FT SPECIAL REPORT

Investing in Nigeria
Wednesday November 28 2012
www.ft.com/reports | twitter.com/ftreports

Pressure on president to switch on more lights
Electricity shortages remain the greatest impediment to growth and investment, write William Wallis and Xan Rice
Uncertain: President Goodluck Jonathan is liked but there is concern that he lacks the backbone to steer changes
Reuters

Inside »
Economy As politicians monopolise oil funds, patience is wearing thin
Page 2

The north Islamist violence compounds decline of nation’s poorest region
Page 3

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f President Goodluck Jonathan succeeds in just one thing – turning on more lights – Nigerians may forgive him for falling short on other fronts. Having risen serendipitously through ruling party ranks to reach the top in 2010, following the death in office of his predecessor, and then on to win elections last year, the affable, former zoology lecturer has made reforming the power sector his priority. A decade of rapid economic expansion on the back of high oil prices and a boom in services has delivered greater prosperity and confidence to parts of Nigeria’s south – notably Lagos, the commercial capital, and more recently the oil-producing Niger delta from where Mr Jonathan hails. But the development of the mainly Muslim north has been left trailing dangerously, at the same time as the region’s elites are smarting from a

loss of political power. It is not entirely coincidental that an Islamist insurgency has taken root, its rank and file peopled by young men with little hope of finding jobs. Conventional wisdom has it that the country will struggle to turn the corner in a more balanced and stable way if it fails to resolve the greatest impediment to growth and investment: electricity shortages. Lastminute vacillation by the government has nevertheless come close to stalling the privatisation programme on which hopes rest following the failure of past multi-billion dollar attempts to improve supplies via state investment. In the epicentre of Nigerian deal making – the Abuja Hilton – successful bidders expecting to take over power plants and distribution networks went in a short space of time from celebrating breakfast over champagne to staring disconsolately into

their coffee. Mr Jonathan’s decision in mid November to revoke a transmission management contract perplexed the experts, unnerved the bankrollers and caused dismay. The president saw his mistake – caused by turf wars among officials – and back pedalled again last week. But the confusion had already reinforced the impression of an administration inclined to set off in the right direction only to shoot itself in the foot. The muddle has added to a more pervasive mood of uncertainty about the direction in which Nigeria is heading: forwards in the fast lane where it could overtake South Africa as the continent’s largest economy; backwards to political turmoil and conflict; or stumbling along somewhere in between. Mr Jonathan is liked – his provincial roots, good humour and humility give him the touch of the common man. But to listen to fractious politi-

cal and business leaders, he is not universally respected. In a country more accustomed to ruthless generals, there is concern that he lacks backbone. Moreover, the former state governor has depended on the same patronage system that he claims to be fighting. Some reformers and activists believe he is too compromised to drive through meaningful change. It is not only electricity at stake. Investment worth tens of billions of dollars in the 2.4m barrels a day oil industry has stalled pending the passage of long delayed legislation aimed at improving efficiency and delivering greater returns. Meanwhile, the theft of oil in the Niger delta has reached unprecedented levels, with criminal networks stealing upwards of 150,000 b/d worth more than $7bn annually. The perception that corruption is waxing has been reinforced, ironically, by the

greater transparency Mr Jonathan has begun to bring to murkier sectors of the economy. A series of investigations into the petroleum industry has shone a light on billions of dollars in losses caused by mismanagement and fraud. “Unless we get a government in place that can squarely face corruption and punish it at all levels, we can’t see the end of this situation,” says General Muhammadu Buhari, the ascetic former military ruler who has run two failed bids to win presidential elections. Yet there are signs of progress. Partly as a result of optimism over power reform – and the prospect of this unleashing Nigeria’s industrial potential and cutting dramatically the cost of doing business – Standard & Poors, the rating agency, upgraded the country this month. The upgrade still leaves the Continued on Page 2

Telecoms For a generation of Nigerians, the smartphone is a must­have item
Page 4

Oil and gas Inquiry finds state has been short changed at most accounting stages
Page 5

Luxury Big brand items are a surefire bet to empty the wallets of the elite
Page 15

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FINANCIAL TIMES WEDNESDAY NOVEMBER 28 2012

Investing in Nigeria

Short termism threatens development
Economy Underpinning the numbers debate is a more profound one about the political system, writes William Wallis

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Under pressure to switch on lights
Continued from Page 1

igeria’s principle source of revenue has been squeezed extravagantly from all sides – upstream from the industrial scale theft of oil and downstream from fraud in the allocation of a multi- billion dollar fuel subsidy But were it not for a recent string of government and donor funded investigations which have uncovered some of the rot, you would not necessarily know it. Standard & Poors, the rating agency, has just upgraded Nigeria at a time that much of the rest of the world is facing downgrades. The International Monetary Fund has given government finances a qualified thumbs up – warning in a forthcoming paper that budget and balance of payments are nevertheless vulnerable to further slowdown in the global economy which might soften oil prices. “In a normal country, pissing 20 per cent of revenues up the wall on fuel subsidies would lead to a crisis in public finances,” says a senior donor official bluntly. In Nigeria, however, when the price of oil, on which the government depends typically for 80 per cent of revenues, is above $100, the cracks get papered over. Moreover, while some officials have been busy colluding in siphoning off subsidy funds and stealing oil, others have been fighting to plug the leaks. Ngozi Okonjo-Iweala, the finance minister, says foreign exchange reserves have risen back up to $45bn. The Excess Crude Account (ECA), set up to collect savings above the budgeted price of oil, is back near $7bn, with another $1bn now dedicated to a sovereign wealth fund. This is a modest cushion when compared with the $19bn the government had in the ECA and then spent after the world economy faltered in 2008. But it is nonetheless an improvement, even when compared with the middle of 2012. Then, continued arrears payments on the staggering N2.1tn fuel subsidy bill, together with a slowdown in oil production was beginning to erode the “financial viability of the government”, some officials were warning privately. At stake was the ability to fully fund salaries and the capital budget, internal documents seen by the FT

The administration is perceived as an unwieldy resource trap, peopled with rent­seeking mandarins

suggest. Any sudden fall in the oil price would also have limited the ability of the 36 states of the federation to pay a recently approved minimum wage. Meanwhile, Ms Okonjo-Iweala has made modest progress towards reducing the proportion of the federal budget dedicated to recurrent expenditure from 74 per cent in 2011, to 71.5 per cent this year and with a target of 68.7 per cent next. This should free up more funds for investment. However, there is another battle to come. The finance ministry has set the benchmark oil price at $75 next year. The national assembly is seeking to raise this to $80, thereby reducing potential savings. “Seventy-five dollars represents an upper limit from our model, if Nigeria is to maintain a stable macroeconomic environment for next year,” Ms Okonjo-Iweala argues in a paper defending her case. An $80 benchmark “would lead to an increase in liquidity . . . inflation rates would certainly rise signifi-

cantly” and the exchange rate would come under severe pressure, leading to a hike in interest rates above the current 12 per cent. Underpinning the debate about the numbers is a more profound one about the way the political system is evolving. The imperative among most politicians is to gain access to funds and monopolise resources in the here and now. This is sharply at odds with a longer term development agenda. Both at federal and state level, the administration is perceived as an unwieldy resource trap, peopled with rent-seeking mandarins. Patience with this is wearing thin. “Oil prices are likely to soften next year. If anything happens to the oil price it could provide a trigger [for social unrest],” says Nasir el-Rufai, a former minister with the ruling People’s Democratic party and now one of the government’s most outspoken opponents. The brash, confident business community in Lagos, the commercial capital, is less fazed. A decade of market reforms has unleashed some of

Nigeria’s potential, agriculture and services are beginning to boom and many argue that, where the state has moved out of the way, the economy is thriving. There is some progress, too, on other fronts. “We are transforming the power sector. The ports are being transformed. The fertiliser subsidy has been scrapped. It’s almost like economic reform by stealth,” says Atedo Peterside, a former banker, who sits on an economic advisory council. Next year’s fuel subsidy bill is forecast to be half that of 2011. The finance minister hands over a list of all the fuel marketers suspected of having submitted fraudulent invoices and some of whom face criminal proceedings. This is evidence, she suggests, that the government is boldly tackling waste and graft. But if oil production slows – a possibility according to industry experts because of chronic underinvestment – and for whatever reason the oil price falls, even she admits there could be trouble.

Oil supply: if production slows, there could be trouble Getty

sovereign rating three notches below investment grade. But as Ngozi OkonjoIweala, the combative finance minister and coordinator of economic policy, notes, downgrading has been the norm for many countries riding through current global economic turmoil. Since last year’s fiscally profligate election, Nigeria has begun to rebuild foreign reserves, increase savings above the budgeted price of oil and marginally improve the proportion of state revenues available for capital investment. Banking reforms initiated after the 2008 crash have also delivered more solid foundations, and telecoms is still booming a decade after it was liberalised. A forthcoming report by the International Monetary Fund gives a qualified thumbs up, predicting growth in gross domestic product this year of 6.3 per cent while noting the risks posed by a fall in the world price of oil, on which Nigeria still depends for more than 80 per cent of state revenues. Impatience with the status quo presents a growing threat. The warning signals have been flashing in multiple ways. One has come from the impoverished northeast, where the Islamist insurgency took root and spread. Another is in the amount of irreverent comment on the web. This peaked this year when the government tried to remove the fuel subsidy, prompting nationwide protests and strikes. To halt the chaos, it was obliged to restore half of it. The lifting of the subsidy sparked an eruption of

Leader’s mild manner adds to sense of drift
Politics

Potential investors see Nigeria as an increasingly attractive frontier market
anger because it forced up the price of transport and food. The public also perceived that people in business and political circles were abusing the subsidy removal for their own ends and forcing the poor to pay the cost. “The government can attempt it again but resistance will still be there so long as people don’t see an improvement in their lives,” says Ahmed Makarfi, who chairs the senate finance committee. Yet, signs of turmoil have not dissuaded potential investors from seeing Nigeria as an increasingly attractive frontier market, especially when returns elsewhere in the world are slowing. Store openings by companies such as Shoprite and Walmart’s subsidiary Massmart are growing at 36 per cent a year, according to a recent McKinsey report. Heineken held its worldwide financial conference in Lagos earlier this month, bringing 60 analysts from all over the world and celebrating a 10 per cent annual growth in its business over a decade. Heineken cites the country’s demographics as one of the reasons – with 160m people, it is home to one in six Africans. What some economists see as a demographic dividend, others see as a time bomb already detonating in parts of the country. Up to six million people are entering the job market every year and youth unemployment is nearly 40 per cent. Hence the urgent need to create conditions for Nigeria to become more productive. This and other difficulties are far from straightforward, for, if successful, reforms will chip away the patronage on which the political system depends. “In terms of tangible results he [Mr Jonathan] hasn’t done well but if you look nine months forward, power is working and the Petroleum Industry bill is passed, things will be looking a lot better,” says Bismarck Rewane, a Lagosbased financial analyst.

President’s standing has yet to recover from subsidy upset, writes Xan Rice
As political honeymoons go, it was brief. A little over six months after Goodluck Jonathan was sworn in as elected president, protesters in Lagos were carrying around mock coffins bearing his name. It was early January this year and, after badly misreading the national mood, Mr Jonathan had decided to end the fuel subsidy that for decades had enabled Nigerians to buy cheap petrol. After a week of strikes and protests, he was forced to back down and reinstate half the subsidy. Although aides suggested that removing even part of it was a victory, his standing in the eyes of the public had dipped. Ten months on, and it is hard to say that the image of the affable former academic has fully recovered. “People believed in him, especially the younger generation, thinking he was of a different breed,” says Jibrin Ibrahim, director of the Centre for Democracy and Development, a civil society group in Abuja. “But the general feeling is that he has performed poorly.” Chief among the complaints is that Mr Jonathan has failed to deliver on his promise to tackle high-level corruption. It is true that no action has been taken against senior officials who, as in previous administrations, appear to be using their offices for personal gain. It is also true that greater openness in government, as well as investigations launched by the presidency, have illuminated the scale of the graft. Instead of sacking the officials implicated and sending them to jail, Mr Jonathan says it will be more useful to reform the system by removing the

easy opportunities for bribery and corruption. Deregulation of the electricity industry is one example of how this is happening, his supporters say. Mr Jonathan’s approval of the Petroleum Industry bill, which will liberalise the graft-filled oil sector is another. The bill, however, still vests much power in the president and the petroleum minister. To give that up means ending the main source of political patronage. The second charge against Mr Jonathan is that the country is drifting under his leadership. “There appears to be no real sense of purpose,” says Mr Ibrahim. “What is he trying to achieve?” Mr Jonathan’s low-key persona, a marked contrast to the forcefulness of many previous rulers and something welcomed by many Nigerians when he came to

‘People believed in him, especially the young generation, thinking he was of a different breed’
power, means that this is not always easy to discern. Besides the privatisation process, the economy is looking more stable. Yet when the country is facing what some say is an existential threat, in the form of the Boko Haram militancy, Mr Jonathan’s mild manner can make him seem indecisive and ineffectual. His opponents are eager to unseat him and the political manoeuvring ahead of the 2015 election is well under way. Mr Jonathan has not yet stated that he will seek another term, though he will be under pressure to do so. He is the first president from the oil-producing delta region and there is a feeling among people there that “our turn” should not just last for a single term. “I think it’s clear that the president will run for a sec-

ond term,” says Emma Ezeazu, general secretary of the Alliance for Credible Elections. “This is not going to go down well in some parts.” Northern Nigeria is one of those areas. The unwritten agreement on “zoning” by the ruling People’s Democratic party in 1999 held that power should rotate between the mainly Christian south and Muslim north. Olusegun Obasanjo, a southerner, ruled until 2007 when Umaru Yar’Adua took over. But Mr Yar’Adua’s illness and then death in 2010 meant that a northerner had ruled for fewer than three years before another southerner – Mr Jonathan – took power. The continued sense of northern political marginalisation comes as the region’s economy is slipping ever further behind that of the south. “The north still feels entitled to the presidency in 2015 because they think they were short-changed in 2011,” says Clement Nwankwo, executive director of the Policy and Legal Advocacy Centre, in Abuja. Mr Nwankwo says that there is no guarantee that the PDP will give Mr Jonathan the nomination if he seeks it. Some of the party’s godfathers, including Mr Obasanjo, are no longer close to the president and are said to be considering alternative candidates. Opposition parties are plotting their own strategies. The PDP’s strength has forced the biggest ones to consider a merger. The Action Congress of Nigeria, headed by Bola Tinubu, the former Lagos state governor, is reported to be talking to the Congress for Progressive Change, under General Muhammadu Buhari, the former military ruler who lost out to Mr Jonathan in 2011. But analysts say neither of the two men is likely to be able to carry the vote, even under a merged party, meaning they would need to find a compromise candidate.

