There are numerous reasons why Nigeria, a member of the “N-11”,1 is increasingly viewed as a viable and attractive investment destination. Like the other countries that make up the N-11, Nigeria’s “attractive demographics, rising income and increased domestic consumption...”2 could make it a significant contributor, along with the other N-11 countries, to global growth in the next decade. Foreign direct investment (“FDI”) increased to $8.9 billion in 2011 (in 2010 this figure was only $2 billion,3 primary due to the Arab Spring).
Nigeria is viewed as having a positive economic outlook with the largest population on the continent (at 160 million people), various natural resources, and a need for infrastructure. In addition, a slowing European economic market has caused investors to consider Nigeria for a better return on investment.
In line with Nigeria’s drive to increase FDI, the legal and regulatory framework is favourable in a variety of sectors, to attract foreign investors. Examples of which are explored further in this article.
The Nigerian Investment Promotion Commission (“NIPC”) and Strategic Initiatives
The NIPC was established to promote, co-ordinate and supervise all investments in Nigeria4 and has various functions including; co-ordinating and monitoring the creation and operation of businesses; introducing measures to promote investment in Nigeria; collating and providing information on investment opportunities in Nigeria; keeping record of businesses subject to the Nigerian Investment Promotion Commission Act No.16 of 1995 (the “NIPC Act”); promotional activities and advising the Nigerian federal government on policy matters.
The NIPC is made up of various departments that facilitate its primary objectives. There is a department that focuses on direct marketing, with the aim of promoting Nigeria and highlighting investment opportunities (the NIPC has promoted investment in Nigeria by hosting business investment forums globally). The department of investor relations provides pre-investment and after-care services and keeps a record of FDI in Nigeria. There is also a department dedicated to campaigning for the improvement of the Nigerian investment climate by proposing policy changes.
The NIPC also has a One Stop Investment Centre (“OSIC”) that allows investors to perform all the necessary administrative functions needed for setting up and investing in businesses in Nigeria. Investors can go to OSIC to obtain licences, permits and for incorporation purposes. OSIC ultimately aims to streamline procedures and reduce the cost of doing business in Nigeria.5 OSIC also aims to maintain transparency in Nigerian business administrative services and provides investment information to prospective investors. The centre also has the aim of upholding the professional working relationship between government agencies and ministries to further support investors in their dealings with business administration.
Vision 20:2020 was instigated by the previous Nigerian government to make Nigeria one of the top 20 economies in the world by the year 2020. The current administration led by Goodluck Jonathan has committed to continuing to achieve the aims of Vision 20:2020. The Government published a transformation agenda for 2011-2015, which builds on the aims of Vision 20:2020 and the 1st National Implementation Plan (which set how the first phase of Vision 20:2020 would be achieved)6 (the “Agenda”). The Agenda notes that despite growth, there has been a lack of “continuity, consistency and commitment in the policies, programmes and projects” that exist to improve Nigeria’s economy, the Agenda aims to harmonise previous efforts. The Agenda assumes that GDP growth will average 11.7 per cent (in comparison to GDP growth of 8 per cent for the period of 1999 – 2010) in line with the Vision 20:2020 target and outlines the changes to policies needed and new programmes that the government will instigate to achieve the target. The government aims to review its monetary and fiscal policy, review governance practices, instigate infrastructure projects and concentrate on “enablers” including “private investment, finance mobilisation and external economic relations and diplomacy”.
Since the NIPC and OSIC were established investment into the Nigerian economy has steadily increased, especially in non-oil industries. It is clear that the current government is keen to encourage investment to strengthen the economy and achieve ambitious targets.
Legislation and Regulation
Previously, FDI in Nigeria was obstructed by minimum capital requirements and indigenous ownership thresholds (of up to 40 per cent in some cases). The NIPC Act replaced previous acts on foreign investment in Nigeria and essentially removed restrictions on foreign ownership of business in Nigeria, except for in limited circumstances. 100 per cent foreign ownership of Nigerian businesses is possible except for within the oil and gas industry, where investment is limited to existing joint ventures or new production sharing agreements and the Nigerian Local Content Act passed in 2010 seeks to promote local participation in the industry. The draft Petroleum Industry Bill will also have a significant impact on investment and foreign ownership when passed.
