‘The general tone towards international investment seems somewhat muddled’
Tom Griffin, MD, and Gbenga Abosede, Associate Director, -both of Control Risks– speaks on the three major areas of concern impacting the Nigeria Rising story. They both share their views with Charles Ike-Okoh (Editor, BDSUNDAY) and Frank Eleanya
What is the general perception of the investment community concerning the Nigerian economy?
TOM: Broadly speaking, the sentiment amongst the investment community is downbeat at the moment, Control Risks sees three major areas of concern impacting the Nigeria Rising story. Primary concerns lie with the draconian capital controls and currency instability which presents an extremely unpredictable investment climate for new and existing investors. Whilst the government has made notional gains in response to the threat of Boko Haram, security across the country remains a key issue for many companies, especially in the North and Delta regions. The well-established concerns over domestic militancy & terrorism threats have been compounded by recent terrorist attacks across West Africa. We have also tracked sharp increases in the levels of violent crime, kidnapping & piracy much of which is driven by the deteriorating economic situation. This factor coupled with the pro-secessionist agitation, social unrest and a spate of election related political violence in the Delta paints a rather gloomy picture for the short to medium term prospects in the region. That being said, the macro-economic fundamentals and opportunity that Nigeria presents in the longer term will always trump the various risks and the trajectory remains largely positive. Particularly encouraging are the growth opportunities that sit within nascent sectors such as mining & agriculture, they are a strong signal of the diversified opportunity the region presents.
How do you see the government’s efforts in reshaping the perception of the investment community?
TOM: Its worth noting of course that we have only had an effective and operational government for the past 6 months so arguably more time is needed to reshape and improve perceptions. The vacuum of governmental decision making and a lack of clear direction meant the country lost a lot of ground and momentum has it buoyantly emerged from the elections last April. The government should have used its first months in power to assert authority on a lumbering federal machine and undertaken tough decisions around fuel subsidies, FOREX stability and government spending & dysfunction. Some distinctly odd decisions and policies relating to trade and monetary policy have dampened their credibility and the pace of change the electorate demanded has been lacking. For all the competent technocrats residing in government, there appears to be a distinct lack of structured & considered policy decisions. Jitters around economic management compounded by a low oil price, a lack of clarity in the regulatory environment and some high profile casualties in the international investor community mean there is still a lot of work to do for the government.
The general tone towards international investment seems somewhat muddled. On the one hand federal and state governments are busy courting international investment and on the other you have the likes of MTN being disproportionally fined and the presidency making it clear that the taxation of foreign firms will be a targeted source of income for the government. The CBN in particular needs to take heed of the concerns and issues voiced by institutions such as the IMF and an international banking sector which are screaming for logical and measured policy making. Whilst many of these factors are in play, investor confidence is going to continue to be muted from many corners.
GBENGA: The conversation has somewhat moved on from the binary question of whether we devalue or not. The conversation now among investors revolves around the need to see a coherent economic plan and policy that gives them confidence that the government’s position is sustainable. Some investors keep telling us that they are uncomfortable bringing in their money to invest now when there still appears to be a credible risk of a significant currency shift.
Is the greater emphasis on corruption by the Buhari government paying off in terms of boosting the confidence of the investment community?
TOM: Without a doubt Buhari’s focus has sent positive signals to the investor community for whom corruption has historically been a huge impediment to investment. As Warren Buffet famously noted, “its only when the tide goes out that you see who has been swimming naked” and Nigeria has its fair share of high profile individuals who will have the spotlight of anti-graft agencies firmly shining on their indiscretions. With state and federal government coffers left distinctly bare, the transparency and accountability demanded by a growing middle class provides tremendous confidence to investors looking at projects in the region. The clear steps to plug the leakages in the system, whether they be in government offices or the NNPC has sent a very strong and positive message to the international community. Its worth noting of course that corruption requires the supply and demand of a bribe; whilst the supply has been constrained by internationally far-reaching legislation such as the UK Bribery Act there are now less people – government officials and company heads alike – willing to demand a bribe in order for a company to secure a contract or business.
