Doing Business in Africa: Nigeria

By Jeffrey Cavanaugh AFKI Original Published: October 30, 2013, 8:45 am
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In the first in a series of reports on business conditions in specific African countries, AFKInsider will showcase Nigeria.

Africa’s most populous country and the dominant state of Western Africa, Nigeria has 174 million people and is the world’s seventh most populous country. The majority of the population – more than 63 percen – is under age of 25.

As with many other developing countries, this huge youth population represents both a source of incredible economic opportunity as well as social and political instability. If these young people can be connected with jobs, income, and opportunities for better lives through economic development, then Nigeria, and the world, will become a safer, more prosperous place. If not, then a historic opportunity will be lost, perhaps never to return, with economic privation and political instability being the result.

How well and how fast Nigerians and those doing business in Nigeria today can create opportunities for its young people will impact the future. Since entrepreneurs and foreign investors play a key role in any country’s climb to developed-state status, it is vitally important that those doing business there understand conditions on the ground if their resources are to be put to best use. As the saying goes, being forewarned is being forearmed.

Ease of Doing Business

With that in mind, how do conditions in Nigeria compare to the rest of the world and other countries in Africa? According to the World Bank, Nigeria currently ranks 137th out of 183 countries on its Ease of Doing Business Index – a measure created to gauge the degree to which commercial enterprises encounter regulatory hurdles, legal threats to property, and the time and money spent on things such as registering a business, ensuring right of title to property, and acquiring licenses. By way of comparison, the U.S. ranks fourth on ease of doing business, right after Singapore, Hong Kong, and New Zealand.

What does this ranking mean? Take, for instance, the bank’s measure of how easy it is to start a business. It defines business-creation costs as time and money outlays involved in the series of legal steps necessary for the entrepreneur to legally establish an in-country firm. Using this framework, the bank then tasks researchers to go through this process in order to establish in-country averages.

When this metric is applied to Nigeria, it ranks 110th out of 183 in ease of starting a business. To start a business in Nigeria, one has to complete eight bureaucratic procedures that take a total of 31 days at a cost of approximately $2,181, with no minimum capital required by the government for the start-up. While not especially expensive by Western standards, the time and money required is often beyond the reach of many, if not most, Nigerians, who have far fewer resources than your average foreign investor.

How the World Bank Measures Ease of Starting a Business

Fig 1

            Using similar metrics for other aspects of business operations, the World Bank Nigeria in a number of other areas. To obtain a construction permit, for instance, Nigeria is ranked 167th out of 183 as it takes the completion of 18 procedures, which takes some 350 days at a cost of nearly $17,000, to begin construction on a given property.

In order to obtain and register that property, another area measure by the World Bank, Nigeria is also a relatively difficult place to do business. It ranks 179th out of 183 countries measured. To register property in Nigeria, the bank finds, it takes the completion of 18 bureaucratic procedures that takes, on average, 82 days and 21 percent of the property’s financial value in fees and other costs to complete.

Nigeria does better on the acquisition of commercial credit, where it ranks 89th out of 183. Here, the bank examines the legal rights of creditors and borrowers in secured transactions and bankruptcy law as well as the strength of credit information bureaus and exchanges. When lenders have both strong legal rights and easy access to a wide variety of information about the client’s creditworthiness, reasons the bank, credit will be more readily available. For Nigeria, while information on borrowers is generally very limited, this is counteracted by relatively strong legal protections for lenders.

How the World Banks Conceptualizes Credit Acquisition

Fig 2

            Nigeria also does relatively well on protecting investors and minority shareholders. Here the bank ranks the country 59th out of 183 countries. The West African giant ranks fairly well on ease of bringing shareholder lawsuits to court and on requiring significant disclosure of conflict-of-interest for executives and members of the board. Where Nigeria does better than most is the degree to which directors are legally liable for company actions, where it outperforms relative to both its African neighbors and many other developing countries.

Next, paying taxes is unfortunately not an easy thing to do in Nigeria. The World Bank estimates that rendering Caesar his due requires a total of 35 payments over the course of a year which takes up to 938 hours to complete and consumes up to 32 percent of a company’s profits. Accordingly, Nigeria ranks near the global bottom on tax burden, coming in 134th out of 183 nations.

The ease with which one can engage in cross-border trade is even worse. In Nigeria, to import goods into the country one is required to have nine documents for customs’ officials to inspect. On average, it takes a total of 39 days to import goods into Nigeria with the cost amounting to $1,440 (excluding tariffs) per container shipped into the country.

