raised domestically.

One of the biggest obstacles that the country face is creating a maintenance culture. An Asset Management Policy type of government initiative would ensure international standards of maintenance, resulting in minimized life-cycle costs and reduce the replacement costs, ensuring the best returns on infrastructure investments. An increased awareness of maintenance culture could also increase the returns from the current infrastructure investments. Infrastructure investors should be following and evaluating the progress with maintenance programmes.

The successful implementation of any infrastructure development plans are highly dependent on low corruption levels in these projects. Projects that have World Bank’s or other major organizations association will see less corruption, due to the overseeing of the organization. Big investors have a tendency to put their own teams on ground to determinate the level of support required and inspect the existing assets. This was the case with the Chinese government’s investments in some road projects.

Apart from financing the infrastructure development, there is another side to the infrastructure projects – the actual building, project managing and sourcing for these projects. There are enormous opportunities in investing at the companies that will be doing or delivering materials for these projects. The domestic cement industry will see increased demands and it’s perceived that there will be a complete change in the gas sectors value chain due to the enormous demand electricity plants will require.

Energy

Nigeria has the lowest energy per capita production rate of any of the frontier markets. The economic growth and the achievement of Nigeria’s economic potential depends on successfully tackling the power issues the country faces.

The power sector is compared to the early telecoms sector, where the early investors made a lot of money and then the industry saturated leaving no space for new entrants. With energy, the supply is so bellow the demand and the demand is growing so quick, that the power sector could see itself growing way longer than the telecoms industry did.

The power sector could be the biggest opportunity in Nigeria for the long term investors – there is little competition, the returns will be huge and the industry won’t mature for a long time. Everything needs power to run – offices, factories and stores. The power shortages are felt by the vast majority of Nigerian citizens – it is one of the top priorities for the government. Internationally -world organizations such as World Bank and other governments recognize the need for energy in Nigeria and are willing to help.

Nigeria currently produces around 4,000 MW of electricity and the expected demand at 2020 is at 88,000 MW. It’s expected that the energy will be at the 30,000 MW level by 2020. If it’s to be achieved, the natural gas levels used by the plants will increase 8 times of the current levels. This is expected to have considerable effects across the entire gas-to-power value chain. The regulatory framework will have to face changes, same as the operating environment for both sectors. The two industries will need to become coordinated to some extent.

The opportunities from energy are, therefore, transferred also to the natural gas sector. The country will need to straighten and expand its gas infrastructure. The logistics industry will also see increased demands – special machinery from abroad will need to be delivered at the Nigerian plants. The natural gas itself will need shipping as well, creating good opportunities for domestic firms.

The energy sector is most likely to be financed by debt and bonds, creating space for investors across the spectrum.

The low oil prices are helping the country with its electricity issues – generators can now run on cheaper diesel. There is a level of instability with this, as when the oil prices go up, the business costs will also go up.

The energy sector of the country was developed before, it didn’t see much success due to corruption and bad management. The Buhari administration has been able to increase the power production. There has been vandalism on the gas pipelines that has now been tackled.

Evaluating Nigerian industries

This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.

Evaluating industries

Industries in Nigeria have a tendency to grow and evolve in unseen industry growth patterns. An industry in Nigeria can simply expand purely based on tackling the informal aspect of it.

Nigerian market is very fragile – threats and surprising events should be recognized, analysed and prepared for. Even huge and reputable foreigner corporations have proven to mess up and leave a short term turmoil and a long term negative investment sentiment, such was the case with Enron’s power plant in Nigeria.

There is a need to view the whole value chain in terms of its efficiency. There have been situations where farmers invest to increase capacity, import fertilizer and yield more tomatoes, but then have a hard time reaching the markets as the tomatoes get smashed after a short distance due to the bad roads. The farmers end up being limited to a specific region to sell their outputs to and possibly with loses, as they have invested to yield more tomatoes. The politicians on the other hand keep talking about the potential to produce the tomato paste domestically, yet it gets imported due to lack of domestic infrastructure.

Similar un-even developments in the value chain are seen in the ports. Some gates have increased their capacity and efficiency by new innovations, policies and construction developments. This doesn’t help the importers however – clearing the goods still takes weeks and as soon as you leave the port you arrive at a traffic congestion.

Some of the issues might be irrelevant for some investors – the people that invested in the ports are making returns regardless of how well the overall value chain of transportation performs and how even the blocks in the value chain are developing. Other industries on the other hand will find these issues very much relevant to their growth sustainability.

Each element in a value chain and an industry might be vulnerable to different risks within the Nigerian landscape. There are federal, state, local and also government organization policies that all might affect, add or remove different risks to the elements industries might depend on. It’s important to analyse the value chain an industry is a part of, see its weak and strong links and how the political risks are reflected in different parts of the chain.

