This piece first appeared in Open Africa, a custom digital publication by Ornico that features interviews, insights and business lessons from some of Africa’s leading CEOs, innovators and decision makers. Download your free digital copy of Open Africa here or go to http://bit.ly/open_africa and share your feedback on social media using the hashtag: #OpenAfricaMag
Nigeria, one of the biggest economies in sub-Saharan Africa, remains a challenge for investors despite the modernisation of the economy and a return to democratic rule in 1998. It retains a reputation for being a complex and difficult market, which can deter less hardy investors; Nigeria’s ranking on the World Bank Doing Business Report in 2016 was at a low 169 out of 189 countries surveyed.
But, despite its challenges, the country has, until recently, been a top emerging-market destination for investment. Hundreds of international companies, attracted by a consumer market of more than 160m people, improving incomes, high average growth rates over the past few years, and large market gaps, have made good returns in this market.
However, several have also had their fingers burned.
Risks are similar
The risks in Nigeria are similar to those in most other African countries — choice of partners, corruption, poor legal systems, unpredictable and often harsh regulation, excessive bureaucracy, inefficiency and a relatively underdeveloped domestic market. Difficult logistics, poor infrastructure and a dearth of regular power supply make it expensive to do business — up to three or four times more expensive than in South Africa — and make planning difficult.
There is no one-size-fits-all advice for investors. Much depends on the sector, market demand, the business model and country strategy, as well as the choice of local partners and the safeguards built into such relationships.
But there are a number of broad issues to consider when investing in Nigeria.
It is vital to remember that there is risk in underestimating potential risk. Companies still tend to go into African countries without doing sufficient homework on the full range of potential challenges, often accepting information and advice from desk-bound analysts with little experience of African markets in general, and Nigeria in particular.
Common causes of failure
One of the most common causes of business failure in Nigeria has been a lack of proper preparation, poor advice and failure to gain sufficiently deep insights into the terrain.
Nigeria’s turbulent past has led to the evolution of a particular business culture that is unfamiliar to most outside the country. This culture needs to be understood by investors, whether they have local partners or not.
It is also important to understand not just the macroeconomic landscape but the socio-political situation in Nigeria, as there may be factors here that have an impact upon business strategy. For instance, the uneven development of different regions, ethnicity and religion may affect how your product is regarded, the type of branding that may be best suited to the area and how to determine the best method of distribution.
It is useful to learn from the experiences of companies already in the market and those that have pulled out. There is no substitute for personal experience to inform market insights. Some companies have only learned that their business model was out of alignment with the realities of Nigeria once already in the market, wasting valuable time and money — and possibly tarnishing their image.
The wrong partners
One of the most common mistakes is getting into bed with the wrong partners. While it is important to have a local partner to benefit from local knowledge, to allow faster market penetration and to manage risk, a thorough due diligence is necessary to ensure the partner does not become the main risk. This is a multi-layered exercise. Partners need to be aligned to your own corporate governance standards and group operational standards. and be invested in the future of the enterprise. There have been cases where partners have set themselves up as competitors to their foreign business partner down the line, or who have used relationships with regulators and other agencies to frustrate the investment in order to push undisclosed agendas. But, mostly, partnerships have been successful where they have been put in place carefully.
Challenges such as bureaucracy — eg registration processes and getting work permits — need to be built into the entry strategy. Hiring a reputable law firm may ease the process.
It is also advisable to become familiar with regulatory agencies that are important to your investment. They include the National Agency for Food and Drug Administration, which issues import licences for food, drugs, cosmetics, chemicals and other such products, and the Standards Organisation of Nigeria for all other imports.
Many companies have tried to take shortcuts to avoid the nightmare of bureaucracy but this may easily backfire. When something goes wrong at a later stage, a company’s case is weakened by the failure to follow due process in the beginning. It is worth taking the extra time to do things the right way.
Corruption is pervasive, despite attempts by the new president, Muhammadu Buhari, to address it. It has become a way of life in a country where institutions and systems have been undermined by years of government mismanagement, easy oil riches and extreme poverty. It is not necessary to fall victim to it in order to operate successfully in Nigeria but it may make doing business more difficult with longer timeframes to get things done.
It is also advisable to keep abreast of changes in the operating environment, such as taxation and incentives. These may change after an election or when the government of the day faces liquidity and revenue challenges, as Nigeria does at present. Regulatory and policy uncertainty has long been one of the major risks in the Nigerian environment. But changing government priorities may also lead to the creation of new incentives as the authorities try to boost particular sectors such as industry and agriculture.
Nigeria is facing tough times as a result of the extended period of low oil prices — this commodity is still key for most of the country’s revenue and foreign exchange. The economy is also being buffeted by an insurgency in the oil fields, which has cut oil production by a third. The president, recognising the need to quickly diversify the economy and attract more foreign investment, has approved the formation of a presidential commission to look at ways to improve the ease of doing business in the country. He has also approved an expansionary budget for 2016 targeted at improving infrastructure in Nigeria.
While Nigeria may still be a difficult market in which to operate, the country has proved its resilience in the past and should remain on the list of investment destinations for any company that is serious about Africa.
About Dianna Games
Dianna Games (@) is CEO of consultancy Africa @ Work and executive director of the SA-Nigeria Chamber of Commerce, Johannesburg.
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