To export goods, on the other hand, the government requires 10 documents to be inspected by customs officials while the total cost (excluding tariffs) is $1,263 per container, with delivery taking up to 24 days from point of origin. Compared to global averages this is an abysmal performance, thus netting Nigeria a ranking of 147th out of 183 on ease of engaging in cross-border trade.

Nigeria does better on contract enforcement, where it ranks in the middle of the pack at 97th out of 183 countries. On average, reports World Bank analysts, it takes a total of 40 legal procedures to take a contract from dispute to resolution, at the cost of 457 days spent in court or attending to legal issues. The financial cost of pursing a contract claim, says the bank, typically accounts for 32 percent of the value of the claim.

Finally, in terms of closing and or liquidating a business, World Banks ranks Nigeria 99th out of 183 countries, where the time spent pursuing legal procedures and the direct financial cost of satisfying creditors can take up to two years and more than 22 percent of the value of the business estate being closed. The end result in Nigeria is a typical investor recovery rate of 26.8 cents on every dollar invested.

Table 1 presents a summary of these rankings as well as Nigeria’s overall ease-of-doing business rating. When compared to the rest of the world Nigeria is a relatively difficult place to do business under normal circumstances. Unfortunately, what is considered normal in Nigeria is a broader economic and political environment that adds on many additional risks for those doing business. We turn to some of those additional risks below.

Table 1:

World Bank Ease of Doing Business

Assessment and Rankings: Nigeria

Table 1

 

Political and Economic Risks in Nigeria

While Nigeria is huge country with a substantial and growing economy that holds the potential for lucrative investment opportunities for savvy investors, the country’s growth prospects are nonetheless intimately tied to the ups and downs of the country’s politics in a number of ways. Most obviously, politics impacts government and governance, creating the generalized business climate described at length above. Equally obvious, the government’s ability or inability to provide critical services and infrastructural public goods can dramatically distort and impact for the worse the smoothing functioning of a market economy.

Endemic Insecurity & Political Conflict

As a state cobbled together by British colonialists in the late 19th and early 20th centuries, Nigeria, along with Sudan, might be considered a poster-child for the type of post-colonial dysfunction in governance that many developing countries – but Africa in particular – have become known for. Since independence from Britain in 1960, Nigeria has suffered a civil war, seen democracy replaced by military regimes twice in its history, and gone through multiple federal constitutions that all aimed at making Nigeria more governable.

Whether Nigeria has made progress on that front is debatable, though the current democratic regime – which came to power in 1999 after 16 years of military rule – has at least seen several presidents more or less freely and fairly elected. Nonetheless, the country is wracked by endemic political conflict that quite often boils over into violence. Increasingly, such violence is now beginning to target foreigners and their businesses more than ever.

This can be seen most readily in the country’s oil industry, where the principal western oil major – Royal Dutch Shell – has come under increasing pressure from rebels and bandits in the country’s oil-rich south, particularly in the Niger Delta. There, bands of armed men – sometimes motivated by politics but, more recently, just as often motivated by greed – have attacked oil production facilities, oil workers, and have turned oil theft from the Niger Delta’s vast network of pipelines and storage bunkers into an industrial-sized operation in scale and complexity. As a result, over the years Shell has had to pay exorbitant amounts on security to protect its on-shore physical assets and personnel while deferring – due to the endemic theft and violence in the Niger Delta – maintenance and investment.

Indeed, Shell and the other oil majors have increasingly moved their Nigerian operations offshore, to the Gulf of Guinea, at least in part to avoid the serious security problems that have come to bedevil onshore operations. Despite this move, however, the recent kidnapping of two American mariners in the Gulf of Guinea as late as Oct. 24 demonstrates that security, even for offshore operators, remains a significant problem for those working in Nigeria’s oil industry.

Alongside the security problems bedeviling the oil industry, the country’s long-running political conflict between its Muslim north and largely Christian south is a major source of violence, political terrorism, and national political instability. Indeed, it is not too much to say that oil – and the desire to possess it – has kept Nigeria territorially intact since independence as northern and southern Nigerian elites have jousted for control of the nation’s oil resources through control of Nigeria’s federal government.

The latest manifestation of this north-south conflict is the emergence of an Al-Qaeda affiliated militant group known as Boko Haram, an Islamist group whose name when translated into English means “Western learning is forbidden.” Since 2009 the group has been responsible for a series of grisly attacks on schools, markets, police facilities and other civilian and government targets that killed more than 3,600 people. Mostly concentrated in Northern Nigeria, Islamist militarism and the federal government’s security crackdown have bogged down into an insurgency that does not look to end anytime soon.

