Risk of Doing Business in Nigeria – Depth of Local Knowledge is Key

Sometime in 2014, massive development began in one of the choice locations in Nigeria, Falomo Ikoyi. The developers were building a grand shopping mall in the very heart of Lagos, and they did not seem to be sparing any expense. Shortly after May 2015, work ground to an abrupt halt; what had happened?

Nigeria currently sits pretty as the 20th largest economy in the world going by purchasing power parity index. It is projected by PWC to be the 9th largest economy in 2050, a few billion dollars behind Japan and Russia in 7th & 8th respectively. Even as the engines of growth slowdown into a recession caused largely by a cocktail of policy and political misdirections, trade in Nigeria in the 2nd quarter of 2016 grew by as much as 49%. Clearly, Nigeria is a place to do business, because there are over 180 Million potentials for success.

Both foreign investors and local businesses in Nigeria require a depth of local knowledge about the policy, economic and political environment to thrive or at least remain afloat. And beyond staying afloat, local knowledge must be valuable by translating into viable business relations that help businesses achieve goals, such as dealing with trigger-happy regulators or revenue officers.

I read over the past week, a post by the founder of Hitv, explaining the sad circumstances surrounding the unfortunate collapse of the free to air satellite tv company. Of all the issues that led to the collapse of Hitv, none was more striking as his explanation that “the delay in obtaining the loan needed to pay for the English Premiership TV rights” which came a day after the rights had been sold, effectively killed the company. More on this later.

I read somewhere that China is a compliance rainforest, so also is Nigeria. Entering into a country fills businesses with a lot of concern about the local partner to engage. The risks of getting it wrong can be devastating, as we found from the Unaoil Scandal. Yet, there is no way of overstating the importance of local partners who understand the terrain. Even for local businesses, the difference between a failed business venture and a successful one usually turns on the knowledge of the terrain. One recent case supremely illustrates this point.

Sometime in 2014, massive development work began in one of the choice locations in Nigeria - Falomo, Ikoyi. The developers were building a grand shopping mall in the very heart of Lagos, and they did not seem to be sparing any expense. Vibrations from the foundation work reverberated some hundred feet away in buildings close-by and a billboard just outside displayed a picture of the state-of the art edifice. Shortly after May 2015, work on the project ground to an abrupt halt; what had happened? Well, there was a new Sherriff in town, who had different ideas. 2015 was an election year, there was going to be a new Governor and the folks who were overseeing the massive project might have saved all the investors the loss of the huge funds sunk into the project if they had the presence of mind to consider all the possibilities. A sound project management plan should have involved a robust risk assessment which should have involved an analysis of the following:

1.     political risks of commencing such huge project a year into the 2015 elections which had been tagged as the most hotly contested in Nigeria in many decades

2.     an analysis of the consequences of victory by each contestant

3.     the ramifications should the opposition party win

In other countries this might be unnecessary; government is a continuum, therefore a change of government should have little or no bearing on already concluded contracts, and in any case, there must be available remedies in the event of infringement of an investor’s rights (and indeed in Nigeria there are “remedies”). But the reality is that it is not always a simple matter in Nigeria. A robust country-entry risk assessment must consider all the preceding possibilities to avoid getting an investor in and leaving them stranded in the courts.

This point is also further illustrated by another interesting instance from Lagos. During the 2015 elections, one of the campaign promises of one of the gubernatorial aspirants was that his administration would discontinue a 30-year concession of the Lekki-Epe expressway to a company known as Lekki Concession Company (LCC). LCC had been awarded a 30year concession to manage and collect toll on the road in order to recoup the (somewhat unbelievable) N50 billion it allegedly spent on the “expansion” (emphasis on expansion) of the 29km road. LCC is a special purpose vehicle by a band of investors who had invested in the project. Imagine the panic and concern among shareholders of the investor companies when they learnt of the campaign promise of a major aspirant to discard the concession? A sound risk officer would have identified the threat long before it came mainstream, and suggested ways of managing the risks to minimise the LCC’s exposure. In the LCC case, I learnt that certain steps were taken which satisfied the investors, although fortunately, the favourable candidate won.

On the second point, a local partner must go beyond reeling out country-entry requirements and post incorporation obligations to providing bespoke value to real time challenges. Such a partner must be proactive. Hitv effectively went underground because a loan came 24 hours late. Imagine a scenario where someone in Hitv had a network of contacts that they leveraged to ensure all the bank’s internal processes were seen to timeously? Perhaps we might have still had Hitv around giving DStv a reason to be customer-friendly. In my experience, with respect to regulators, a business can be shut down with the attendant loss of revenue because a local partner either did not know how to or whom to engage.

As I write, a government project that has arguably gulped billions in funds is lying abandoned in Illubirin, Lagos because there is a new administration in power. Imagine if some banks bankrolled such massive project? In Rivers State, the new administration has abandoned a mono-rail project that gulped billions of state funds. Had investors’ funds been involved what would have been their remedy?

A local partner must not know the law alone, he must know the terrain, understand how it works and where to go to get things done. As with everything in business, great care must be taken to select an ethical local partner to avoid a Unaoil type scandal.