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.
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”.