There are also special protected sectors viewed as important to national security, such as the production of arms where investment is prohibited for both foreign and Nigerian investors.
The NIPC Act also introduced legislation to prevent businesses from being nationalised or expropriated by the Nigerian government and protection against an investor being forced to surrender his interest in the business.7
There is no requirement to seek investment approval before doing business in Nigeria. Businesses must first be incorporated through the Corporate Affairs Commission (“CAC”) and must then register with the NIPC to be protected by the provisions of the Nigerian investment laws. Companies that are part of Nigeria’s “Export Free Zones” are not required to register with the NIPC as investment approvals are governed by the Nigerian Export Processing Zones Authority (“NEPZA”). NEPZA governs the various free trade zones across the country. Free trade zones or Export Free Zones were created for companies whose main purpose is to produce products for export to confer on those investors various incentives including exemptions from local and government taxes, imports without custom duties and rent free land during the construction period. The first Nigerian free trade zone was in Calabar with construction completed in 1999 and operations commencing in 2001. Although created to encourage FDI, free trade zones have had to deal with problems caused by poor quality access roads and inconsistent power supply.
Liberalised exchange control provisions
The Foreign Exchange (Monitoring & Miscellaneous Provision) Act no. 17 of 1995 (the “Foreign Exchange Act”) liberalised the exchange control regime of Nigeria so that it is now easier to import capital and repatriate profits. The Foreign Exchange Act created an autonomous foreign exchange market for transactions with end-users through authorised dealers (such as banks). Under the provisions of the Foreign Exchange Act investments can be made in foreign currency or using imported capital, however information on transactions must be filed with the Central Bank of Nigeria (the “CBN”) by an authorised dealer within 24 hours. The CBN will then issue the investor with a certificate of capital importation (“CCI”).8 The CCI ensures the unrestricted transfer of dividends and capital made from any investment.
The Foreign Exchange Act specifically makes provision for the transferability of capital in any convertible currency without any conditions, in relation to dividends or profits (net of taxes) attributable to the investment; payments in respect of loan servicing where a foreign loan has been obtained; and the remittance of proceeds (net of all taxes) and other obligations in the event of sale or liquidation of the enterprise or any interest attributable to the investment.9 The transfer must be made through an authorised dealer, the authorised dealer must check supporting documents such as the CCI and tax clearance certificates before making the transfer.
Trade and Bilateral Investment Agreements
The Nigerian federal government has entered into a number of Bilateral Investment Promotion and Protection Agreements (“BIPPAs”) to further encourage investment in the Nigerian economy. The intention is that BIPPAs protect investments in the case of war, revolution, expropriation or nationalisation. They are also entered into to guarantee the transfer of interests, dividends, profits and other income as well as compensation for dispossession or loss.10 Nigeria has so far entered into BIPPA’s with countries including France, Netherlands, Switzerland, Romania, Spain, UK, South Africa, China and Germany.
Nigeria is also a member of the African Union and Economic Community of West African States (“ECOWAS”). The government has made efforts to promote the country as an access point for the ECOWAS region because of its location.11 It is also a member the World Trade Organisation, the European Union Partnership Agreement and the Organisation of Petroleum Exporting Companies, each aimed at promoting investment.
Tax as an Investment Incentive
Corporation tax for non-resident companies in Nigeria is charged at 30 per cent and is only charged on Nigerian sourced income. For resident companies there is also an additional 2 per cent education tax levied. Capital gains, interest and dividends are taxed at 10 per cent for both resident and non-resident companies.12 Companies in the oil and gas sector and construction companies that serve the oil and gas sector have separate tax regulation. There are various tax incentives in place that reduce tax liability, especially in key sectors to the Nigerian economy needing investment.
Other industry specific tax incentives include tax exemptions from interest earned on agricultural loans (where certain conditions are met) in the agriculture industry; exemptions from custom and excise duties on plant machinery in the export and mining industries; 20 per cent of the cost of providing basic infrastructure in areas where infrastructure does not already exist is tax deductible (once only); and 120 per cent, or 140 per cent, in respect of local raw materials, of expenses on research and development conducted in Nigeria is tax deductible.