The domestic rice industry for example, is very vulnerable to the political risks. Rice costs twice as much to produce in Nigeria than in Thailand. The domestic industry is seeing developments only due to the rice tariffs.

As people in the developing nations get richer, they don’t just eat more, they also eat better. With increased income levels, people consume more meat. The Nigerian consumer is also experience oriented, so simple food like rice might be cut to the minimum consumption once a household enters the middle class.

Food industries that work with economies of scale shall have multiple uses for their produce, else the industry might run into overcapacity, as the demand decreases. In Brazil, corn was used in ethanol production after the domestic demand for corn fell.

Safe, long term opportunities and industries are the ones that have a naturally good fit internationally, not artificially created industries by means of tariffs.

A great example is the cassava farming industry. Nigeria is the world biggest producer of cassava. Cassava has multiple uses, from wheat to crisps. Cassava farming industry is positioned greater than rice farming industry – Nigeria is already the top producer, there is demand for cassava all over the world and the agricultural output has many uses. There are government policies to increase the market conditions for cassava farming, such as the Staple Crop Processing Zones introduced by ATA – a government organization not directly facing the political risks. If implemented, the Nigerian cassava industry will be competitive globally.

The rice industry, on the other hand, is not a natural fit as it costs a lot more to produce rice domestically and the industry is dependent on the federal government tariff policies, that are not sustainable in the long run and volatile to each election due to the lobbies behind these tariffs. The rice industry is also dependent on efficient border control for smuggling – an activity that increases with the tariffs.

Generally, the costs of transportation are going down, it’s cheaper to buy goods from another area of the world and transport them to Nigeria, then to produce them domestically. International value chains however, are exposed to risks in currency fluctuations.

Nigerian industries are volatile to other domestic industries failing publicly and creating negative investment sentiment, lowering the FDI volumes and the sectors of the economy that depend on FDI.

The population of Nigeria is growing, Nigerians have to feed, clothe and house themselves – there are industries that are driven by these aspects and face less risks, yet stand to make great frontier market returns.

Making safe investments

Investors should identify the risk and high return factors in Nigeria and find opportunities that bring the frontier market returns, yet don’t particularly have all the associated risks. The Nigerian market doesn’t offer much liquidity and the lack of liquidity shall be subsidized by good due-diligence, research and analysis.

Information on the Nigerian sectors is very valuable and always desired. A lot of the deals that have gone wrong in Nigeria have lacked due-diligence and clarity.

Finding local partners is the key to safe investments in Nigeria, as John Foster put it to me – “Trustworthy local partners are worth twice their weight in gold”.

Evaluating Nigerian companies

This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.

Nigeria specific conditions

Africa’s industries and businesses differ from the developed world and the common industry growth patterns in these countries. An example is the informal sector – a lot of business is done informally and an industry eventually enters the formal stage as it grows, this was seen in the Nigerian lottery sector.

It should be kept in mind that frontier market industries might not fit well with the industry analysis frameworks used in the developed world. The due-diligence done in Nigeria is no different than that done in the developed countries in terms of what investors look for, it’s just that it’s way harder to find the information and data desired.

Some foreigner multinational manufacturers have invested in plants that have overcapacity. This works great for building entry barriers, as economies of scale can be achieved if needed and prices dumped to protect the market. It also appears that many companies are investing in the future potential of Nigeria, preparing for the mythical African middle class, with the building of overcapacity. Investors seem to follow a similar mind-set – Nestlé stock traded at 44 price earnings ratio at one point.

Businesses in the same industry don’t particularly compete against each other, but rather for the disposable incomes of Nigerians. Innovation in Nigeria means bringing existing products, technology and concepts, that have been around in the developed world for a while and introducing them in Nigeria. This puts a lot of emphasis on a good marketing strategy for successful businesses.

There is so much growth possible, especially in the unsaturated industries, that a businessmen in Africa can be successful simply by having pure focus on his business and sticking with it for a long time. Businesses don’t compete on day to day bases, a business doesn’t particularly need the best quality product or service – it simply needs a focus and work to be put in on the business.

The pure focus many successful businessmen in Nigeria have is reflected in the quality of goods. There have been records of domestic companies failing to enter markets abroad due to low quality or violations of consumer rights, such as best before dates.

Many of the world’s frontier markets are very similar in their economic appeal, but they differ in their operations and culture. Some opportunities in the economy might simply not be realizable by specific foreigner companies. Some argue that a partnership is more valuable than a business strategy. A business in Nigeria is likely to fail because of lack of contacts and operational know how rather than a lack of strategy.