However, despite the positive steps there remain some key concerns. A largely unchanged judicial system still gives rise to the concern that individuals will be “too big to jail”. The largely politicised nature of many of the investigations to date and an unwillingness to look within their own party suggest a situation where the government’s bark is presently greater than it’s bite. The anti-graft agenda needs some high profile convictions to its name in order for the crusade against corruption to be truly seen to be successful
GBENGA: I don’t think you will find any serious investor who isn’t supporting the anti-corruption drive. Clearly corruption, as government has said, is a central issue. The government has taken a clear stance against corruption. And that is the right thing to do. In our annual survey of international attitudes to corruption, a global average of 64% of legal and compliance professionals agreed that the enforcement of international anti-bribery and corruption laws was helping to improve the business environment. For the businesses that we sampled in Nigeria, 97% of them said they support this position. We can probably extrapolate from that to assess how they might feel about the ongoing drive to enforce local anti-corruption laws as well.
How much of a risk is our currency volatility to businesses?
TOM: The risk is very real and presents a chaotic challenge to doing business on a day-to-day basis for businesses in Nigeria. This has led to a number of companies who run established and successful entities, being forced to reduce their operations or withdraw completely. The aviation & manufacturing sectors, for whom low oil prices should have provided an opportunity for competitive advantage, are being slammed by an inability to procure raw materials or repatriate locally generated profits. A one-dimensional response from the government to currency volatility sets an uncomfortable tone for investors, many businesses are unlikely to commit to sizeable projects until they see some evidence of stability or coherent policy.
In view of the exit moves from Barclays Bank and Old Mutual, do you think that in time businesses will also rethink doing business in the country and what could trigger that?
TOM: All global companies face the decision of competing priorities, opportunities and how best to allocate resources & focus. The longer term prospects for the banking sector in Nigeria and indeed across Africa are still very positive. Our recent Deal Drivers Africa report on M&A activity in Africa re-enforced this with the financial services sector seeing the second highest deal volume, a number which is increasing year on year. Both of these companies are extremely well established businesses in Africa and arguably – what will amount to a simple change in shareholding – will enable them to focus on an Africa specific growth strategy that I am sure will continue to be a success.
Are we having the right conversation in this country in terms of cyber security which is a big challenge for businesses?
TOM: There appears to be a conversation happening but whether it is the right one with sufficient buy in & engagement from industry stakeholders remains to be seen. Bold steps were made in 2014 with the cyber-crime bill but the degree to which this has been implemented or considered within businesses remains to be seen. Cyber security tends to be an issue that receives greatest focus at HQ but ignores the threat actors in play – that are arguably more nimble – here on the ground in Nigeria. Control Risks tends to see a number of companies – be they banks, FMCG or pharmaceutical companies – spending substantial amounts of money and effort on technology, infrastructure & policies but less time about how likely threats are likely to manifest themselves and how vulnerable they might be to an attack. We operate in an increasingly interconnected world where the risk of a cyber-breach on the ground in Nigeria has the potential to adversely impact the share price or reputation of a large multinational company based in any continent across the world. This threat needs to be taken seriously and there is a clear requirement to develop and implement more rigorous security strategies, strengthen cyber emergency response team, boost capability and raise cyber skills and awareness.
If you are to advice the government what type of security investment will you encourage them to make in this country?
TOM: Noting the complex and deeply inter-woven security issues facing Nigeria the government needs a more coherent and joined up approach to tackling the problem on a national scale. To date, we have tended to see a rather heavy handed military and armed response to many of the security issues. A military strategy clearly needs to be an aspect of the response but this needs to be bolstered with investment in technology, capacity and capability building across the security agencies.
However, if we look at Boko Haram – deemed the number one security problem for the country – the issue has deep roots in socio-economic problems and doesn’t mirror the hard line Islamist ideology seen by terrorists in Syria and across the Middle East. Boko Haram represents a rather misguided group of youths with shared grievances against a society and government that has left them with low education standards and without job prospects or hope. Whilst a kaleidoscope of ethnic & tribal factors add layers of complexity to the problem in the Niger Delta the issue is exactly the same. This problem isn’t singular to Nigeria but simply put, you must address the social & economic issues if you want to grip and address the security problem.
Would you say the government are making the right investment in taking the agricultural sector to where it should be?