Investors may be able to take advantage of the benefits of pioneer status, which affords businesses with varying tax benefits dependant on the type of industry and location. Generally, pioneer status can mean an exemption from income tax for an initial period of 3 years (with the possibility of an extension to 5 years), tax free dividends during the tax free period, losses during the tax free period being set off against profits after the end of that period and capital expenditure which would have occurred during the tax free period being deemed to have occurred on the first day after the end of the tax free period, so that capital allowances can still be claimed.13 To benefit companies must apply to the NIPC.
Double Taxation Treaties
Nigeria has entered into double taxation treaties with the UK, France, Netherlands, Belgium, Pakistan, Canada, Czech Republic, Philippines, Romania14 and in August 2012 Nigeria also entered into a double taxation avoidance agreement with Mauritius, a country viewed as a gateway for investment in Africa.15 Nigeria’s double taxation treaties apply a “tax credit” method, so that the total tax payable in Nigeria is reduced by the total tax to be paid in the foreign country where profits are being remitted and vice versa. The Nigerian government has also approved lower tax rates on dividend, interest, royalty and rent payments made to owners who are located in treaty countries.
Investment in Non-Oil Sectors
The Nigerian federal government identified in its Agenda seven sectors that will be the main growth sectors between 2011 and 2015, being agriculture, water resources, solid minerals, manufacturing, oil and gas, trade and commerce and culture and tourism.16 The Agenda additionally identified the need to improve infrastructure to facilitate growth. Below is a snapshot of key sectors, identified in the Agenda.
As 40 per cent of Nigeria’s 84 million hectares of arable land is currently untapped17 and the country was once a leading world food producer, the Nigerian government is seeking investment and incentivising indigenous companies to take advantage of this potential. To reverse the trend of vast food imports the government has introduced measures to encourage dairy companies and millers to use local ingredients and the CBN is giving commercial bank loan guarantees to encourage lending to farmers.18
Other incentive specific to the agriculture related businesses include a disapplication of the 60 per cent threshold on the application of capital allowances and 30 per cent tax concession for 5 years if agriculture companies use at least 80 per cent of local materials (70 per cent for agro-allied businesses).19
Economic development and wealth creation requires strong infrastructure, as a result, the Nigerian government has placed a premium on infrastructure projects in recent years.20 The government reinforced this focus in its Agenda by implementing priority policies for infrastructure development covering the seven key sectors. Public Private Partnerships (“PPPs”) are also being used to assist in providing this much needed infrastructure, the Nigerian government recognises that the private sector can bolster deficiencies in public services.
There are two governing bodies that oversee PPPs. The Infrastructure Concession Regulatory Commission (ICRC) was created in 200521 to monitor, oversee and regulate PPP projects. The ICRC also has the specific function of taking charge of all PPP concession agreement and monitoring compliance with those agreements. The Bureau of Public Procurement (“BPP”) was established in 200722 to create a legal framework for public procurement standards in Nigeria. BPP was created to bring together existing public procurement policies, implement pricing standards and to uphold transparency and competition.
Nigeria’s large population and a positive economic outlook is enticing consumer businesses to enter the market. Retailers such as Massmart (partly owned by Walmart), Artee (a Nigerian based business that has partnered with Spar) and Shoprite all announced expansion plans in 2012.23 There is a high demand for the shopping centres and an opportunity for first mover advantage due to brand consciousness.24 International companies are viewing Nigeria as an attractive investment destination to boost slowing national growth, because of the consumption potential of the population size. Despite obstacles such as infrastructure and local spending practices businesses are adapting to break into the market, by partnering with local enterprises or adopting a distribution model.
Economic potential and under-developed infrastructure means that there are numerous investment opportunities for FDI in Nigeria and the regulation and initiatives are further encouraging this. The private equity industry has also made tracks to invest in Nigeria.