FINANCIAL TIMES WEDNESDAY NOVEMBER 28 2012

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Investing in Nigeria

Unequal growth puts strain on federation
The north William Wallis reports on a region that is a shadow of its former self

Corruption More serious steps needed at all levels of society to combat institutional graft, says Tolu Ogunlesi
The epic scale of graft within the Nigerian bureaucracy is well­ documented. Out of 183 countries on Transparency International’s most recent index of perceived levels of public­sector corruption, Nigeria ranks as the 143rd worst. Human Rights Watch was even more damning in a report last year, saying that graft “has turned public service for many into a kind of criminal enterprise”. But what about corruption in the private sector? Speaking to business executives, there is little doubt that it is a significant problem, though one that is usually kept under wraps. “Most private­sector organisations do not seem to like to disclose fraud­related incidents within their organisations, possibly due to concern about reputational risk,” says Linus Okeke, partner and head of fraud investigation and dispute services for west Africa, at consultancy Ernst & Young. Some of the corruption is petty – low­level employees “chopping” money, by colluding with suppliers or stealing goods. But, as in government, the rot can go all the way to the top. Among the unreported fraud statistics are cases perpetrated or attempted by senior management, Mr Okeke says. Even then, “more often than not, one rarely hears of such cases other than in exceptional circumstances”, he says. Awareness has shifted from the cleaned­up banking sector to oil and gas, where the scale of fraud related to the import of fuel has been under the microscope since the beginning of the year. Because Nigeria’s refineries do not produce enough petrol to satisfy local consumption, the government hands out import licences to private companies that sell it at subsidised rates, then collect the difference from the government. The system is rife with abuse, with several companies habitually inflating their subsidy claims and obtaining payment without ever having delivered fuel. One government panel of investigation found that Nigeria lost $6.8bn to the manipulation of the fuel subsidy scheme between 2009 and 2011. Court proceedings have started against a number of fuel marketers, including sons of prominent business people and politicians. Inevitably, graft has an effect on foreign companies doing business. “We have seen a significant increase in concern on the part of companies looking to do business in Nigeria and other countries in the region about governance issues,” says Antony Goldman, analyst at ProMedia Consulting. “[This is] not so much because anything has changed in Nigeria but because of greater scrutiny by the regulatory authorities in the US and parts of Europe.” Mr Goldman says the short­term benefits of bribery will never offset the risks. “In every case, payment of bribes is a short­cut to trouble, an action that forever leaves the company obliged to individuals or institutions in Nigeria that typically have less to lose than they do. There are all kinds of things a responsible foreign investor could or should do to demonstrate social responsibility, but that should not be confused with bribery.” Awareness of corruption has grown among Nigerians, via the media, the internet and mobile phones. Five years ago, the main platforms for reducing opaqueness were high­level ones such as the Extractive Industries Transparency Initiative, which has conducted a series of audits of the oil sector. Now citizen­led projects are pushing for transparency. BudgIT, the “civic start­up” behind a mobile and web­based app, converts government budgets into easily understandable charts. Integrity Nigeria, an NGO that promotes transparency in the public and private sectors, this year launched egunjedotinfo, a website for reporting bribery. Increased awareness about the scale and impact of corruption has not yet translated into a belief that ordinary citizens have any power to change things. “Corruption actually is getting worse,” says Soji Apampa, director of Integrity Nigeria. “It is the nature of our extractive political and economic institutions. It is about holding the cow of state steady while your group milks it to death.” Soji Apampa, director of Integrity

T

he comparative economic decline of Nigeria’s north was putting a strain on the federation long before an Islamist insurgency took root. The insurgency, spawned in the poorest part of the country, the northeast, is compounding this threat to Nigeria’s unity. Kidnappings, bombings and a brutal military campaign against the alQaeda linked Boko Haram sect, have deterred fresh investment, while slowing both national and regional trade. Like the ancient walled city of Kano, Maiduguri in the northeast was once one of the largest trading centres in the semi-desert Sahel. Under curfew, and subject to frequent bouts of violence, Maiduguri is a pockmarked city and a ghost town much of the time. Kano too is a shadow of its former self, its large industrial zone a wasteland, with most of its warehouses and factories closed. Consumer goods companies say sales are falling as traders who used to flock across the border from neighbouring countries go elsewhere. Internally, trade has slowed and transport has become more expensive because of shorter market hours and holdups at military road blocks. The International Monetary Fund has shaved its overall estimate of growth in gross domestic product for Nigeria this year to a below trend 6.3 per cent. Boko Haram was not inspired directly by the economic conditions of the predominately Muslim north. Its origins were in a radical Muslim cult drawn into a fight with security agencies. “Their beef was not originally political. It morphed when they felt more grievances with the state,” says an official drafted in to help develop a de-radicalisation plan for the region,

including a shakeup of the Koranic education system. Over the long term, this is unlikely to work, regional politicians and business people argue, unless there is something of a Marshall Plan to regenerate the economy and create jobs. “The best thing is that the whole mess is waking people up to the need to revitalise the north. We have the largest population and a huge youth bulge,” the official says. As things stand, the way state funds are allocated and the direction in which private investment is flowing, are skewed heavily in the south’s favour. Oil-producing areas of the south benefit from 13 per cent of the revenues generated from oil in their area, on top of the federal allocations they and other states receive. As world oil prices have risen, this has led to a widening gulf in income between states with oil and those without. The formula was introduced after the military relinquished power in 1999 as part of efforts to redress historic grievances among the inhabitants of the Niger delta and quell a militant campaign that was jeopardising output. But by seeking to address one problem, Nigeria may inadvertently have helped create another, weakening other states in the federation and fostering resentment in the poorest region . The imbalance is so stark because the state still depends on oil for more than 80 per cent of revenues. It has made little progress in raising taxes from agriculture, which accounts for 42 per cent of GDP, and the north’s mining potential has long gone unexploited. “When you look at the figures and look at the size of the population in

National divide: people in the north are among the poorest in Africa

Reuters

the north, you can see there is a structural imbalance of enormous proportions,” Lamido Sanusi, the central bank governor told the FT earlier this year. Broken down on a per capita basis, the contrast between allocations to the states in the north and those in the south are stark. Between 1999 and 2008 the inhabitants of the six states in the northeast received on average N1,156 per person compared with N3,332 per person in the south. As might be expected, inhabitants of the delta are fiercely defensive of this revenue formula, given that their own region saw little benefit from oil

Almost all the region’s textile factories have closed, at the cost of hundreds of thousands of jobs

during the many years when Nigeria was ruled by northern leaders. But the absence of dividends flowing to the north is a source of national tension, for which market forces have not provided an answer. Many of the state-owned or protected industries established in the north as part of earlier efforts to promote economic balance, were lossmaking by the time the government accelerated its privatisation programme in 1999. Almost all the region’s textile factories have since closed, at the cost of hundreds of thousands of jobs. The north’s inhabitants, although more numerous, are among the poorest in Africa, and therefore represent a less attractive market for the banks, telecoms and retail companies booming in southern pockets of comparative affluence. While industry in the north might become viable again if reforms in power supply begin to deliver, the case for more state intervention to bridge the gulf is unlikely to go away.

Circle of violence as Islamist group broadens its reach
Security

Xan Rice reports on the Boko Haram attacks crippling parts of the country
The YouTube video is chilling, both in its content and its making. It shows a man smiling and relaxed at the steering-wheel of a fourwheel drive on April 26 this year. The vehicle is then shown driving along the road in Abuja, the capital, before the cameraman, or perhaps a second one, positions himself in an empty field opposite the headquarters of This Day newspaper group. From a safe distance he captures the car moving slowly towards the main gate and suddenly exploding in a giant ball of orange and grey. The suicide attack, which killed several people and caused extensive damage, was the work of Boko Haram, the Islamist movement based in northeast Nigeria. It demonstrated the capacity of the group to carry out bombings in the capital, even after security was tightened following attacks on the United Nations and police headquarters in 2011. It was also an illustration of the changing nature of the targets. What began as an insurgency against security forces and local government officials in the Muslim north has broadened with attacks on students, the media and especially churches – causing much anger in the mostly Christian south and leading to fears the militants are trying to start a religious war. The scale of the attacks and their geographical range has lessened in recent months, which security forces say illustrates gains made against the militants, as well as a possible split in their ranks. But the frequency of raids, especially in northeastern states of Borno and Yobe, has not fallen. This year has been

the most deadly, with at least 815 people killed in 275 attacks between January and October, according to a Human Rights Watch report, compared with about 700 between 2009 and 2011. There are few other places in the world where suicide bombings have become so commonplace. “The group, whose professed aim is to rid the country of its corrupt and abusive government and institute what it describes as religious purity, has committed horrific crimes against Nigeria’s citizens,” Human Rights Watch says. It also accused security forces of serious abuses in their counterinsurgency efforts, including possible crimes against humanity. The military denies this. Sitting in Lagos, the commercial capital, it is easy to feel that the violence is taking place in a distant country. The nearest place that has been attacked is Abuja, nearly 500 miles away. Some businessmen – and financial analysts abroad – even argue that the insurgency should have little impact on investment decisions, since the south has a much stronger economy. Northern Nigeria may be the poorer half of the country but it is still home to about 80m people, half its population, who represent a huge market. And it is clear

that the insecurity has hit business there. Consumer goods companies have seen their sales in parts of the north cut. Traders from Chad, Niger and Cameroon who used to travel to markets to buy Nigerian products can no longer do so because of border closures, says Keith Richards, managing director of Promasidor, a consumer goods company that sells tea, powdered milk and other products to the lower end of the market.

The north may be the poorer part of Nigeria but it is home to about half its population
Supermarket groups have delayed expansion plans in the north, while banks there have had to shut branches or reduce work hours due to the threat of robbery by gangsters and Boko Haram militants. Some non-Muslim workers no longer feel comfortable there, while most expatriate workers are banned from travelling in the north by their employers. Transport costs have soared because of the risks and delays at military checkpoints. The effect has been to

Deadly: at least 815 people have been killed this year

Reuters

further hurt the northern economy. Weak local prospects and lack of jobs enabled Boko Haram to recruit members after its emergence in the early 2000s. The group, whose name means “western education is forbidden”, was then led by the cleric Mohammed Yusuf. His execution by police in 2009 set off the chain of events that continue today. “It’s a vicious circle,” says Kole Shettima, who is the Nigeria country director of the US-headquartered MacArthur Foundation, and comes from the northeast. “The military has its own sense of insecurity, so it responds with greater force, increasing sympathy for Boko Haram.” After a recent trip to Maiduguri, the large, northeastern city in Borno state where Boko Haram originated, Mr Shettima says the area around the main hospital reeks of “the smell of corpses” dumped at its doors. These are victims of insurgent attacks as well as the military’s response. The situation in Potsikum and Damaturu, the economic and political capitals of Yobe state, was scarcely better. “Many business premises in Potiskum and Damaturu have closed,” he wrote in an essay after a visit. “The operators have been thrown to the list of teeming unemployed and underemployed . . . Evidence of economic paralysis is everywhere.” A solution to the crisis does not appear near. Several times this year there have been unconfirmed reports of tentative talks between Boko Haram and the government. On the surface, the government’s only strategy is a military one. “There needs to be a multisectoral approach to this problem if this to end,” says Mr Shettima, adding that both the government and the Muslim community need to do more. “Not enough attention is being paid to the ideological challenge. Even if only one in 10 members of Boko Haram are left, there will still be problems.”

