Rand Merchant Bank recently released its annual report on “Where to invest in Africa in 2018.” The most significant revelation for Nigerians was the fact that the country dropped out of the top 10 investment destinations in Africa. Basically, if you counted top 10 countries where investors are considering investing in Africa, Nigeria is not one of them.
This is the first time the country is falling out of the top 10. And it is unusual considering that Nigeria still remains the largest economy and most populous country in Africa. The share size and potential of our consumer market should make the country the preferred investment destination on the continent. But that sadly is not the case currently.
In fact, until we saw a reversal of the trend in the second quarter of 2017, investors were fleeing the country. Investment inflow into Nigeria for the three months ended June was US$1.79 billion which was 97.34 percent higher than the investment flows recorded in the first three months of 2017 for the period ended March. It was also 71.98 percent higher the foreign investment inflow into the country for the second quarter of 2016.
Even though this significant increase in the foreign investment inflow into the country in the second quarter of 2017 was highly lauded by the government, the US$1.79 billion inflow recorded for the period represents just a fraction of the slightly over US$6 billion that came into the country as foreign investment in the second quarter of 2013 or almost US$7 billion received in the first quarter of 2013. This clearly shows that investors, especially foreign investors are not as enthusiastic about investing in Nigeria as they once were.
But interestingly, investors reduced appetite for investing in the country has nothing to do with a decline in returns on their investments in the country. Global risk consultancy firm, Control Risks, in its latest Risk-Reward index report identifies Nigeria as offering investors the highest return on the continent, only second to that of Ethiopia. However, the catch is that the country also has the highest risk, only surpassed by the risk of investing in Zimbabwe. So, Nigeria, one of the best places to invest in on the African continent, is also one of the riskiest places to put your money. So, what are the major risks faced by an investor putting money in Nigeria?
Policy inconsistency is the first major risk most investors worry about when investing in Nigeria. You are never sure if a major policy initiated by one government will be sustained by the next government or even reversed by the same government. This risk manifest easily as political risk and is easily evident as election approaches. Capital inflows into Nigeria tend to slow down as election approaches and picks up post-election once investors become certain of the direction of government policies in a new administration.
Another risk investors are often concerned about is the respect for certainty of contracts in the country. Often times the government has entered into contracts with investors only for the government to turn around and seek to change the terms of such contracts without the consent of the companies or persons it entered into the contracts with. There are several instances where the government has entered into valid contracts and has gone ahead to change the terms of the contract or gone ahead to ignore and violate the terms of the contract without due regard to the counterparties or even to third parties that have invested in the projects created by such contracts.
Corruption is another risk faced by investors doing business in the country. There are instances where investors have been asked to bribe certain government officials that are in change of approving projects that they have already invested significant amounts of money into before such projects will be allowed to be taken to the next stage.
If they fail to pay these bribes, such projects could be delayed. Often times, where these investors go ahead and give these bribes, they risk being charged in their home countries on corruption related offences, especially if they are based in Europe or America. Also, where they resist paying these bribes, they risk having significant delays on their projects, which leads to increased costs or even having their contracts totally taken away from them.
Insecurity is perhaps the most talked about risk for investors putting their money into the country. The North East is now an area most foreign investors cannot visit because of the risk of being killed or kidnapped. Foreign and local investors also face similar risk in other parts of the country especially in the oil and gas rich South South and industrious South East. This forces most investors to restrict their activities to just the few areas that they can operate safely. Not surprisingly, about 70 percent of investment inflows into the country are directed to companies in Lagos or around Lagos, leading to over concentration of investment inflows into the country.
There are other risks faced by investors, which revolve mainly around navigating an opaque bureaucracy in many states of the federation, poor manpower capacity, failed infrastructure and of course, power supply. However, these are risks that are within the control of the investor and is usually provided for in the business plan.
To rebrand Nigeria as an investment destination of choice, the government would have to take a critical look at all the major risks faced by investors coming into the country and work out strategies to reduce the risks. Some steps are already being taken in that direction like the executive orders recently signed by the government in a bid to improve the ease of doing business in the country as well as the current focus on fighting corruption in the country. But what have been achieved so far is still very far from what is desired. Insecurity is still a major issue across the country, corruption remains endemic in public offices while the government still has not shown any strong commitment for the sanctity of contracts or respect for private property. Nigeria can emerge as a strong destination of choice when these issues are taken care of.