Nigeria’s businesses are very volatile to new policies and regulations, these policies can evolve industries and companies. As concluded before – investors should view investments based on increased positive market conditions due to government policies as higher risk than the investments that are based on the opportunities in the markets now.

There are, however, government organizations set up that don’t fall under this risk category, since they are set up purely to increase market conditions by governments intervention. An example is the Agriculture Transformation Agenda (ATA) – an organization set up to develop the agriculture industry. ATA doesn’t have to win the elections every 4 years or constantly look for political allies. It can do its job and the people running it are accountable by the progress they have made. This results in actual actions being taken to positively increase the market conditions, lowering the risks.

Evaluating companies

One of the key elements in evaluating a company in Nigeria is to evaluate the entrepreneurs in terms of how structured they are and if they will follow proper corporate governance. Investment strategy adjustments should be made based on the willingness of the entrepreneurs in a company to be structured. A majority paper stakeholder might find it very challenging to exercise his majority with an unstructured company, so a minority stake is favoured in such a case.

The dependence on managers for the company’s success shall be looked at. The risks of companies that depend on one or two employees should be recognized – it’s not unseen for managers to leave a company to start their own shop. Equity shall be given to the key managers or the successful running of the business should be spread around to multiple people.

The lack of operating talent shall be accounted for. Some industries are more desired by employees than others – it should be evaluated how appealing a company is to potential employees. Investors can also look into the education levels the regions the company operates in has, to get an idea on how challenging it might be to find new employees.

A big interest rate for a company doesn’t particularly mean that it’s viewed as risky by the lender. A firm will pay high interest rate to compete versus the two digit percent returning federal bonds, not particularly because there is a high risk of default. The Bank of Industry offers one digit interest rates to some critical businesses. It should be seen if the company in question can qualify for this interest rate and if other firms in the industry are. In a company’s debt structure, the currencies the debt is in is the key information.

Good and efficient operations in a market like Nigeria’s are very important. A smaller company that is a part of an industry wide organization will get access to the latest trends and operational secrets. This is especially true if the industry has a big, multi industry player operating in it, as companies like Dangote Group are known to invest in training and upskilling their employees. It’s common for employees of different companies to exchange tips in industry gatherings, this was told by Aliko Dangote himself in an interview with OBG.

There are tax breaks for specific companies and an investor will likely be told if the company qualifies for any tax breaks. If there are no mentions of tax breaks, it is advised to check if other companies in the industry are qualified for tax breaks, as this might reveal insights on where the company in question stands in its industry.

A business plans success is often dependent on the whole value chain and one of the most important elements in the chain is the infrastructure across all participants of the chain. A farm that has a great yield will see it go to waste if there is no infrastructure to transport the agricultural outputs by.

To evaluate if the returns a firm is seeing are sustainable, the key infrastructural elements need to be identified and the development of these elements researched. It needs to be recognized how much the business can grow on the current level of infrastructure to determinate if the peak growth the infrastructure offers is achieved.

Companies need to be evaluated in terms of their competitiveness internationally. There are 150 Indian companies operating in Nigeria and even though the government has protectionist policies, these policies are likely not to be held for very long. There is a free trade deal in making with India. The EU and West Africa trade is strong and there are free trade deals proposed. It should be recognized if a business will face threats in case of a more free market conditions and how competitive the business will be. An alternative to a Nigerian business being competitive is great liquidity for the investment.

The fundamentals for companies are a lot different on ground versus the paper. There have been instances of foreigners buying companies thinking they can’t go wrong with the deals. Once they arrive to develop these companies, they find a completely unfit asset for its purpose that requires a lot more capital to get it to the condition they thought they were buying it in. The causes for such situation are rationalization, deregulation and privatization. This is yet another example that demonstrates the need for reliable local partners.

A company that sees cost savings from positive developments in the infrastructure it uses, won’t particularly see increases in its profits. The company can now grow further and the savings will go towards growing the business.

Analysis of Nigeria’s elections in 2015

This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.

The recent elections reflected themselves in investor activity by a “wait and see” approach, trade volumes in the stock marked lowered and there are strong indications of some funds being moved to Kenya’s stock market while the elections took place in Nigeria.

In the recent elections, uncertainty was felt by the average Nigerian, as each elections have the potential to evolve the country forward or put it decades back.

It’s no surprise however that the power was transferred peacefully – the country depends on democracy to advance further and achieve its potential.

There have been international concerns about the democracy development in Nigeria, however it can be argued that the concerns are just a phase in development of democracy. Political changes in a democratic environment cannot happen overnight, even the questioned 2007 elections can be considered normal in an 8 year old (at the time) republic that evolved from a military rule. The issues and concerns of the present government can be viewed similarly.