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FINANCIAL TIMES WEDNESDAY NOVEMBER 28 2012

Investing in Nigeria

Image conscious: BlackBerrys now account for 46 per cent of Nigeria’s 4m­user smartphone market

Dami Olateru­Olagbegi

Status symbols that have the upper hand
Telecoms The BlackBerry has become central to the aspirations of many Nigerians, writes Ed Hammond

E

ven by the standard of Lagos’ ubiquitous traffic jams, the queue into Computer Village is bad. Cars jerk through the horn-pierced fug at about five metres a minute. Fifty feet above, a brash red billboard stretched fully across two identikit tower blocks bears the message that the Visafone network is now available on BlackBerry. Once inside the village, a sprawling network of electrical retailers, techcafés and street-stall workshops, it is obvious why Visafone – the fifth largest mobile phone network provider in Nigeria, after MTN, Glo, Airtel and Etisalat – required such a prominent advertisement of its newly sealed telephonic tryst: BlackBerry is everywhere. For a generation of image conscious Nigerians, the smartphone has become a must-have status symbol; a

material affirmation of having a place in the country’s upward trajectory. From a standing start in 2006, BlackBerrys now account for 46 per cent of Nigeria’s 4m-user smartphone market, according to data from GfK, the market research company. Those networks that cannot connect to BlackBerry handsets are at risk. Even more remarkable is that the rapid success of the brand comes as its fortunes in the US and western Europe appear to be in terminal decline – Research In Motion (RIM), the maker of BlackBerry, posted a $235m net loss for the latest quarter as it continues to lose ground to rival smartphone makers. “The BlackBerry has become a product central in the aspirations of a lot of Nigerians, but, crucially, one which is affordable,” says Waldi Wepener, RIM regional director. Mr Wepener, who moved to Lagos

this year to set up RIM’s Nigerian office, adds that demand in Africa’s most populous country has really taken off in the past 18 months. “The most common misconception about what we do here is that we are mainly selling the cheaper models. The reality is that there is a hierarchy even within the BlackBerry owning class and we sell right the way through the range from $200 to $500 handsets,” Mr Wepener says. One of the things insulating the BlackBerry pre-eminence in Nigeria is the absence of global sparring partner. Thus far, Apple has not made a meaningful entry into the country and industry observers suggest the price of the company’s hardware might make it tough to get going. But the success of the BlackBerry is also down to one of its own features: BBM. A staggering 95 per cent of the Nigeria’s BlackBerry owners use

BBM, the smartphone’s instant messaging service which allows free communiqué between users. Having a PIN – the identification code for a BlackBerry BBM user – has become more important than having a phone number among young Nigerians. “If you are being asked out and the guy asks for your phone number rather than your PIN, then you know he is old-school,” explains a woman queueing to have her BlackBerry serviced in Computer Village. Other young Nigerians are harness-

Insulating BlackBerry’s pre­eminence is the absence of Apple, its global sparring partner

ing the growing number of people with access to the internet via their phones and laptops to find solutions to the social, economic and infrastructure problems that besmirch the country’s image overseas. One such project, the Co-Creation Hub, has bought together an online community of 1,200 businesses and individuals who combine to find ways to fix each others, and Nigeria’s problems. Using £25,000 of seed funding from one of the Sainsbury Family Charitable Trusts, CCH used the skill base of its network to design and launch “BudgIT”, an online tool that simplifies the country’s opaque public finance data into graphics and textbites, including tweets. “The idea was to make information that most people don’t understand accessible to everyone,” says Femi Longe, co-founder of CCH. He adds:

“A lot of the government data are in a format that doesn’t make sense to outsiders. Making it clear is a way of helping overseas investors understand what’s actually going on and, hopefully, encourage them to invest here.” Back in Computer Village, BlackBerry has just opened its first licensed store in Nigeria, teaming up with Slot, a local mobile phone retailer. As a mark of how important the country has become to RIM, the company has slated the Nigeria launch for its new generation of smartphones, BlackBerry 10, to coincide with those in Europe and the US early next year. Meanwhile, Nnamdi Ezeigbo, Slot’s managing director, says the demand for BlackBerry products is showing no sign of slowing. “BlackBerry have taken an aggressive approach with advertising and pushing the fact that they have stable internet access. It definitely seems to be working.”

Local knowledge is important in fulfilling towering ambitions
Company profile IHS

Xan Rice finds top tips on operating in difficult territory
In 2001, when Nigeria was liberalising its telecoms market, many people were scrambling to acquire mobile licences. Issam Darwish, a Lebanese engineer working in Lagos, had loftier ambitions: 50m high, to be precise. To provide network coverage across a large, and in places densely populated country, Nigeria needed many thousands of mobile towers. The company Mr Darwish cofounded started by building base stations for mobile operators. Today IHS, which is listed on the Nigerian Stock Exchange, is one of the four main tower companies in Africa, with 5,700 sites under management, including 3,000 that it owns outright. Turnover for the year ended April 30 was $97.5m. Mr Darwish, the CEO, is still looking up. Within five years he wants IHS to own 20,000 sites by building more of its own and, especially, by buying them from mobile phone operators. The masts are leased back to the mobile operator and other service providers seeking to share infrastructure and costs. IHS’s story offers lessons for other businesses looking to set up in a country that offers large rewards, but has a difficult operating environment.

Crucial to the company’s success, Mr Darwish says, is local knowledge. “In the US and Europe, you buy a piece of land and erect a tower,” Mr Darwish says. “There is a power grid, a clean environment and no big need to really secure the site. In Nigeria, it’s the other extreme. You may have to build access roads. The environment can be dirty, and the power grid is unreliable and nonexistent in many places. Each tower requires a small specialised power plant to keep it running.” In IHS’s early years, when it was mostly only a tower builder, the mobile operators were responsible for the maintenance. The two generators at each tower site needed to be checked twice a month. Diesel had be delivered, and stored safely. Guards and cameras were, and still are, essential at most sites. But around 2006, with the mobile market expanding fast, service providers started realising that they should be concentrating more on selling their products than running a diesel logistics operation. So IHS began shifting from being a site building company to also managing towers for the likes of MTN and Airtel. By expanding its staff – the company now has nearly 1,000 personnel – IHS was able to cover much of the country, including areas of insecurity, such as the Niger Delta and, more recently, northeast Nigeria, home to an Islamist insurgency. Militants there

recently attacked telecoms towers, including two belonging to IHS. “The thing with telecoms is that everyone wants to talk; the good guys and the bad guys. Of course we [as non-Nigerians] cannot go to some places any more because of the violence, but you have people from that area who work for you. We also have about 100 dedicated subcontractors,” Mr Darwish says. With the business growing fast, IHS needed capital, so it listed on the stock exchange in 2008, raising $65m. It was not long before the business model shifted again. As

‘The thing with telecoms is that everyone wants to talk; the good guys and the bad guys’
mobile competition increased, prices fell, and operators were seeing a drop in revenues per user, even as their subscriber numbers – and need for more base stations – rose. A single tower cost up to $250,000, and service providers were becoming capital constrained. The idea of operators sharing towers – and costs – with rival mobile service providers, internet companies and banks had already caught on elsewhere in the world. IHS decided that colocation would be crucial

to the company’s strategy. Since then, as its portfolio of towers has expanded within Nigeria, as well as in Ghana, Sudan and South Sudan, so has the need for new funding. The crash at the NSE in 2008 had left investors wary, and the pool of money available for companies “too shallow” for IHS’s needs, Mr Darwish says. So it looked to the global markets, selling equity to the International Finance Corporation, Investec, the Dutch development bank FMO, ECP Private Equity, European investment firm Wendel and Nigeria’s Skye Bank. In the 12 months to December 2012, IHS will have raised $269m in equity, and $480m in debt to fund its expansion. In October, IHS paid $284m to MTN for 1,758 towers in Cameroon and Ivory Coast. But Nigeria, which has more mobile subscribers than anywhere in Africa, remains the company’s biggest focus – and offers the richest prize. The country has 24,000 mobile towers and 10,000 more will be built in the next few years, IHS reckons. Setting up a business so soon after the end of military rule in 1999, IHS has been able to capitalise on the years of solid growth that ensued. But Mr Darwish says there are still many prospects. Asked for one piece of advice for potential investors, he says: “Put in a strong management team and work in the private sector. Don’t look to rely on government contracts.”

Contributors
William Wallis Africa Editor Xan Rice West Africa Correspondent Shawn Donnan World News Editor

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Ed Hammond Property Correspondent Tolu Ogunlesi FT Contributor Stephanie Gray Commissioning Editor Steven Bird Designer Andy Mears Picture Editor For advertising contact: Mark Carwardine +44 (0) 207 873 4880; mark.carwardine@ft.com, or your usual FT representative. All FT Reports are available on FT.com at ft.com/reports Follow us on Twitter at twitter.com/ft.reports All editorial content in this supplement is produced by the FT. Our advertisers have no influence over, or prior sight of, articles.

FINANCIAL TIMES WEDNESDAY NOVEMBER 28 2012

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Investing in Nigeria

Big bang approach to power test
Electricity More than half the 160m population has no access to the grid, says Shawn Donnan

Bunkering Such is the scale of theft that delta thieves ‘constitute the 12th largest oil producing group in Africa’
For years, even decades, Nigeria has been quietly losing revenues to oil thieves who tap into pipelines and even fill up tankers directly from flow stations and export terminals before selling their cargo at home and abroad. But the criminal industry surrounding the illegal trade is now so lucrative and extensive that it has become impossible for either the international oil companies or the federal government to ignore. Because of its illegal nature, there are no consistent estimates for the scale of “bunkering” – a term used elsewhere to refer to the supply of anchored ships but which has been corrupted in Nigeria to describe the trade in stolen oil. But all the evidence suggests it is on the rise. In 2011, for example, the state agency regulating pipelines recorded 4,468 pipeline break­ins compared with an annual average of 1,746 between 2001 and 2010. Ngozi Okonjo­Iweala, the finance minister, blamed a 17 per cent fall in April in the sale of crude oil largely to theft, implying that about 400,000 barrels a day went missing at a cost to the state and oil companies of about $1.2bn that month. A similar, more recent fall, has been blamed both on theft and floods along the Niger river – the worst in 60 years. In a bid to draw greater attention to the issue, Patrick Dele Cole, a businessman, former ambassador and former international affairs adviser to President Olusegun Obasanjo who hails from a town at the centre of the trade, has launched a web campaign (www.stopthetheftng.com). He estimates the scale of theft typically at about 180,000 b/d. At this rate, he points out, thieves in the Niger delta constitute the 12th largest oil producing group in Africa, generating revenue that exceeds the gross domestic product of 15 different African countries. Almost singlehandedly Mr Cole has begun to force the issue up the agenda. Bunkering is carried out in three main ways. The first involves cargo canoes manned by gangs that navigate the creeks, puncturing pipelines and siphoning crude into improvised tanks. They sell this on to crude refineries across the delta to supply paraffin and diesel to the domestic market at half price, or to larger coastal barges for export. Where they can, these barges fill up directly from wellheads. In turn, they carry the crude to tankers waiting offshore to supply refineries at a discount as far away as South Africa, Ukraine, China and the Rotterdam spot market, according to members of a task force set up by President Goodluck Jonathan to investigate. There is a third form of “white collar” bunkering. This involves tankers filled directly at export terminals, where metering systems are manipulated to conceal outflows – a practice that began when Nigeria was busting its Opec cartel quota in the 1980s. “The interesting thing is that it’s getting worse because we now have international bunkerers coming into our waters. This has never happened before,” Diezani Alison­Madueke, the petroleum minister, told the FT. Nigeria’s intelligence agencies are now investigating where the oil is being sold, she says. “We are addressing it at the diplomatic level. The president himself will shortly be taking it to his counterparts in various countries.” On paper at least, it should be relatively straightforward to curb the trade though a combination of tighter policing, patrolling of the high seas and other legal and technical measures. But although past governments have bought drones from Israel to monitor pipelines, deployed soldiers and sailors to the creeks, no effective measures have yet been taken to halt the trade. This may be because the networks profiting from stolen oil have tentacles deep within the state, financing politicians and officials who have a vested interest in ensure it continues to thrive.

