Useful Practical Note:
Proem
Increasingly, international businesses are considering Africa as strategic to their further growth and are, indeed, making serious efforts to obtain in-depth understanding of the African market. They are also learning more about the opportunities inherent therein together with the growth drivers of Africa’s economy and the plausible issues which could lead to failure. Many of these international businesses appreciate that new markets are rapidly opening up in the continent and seek to understand the factors for both success and failure.
Of all the African countries where opportunities and new markets are opening up, Nigeria appears to be a key destination and with its reforms in critical sectors, the country should really become the next powerhouse on the African continent and many of these international businesses and investors are aware of this. Incidentally, Nigeria has taken over from South Africa as the continent’s (and not just the Sub-Sahara’s) largest economy Hence, many of them are attempting to properly establish themselves within Nigeria and quickly realize that the several challenges in Nigeria, mean that a lot of goods and services are required. It is simple, add value and smile to the banks especially now that the country is actively working towards diversifying from the ‘drawer of water and hewer of wood’ (hydrocarbons) economy.
Knowing the sheer size of the country and having their local partners/ advisers etc. explain the demographics to them; they really do want to invest in various sectors. A key sector many of these investors look to is the power sector because this sector simply drives trade and commerce and is fundamental to economic growth. Despite best efforts, there have neither been many successful private sector driven power projects nor many that are making appreciable progress.
In this paper, therefore, we examine the serious interest shown by international corporations and foreign companies in doing business in the power sector, the real challenges they have faced that have made it nearly impossible to see projects come-off and other interesting but typically controversial issues in the Nigerian power sector.
The Interesting Prospects
It is often said that no country can achieve serious economic growth if it does not have sufficient and efficient grid power. Therefore, inexpensive power is a key economic catalyst and with Africa which accounts for almost 17% of the World’s population producing a paltry 4% of the World’s electricity, investors see very interesting prospects doing business in the region. The prospects are particularly appreciated when foreign/ international business owners consider that a country like Nigeria holds almost 20% of Africa’s population and is amongst the approximately 30 countries which face routine power shortages. Many of them also consider the huge profits international telecommunications and many others operating in Nigeria generate and consider the prospects very luxuriating where they are able to scale regulatory and other hurdles. It really does take long-term vision with clearly defined goals with unwavering focus to build viable businesses in Africa.
Africa and Indeed Nigeria Rising- Yet A lot Still Amiss
Africa, and indeed Nigeria, is rising as can be deduced from the continuous inflow of foreign direct investment into the continent with Nigeria being a major focus. Further evidence, is in the rising number of young people making up the middle class- a phenomenon which was almost alien to a country like Nigeria for several decades especially during military role. Commercial law firms and other consultants earn much more than they ever did as they service the growing number of businesses.
Consulting and many indigenously run businesses which support international corporates now seem like great ideas whose time is now (something that could not have happened before the advent of huge foreign investments into the African economy and which took a newer dimension from the late 1990s). Certainly, the course of Africa’s transformation cannot be refuted. It would be a fundamental omission not to note that democracy and indeed improving leadership (which does still require much better enhancement) appear to be playing a key role in this overall improvement in the lot of the people in Nigeria for example.
Despite the seeming interesting opportunities, it would appear that there is some skepticism as many of the early investors (apart from the first movers) complain about issues of trust, lack of stability of legal & regulatory regimes and policies in these African countries including Nigeria. They complain about the lack of cast iron property rights, huge transaction perfection costs, corruption in the sense of government functionaries wanting personal stakes in their businesses whilst contributing almost nothing.
There are still serious challenges with transparency in processes, lack of clarity and certainty regarding investments incentives. Indeed there is a huge infrastructure gap in almost every area and the country indeed is also still poor as it ranks in the 150s out of 188 countries in the UN’s Human Development Index which measures the level of development (life expectancy, education and income). For infrastructural development for example, it would appear that only private investment within the context of an enabling environment which most a times means government support can ease.
The power sector, in Nigeria for example, has struggled to see private sector led projects and initiatives make appreciable progress because of many challenges doing business in Nigeria generally and the power sector specifically. There appear to be complaints about overregulation and the challenges encountered with moving projects ahead and there are indeed several projects in the power sector in Nigeria that are simply not making progress. Financing is getting more difficult to obtain because of these challenges and a key driver for economic growth, appears stuck. There is the push for local content but there are doubts as to whether this is the right time for a serious local content push when the sector doesn’t appear to be achieving much.
Many of the projects that appear up and running seem to be government initiated projects and there appears to be something fundamentally wrong with our investment attractiveness and or investment success level. An additional regulator for the power sector is about to be introduced and the question is whether that is necessary. Getting licensed is difficult enough as this stands. Adding a new regulatory body or institution just kills things in the sector. An enabling environment is key to investment success, not the number of regulator. Bottlenecks, corruption and such other matters only go to kill investor attractiveness and as is often said, bad news, travels very fast.
The things that really do matter to an investor are the quality of the regulatory body and not the number of regulators, good regulations and not a multiplicity of regulations, efficiency and speed in determination of the grant or otherwise of a licence, authorization or approval and not bureaucracy, clearly defined incentives and parameters for granting same and not fact that those exist with arbitrary application of same or the fact that those only exist in documents or indeed statute books.
The foregoing risks lead many investors (particularly foreign) to seek to protect themselves through the requisition for investment guarantees and political risk insurance which further make projects and or transactions almost too expensive such that success on same could be considered pyrrhic.
The issues highlighted notwithstanding, it is worth reiterating that Africa, and Nigeria in particular (notwithstanding the budget deficit and the low oil prices (which in itself gives opportunity to other sectors)), could well be the next economic hub where the appropriate measures are put in place. It is also the case, that Nigeria has the capacity to generate sufficient and efficient electricity for use within its borders and even for export to neighbouring countries. The foregoing could be achieved if the right steps are taken to attract and encourage investors. Until appropriate measures are taken, investors may be tempted by the business prospects but become discourage by the enormous challenges to be faced by them to fully commence business operations and even keep their business profitable in the long run.
For more details about the power sector, do pick up a copy of the text on the power sector written by the author.
Ayodele Oni
Ayodele Oni {ayodeleoni@outlook.com}, a solicitor, specializes in international energy (oil, gas and electricity) investment law and policy. He holds a mini-MBA in power & electricity. Follow me on twitter @ayodelegoni.