There is a conscious awareness of the fact that people of Nigeria have rights and power to make changes. The people of Nigeria are hungry for democracy, Nigerians won’t accept any more military rulers. Any political players need to work within the democratic framework. This is largely due to the occupy Nigeria movement, that saw the country held to ransom for 5 days in January of 2012. The fact that hundreds of people died after demonstrations following the 2011 elections, demonstrates the mobility of the population and the desire for democracy.

PDP vs APC

The parties don’t differ in any ideological way, parties in Nigeria generally represent specific interest lines or ethnicities, not ideology. This results in the people at government changing, not any major changes in developments or ideology. In fact, many of the regulations, laws and policies from the previous federal government is being carried out by this government.

Before the previous administration, there was a tendency for the government’s to start with fresh new plans and policies. This is less of a case within the federal government now, however remains the case with state governments on governor bases. That is one of the main drivers of gaps between the states – no changes can get traction due to being dropped the moment a new governor comes in.

The real change in the fact of the election of APC is that the country now has two strong oppositional parties, which are willing to challenge each other. The PDP is facing the need to settle in as the opposition, if they are able to do this, the country will see more getting done due to public pressures.

Reasons for APC’s success

A question remains of why the citizens felt the need to elect the opposition and face the risks associated with it. Buhari had ran for president in every election from 2003, there was a chance to elect him before. What had changed?

Prior to the 2015 elections, the country had reached an extreme point – Boko Haram was gaining traction, frequency of power shortages hadn’t changed and the corruption was very public. By many of the public, any government was perceived to be better than the Goodluck Johnathan’s government.

Even though Buhari had ran before, he was sectional with his statements and simply put – not electable in the South. This changed in 2015, he gained support from the powers in South and became more electable all around the country, not just the North.

The General Buhari, as he was known before, was also perceived as fairer and able to tackle the very public corruption.

The new Nigerian president Buhari

President Muhammadu Buhari could be considered a power player – he’s been involved in 3 coups before becoming the head of state in 1983 and has ran for the president in 4 out of 5 elections the 4th Nigerian republic has seen.

Buhari seems to have a deep desire to be the president, a personal ambition and a quest. He’s considered the first president to actually want to be a president, the previous presidents were put in by someone or by circumstances – they were foisted to some extent.

Nigeria is facing challenging times and needs a strong government to overcome the upcoming challenges. A concern with Buhari is that the presidency title is his personal ambition and it might not be his career potential. It appears that he’s not fully aware of his responsibilities and demands of this position.

With his drive and ambition to become the president, he has made many statements and possibly promises to other politicians that he simply cannot follow through. This could be considered the main reason why there has been a delay at appointing the cabinet – he’s looking around to whom he can trust and how to deliver the promises he’s made. The fact that the APC consists of merged 3 parties doesn’t help – he will have to upset some people that have sacrificed for him to become the president.

As an example, Buhari made a statement in February 2015 at Chatham House, stating that his government won’t consist of corrupt officials, yet he has gotten to where he is thanks to people that put him there and a collective effort of his party. He will have to be biased at any attempts to tackle corruption, which might lead to him simply tackling the public corruption, which has been the case in many African nations.

The personal interests of politicians are now overlapping the desires of people, the only way this government will work out and transform the country is if they lay down their personal interests. This is not likely to happen, given the motives behind forming the APC party. We will likely see 4 years of the political party members establishing themselves and arguing between themselves.

Some political commentators have even forecasted the APC splitting – “I said it before the elections that the APC will be challenged to stay together, should they win the election. This is because I recognized that there are too many political heads, too many egos in the party with different agenda’s that will need to be satisfied” Priscilla Nwikpo told me.

If the party was to split before the next elections and the nation was to follow its constitution, Buhari would have no legal rights to be the president and a new election should take place. This would add to the already high political risks and likely have some reflection in the countries capital markets due to changes in investment sentiments.

It should be emphasized, however, that all these short term issues and concerns might be a part of transforming the country. Clearly it could be considered good for the country in the long term if the nation followed its constitution and another elections were to take place in case the APC split.

It’s important for long term investors to recognize and follow on aspects of the political landscape that might be off of this transformation and potentially put the country decades back. Africa generally has had a history of power hungry leaders holding power for the sake of it, resulting in leaders making decisions to stabilize their power base, instead of utilizing the power to increase economy and living standards. As long as there is a shift away from this history, we are likely to see developments, especially with the changing view on Africa – journalists are no longer asking about aid and corruption in conferences, but rather about trade, investment and capital.