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sk Elo Umeh to run through the difficulties that face his young internet company and it does not take long for him to come to electricity. Terragon employs 25 people, has a client list that includes international brands such as Google and a whole raft of local media companies for which he is building mobile news sites. He has little access to capital from local banks and struggles to retain staff who are inevitably poached by competitors once he has trained them. But the thing that really drives him crazy is that each month he spends up to 25 per cent of his cashflow on diesel to run the generator he relies on to supplement the fickle power supply he gets from the grid. “That,” he says, “is capital I should be using to expand.” From multinational companies to internet start-ups, the most common complaint is the lack of a reliable electricity supply. Nigeria ranked 178th out of 185 economies for access to electricity for new businesses in the World Bank’s latest “Doing Business” report. More than half the 160m population lives without access to the power grid and about 70 per cent of the country’s power demand goes unmet, the Bank found. Recurrent power outages mean that more than 90 per cent of industrial users have installed their own costly generators. So too have any residential consumers who can afford to. The government of President Goodluck Jonathan has made resolving the power crisis an important focus and bet on a “big bang” approach to do so. It is in the process of privatising the country’s generation and distribution businesses and is having some success in encouraging investments in new greenfield power projects. It has also hired Canada’s Manitoba Hydro to manage – and fix – the state-owned transmission network that has suffered from years of under-investment and poor maintenance. The goal, says Atedo Peterside, the investment banker who chairs the National Council on Privatisation committee, is to make a “quantum leap” as an economy. To Mr Peterside, the politically

In the dark: erratic electricity supply means that those who cannot afford generators have to rely on candlelight

AP

connected chairman of Stanbic Nigeria, the local arm of South Africa’s Standard Bank, the case for investors is clear. Join in now and be in position to take advantage of the boom to come or sit on the sidelines and watch others count the profits. “It’s hit or miss. You’re in or you’re out,” he says. In a messy emerging democracy such as Nigeria, the process has been far from smooth. The selection of preferred bidders for the six generation and 11 distribution businesses for sale has been criticised for awarding concessions to local tycoons and likened to the 1990s privatisations in Russia that gave birth to a class of oligarchs. Mr Peterside and others defend the process, pointing out that all the local bidders have paired up with foreign partners who will provide the technical expertise. The realities of doing business in Nigeria – and a record of contracts and privatisations that have gone awry – mean few big foreign investors are willing to take the risk alone. The local political landscape also remains fraught. Bart Nnaji, the technocratic power minister who oversaw the reform push in the sector in

recent years, was forced to step down in August over allegations of conflict of interest. After being awarded a $23m, three-year contract to manage the Transmission Company of Nigeria earlier this year, Manitoba found itself caught up in a dispute over the contract again this month amid allegations of “irregularities”. Eventually, the president stepped in and affirmed the contract. But not before investors had spent a week scratching their heads and wondering what the implications were for the broader programme. In part, those fears were aimed at what is already an ambitious timescale. The oft-stated goal is to have contracts finalised by the middle of 2013. Yet industry experts say that is likely to slip and if it slips too far the contracts could become even further

More than 90 per cent of industrial users have installed their own costly generators

embroiled in politics in the lead-up to 2015 elections. There are also longer-term problems. Industry experts fret that the government still needs to secure a reliable supply of natural gas to fuel new gas-fired power plants and the expansion of the sector. The World Bank has offered a programme of guarantees for gas payments to help encourage investment in the domestic market. But the oil majors that operate the bulk of oil and gasfields appear to remain more interested in exporting gas as LNG than selling it locally. The transmission network also needs huge investment if it is to carry the doubling of the current 4500MW supply that is envisioned. According to one industry expert, that could require as much as $10bn. It also means playing catch-up on an investment programme that should have been launched a decade ago. But Nigeria has few alternatives. If President Goodluck Jonathan and his successors are to deliver long-term economic promise, they have no choice but to make sure the country can keep its lights on. It is the government’s biggest test.

William Wallis
Ngozi Okonjo­ Iweala, finance minister

Inquiry shines light on murky mechanics of the oil industry
Ribadu report

Public is impatient for reform of the sector, writes William Wallis
No one in Nigeria is in much doubt about how badly the oil industry has been managed. But, until recently, there has been little clarity about the extent of the rot or at what stage and how, billions of dollars have been going missing. An investigation headed by Nuhu Ribadu, the former anti-corruption chief, has gone some way to shining a light. The findings of the Petroleum Revenue Special Task Force he was appointed to head this year, aim an arrow at the system that lubricates Nigerian politics and pile pressure on President Goodluck Jonathan’s administration to clean it up. Between 2002 and 2011, the state has been short changed at almost every stage of accounting for oil revenues, the task force found. Signature bonuses and royalties amounting to billions of dollars have gone unpaid. Discretionary decisionmaking in awarding oil blocks, and crude lifting contracts – centrepieces of the patronage system – have together caused huge losses. Gas – which has been developed as an export in just over a decade – has also been sold, the report argues, at cut price by Nigeria Liquefied Natural Gas, the joint venture owned by the Nigerian National Petroleum Corporation, as well as Shell, Eni and Total. “The estimated cumulative of the deficit between value obtainable on the international market and what is currently being obtained from NLNG, over the 10-year period, amounts to approximately $29bn,” it says. Both NLNG and the NNPC are up in arms and have printed detailed rebuttals to the Ribadu findings

Nuhu Ribadu: findings put pressure on president

Reuters

in national newspapers. Almost as soon as the report was out of the bag – leaked to Reuters this month after languishing for several months – officials in the presidency were also sending mixed signals, some rubbishing the report, others suggesting it will be studied carefully. Steve Oronsaye, deputy head of the task force, came out publicly in opposition, citing procedural flaws in the investigation which, he told the Financial Times, undermined the usefulness of the final report as a legal document. It was quickly noted that he and another member had both recently been appointed to the board of the NNPC at the centre of many of the allegations. Diezani Alison-Maduekwe, the oil minister who commissioned the investigation at the outset has herself offered only lukewarm support. “A lot of the facts and figures and assumptions were inaccurate,” she told the FT. “Having said that, it does not mean that the report is not usable. As we speak, the government has gone ahead to set up white paper committees,” she says. These will make recommendations to the government.

“We took a major risk. We brought in opposition leaders to head up various committees,” she adds, referring among others to Mr Ribadu, who won public respect in his former guise as anti-corruption chief, and stood and lost against Goodluck Jonathan in last year’s presidential polls. The investigation was launched by the government after protests at an attempt to withdraw the subsidy on fuel brought

Nigerians are inclined to believe Mr Ribadu’s numbers are close to the mark
Nigeria to a standstill in January. The bill had reached N2.1tn ($7.6bn) in 2011 and became another source of billions of dollars in ill-gotten gains. The subsidy has become unaffordable. It has also distorted the market by providing incentives for smuggling and fraud while deterring investment in the infrastructure and maintenance needed to refine Nigeria’s oil at home.

But the protests were not so much against the economic logic of removing it – which many Nigerians have begun to accept. It was the ineptly-handled decision to go ahead with it before persuading the public the government can deliver improved services and better livelihoods. Nigerians were thus galvanised into taking issue with a far broader range of wasteful government habits. Facing mounting chaos, the government restored half the subsidy and pledged a clean-up, to be preceded by Mr Ribadu’s investigation and others into abuse of the subsidy. It was always likely these would expose business people, officials and politicians closely associated with the government, some of them contributors to the ruling People’s Democratic Party election campaigns last year. Mr Jonathan now finds himself caught between conflicting interests – of his party and associates who have benefited from the opaque way in which the oil industry has been run, and an increasingly angry public. Nigerians are not buying objections to the report. Broadly, they know the oil industry is rotten and are inclined to believe Mr Ribadu’s numbers are close to the mark. Ahmed Makarfi, chairman of the Senate committee on finance, says: “We are looking willingly into the oil industry. In the past, no one dared look at what is going on. The cat is out of the bag.” He adds that it would be difficult now to suppress public impatience for reform. The task force has a host of recommendations, some of them involving relatively straightforward ways of monitoring the flow of production. But a senior western official following the process closely concludes: “Without wholesale reform of the architecture of the NNPC it doesn’t matter who is in charge. It will still be a mess.”

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FINANCIAL TIMES WEDNESDAY NOVEMBER 28 2012

Investing in Nigeria

Minister has chance to deliver genuine change
Interview Diezani Alison-Madueke
Minister of oil

Xan Rice and William Wallis meet the woman behind the divisive bill
ontroversy was always likely to follow Diezani Alison-Madueke. First, there was her gender: before her appointment in 2010, no woman had run the oil ministry in Nigeria, or in any Opec country for that matter. “Let’s face it, this is a completely male-dominated environment,” she says. Second, there was the job itself. Oil accounts for about 80 per cent of Nigeria’s revenues. It also lubricates the political patronage machine. Mrs Alison-Madueke, who is a close ally of President Goodluck Jonathan, can make or destroy fortunes with the stroke of her pen. “I don’t think I’m controversial, I think the position is,” she says. “You can never win with this thing. If you take a hands-off approach, they say you are not doing your job. If you try to move for transformation and reform, you get the highest kind of pushback in any sector.” Yet Mrs Alison-Madueke has a genuine chance to deliver. The Petroleum Industry Bill is designed to reform the industry and attract much-needed investment in oil and gas exploration and production. It recommends unbundling the state-owned Nigerian National Petroleum Corporation and running successor companies along commercial lines. Transparency and accountability will be improved, production by local companies promoted, and new onshore and offshore scal terms put in place to increase the government’s total take by 7 to 8 per cent, she says. The 223-page bill has been stalled for several years, thanks to lobbying by multinationals and opposition from politicians and businessmen whose interests are threatened by a more open system. But now, having passed two readings by legislators, the bill is set to pass in “two to three months”, says Mrs AlisonMadueke. Promises of swift passage have been made before – including by her in an FT interview in 2010 – but this time is different, she insists. “The polity alone, and mood of the polity, will probably not allow it [any further delay] to happen,” she says. The pressure is enormous. Various investigations ordered after the bungled attempt to remove the fuel subsidy in January have highlighted how tens of billions of dollars have been lost to fraud or mismanagement over the past decade. The government also knows that, while Nigeria is Africa’s largest oil producer, and has vast gas reserves, other countries on the continent have discovered petroleum in recent years.

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Mrs Alison-Madueke: ‘I don’t think I’m controversial, the position is’

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Lack of clarity over the proposed laws has forced the big oil companies, including Shell, ExxonMobil, Chevron, Eni and Total, to put investment on hold. While they welcome many of the Petroleum Investment bill’s aims, their principal concern is the bottom line. The multinationals have made clear they are unhappy with new terms, especially those relating to offshore production sharing contracts. In a presentation to diplomats and government of cials in Abuja in midNovember, the oil companies warned 470,000 jobs and $100bn in investment could be lost by 2020. Mrs Alison-Madueke describes the new scal regime as “relatively equitable” and more favourable to companies than those in Angola or Indonesia. But she says there is

‘If you take a hands-o approach, they say you are not doing your job. If you move for reform, you get the pushback’
room for compromise, and that she will chair a meeting with oil company representatives in London at the end of November to hear their concerns. “I hope that we will come to a fairly middle landing,” she says. If the PIB passes, the break-up of the opaque and dysfunctional state oil corporation will have lasting impacts. Two new bodies will oversee upstream and downstream regulation. Three new companies will be spun off, with the aim of running them like proper businesses. The National Asset Management Corporation will house the government interests from joint venture agreements, which account for 82 per cent of all petroleum

revenue. A new, commercial-style national oil company will be established, with 30 per o ts shares sold to the public. It will take over the assets of the Nigerian Petroleum Development Company, which produces 130,000b/d, up from 30,000b/d a few years ago. The new gas company will divest 49 per cent o ts equity to the public. The country’s four re neries, which operate at less than 50 per cent capacity due to poor maintenance, will also eventually be privatised, she says. The fuel subsidy will probably have to be removed before that takes place, something that will not be easy due to public opposition as well as resistance from business people who have made fortunes from importing petrol – and in some cases scamming the system. Mrs Alison-Madueke says she received death threats after taking away import licences in November 2011 from 90 fuel marketers who had no infrastructure in Nigeria. No one believes the proposed legislation is perfect. Pedro van Meurs, a consultant on earlier drafts of the bill, wrote in a recent commentary that allowing the president to keep granting licences and leases without process “leaves the door wide open to political favouritism and corruption”, and that the oil minister would retain “draconian powers to determine rentals and royalties by regulation”. Details on a new 10 per cent tax on onshore and shallow water pro ts, which is meant to bene t host communities “could result in political interference and nontransparency”, Mr van Meurs says. But Mrs Alison-Madueke insists the bill is good enough as it stands, an assertion that some in the industry agree with, even if only because having clarity over legislation is better than the uncertainty of recent years. “We have taken the bull by the horns.”