TOM: Agriculture has long represented an untapped sector for Nigeria and arguably security risk has been a contributing factor to the slower pace of its growth. Clearly the industry represents an excellent opportunity to provide job security and economic stability to great swathes of Nigeria, indeed many of the security problems could start to be addressed with the employment offered by agriculture sector. The focus is paying off with a number of multinational and indigenous players actively engaged in this sector which will inevitably trickle through the supply chain to food processing, manufacturing and so forth. Whilst I don’t necessarily agree with the protectionist stance being taken by the government, import & currency restrictions will ultimately also benefit this sector in the short term. The government does however need to consider issues around land and grazing rights which have caused significant security challenges for agriculture projects in certain locations across the middle belt. Local reports suggest such clashes in Benue state resulted in the death of over 500 in February alone.
What should investors worry most about Nigeria and what should they do?
TOM: This time last year companies were overwhelming concerned about the political landscape and indeed the outlook for the country augured badly. Off-cycle elections and re-runs aside there does seem to be stability in this realm at the moment but security & corruption risks remain firmly on the agenda for companies looking to invest here. Obviously there are radically different operating dynamics if your business sits in the bubble of Lagos compared to Port Harcourt and ensuring you have an objective & measured perspective of the risks is needed. This also needs to be considered for the lifecycle of a project or investment as inevitably the challenges you face on day 1 vary considerably to those 10 years down the line. Successful companies that we work with have risk management and the very forefront of their decision making process and seek to build resilience into their business plans and supply chains to ensure they withstand risks and shocks as they occur.
Whilst there seems to be a comfort with the level of political risk in Nigeria the country remains dismally ranked in the ease of doing business stakes (#169 out of 189 countries listed and nestled between Yemen and Mauritania). Simple acts such as getting visas or opening a bank account, overcoming the opaque tax structures and the high capital cost of establishing a business, are sufficient for investors to quickly put Nigeria in the “too difficult” category. Identifying competent & trustworthy local partners who share organisational culture & outlook can ease the pain but for every politician encouraging an international investor to make the leap, there will be a well-established web of inefficient & bureaucratic processes designed to make the experience more difficult. Patience, courage and good humour in equal measure are keys to success
GBENGA: The business environment is still fairly complex due to the prevalence of corruption. In addition, the government’s anti-corruption efforts have increased the risk of local investigations and enforcement. You can therefore credibly argue that the business environment is a bit more complex now. We hear more businesses telling us that they passed upon certain business opportunities because the risk of getting involved in graft is simply too high whereas there are other opportunities which may not be as lucrative but still profitable. I think that this trend will grow over time. Now is the time for businesses to really ask some critical questions about their business plans and strategy. You have to have right intent which essentially is to ensure you are operating on the right side of the law. You also have to ensure that your anti-bribery and corruption policies are appropriate for this environment and that the principles are being properly implemented in the field, rather than just having a policy on paper.
What do you think about plea-bargaining as against actually prosecution and conviction? Which pays us more as a country?
GBENGA: It has to be a bit of both. The Vice-President for instance has always spoken of the need to remind Nigerians that corruption is a crime, that there are consequences and quite often that means there is a jail term. If you look at what Nigerians were clamouring for during the elections, it was for someone that will come in and take corruption more seriously. There is a desire to see more senior offenders ending up behind bars. There has to be something that serves as an effective deterrent. I don’t see how you can have a credible anti-corruption drive and nobody goes to jail at the end of the day. There has to be a balance and ofcourse there has to be due process.
The government has just been there for nine months, let’s give them time.
But we have seen cases that have spent years and are still in court, would it not pay more if we only focus on just taking back the monies stolen?
GBENGA: I don’t think so. Plea bargaining is always an option wherever you go. The United States also talks about plea-bargaining. But I think over here, firstly, there is clearly a need to reset the agenda and reset the culture. So some cases will need to go to conclusion. If there are reasons to convict people, then they should be convicted. I think that will do a lot of goodin terms of the credibility of the process. I cannot see this government which is very aware of its public relations obligations going to the next elections without some convictions to show people to say we have done our job. This should be a wake-up call for businesses. Yes there has to be a balance to account for government resources and also the length of time cases take. It is certainly important for government to address that otherwise there is a risk that the credibility of the process evaporates and if that is allowed to happen, then I think the government is on shaky ground.