Corruption

Another factor impacting business and investment in Nigeria is the widespread presence of corruption throughout the country’s public institutions. Transparency International, a Berlin-based global nonprofit that tracks corruption around the world, lists Nigeria as one of the most corrupt nations on Earth.

In a nationally representative survey of Nigerian citizens conducted by Transparency International, 63 percent of the population reports having paid an official a bribe in 2010. It ranked Nigeria 139th most honest country in 2011 out of 176 in terms of government graft and corruption, openness, and public accountability.

World Bank estimates that though 80 percent of oil revenues flow to the government, those revenues benefit 1 percent of the Nigerian population.

Macroeconomic Risk

Finally, those looking to invest and do business in Nigeria should be aware that as one of the world’s major oil exporters Nigeria is extraordinarily dependent on the price of petroleum to prop up its currency, spur economic growth, and supply the government with revenue.

When the price of oil falls, as it did dramatically as a result of the 2007–2008 global financial crisis, the Nigerian economy generally retracts violently as lower demand for oil constricts activity in nearly every part of the Nigerian economy. As the economy outside the oil sector remains largely inefficient and significantly underdeveloped by world standards, Nigeria lacks the stabilizing buffers that productive sectors in a more developed, diversified economy might provide. Thus, the Nigerian economy is susceptible to commodity-driven boom-bust cycles largely emanating from the global supply and demand for oil.

Structural Silver Linings

Despite the less-than-ideal business conditions and risk environment encountered in Nigeria, the country has made a great deal of economic progress over the past decade. Nigeria has, for instance, steadily increased economic output since 2000 when its gross domestic product was ranked 52nd in the world to ranking 30th today. The country possesses the second-largest economy in Africa and is on course to become one of the world’s 20-biggest economies by the 2020s.

Despite under performing by world standards and dwarfed by the oil sector, the non-oil sectors of the Nigerian economy are in fact quite large and employ a significant number of people, particularly in agriculture – which ranks sixth in the world in terms of farm output and first in terms of African farm output.

Nigeria’s manufacturing sector is the third largest in Africa and serves as a production hub for the rest of West Africa. Nigeria’s bustling cities, which have grown prodigiously since 1960 and look to grow even more by 2050, have in turn become transport, finance, and media centers for much of West Africa.

Prospects

Going forward, Nigeria represents tantalizing opportunities for risk-acceptant foreign investors who understand that the country’s business climate is very different from that encountered in the U.S. or a similarly developed Western country.

Its huge population and growing economy, despite being handicapped by weak and corrupt political institutions, offers a huge opportunity for those willing to take on the challenges of working and investing in the most populous country in Africa.

Market-based reforms, which have been in place since the transition to democracy in the late 1990s, are relatively secure and have led to both business formation and economic growth in the country as excessive bureaucracy, regulation, and macroeconomic mismanagement has been reigned in by pro-market reformers.

While the 2007-2008 crisis rattled Nigeria and put pressure on its currency, the country has maintained a steady rate of economic growth in the face of trying global conditions. Confidence in the country’s long-term prospects has enticed investors. Foreign direct investment amounted to $85.7 billion in 2012, and global investment analysts have designated Nigeria a top growth economy for the next several decades.

In terms of growth, one should look to sectors outside the traditional oil and gas for opportunities in the future. Nigeria’s agricultural output, already significant, is still mostly traditional in organization and practice, meaning there is great room for rationalization of the sector towards greater farm size, more efficient production, and eventual orientation of agricultural output to the export sector after food self-sufficiency has been established.

This, in turn, will mean a release of peasant labor currently bound up in the traditional, yet highly inefficient agricultural sector to manufacturing and services. Given the huge youth cohort in Nigeria’s demographic makeup and an aging population in China that is also growing wealthier and therefore comparatively more expensive to use, there is potential for a shift in export-orientated light manufacturing of the type that fueled China’s economic takeoff in the 1980s and 1990s to Africa and, in particular, Nigeria – which is geographically well-placed to serve markets in both North America and Europe.

Potential, that is, if Nigeria’s young democracy can pry resources away from its corrupt political elites and shift them into improvements in infrastructure, health, and education that the country desperately needs.

One cannot compete with competitor nations, after all, if one cannot keep the lights on, transport goods across the country, or ensure that order is maintained. Whether Nigeria can escape the oil curse that has kept its people poor for so long is an open question that only the country’s political system will be able to answer.

Jeffrey Cavanaugh holds a Ph.D in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFKInsider, Mint Press News and BAM South.

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