Hopes rise for local oil groups
National operators
The homegrown sector accounts for 4 per cent of output
AFP

Xan Rice reports that new legislation is expected to ‘reactivate industry’
About 20 years ago, Nigeria began trying to promote local companies in the oil sector. Though the idea was sound, the practice was not. The military still ruled, and the allocation of oil licences was mostly about patronage. “It was essentially land grabs,” says Labi Ogunbiyi, chief executive of First Hydrocarbon, a Nigerian oil company. “These people then went looking for companies that could provide technical capacity and the signature bonus. For Nigeria it was a terrible model.” It has been a slow process but today the country has a respected homegrown sector. Local companies such as First Hydrocarbon, Oando and Seplat account for about 100,000 b/d, only 4 per cent of the country’s total output, and some of that in elds operated by larger partners. But Mr Ogunbiyi reckons that may quickly change, particularly if the longawaited Petroleum Industry

bill is passed, and new scal terms are introduced. That could prompt the multinationals to sell more of their mature marginal elds onshore to concentrate on more lucrative deepwater projects. Up to 8bn barrels of oil – nearly a quarter of reserves – are on land, or in shallow waters. “I think local production could double within two years,” he says. Other companies, such as Seplat, are even more optimistic, with Austin Avuru, chief executive, suggesting this year there could be a fourfold rise in local output by 2014. History suggests some caution may be required. In the early 2000s, 24 licences for marginal elds were auctioned to indigenous companies. But many of them failed to raise the necessary capital and only a handful ever made it into production. Mr Ogunbiyi reckons that circumstances have changed – both for local companies and their potential nanciers. “The most interesting shift from ve years ago is that we have a class of real indigenous companies with both technical expertise

and nancial allure,” Mr Ogunbiyi says. “The banks have got wise to the fact that oil and gas can be lucrative. They also have the capital.” First Hydrocarbon purchased a 45 per cent stake in block OML 26 from Shell in October 2010. Production was already under way; today the block’s output is about 10,000b/d, though the intention is to expand to 50,000b/d within ve years. But when First Hydrocarbon looked to raise between $200m and $300m to fund the purchase, international banks were lukewarm, and proposed complicated and costly nancial structures. So, the company looked to local banks, which were recovering after the banking crisis in Nigeria a year or two earlier. A consortium led by First City Monument and Stanbic IBTC agreed to provide nancing “on world-class terms” against the OML 26 block. Other local oil companies have done similar deals since. This has persuaded international banks to offer better terms for deals in the Niger delta. Mr Ogunbiyi says Nigeria was fortunate to have a banking system

that is “on track to support the emerging indigenous sector and even participate in the biggest deals”. Over the past two years, Shell has sold onshore blocks to local consortiums Neconde Energy and Shoreline Natural Resources, which is supported by Heritage Oil, of the UK. The US independent, ConocoPhillips, is also trying to sell its onshore leases, which account for about 45,000b/d from OML 60, 61, 62 and 63. Oando and Seplat are reported to be among four local bidders for the assets, expected to fetch more than $1bn. Diezani Alison-Madueke, the oil minister, plans to hold an auction of marginal elds before the end of the year. Afren, an independent producer that focuses on Africa, and owns 45 per cent of First Hydrocarbon, believes it will take the Petroleum Industry Bill, which it expects will pass next year, to properly “reactivate the industry”. Adebayo Ayorinde, the company’s Nigeria managing director, says while 38 per cent of oil licences are held by indigenous companies, only 4 per cent have been developed. Under the proposed legislation, companies with oil blocks will be told to use them or lose them, Mr Ayorinde says. “From our point of view, there are a lot of opportunities because we can provide nancing and technical knowhow to local companies. There are also great prospects for those indigenous companies that have developed the right knowledge and have banks behind them. If the divested assets are already producing oil, it will help keep the ball rolling.”

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Investing in Nigeria

Big business faces bumps on road to progress
Infrastructure Logistical challenges bring cost and opportunity, says Shawn Donnan

P

ay the N120 ($0.75) toll and pass through the gates and the Lekki-Epe expressway toll road is a brief vision of what Nigeria could be. Cars accelerate on to smooth tarmac free of potholes. The verges are clear, the fuelling stops oddly serene – one is even home to a restaurant named “Relish de Buddha”. But then, after just 15 minutes, you pass through a toll plaza where the attendants take no money and are paid simply to open the gates and it all ends. Near a clutch of banana sellers, with a bump and a burst of dust, you are back in Nigeria’s everyday reality. Traffic crawls over scarred roads, motorcycles dart in and out between the cars together with street vendors selling mobile phone cards, nuts and “tummy trimmers”, portable exercise machines. An every-man-for-himself law of the road returns. Ask anyone doing business in Nigeria what the main obstacles are and, very quickly after they tell you about their difficulties with electricity, the subject will turn to their transport woes. Years of poor maintenance and widespread corruption and mismanagement have made roads a vivid symbol of the country’s infrastructure difficulties. Workers spend up to five hours each day commuting to and from work. Trucks laden with valuable loads spend days at a time away from base making deliveries that would take a fraction of the time anywhere else. When it was awarded in 2006, the Lekki-Epe toll road concession – a 50km public-private partnership project that would see private investors foot the bill for its construction and operate it for 30 years before

handing it back to the government – stood as an example of how Nigeria was moving to solve its infrastructure problems. These days, however, with construction stalled by a dispute between the government and the concessionaire, it is cited most often as an awkward example of why more public-private partnerships are not happening. The simple introduction of tolls last December prompted violent protests. Still, those involved in constructing deals insist that Nigeria stands at a crucial moment in time when it comes to building the infrastructure it needs to sustain – and build on – the 6.5 per cent annual economic growth it is enjoying. Martin McCann, London-based head of infrastructure, mining and commodities for Norton Rose, the US law firm, says there is a “clear pipeline” of airports, ports and other projects in Nigeria being offered to investors. He says: “It is too important a country for bidders not to look at.” The investment landscape can indeed be messy and “the reality is that, if you look at the projects, we are in that transitional stage”, Mr McCann says. But it is also clear that the landscape is poised for change over the next decade and that investors may be facing an important opportunity. “It would be a pretty brave investor that, on the basis of disputes, the fact that there are disputes, says ‘I am going to stay away’ because of the scale of the economy,” he says. For the time being, however, the reality for anyone doing business in Nigeria often means providing your own infrastructure, or finding ways to adapt. For DHL, the courier and logistics company, the solution has been to do

Transport woes: some workers spend five hours a day commuting to and from work
Getty

both. In 2009, after years of strugglingwith the public cargo facilities, notorious for their pilferage and corruption, it opened a new cargo operation at Lagos’ Murtala Muhammed Airport. The investment in the west African hub has been worth it – across the region, DHL’s business is growing at a rate of 15 per cent a year. These days, the facility is an odd oasis of calm just yards away from the chaos of the public terminal and a welcome respite for the oil companies and others bringing goods into the country. Six days a week, a DHL 767 flies in from Leipzig via Brussels bringing packages destined for countries across west Africa. They are quickly sorted and transferred and, thanks to the new threeyear-old terminal, can often clear customs and be delivered to customers on the same day.

“We’ve got a big competitive advantage,” says Randy Buday, DHL’s Lagos-based managing director for anglophone Africa. That sort of approach has brought other business opportunities for DHL as well. After losing 12 employees in the space of a year to armed robberies on the road between Lagos and Abuja, the capital, Mr Buday decided to suspend the road runs and take to the air instead. It took 18 months for him to gain approval, but DHL now runs a daily air freight service between Lagos and Abuja on a Boeing 737. He no longer faces the headaches he used to have with vans on a perpetual loop on Nigeria’s dangerous roads. He also created a new line of business for DHL. “There used to be no overnight courier service to Abuja. Now there is. And we own it.”

Airlines struggle to shake off their poor image
Aviation

More improvements are needed quickly, says Ed Hammond
It was the end of a tiring day for the crew of Dana Air Flight 992 when the twin-engined jet began its final approach to Murtala Muhammed Airport on June 3 this year. At 3.18pm, the captain and first officer realised the engines were losing some power. The condition was not serious, however, and they concluded it would not affect the descent into Lagos – the last leg of a gruelling double round trip between the city and Abuja, the capital. Twenty minutes later, with the runway in sight, the plane slammed into an industrial park. During the seconds before the impact, the in-flight recorder captured the two men battling to restart the engines.

Six months after Nigeria’s worst air disaster in 40 years – and one that shook the rapidly emerging society to its core – the country’s aviation sector is fighting to rise from the wreckage. “It was one of the worst periods of life for me, a blow you cannot imagine,” recalls Harold Demuren, director-general of the Nigerian Civil Aviation Authority (NCAA). Mr Demuren, who was drafted in to clean up the country’s air safety record in the wake of two plane crashes in 2005, adds: “But aviation is the engine for economic growth in Nigeria and we have to be resolute and stick to our task of improving the sector here – it is the best way of showing the world what we are about.” The tragedy of the crash, which claimed the lives of all 153 on board and 10 more on the ground, is amplified by the fact that it has obscured to the outside world much of the progress made by the sector

over the past seven years. After taking the job in 2005, Mr Demuren set to work on cleaning up a sector that was “drifting into a very dangerous place”. Airlines, many of which were using stock that had been in operation for more than 30 years, were forced to modernise their fleets. The NCAA conducted a

‘You just cannot cut corners in this game because the risks are too high’
full audit of the sector, from ground servicing crews upwards, and pushed through reforms to improve transparency and accountability. Security was tackled, too, with the west African country among the first in the world to introduce fullbody scanners at its airports. The approach paid divi-

dends. In 2010, after five years of rigorously improving air-safety procedures, the NCAA was granted a certificate from its US counterpart allowing Nigerian airlines to fly direct to the country. Paul Hayes, director of air safety at Ascend, the aviation advisory group, says a reduction in the number of small airlines operating short-haul domestic flights in Nigeria could be one factor in improving its safety record. “It is much harder to regulate when you have a high number of small companies each trying to survive in a competitive industry,” he says. And, yet, there are still deep-set problems with aviation. No traveller arriving at Murtala Muhammed Airport in Lagos is likely to forget the ordeal; the humid gloam of the lowslung terminal building reminiscent more of an overcrowded hospital waiting room than the portal to an economy that is aspir-

ing to be among the world’s 20 largest by 2020. The country’s infrastructure is another hitch. The parlous state of Nigeria’s roads, coupled with a lack of railways, complicate the process of transporting freight to and from the airport. “There has always been a high demand for air travel to Africa and Nigeria but the continent and country have, to date, been significantly under-serviced,” says Dr Michael ArumemiIkhide, chief executive of Arik Air, Nigeria’s largest airline by value. “The industry has been typified by inefficient and unreliable operations.” Dr Arumemi-Ikhide says, however, that the situation is improving. Most of this is being driven by the government’s recognition of the pivotal role the aviation industry is likely to play in economic growth. The government has made commitments to improve and expand Nigeria’s airports, while

President Goodluck Jonathan said in the days after the Dana crash that “every possible effort” would be made to boost the nation’s aviation safety. The improvements will need to be delivered quickly. The International Air Transport Association has predicted that the west African region will experience annual growth in passenger figures of 6 per cent until 2025. Moreover, time-poor international investors will be dismayed if Nigeria’s transport infrastructure does not keep step with its economic trajectory. Mr Demuren warns, though, that rushing to fix the industry would risk another accident. “You cannot cut corners in this game, the risks are simply too high. “We have worked hard and patiently to get into the premier league of international air safety. Now, the infrastructure that serves the industry needs to step up and do the same.”

Consumer demand draws in more retailers
Shopping

Ed Hammond says market is ripe but supply chain is not
Haresh Keswani is unequivocal about the biggest problem he faces. “The infrastructure here is a nightmare,” says the managing director of Artee Group, the Nigerian retail chain that operates Spar and Park ’n’ Shop throughout the country. “If I want to do anything, I have to organise and build the entire supply chain, from the shop, right down the watering hole at our truck garage,” he adds. The gripe is a familiar one among Nigeria’s retailers; the low quality of the country’s infrastructure an impediment to the modular construction upon which

the economics of retail expansion depend. From poor quality roads stifling the passage of goods, to complex land buying regulations that have kept a lid on the building of shopping malls, Nigeria has not been fruitful ground for big-brand retailers. Conservative estimates put the scale of the formal retail market in Africa’s most populous country at 10 per cent. For wealthy Nigerians, those luxury goods they cannot buy in markets have traditionally been bought during shopping trips in Europe, the US or South Africa. All that, though, may be about to change. As well as Artee, which Mr Keswani founded 24 years ago, the world’s largest retailers are planning to step up their game in Nigeria. Massmart, the Walmart-controlled supermarket chain has announced plans to grow its

Transition: most shopping is done in informal markets

Getty

presence in the country from two to 20 stores. Meanwhile, Whitey Basson, chief executive of Shoprite, the South African retailer, said this year the company would roll out 700 stores across Nigeria. According to Bill Russo,

director of retail and consumer goods for McKinsey in sub-Saharan Africa, the high demand among Nigerian consumers for the formal shopping experience of a mall is ready to be tapped. “I don’t know if there is a market of higher interest

for retailers wanting to grow their operations in Africa. There is an enormous first mover advantage as Nigerian shoppers are very brand conscious and those companies which get established quickly will benefit,” Mr Russo adds. He concurs, however, that the country’s infrastructure must be improved to accommodate the establishment of a modern retail sector. Wandering through the sprawling mess of Balogun market, it is apparent how great the transition is for Nigeria to move to more institutionalised shopping. The chaotic patchwork of stalls in central Lagos, said to be west Africa’s largest market, sell everything from pinstripe suits to jars of cashew nuts and car parts. Hawkers stroll the narrow streets, head-mounted baskets overflowing with polythene-wrapped brioche and oranges. A man carry-

ing two puppies proudly assures passersby they were “born only last week”. In the gap between the informal and a more structured market, some retailers have turned to another kind of outlet: the internet. Online retailing in Nigeria has a chequered history. A handful of web start-ups has tried in the market but they have come unstuck. One of the main problems is getting Nigerian buyers – weary of internet-based scams – to part with their credit card details. Jumia, an online retail start up, is trying to circumvent the problem by running a cash on delivery service. Tunde Kehinde, one of Jumia’s co-founders, explains that the business aims to bridge the disconnect between Nigerians’ desire for good quality, recognised brands, and the lack of places to buy them.