Private Equity Investment in Nigeria
Private equity investment in Nigeria, like FDI, has sought to take advantage of the opportunities created by a growing economy, government incentives and reforms. One reform has caused an increase in investor capital as Nigerian pension funds can now invest (up to 5% of assets) in private equity. Private equity investors are also targeting industries such as telecommunication, mining, oil and gas, food and agro-businesses and financial services that form part of the government’s sector focus, this investment being representative of the needs of the emerging middle class. Private equity investment however, is not necessarily targeted at businesses that will yield a rapid return, but in investments that create a supply chain, jobs and ultimately longer term potential for sustained return to investors and an eventual exit at a significantly higher value.25
The regulatory reforms that have relaxed the Nigerian investment rules and exchange control provisions are also applicable to private equity investors. As stated above, the rules on the repatriation of foreign capital have also been liberalised, the CCI has made it easier for foreign owned companies to return profit to their home jurisdictions irrespective of the amount of capital initially invested. The CCI has created a quick and efficient mode of transferring profit so long as an investor is compliant with the requirements of repatriating funds, this raises compliance considerations for fund managers. An important consideration is that underlying companies are transparent in their dealings and use reputable professional advisors,26 this is particularly important in a jurisdiction that continues to face problems with corruption.
Difficulties in the local operating environment of Nigeria, also highlights the importance of local knowledge. The development of the mobile phone industry is an example, the lack of enforcement legislation and high rate of people without fixed addresses meant that a mobile phone industry based on bills could not work. In addition, poor infrastructure for land line communication led to the rapid growth of the pre-payment mobile telecoms industry. FDI in the telecoms industry increased by 39 per cent between 2009 and 201227 and investment opportunities still exist as there is now a need for better services, coverage and broadband technology.
The demands of a burgeoning middle class and the initiatives of Nigeria’s government has spurred investment opportunities in industries that extend beyond the traditional destinations of oil and gas. There are investment opportunities in consumer industries, agriculture, infrastructure and telecoms and positive economic outlook for Nigeria will further encourage investors.
The Nigerian government has recognised the benefits of foreign investment in achieving economic growth and stability, however concerns with corruption, political instability, poor infrastructure and financial misconduct has in the past deterred FDI. To counter this, tax incentives, a liberalised regulatory system and strategic initiatives are being used to encourage investment. A continued coherent strategy will help to further entice investors.
Africa is also one of the last untapped regions for private equity investment, the potential created by the growing population and rising economy in countries such as Nigeria is high if investment is deployed to support the growth business sectors of the country. The private equity model of investment, development, and diversification of risk is well suited to accelerating growth and reaping the potential of the Nigerian economy.
The author would like to thank Jide Olanrewaju of Satya Capital LLP for his contribution to this article.
1 The Next 11, an acronym for the next set of countries (Bangladesh, Egypt, Indonesia, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam) with a promising outlook for growth and investment potential as named by Jim O’Neill and the Global Economics, Commodities and Strategy Research team of Goldman Sachs in 2005
2 Jim O’Neill, 28 February 2011
3 Financial Times, “Market reforms bring fresh flows of funding”, 28 November 2012
4 The NIPC was established by NIPC Act No. 16 in 1995
6 The Transformation Agenda 2011 – 2015, Summary of the Federal Government’s Key Priority Policies, Programmes and Projects
7 NIPC Act 1995, section 25
8 KPMG Nigeria fiscal guide 2012/13
9 The Foreign Exchange Act, section 15
10 Investment incentives, www.nipc.gov.ng
11 Financial Times, “Nigeria is open for business”, 28 November 2012
12 KPMG Nigeria fiscal guide 2012/13
14 Investment incentives, www.nipc.gov.ng
15 Xavier-Luc Duval, Mauritian Finance and Economic Development Minister, www.businessdayonline. com, 14 August 2012
16 The Transformation Agenda 2011 – 2015, Summary of the Federal Government’s Key Priority Policies, Programmes and Projects
17 Minister of Agriculture and Rural Development, Dr Akinwunmi Adesina, “Nigeria Tops Global Destination for FDI” www.leadership.ng
18 Financial Times, “Farming revolution has yet to take off”, 28 November 2012
20 PKF Nigeria tax guide 2012
21 Minister of Works, M. Onolememen, “Nigeria Vision 2020: Building the Infrastructure”, The African Executive, November 2012
22 ICRC was established by the Infrastructure Concession Regulatory Commission (Establishment etc) Act of 2005
23 BPP was established by the Public Procurement Act of 2007
24 Nigeria: a retailer’s market , 16 August 2012
25 Bill Russo in Financial Times, “Consumer Demand draws in more retailers”, 28 November 2012
26 “Nigeria’s telecoms sector records 39 per cent growth in FDIs”, The Guardian News Nigeria, 22 August 2012