This article was co-written by London partner Ian Hargreaves, head of investigations, fraud and compliance, and managing associate Chiz Nwokonkor. The article was first published in African Law & Business http://www.africanlawbusiness.com
A sea change in Nigeria’s political and economic history took place on 28 March 2015. What was widely expected to be a tense and possibly violent election proved to be a peaceful democratic handover with General Muhammadu Buhari becoming the first Nigerian to unseat a sitting President at the ballot box.
The euphoria that followed found its way to the markets almost immediately. Shortly after President Goodluck Jonathan’s concession, the Nigerian stock market recorded an unprecedented rally on gaining NGN 904 billion, as investors reacted positively to the peaceful conclusion of the elections.
In this new chapter in Nigeria’s history, the All Progressives Congress (APC) not only holds the presidency, but also more than 50% of the seats in the legislature, which will almost certainly assist the new administration in seeing its planned policy and legislative changes made manifest.
While this may seem to herald a positive outlook for Africa’s largest economy, structural and economic challenges abound for the new government. The economy remains heavily crude reserve-dependent: oil and gas still accounts for 80% of Nigeria’s fiscal revenue and 95% of its export receipts.
The World Bank reduced the country’s economic growth forecast from 5.5 percent in 2015 to 3.7 percent in 2016. Unemployment levels remain unfeasibly high, tax evasion in the informal economy frequently goes unchecked and the wealth disparity continues to create a lag in Nigeria’s development metrics.
In short, the President-elect has inherited a structurally challenged, if optimistic nation. The challenges cannot be addressed by fiscal or economic policy alone. It is likely that we will see significant legislative reform as an engine for the change promised in his election campaign message.
The two pillars of this message of change were an austere fiscal policy and a clampdown on corruption, which it is hoped will lower the cost of doing business, thereby fuelling small business as well as encouraging inward investment. While the specifics are yet to be communicated, Buhari’s economic blueprint appears to be to establish a regulatory and policy framework that stabilises the economy. He plans to further diversify the economy by investing in agriculture and mining, and ensuring job creation. Analysts also expect him to continue with many of the Jonathan administration’s priorities, such as power and agricultural reform, and liberalisation of parts of the economy.
Several leading voices in the Buhari camp have expressed a desire to use their tenure to create an enabling business environment for domestic and international investors. A survey of the horizon from an investor’s perspective shows that there are four key areas that will determine the extent to which the country will remain among the fastest growing economies and continue to attract foreign direct investment: power sector reform; petroleum industry legislation; economic diversification and the rule of law.
Power sector reform
Buhari’s APC party manifesto included a promise to:
“Generate, transmit and distribute power from current 5,000 - 6,000MW to at least 20,000MW of electricity within four years and increase to 50,000MW with a view to achieving uninterrupted power supply within 10 years, while simultaneously ensuring development of sustainable/renewable energy; construction of 3,000km of superhighway, including service trunks and building of up to 4,800km of modern railway lines – one third to be completed by 2019 via public private partnership (PPP) arrangements.”
Following the privatisation of many of the nation’s power generation and distribution assets, in 2014, Nigeria’s Ministry of Power announced plans to sell Nigeria's transmission network to private sector investors in order to facilitate the development, upgrade and management of the transmission network in Nigeria. A further privatisation process is near completion with the Bureau of Public Enterprise and Niger Delta Power Holding Company (a special purpose vehicle of the federal government) selling ten newly developed power plants as part of the Nigeria Integrated Power Project.
While the generation and distribution privatisation exercises were central to addressing Nigeria’s power supply deficit, the transmission sector is all-important. Estimates suggest that if Nigeria’s power plants were to operate at full capacity, its transmission lines could only presently carry 5,500MW – less than a third of what the country requires to meet its electricity needs. To be fit for purpose, the existing transmission network needs to be upgraded, expanded and properly maintained. It follows that attracting further investment in this area must be a priority for the new government.
Petroleum industry legislation
The incoming government has made a very clear commitment to the speedy passing of the long-awaited Petroleum Industry Bill. If successfully passed in its current form, this will trigger fundamental reforms in Nigeria’s hydrocarbons sector. Among the most far-reaching legislative changes will be the introduction of production sharing agreements – private agreements between international oil companies and Nigeria’s National Petroleum Corporation (NNPC) – which will vest a licence or exclusive authorisation in the NNPC to explore, exploit and produce hydrocarbons.
While these changes will undoubtedly alter the investment environment for oil majors, these production sharing agreements are intended to better protect Nigeria’s national interest in the areas of technology transfer, the building of local skills and capacities and the preferential use of local suppliers.
Notwithstanding its dependency on crude oil exports, Nigeria will continue to diversify into the non-oil and services sectors. Non-oil GDP growth now outpaces oil sector growth significantly. The re-basing exercise of 2014 brought the momentum behind non-traditional economic sectors to the fore, such as entertainment, telecoms and retail. This will likely be a legacy policy focus of the Jonathan administration, with Nigeria’s ‘Development Planning – Vision 2020’ remaining an important set of milestones for the Buhari government.
Under this strategy, Nigeria plans to be one of the world's 20 largest economies (by nominal GDP) by 2020 through sustained socio-economic development. By necessity, this will include embedding those non-traditional sectors further and perhaps shifting the emphasis from oil and gas to mineral extraction.
Rule of Law
Anti-corruption quickly became a hallmark campaign message for the APC. The incoming government is expected to spend considerable time on the anti-corruption effort not least in order to contribute to a more investor-friendly business environment.
There are a number of draft bills in circulation that seek to address the challenges of fraud and corruption, some of which propose to grant additional powers to agencies such as the Economic and Financial Crimes Commission to investigate, prosecute and confiscate the proceeds of crime or corruption, (particularly as regards state assets) using both criminal justice and civil recovery architecture. It is widely expected that this will provide a major legislative focus in the coming months.
Furthermore, the incoming vice-president, Professor Osinbajo was heavily involved in reforming the Lagos judicial system both as Attorney General and subsequently Commissioner of Justice between 1999 and 2007. There is therefore an expectation that he will be instrumental in delivering on the electoral promise of adherence to the rule of law.
Of equally pressing importance will be the efforts to neutralise the terrorist threat posed by Boko Haram, so far focused on the north of the country. In addition to the loss of life and territory that has resulted, the destabilising effects of the militants’ activities on investor sentiment must not be understated. It is therefore essential that the Buhari administration finish the task the Jonathan administration began to bring the insurgency to an end.
Without wishing to dampen the optimism surrounding the democratic handover, the business community worldwide needs to see concerted, principled action on the part of the new administration to drive the change it promised. Nigeria’s macro-economic fundamentals are strong, and the hope remains that with new leadership, a new, more favourable investment environment will follow.