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FINANCIAL TIMES WEDNESDAY NOVEMBER 28 2012

Investing in Nigeria

Improvements applauded but lack of lending causes concern
Banking Imposition of strict capital and operational conditions has won the approval of rating agencies, says Ed Hammond

Stock exchange Reforms restore confidence
As he sits in his high­rise office on
Lagos Island, the city’s old financial district, Oscar Onyema can afford to smile now. Hired as chief executive of the beleaguered Nigerian Stock Exchange in April 2011, he saw the market fall further as investors offloaded shares. By the end of last year, the All­Share Index had tumbled 16 per cent, nearing the lows of the 2008 crash that saw about two­thirds of the exchange’s market capitalisation wiped out. This year is different, with the index up by 27 per cent. “Investors are coming back,” Mr Onyema says. “They are seeing returns, and what is being done to improve regulation.” It may be premature to suggest this is the start of a sustained rally. But few dispute that reforms implemented by Mr Onyema, and by the Securities and Exchange Commission, have helped restore some investor confidence, especially domestically. While foreign investors still dominate trading volumes, local investors are now responsible for about 33 per cent of transactions, up from 30 per cent a year ago, Mr Onyema says. The 2008 crash was caused by a bubble in share prices and irresponsible lending by banks, sharp practices by brokers, malfeasance and lax regulation. Mr Onyema quickly set about shaking things up, starting with the quoted companies themselves. Last year, he briefly suspended 48 companies on the exchange for failing to file accounts on time. Eight are due to be delisted for non­compliance. Fines for breaching regulations have been increased by up to 10 times. Mr Onyema says that surveillance of traders and brokers has also been improved to prevent market manipulation. In the past, enforcement was selective, he says. “I think people realise it’s a much fairer playing field.” This year’s share rally has been led by banking, industrial and consumer goods stocks. Sven Richter, head of frontier markets at Renaissance Capital, the Moscow­based investment bank, says that, while the consumer goods companies may be overpriced, stocks in general remain cheap in global terms. Despite the strong performance in 2012, the All­Share Index is still less than half of its 2008 peak. “There has been a lot of catch up, but there are still huge prospects. Most investors believe that the government reforms [of the power and oil sectors in particular] will succeed, and this will drive growth,” Mr Richter says. Difficulties remain. Liquidity on the exchange is still too low, and brokerage fees too high, Mr Richter says. One of the biggest complaints from investors is that there are more brokers – about 235 – than there are stocks. Mr Onyema says this number should come down once new minimum standards for capital, training and technology at broker­dealer firms are introduced. He is reluctant to say how many brokers will disappear, but Kayode Akindele, partner at 46 Parallels, an investment firm, says it should be the majority of them. “The market should not support more than 30 or 40 brokers,” he says. Mr Onyema has also introduced exchange traded funds, and a fixed income trading platform for retail investors is planned. His goal is to bring more companies to the market. While listings boomed before the crash, there have been only a few each year since. And quoted companies looking to raise cash have generally not seen rights issues as a viable option. The stock exchange is talking to about 500 unquoted companies, judging that the improved market will tempt dozens of them to list eventually. Mr Onyema says he is especially keen to attract companies from sectors that are crucial to the economy but are currently poorly represented. These include mobile service providers, both local ones and foreign­owned operators such as South Africa’s MTN, which has more than 40m subscribers out of a total market of 100m. “People understand what mobile operators do. If MTN’s Nigeria operation were to list, it would be oversubscribed, no doubt about it,” Mr Onyema says. The power sector, which is undergoing privatisation, presents another opportunity. The 15 companies recently named as preferred bidders for the state generation and distribution assets will be encouraged to list within a few years of taking over the assets. Though analysts such as Bismarck Rewane, of the Lagos consultancy Financial Derivatives, says that the NSE’s listing targets are unrealistic, Mr Onyema hopes that up to 20 companies may come to market in 2013. Xan Rice Oscar Onyema has shaken things up at the NSE

J

ust as it was across much of the world, the collapse of Nigeria’s banking system was brutal and swift. From the mid-2000s the country’s banks, bloated by oil revenue deposits, began lending aggressively, pouring billions of dollars of unsecured credit into real estate, the downstream oil sector and buttressing the personal fortunes of the political elite. A lax regulatory regime, and the “good-time” malaise engendered by a stock market boom that increased the market capitalisation of listed banks ninefold between 2004 and 2007, ensured that the lending went largely unchecked. When the global economy started to wobble in 2008, sending the price of oil spiralling downwards, the Nigerian stock market went into freefall, losing 70 per cent of its value in 2008-09. Ten of the country’s lenders, between them accounting for 40 per cent of the banking system by value, failed. A subsequent investigation by the central bank found that many were giving a misleading impression of the quality of their assets. A bailout followed. As well as banks being shunted into mergers, the government created a so-called “bad bank” to assume $11bn of non-performing loans from the books of the commercial banks. The total price tag for the clean-up is estimated at $21.5bn. Godwin Emefiele, chief executive of Zenith Bank, Nigeria’s second largest by market value, is confident that the

bailout has set the sector on a positive trajectory. In the wake of the financial meltdown, regulators imposed strict capital and operational conditions on Nigeria’s banks. Today, lenders are required to invest 20 per cent of deposits in liquid assets and a further 10 per cent must be parked with the treasury. In addition, banks are required to adhere to a standard reporting calendar with a December year end. “The bailout was a worldwide phenomenon and affected Nigeria as much as anywhere else. But enough has been done and Nigerian banks are now better regulated than those in Europe or the US,” says Mr Emefiele. External analysis of the financial stability of the sector has been improved gradually. In a report in July, Fitch, the rating agency, warned that many of the banks had levels of core capital that were “lower than is appropriate for Nigeria’s difficult operating environment”. However, in a November update, it praised the slowdown in new lending undertaken by Nigerian banks. “The stabilisation in credit growth reduces a build-up of risk so soon after the balance sheet clean-ups in 2010 and 2011 . . . Credit booms in Nigeria have historically involved a relaxation of underwriting standards and an accumulation in portfolio concentration for the banks. We believe a slower pace of loan growth lowers the risk of a relapse in nonperforming loans.”

Loans: Zenith says it needs more data before it can extend consumer credit

The improved view on the sector was echoed by Standard & Poor’s, the ratings agency. The group says that, during the next 18 months, it expects the capital position of the banks to remain broadly stable. In spite of the improving capital positions, it is unlikely the country will address the issue most pressing to average Nigerians: the dearth of available banking facilities. Recent research by the Economist showed that more than one in 10 Africans has access to a personal bank account. In Nigeria, there are an estimated 22m personal bank accounts – a staggeringly low number in a country with a population of 160m. Some lenders, including Zenith, will provide short-term finance to employees of multinational corporations with which they already have lending relationships. “We would like to do consumer credit to a much broader range of people, but there is not enough data available yet,” explains Mr Emefiele. The lack of retail credit has attracted specialist funds to look at providing high-interest loans to Nigeria’s growing consumer class.

On a clammy November evening, Renaissance Group, the Russiabased emerging markets investment group, gathered senior figures in the Lagosian investment community in a penthouse bar on the city’s beachfront. The company used the cocktail party to herald the launch of a consumer finance business. The company will provide three- to nine-month point-of-sale loans, up to about $1,200 and typically yielding about 8 per cent, to help buyers of electrical goods. Renaissance has already signed agreements with LG and Samsung. “All the economic indicators are pointing in the right direction in Nigeria,” says George Taylor, chairman of Renaissance Credit Nigeria. “You can get a much better return on capital than you can in Europe or even eastern Europe, which is starting to look more like a mature market,” he says. “To begin with, we are expecting quite a lot of people to try and cheat the system and not repay the loan. But we have a big dog and are not afraid to go door-knocking,” Mr Taylor adds.

Technology business prospects lure entrepreneurs back home
Ecommerce

The brain drain is reversing as talent returns, writes Shawn Donnan
For decades, the flow of Nigeria’s best technology talent to overseas destinations has followed a predictable and usually one-way pattern. Common was the story of the engineer who, having graduated from the University of Ibadan, had fled to graduate school in the US and ended up working on a corporate campus and raising a family in the suburbs of Boston, New York or San Francisco. But these days, the talent is turning around and coming back. Lured by the promise of an economy in vibrant transition, a growing number of educated Nigerians are leaving high-flying careers – or even just the promise of one – in the developed world to come home and start their own technology businesses. The result is a technology sector that is undergoing a rapid transformation. Funke Opeke, who grew up in Nigeria and, after graduating from a local university, went on to Columbia University for graduate school, left her job as an executive director of the wholesale division of Verizon Communications in New York to return home in 2005. After stints with other companies, she founded her own, Main One, two years later. Five years on, the company has laid and runs a 7,000km submarine cable from Portugal to Lagos that has brought much-needed broadband bandwidth to west Africa and stands as a rare infrastructure success story. The attraction of returning to Nigeria was obvious, says Ms Opeke. “There’s only so much value you can add in the US. You can add incremental value there. You can add fundamental

value in Africa,” she says. Tunde Kehinde and Raphael Afaedor, the co-founders of Jumia, a six-monthold online retailer that aspires to be Nigeria’s Amazon and has won backing from Germany’s Rocket Internet and JPMorgan, tell a similar story. Both are graduates of Harvard Business School and both flirted with careers abroad before coming home to Africa. Mr Kehinde, who is 28 and grew up in Lagos, has worked as a banker for Wachovia in the US and as a business analyst for Diageo, the drinks giant. Mr Afaedor, a 36-year-old Ghanaian, has worked in business development for Notore, a chemical and agribusiness company, spent time at the jobs website Monster.com in Europe, and once passed a summer at Goldman Sachs and “didn’t like it”. Both are evangelists for a business they see as a way to transform how Nigerians shop, in the same way that online retailers have in the US and Europe. And both believe that, after numerous false starts, Nigeria and its technology

sector have reached an important moment. “You get a sense that something is happening,” says Mr Kehinde. “The chance to build an amazing business happens once in a lifetime. You don’t get that opportunity twice.” Nigeria’s tech sector has long struggled with its own infrastructure problems. Internet penetration – at roughly 26 per cent of the population, according to the

‘The chance to build an amazing business happens once in a lifetime’
International Telecommunications Union, the UN agency – remains low. Moreover, few of the country’s roughly 40m internet users have access to the internet at home and even fewer – just 6 per cent of the population – have access to broadband internet. Ms Opeke, whose business, Main One, sells wholesale internet access to local

Funke Opeke set up Main One, which sells internet access

providers, likens the problem to having built a highway before all the feeder roads – the “last mile” cables that bring broadband into homes – have been built. The result, she says, is that Main One is “finding that we have to develop more infrastructure than we expected”. Eventually, she hopes, that investment will pay off. To her chagrin, Nigeria is for now using just 5 per cent of the bandwidth that Main One has brought onshore. But increasingly powerful wireless options such as WiMax are providing the solution, she says. And Ms Opeke is not alone in believing that Nigerians are hungry for the internet and the wonders it can bring. As Ms Opeke and others build and wait for the needed infrastructure, others see a different solution. More than 100m Nigerians now have mobile phones, and smart phones with internet access are a growing – and increasingly affordable presence – in the market. Like many internet entrepreneurs, Mr Kehinde and Mr Afaedor guard their numbers closely. But they do say that half of the traffic to Jumia’s website in search of the phones, books, household appliances and even polka dot cravats that the retailer sells come from mobile devices. Retailers such as Jumia are also finding a way to get around Nigerians’ reluctance to pay online and part with credit card details, rational behaviour in a country renowned for its credit card fraud. The 25 motorcycle drivers Jumia uses to deliver goods in Lagos accept cash on delivery, for example. There is also hope that a push by the central bank to develop cashless payment systems will help. All of which means that for entrepreneurs like Ms Opeke, Mr Kehinde and Mr Afaedor, Nigeria’s technology sector remains an alluring proposition.