How much in terms of investment and image accrues to the country with regards to the numerous travels of the president?
TOM: Global business and the international press have feasted on a diet of largely negative news stories about Nigeria for the past 5 years. Whether the subject relates to security, governance or corruption, the countries brand image is in need of a severe makeover & re-haul to improve international perceptions. International trips will always come under scrutiny, especially when there remains a plethora of home grown issues to wrangle with. That being said recent trips and engagements with China, Qatar, India have been largely positive both in terms of re-enforcing the anti-graft agenda but also ensuring longer term trade agreements. The previous administration cemented Nigeria as a poster child for the corruption, greed & excesses that has thwarted the growth prospects of many African nations. President Buhari and his government have managed to quickly demonstrate a clear political will and desire to address these issues and set a new course for Nigeria – this is an absolute requirement if it is to fulfil its potential
How would you advice people who want to do commodity business in Nigeria giving that globally commodity prices are down?
TOM: Risk and opportunity are different side of the same coin and nowhere do we see that more than in the commodity business. Across the oil and gas sector there are lots of companies facing severe challenges in the current environment, those who are over leveraged with high dollar loans with yet to be producing assets are clearly in significant trouble. However these distressed assets obviously present an opportunity for the more risk averse investors, this is especially true with the cost of exploration and production at a fraction of what it was 2 years ago. The mining industry is also an area where we are seeing interest from international clients and investors; a relatively nascent industry with sensible leadership at the helm in the ministry advocating incentives and structured policy sets a positive tone for investors. Let us not also forget that lower commodity prices offer a tremendous opportunity for companies in the manufacturing sector for whom diesel hungry generators and expensive input materials have adversely impacted their competitiveness for so long.
GBENGA: There are a lot of factors here and it all depends on your perspective as an investor. Someone who is lender for instance is probably going to be wondering should I lend money into a sector where I cannot see how companies are going to find money to repay me? If you are an equity investor, your perspective might be different; you might see it as an opportunity to pick up a bargain. Situations like this are always going to create a set of opportunities for some and challenges for others. That’s why we keep advising our clients to keep on top of what’s happening and look beyond the country veil. Investors need to look at each sector on its own merits, look at their specific areas of interest and ensure they have the right level of intelligence and information. That way you are better informed and you can be bolder with your investment plans even when it seems too challenging for others.
What is the projection for investment in 2016?
TOM: I have been visiting Nigeria for the past 12 years and lived here for the past 4, the entrepreneurial spirit and energy never ceases to amaze me. I am overwhelmingly “glass half full” for the longer terms prospects and opportunities for Nigeria. However, one cannot ignore the fundamental risks and issues that still remain, especially in respect of the security situation that I believe will get worse before it improves. This is especially marked in the Delta region which precariously sits as both the piggy bank and tinder box for the country’s problems. The operating context remains extremely challenging for many companies with an increasing number seeking an exit strategy as profits become harder to generate and repatriate. However, with growth prospects waning in domestic markets many companies are forced to look further afield to satisfy shareholders. Whereas Nigeria, and indeed Africa, were often unappealing for many, most international companies recognise the need to explore an Africa strategy. Nigeria as the largest economy often underpins that strategy and acts as a natural jump off point into the continent. The notion of a burgeoning middle class, mind-boggling population growth and some of the most energetic consumers in the world are extremely appealing to companies regardless of the sector and this will always trump a lot of issues and challenges. Nigerians always expect a lot from government but have actually done an extremely good job of succeeding in spite of it so maybe with more measured expectations they will be given a chance to succeed and political stability will endure. Smart companies know that key to unlocking the long term opportunity is understanding and gripping the myriad of challenges & complexities inherent with of operating here. Clear risk management structures, plans, processes and ownership of these risks and know how to manage and mitigate them is at the forefront of their strategy.
Assuming the current mist of economic malaise lifts, I believe Nigeria is still on a positive trajectory and this is very much the message we pass on to our clients – just be eyes wide open to the challenges and risks you encounter. With that in mind I remain cautious, yet optimistic for the country and its business prospects.