FINANCIAL TIMES WEDNESDAY NOVEMBER 28 2012

13

Investing in Nigeria

How to make a chaotic city work better
Lagos Transformation of the teeming metropolis has not been to the advantage of everyone, writes Tolu Ogunlesi
nly seven years ago, Ahmadu Bello Way, the coastal highway that runs along Lagos’ Bar Beach, lay at the mercy of the vicious tides of the Atlantic Ocean. Consistently hounded by the surging waters, many residents fled. Today, a wall of giant interlocking stones stands sentry against the ocean, and the once-desolate beachfront is bustling again. Behind that wall, far out in the ocean, another, even more imposing wall is rising. Known as the Great Wall of Lagos, it will form the outer boundary of a new city, touted in publicity material as “the Manhattan of west Africa”. When completed at the end of the decade, it will offer luxury residential and office accommodation to about 400,000 people. The cars hurtling along Ahmadu Bello Way will notice something else apart from the stones keeping the ocean out. A few months ago, the state government rolled out a new set of traffic rules banning okadas – the city’s ubiquitous motorcycle-taxis famous for their menacing horns and their frequent accidents – from main highways. The business district on the marina will be unrecognisable to anyone who knew it 10 years ago. The urchins who once laid claim to the area have since been reformed into uniformed traffic agents and tax collectors. A new emergency number helped a taxi union speedily recover one of its vehicles, stolen at gunpoint, says Subomi, a taxi driver in Ikoyi. In the old Lagos, that would have been unthinkable, as would the traffic lights and street markings that have become normal features on the streets. The state has an office for publicprivate partnerships overseeing concessions for everything from public mortuaries to six-lane tolled highways. Two-thirds of its revenues come from taxes, bucking a national trend that sees states desperate for “allocations” from monthly federal oil receipts. Across the city, work is in progress on a light rail project that promises to make a dent on Lagos’ trademark traffic jams. On the Lekki Peninsula, the city’s fastest developing corridor, an

O

Luxury: the $6m residential and office project under construction off Lagos is touted as the ‘Manhattan of west Africa’ Eko Atlantic

‘Are we using the elitist argument to argue against compliance with laws. . .for public interest and safety?’

international airport is being built that will rival the federal government’s Murtala Mohammed International Airport. The man pushing the reset button in this teeming metropolis of 15m people is Babatunde Fashola, the state governor, handpicked from relative obscurity by Bola Tinubu, the former pro-democracy activist who returned from exile to rule the state from 1999 to 2007, and who today leads the Action Congress of Nigeria (ACN) party, the country’s biggest opposition party. Lagos is the model for the rest of southwest Nigeria, where six of seven states are controlled by the ACN. The ambitious road construction

projects that have been a familiar sight in Lagos are now springing up in state capitals across the region. Even the authorities in Abuja appear to be borrowing a leaf from the Lagos handbook, with their often illfated attempts at public-private partnerships. But several difficulties remain. One criticism thrown Mr Fashola’s way is that he runs a shamelessly elitist government. As evidence, critics point to: the tolled, six-lane Lekki-Epe Expressway; $6m Eko Atlantic City project, where the cheapest land prices will be $850 per sq m; the restriction on okadas, a provider of employment for tens of thousands of jobless men; the sustained demolition of shanties with-

out making alternative arrangements. Before Mr Fashola’s reforms, taxi driver Subomi would have been able to get a commercial licence for his car, which he would then have painted in the city’s trademark yellow-and-black colours. “Now you can only register a brand new vehicle as taxi. How many of us can afford that?” he laments. The cabs that once defined the city are being phased out and replaced by brand new cabs that cost more to own and, as a result, charge significantly higher fares. To circumvent the new system, Subomi, who prefers not to provide his surname, keeps his cab unmarked. To evade uniformed officials out to

nab cabs without commercial licences, he cannot attempt to pick customers off the streets. Instead, he depends on a network of clients who summon him via mobile phone. Across the city, the poorer classes generally feel short-changed – their markets and shanties and okadas bear the bulk of the brunt of Mr Fashola’s policies. The government insists these reforms are necessary. Moji Rhodes, deputy chief of staff to Mr Fashola, queries the “correlation” between efforts to make the city work, and the “elitism” critics like to talk about. “Are we using the elitist argument to argue against compliance with laws that are established for public interest and safety?”

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FINANCIAL TIMES WEDNESDAY NOVEMBER 28 2012

Investing in Nigeria

Farming revolution has yet to take off
Agriculture The nation imports a huge bulk of its rice each year, such has been the decline in rural areas, explains Xan Rice

Heineken shows it is in for long haul
Consumer goods

H

ad he been a child of the sixties, Adeniyi Adewusi would have seen Nigeria’s glory days as a world leading food producer: the biggest exporter of peanuts and palm oil, and an important operator in the cocoa and cotton markets. Instead, as a farmer’s son born in the 1970s, Mr Adewusi witnessed the country’s steady agricultural decline. The oil boom was starting, and farming was neglected as the petrodollars flowed. “Agriculture pretty much died a death,” he says. After school, he studied electrical engineering in England and then worked in IT. But when he returned to Nigeria a few years ago he felt agriculture was ripe for resurrection. The population had soared to 160m, and so had the food import bill. Though Nigeria has the climate and land to grow rice – only about half the 75m hectares of arable land is used – this year it will import 2.45m tonnes of it, more than any other country in the world. Billions of dollars will also be spent on buying sugar, wheat and fish from abroad; in 2010 the food import bill was $10bn. “We should not be importing a single grain of rice,” says Mr Adewusi, describing the agricultural potential as “ridiculous, just ridiculous”. Together with two partners in the financial sector, he explored the possibility of starting a commercial farm from scratch, growing crops such as rice, maize and soya. But poor infrastructure and high interest rates meant it was not feasible. Instead, they decided to move up the value chain, forming a company called Food Pro and taking over a cashew nut factory owned by Mr Adewusi’s father in Ilorin, the capital of Kwara state. The hand processing method was mechanised, and output and quality quickly improved. Most of the nuts are exported to the UK, and sales will reach $750,000 this year. The target for 2013 is $4m. Since much of the produce the country does export – including cashews – is usually not the finished product, Mr Adewusi has the satisfaction of knowing that value addition is possible in Nigeria. Yet he still wants to get into pri-

Soaring costs: food purchases from abroad have added up to $10bn a year
Reuters

mary production. “It’s a question of the government having the will to make this possible,” he says. “Look at Shonga Farms – it shows what can be done if resources are put in.” Shonga was set up in 2005, when 13 white Zimbabwean farmers who had lost their farms under a land reform programme were invited to start afresh by Bukola Saraki, the then-governor of Kwara state. They were each given 1,000 hectares of land on a 25year lease, access roads, machinery to clear the terrain, and start-up capital. The early years were hard, however. The promised irrigation system was

never delivered, and maize and rice crops failed. Five of the farmers left. Of those who remain, the four poultry farmers are doing the best. Those focusing on dairy and crops have found it more difficult, especially to find reliable buyers. Recent moves by the government to force dairy companies and millers to use local ingredients – part of a strategy by Akinwumi Adesina, the minister of agriculture, to encourage domestic production – have, however, provided a lifeline. Obtaining funding has also been a big problem. The Shonga farmers say

‘Up to 70% of the country’s workforce is involved in agriculture’

banks are not interested in agriculture. The central bank is trying to change this with loan guarantees to commercial banks that lend to farmers. Graham Hatty, a Zimbabwean who grows cassava, one of Nigeria’s staples, says that large-scale commercial agriculture can work “if things keep changing”. Kola Masha agrees. Previously chief of staff to the agriculture minister, and a former executive at Notore, the agricultural conglomerate, Mr Masha is managing director of Doreo Partners, an investment company. The solution does not necessarily lie in sprawling commercial farms, Mr Masha says, but rather in improving smallholder ones. He says up to 70 per cent of the country’s workforce is involved in agriculture directly or indirectly. The sector contributes about 40 per cent of gross domestic product. “Farming is Nigeria’s job creation engine,” he says. “The problem is the yields are low. They are good farmers, but they can barely access agricultural inputs, working capital and government services.” Doreo’s solution was to create an “agricultural franchise” called Babban Gona, which means “great farmer” in Hausa. Those who sign up receive training in business and agronomy, access to credit, and inputs, including soil analysis, seeds, fertilisers and crop protection products. At harvest time, they get the use of a thresher, and are given bags and thread to pack their produce, some of which Doreo stores and sells for them. Doreo has raised $1m, and is working with 107 farmers in Kaduna, in northern Nigeria. Each has about 1.1 hectares of land. Early results are promising, with yields more than doubling, Mr Masha says. Doreo wants to have 1,500 hectares in the programme next year, and 1m hectares by 2020. Mr Masha believes his model can reduce food imports but equally importantly create much-needed jobs. “Unless we employ everyone as desk people, there are going to be a lot of people trying to make a living off small pieces of land. We have got to get serious about agriculture very quickly.”

Conference choice highlights the bet on Africa’s future, says Shawn Donnan
When Heineken set out to plan this year’s annual confab for the analysts and investors who track its fortunes around the world it did not take long to decide on a venue. With its dusty streets pocked with occasionally epic potholes, 1970s vintage airport, and notorious propensity for “go-slows”, or traffic jams, malarial Lagos offered the perfect place for a conference earlier this month. The brewer does 60 per cent of its business in emerging markets and sells more beer in Nigeria than it does anywhere in the world bar Mexico. It is also an important component in a long-term bet Heineken is making on Africa. The bet is not a new one. Nigerian Breweries, the bigger of its two local subsidiaries, was incorporated in 1946 (Heineken took majority ownership in 2000). It is also not alone among multinationals chasing the rising purchasing power of Nigerians. Unilever boasts that its local subsidiary, incorporated in 1923, is one of the oldest manufacturers in the country. Cadbury and Nestlé have had thriving local operations for years and listed local operators such as Flour Mills Nigeria are attracting the interest of foreign investors. But while the long-term picture remains compelling, 2012 has offered an example of the pitfalls. The January decision by the government to reduce fuel subsidies, epic floods, and growing security problems in the north all hit companies that sell to consumers. The result is, this year, “consumer goods companies will probably have had their worst year since 1998”, says Keith Richards, managing director of Promasidor Nigeria, a group that sells powdered milk and other goods targeting the low end of the market. Outside a growing middle class, most Nigerians remain incredibly sensitive to price rises. By Mr Richards’ estimates, the average factory worker in Lagos spends 30 to 40 per cent of his or her take-home pay on getting to and from work. Still, the promise of the Nigerian market is alluring for many. Binta Drave, who watches the Nigerian consumer market for Londonbased broker Exotix, says while companies such as Unilever and Cadbury have seen flat growth in revenues this year it will not be long before they see a return to the longer term trend of 15 to 20 per cent top line growth. “Beyond 2012, we think there should be an improvement” in the performance of consumer companies, she says. If anything. Ms Drave says, the problem now is that, even after a difficult year, for many investors the stocks of many local listed subsidiaries have valuations that look high. Nestlé and Unilever’s local listings trade at price to earnings ratios of 25-26 per cent. The Nigerian Stock Exchange’s benchmark index is also up almost 30 per cent on the year, prompting many to fear a correction is just around the corner. Heineken now claims that its brands have a 70 per cent share of the Nigerian beer market which saw almost 20m hectolitres sold in 2011. It expects that market to grow at an annual rate of almost 6 per cent for the foreseeable future. Its sales have taken a hit this year. But any shortterm problems have done little to reduce the allure of Nigeria and its beer market. “The dynamics don’t change,” says Siep Hiemstra, the brewer’s regional president for Africa and the Middle East. “The bottom line is [Nigeria is] an emerging market.” And emerging markets “are what they are. They emerge!”

Market reforms bring fresh flows of funding
Foreign investment

Tolu Ogunlesi says the days of going cap in hand are over as money pours in
After Nigeria’s return to civilian rule 13 years ago, its leaders made a show of globetrotting in search of foreign direct investment (FDI). In 2002 one critic said Olusegun Obasanjo, the then-president, had already spent a third of his three years in office out of the country. The trips abroad have since slowed, as it now takes less effort to convince potential investors that Nigeria is worth looking at. According to the Ministry of Trade and Investment, FDI into Nigeria rose to $8.9bn in 2011, up from $2bn a decade ago. This compares strongly with other African countries, representing 55 per cent of the foreign investment into west Africa, and a sixth of the continent’s total. It also came despite stagnation in the oil and gas industry, which is responsible for nearly 80 per cent of the country earnings. Those ploughing in money include investors across a range of sectors, from food and clothes retailers to hoteliers and construction, logistics, power and agricultural companies. Some were proceeding with understandable caution given the challenges the country can present. On the one hand there is the obvious potential – a huge population, a growing middle class, and an ambitious privatisation agenda. On the other hand are longstanding issues such as corruption, poor infrastructure, and an Islamist insurgency in the northeast. The investment story everyone aspires to replicate is that of MTN. In 2001, when the world was still wary of investing in Nigeria, the South African mobile phone company made a bid for one of three mobile licences on offer. In its first year of operations it racked up 300,000 subscribers. Today,

GDP growth dipped to 6.5%

it has more than 40m subscribers, and a large chunk of the company’s total revenues come from Nigeria. Telecoms infrastructure is still an FDI hotspot, says Afolabi Williams, a Lagosbased private equity investor. Retailing and consumer goods is another. Since it opened its first store in Nigeria in 2005, Shoprite, the South African supermarket chain, has added five more. This year Tiger Brands, the South African consumer goods firm, acquired 63 per cent of Dangote Flour Mills,

‘Choose the right partners, and take a long­term view. [FDI] takes time and is expensive’
adding to the 2011 acquisition of Deli Foods and 49 per cent of UAC Foods. In August SABMiller opened a $100m greenfield brewery in the southeast, after initially making inroads in to the country via acquisition of plants in Port Harcourt and Ibadan. Economic reforms from 2003-06 set the stage for the surge in Nigeria’s attractiveness to investors. The government ramped up its privatisation strategy, and demonstrated greater commitment to the battle against corruption by establishing an Economic and Financial Crimes Commission, and a Nigerian arm of

the Extractive Industries Transparency Initiative. The Central Bank’s consolidation plan compelled the country’s 80-plus banks into a series of mergers and acquisitions that left 25 much larger institutions. Pension reforms took shape, and, to cap it all, Nigeria’s $30bn foreign debt was wiped out in an unprecedented deal with the London and Paris Clubs. During the first decade of the 21st century Nigeria maintained annual GDP growth rates often above 7 per cent, before dipping to 6.5 per cent this year. Foreign investment will surge further if the government fixes the oil and gas sector. A bill to reform the industry has languished in parliament for years, with the resultant uncertainty forcing oil companies to put on hold plans for fresh exploration and production. The struggles of the oil industry highlight the difficulties that can accompany dealing with the Nigerian government. Signed contracts are regularly cancelled. In 2007 President Umaru Yar’Adua revoked a number of “oil-for-infrastructure” deals his predecessor had signed with Asian oil companies. This month, the presidency announced that a crucial $24m contract for Canadian firm, Manitoba Hydro, to manage one of the privatised assets of the state-owned power company, had been cancelled, only to reverse its position a few days later. With privatisation ongoing, the power sector is expected to be a big recipient of foreign investment. So too are newer areas, such as e-commerce. This year, Iroko TV, a movie streaming service that targets the African diaspora with Nollywood films, received $8m from American hedge fund Tiger Global, and another $2m Swedish company Kinnevik. Despite the market’s potential, Mr Williams says investors should not rush in. “Choose the right partners, and take a medium to long-term view. It takes time and is expensive.”

FINANCIAL TIMES WEDNESDAY NOVEMBER 28 2012

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Investing in Nigeria

Wealth and attention to style draw in big brands
Luxury A super­rich elite and growing middle class that places a premium on status, makes for a lucrative market, says Tolu Ogunlesi

Real estate groups are ready to take a risk
Property

Ed Hammond finds a big potential market for commercial space and home ownership
House-hunters driving the beach road on Banana Island are afforded a good view of the two faces of the Lagos property market. Properties sell for an average of N300m ($1.9m). The luxury enclave is a dream for local estate agents; the equal of Mayfair in London or the Seventh Arrondissement in Paris. Residents range from former state governors to retail millionaires and retired football players. Total, the French oil company, rents apartments here for its Nigeria-based executives. But walled plots that punctuate the long march of cream and apricotwashed villas bear the same red-paint warning over and over: “Caveat Emptor. This land is NOT for sale.” Land and property touted by individuals or companies that neither own, nor have a mandate to sell, is rife in better-heeled neighbourhoods. Peter Welborn, head of Africa at Knight Frank, the property consultancy, says: “Perceptions, perhaps more than reality, of corruption and difficulty of doing business are deterring foreign buyers from investing in the country’s real estate.” As well as a restrictive land ownership structure, that allows leasehold for a maximum of 99 years before the plot must be returned to the government, there are prohibitive costs. Stamp duty land tax (SDLT) is close to 20 per cent – more than double the top SDLT

Banana Island

D

uring the oil boom of the early 1970s, Yakubu Gowon, head of state, famously declared that Nigeria’s problem was not making money but finding ways of spending it. Purchases of luxury goods from abroad, it turned out, were one way to empty wallets. By 1977, with Gen Gowon chased out of power, spending on luxury was so excessive that Olusegun Obasanjo, another military ruler before his later democratic election, banned imports of lace and Champagne. What has proved impossible to curtail in the decades since, is the desire. Today, the giant billboard overlooking the bridge between Lagos’ financial district and its smartest suburb advertises Moët Champagne. Just a few hundred metres on is a Porsche dealership that opened in March. “Nigerians are very partial to luxury brands,” says Michael Wagner, brand manager for Porsche in Nigeria. Its prices for the Panamera brand start at N24m. This in a city where few roads are good enough – or empty enough – to drive fast. Today’s civilian governments are more likely to fawn over foreign brands. And, with its super-rich elite and a growing middle class that places a premium on status, Nigeria is an increasingly lucrative market for luxury goods companies Bobo Omotayo runs a Lagos-based public relations company that has Moët Hennessy as one of its clients. As evidence of the size of the market,

he says Cyrille Gautier Auriol, Hennessy’s global ambassador, visits the country about twice a year. It is not all fizz, but sparklers too. In November 2011, Chris Aire, the Nigerian-born, California-based jeweller and watchmaker, opened a store at the Hilton in Abuja, at an event attended by politicians, music stars and diplomats. The self-styled “King of Bling”, Mr Aire is known for selling diamond jewellery to celebrities such as Angelina Jolie, Celine Dion, 50 Cent, Oprah Winfrey and Jay-Z. The focus on Nigeria by luxury brands may seem odd given that twothirds of people live in poverty. Yet the huge population means that the “1 per cent” elite class represents about 1.6m people. Among these are jet-setters whose insistence on stylish travel has made British Airways first-class tickets from Lagos to London almost twice the price of those from neighbouring Ghana. Louis Vuitton luggage is not a rare sight at check-in counters. For local air travel there is always the private jet. In September, Robert Habjanic, Bombardier’s sales director for Africa visited Lagos to showcase the $60m Global 6000 business jet. He says there are more than 30 Bombardier jets in private ownership in Nigeria. Their owners include Aliko Dangote, Africa’s richest man, David Oyedepo, Nigeria’s richest Pentecostal preacher, and Rotimi Amaechi, the governor of one of its richest states. One of the newest owners of an air-

Status symbol: Porsche has opened a dealership in Lagos
Reuters

The huge population means the ‘1%’ elite class represents about 1.6m people

craft is a 27-year-old university student who won a Cessna 182T in a competition run by MTN, the country’s biggest mobile operator. Mr Wagner at Porsche admits that luxury brands constantly fight accusations of peddling unattainable luxury amid widespread poverty, but says the company is creating muchneeded employment, and top-class training for staff. “This [showroom] is built to the standard of any Porsche Centre anywhere in the world,” he says. “Customers can expect the same levels of service as they would overseas.” For all the money sloshing around, there is an element of show to the spending, which may not always be in line with the customer’s earnings. “Even if we can’t afford [Moët], we still love to serve it at our parties,” says Mr Omotayo.

rate in the UK – while agency fees, the responsibility of the buyer, typically rack up to 10 per cent of the price. However, Mr Welborn argues that a population of 160m with aspirations to home ownership twinned with demand for better quality commercial property means there are good opportunities for those investors willing to take risk. “There are opportunities across the sub-sectors of real estate,” he says, adding: “Take retail, for example. It is ridiculous that there are more shopping centres in Nairobi than there are in Lagos when you look at population and disposable income demographics. Someone needs to build more malls.” Rents in the commercial property market mirror the rising house prices on Banana Island. Central Lagos, “Grade A” commercial property rents topped $950 per square metre in 2010, up from $750 psm in 2008, and are expected to top $1,000 this year. In spite of the demand developers are being stifled by a lack of bank financing. As in Europe, the US and Japan, the subsidence of Nigeria’s banking sector and subsequent bailout in 2010 has provoked a retreat of lending in real estate. The banks, hamstrung by higher capital requirements

and tighter regulation, are loath to write loans secured against fixed, and often illiquid, assets. From his eighth-floor office, Godwin Emefiele, chief executive of Zenith Bank, Nigeria’s second largest by market value, looks out over the scores of unoccupied office blocks that punctuate Lagos’ low-slung skyline. “Commercial real estate is doing badly because a lot of people lost money on the sector during the crash,” he says. “In the pre-2009 period, banks would lend 70 to 80 per cent of the value of the property. That is not sustainable now and we wouldn’t want to do loans above 30 per of the value.” In spite of this, there are opportunities. Niche property markets such as student housing, are up for grabs. The November issue of the Lagos-focused real estate publication, Premium Property Index, estimated purpose-built housing can cater for fewer than 30 per cent of its students. The market for student housing is the fastest growing real estate sector in Europe, with more than £2bn invested in the UK alone during the first nine months of 2012, according to research from property group CBRE. The establishment of an institutional investment model for the sector in Nigeria would be likely to attract interest from overseas. Deepak Jain, head of consultancy for Jones Lang LaSalle in Africa, says: “The real estate market is currently in a transition phase leading to a more structured environment for investors and end-users. “But macro level risks related to the political landscape, corporate governance and security are foremost in the minds of international investors looking at Nigeria at the moment.”

Trend for African art drives surge in sales and prices
Culture Interest grows but work is still affordable, says Shawn Donnan
When Arthouse, the Lagos gallery and auctioneer, held its first sale in 2008, Kavita Chellaram, the managing director, had a simple goal. A long-time collector of Nigerian modern and contemporary art – the walls at her Lagos home hang heavy with works by some of the lions – she was eager to establish a market. “There was no transparency of price,” she says of the days before that first auction, which saw a painting by Bruce Onobrakpeya, one of Nigeria’s famed “Zaria rebels”, fetch more than $80,000. Just four years on, the market Mrs Chellaram helped establish is booming and prices are soaring for the best works by Nigerian contemporary artists, the finest of which are now celebrated around the world. In May, Bonhams, the London auction house, achieved a world record price for El Anatsui, the Ghanaian-born artist, when it sold his “New World Map”, a vast tapestry made out of flattened aluminium bottle caps and copper wire, for more than £540,000. The price in part reflected the rise of Mr Anatsui, who since 1975 has lived and worked in Nigeria and heads the sculpture department at the University of Nigeria in Nsukka in the southeast of the country. Now in his late 60s and one of Africa’s most celebrated contemporary artists, he has seen a surge in popularity (and prices) since he began making his monumental tapestries out of bottle caps in 1999. One of those works wowed visitors to the 2007 Venice Biennale and his name features in the collections of the British Museum, the Metropolitan Museum of Art and the Smithsonian. But beneath that headline-grabbing success was a bigger trend. African contemporary art is hot and none is hotter than that black graphite depiction of an “Adorable Maiden” with a teary vivid yellow pastel eye by Victor Ekpuk, was expected to sell for up to $7,500. Even large canvases such as “Talking”, a vivid blue oil and acrylic painting depicting two ethereal heads facing each other by contemporary artist Chidi Kwubiri was offered with the expectation that it would draw bids up to $12,500. All of which leads experts such as Mr Peppiatt to argue that the market for Nigerian art is a long, long way from bubble territory. Prices, he says, have not seen “one of those lunatic rises that you see in some markets where you know it is going to collapse at some point”. Part of the reason is that a growing affluent class of Nigerians is becoming interested in art and starting to constitute a significant presence at auctions, whether they are held in London or Lagos. “We keep getting new Nigerians coming in,” says Mrs Chellaram. “They’ve got their cars. They’ve built their houses. Now they want to fill their walls.” Accompanying that is a growing consciousness in Nigeria about the value of art and the need to nurture young artists. Arthouse, for example, is establishing a foundation to help fund the best young contemporary artists emerging from Nigeria’s art schools and Mrs Chellaram speaks of setting up a centre in Lagos that will draw international artists for residencies. “We have young contemporary artists who are doing abstract and figurative art that can compete around the world,” she says. But, she adds: “We’re just at the tip of the iceberg in [terms of] tapping into people.”

El Anatsui’s ‘New World Map’ fetched a record £540,000

coming out of Nigeria these days. When five years ago Bonhams ran its first “Africa Now” auction it had to assemble a list of potential buyers from scratch, says Giles Peppiatt, the auctioneer’s director of contemporary African art. “The first two sales were – to use the euphemism – quite challenging,” he says. This year, however, Bonhams sent out more than 3,500 copies of the catalogue for the sale to a clientele that included serious collectors in the UK, continental Europe and Africa, and private buyers and institutions in the US. The growing interest has driven up prices and made stars out of some artists such as Mr Anatsui. But much of what is offered for sale remains affordable by international standards. The May sale at Bonhams

included many works by celebrated Nigerian artists, such as Mr Onobrakpeya, with estimates of less than £2,000. Prices rose substantially for better works by Mr Onobrakpeya and other Zaria Art Society “rebels” such as

‘We have young contemporary artists who can compete around the world’
Yusuf Grillo. Many of the works offered in a November 26 sale at Arthouse in Lagos carried estimates of less than $10,000. The cover image for the catalogue, a minimalist

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FINANCIAL TIMES WEDNESDAY NOVEMBER 28 2012