Contrary to popular misconceptions, many foreign investors no longer see Nigeria as a petrodollar economy. Its attractions now lie in the agriculture, consumer, power and services sectors. Consider the graph below which shows the sharp decline, over the two decades between 1992 and 2012, in the percentage of the country’s GDP attributable to oil rents. This trend has continued over the past two years, to the point where Nigeria’s statistician general, Yemi Kale, announced in April 2014 that not only had Nigeria overtaken South Africa as the continent’s biggest economy, but the share of the country’s GDP attributable to agriculture (22 percent) and the service sector (51 percent) dwarfed that of oil and gas (16 percent) despite the high oil prices which prevailed at the time.
Needless to say, there is a vigorous debate as to the lessons to be drawn from this rebalancing of the Nigerian economy away from its previous dependence on the black stuff. Is it a reflection of a negative development, i.e., the failure of the country to markedly increase its oil production during the years of peak oil? Or is it a reflection of something much more positive, i.e., the extraordinary, year-on-year, expansion in its non-oil sector which has been growing at approximately 7 percent per annum for the last five years?
Whatever the cause of this GDP rebalancing, it now means that the Nigerian economy is more resilient to oil price shocks than it was twenty years ago. As such, it stands in marked contrast to other OPEC countries such as Venezuela, Angola and Saudi Arabia, who have maintained or increased their dependence on the oil and gas sector during the past twenty years.
This is not to deny that the precipitous slump in oil prices will painfully impact federation accounts. Oil revenues still provide the lion’s share of the monies that flow into the Consolidated Revenue Account and constitute the primary source of the country’s foreign exchange earnings. Meanwhile, the domestic manufacturing sector has suffered a sharp spike in input costs as a consequence of the devaluation of the naira.
Yet, while we lament the negative impact on fiscal revenues and the CBN is bravely defending the naira, something rather curious is taking place. Investors, rather than heading for the hills, are still doggedly pounding on the front door. This is partly because the policy response to these challenges has helped up to shore up investor confidence. For example, the minister of finance, Ngozi Okonjo-Iweala, has insisted that the government will not shy away from taking “tough” fiscal and monetary decisions.
This is not an easy commitment to make at a time when the country’s politicians are fighting tooth and nail to win the votes of their respective constituencies in the run-up to next February’s elections. But tempting though such fiscal profligacy must surely seem, the minister of finance has insisted that the correct response to the country’s macroeconomic challenges lies elsewhere. More specifically, she has introduced a package of belt-tightening measures aimed at cutting the government’s recurrent expenditure on non-productive activities.
Nevertheless, whilst demonstrations of prudent economic stewardship will be welcomed by the international investment community, they play more of an auxiliary rather than a progenitive role in the maintenance of investor appetite. Or, at least, that’s how it appears to those of us who are making investments over the medium to long term.
A good illustration of theunderlying drivers of investor sentiment took place a few days ago with the much-heralded completion by the World Bank and the Federal Government of Nigeria of the first in a series of Partial Risk Guarantees (PRGs) provided by the World Bank. This “Debt Mobilisation” PRG supports the investments made by a set of 20 international banks and equity finance institutions from nine different countries in the $900m Azura-Edo Independent Power Plant (IPP) which, in turn, will sell power under a 20-year Power Purchase Agreement (PPA) to the Nigerian Bulk Electricity Trading Plc.
That a large-scale, project-financed 450MW IPP could reach financial close and secure World Bank securitisation support less than 15 months after the wholesale divestiture of the country’s electricity distribution companies is a testament to the extraordinary demand by foreign investors (both commercial banks and multilaterals) for access to a sector that offers a long-term growth potential currently unparalleled elsewhere in the world.
And in a nicely ironic twist of fate, the next IPP in line for a World Bank PRG is likely to be Exxon Mobil’s Qua Iboe IPP. While other IOCs are busy selling off non-core assets to indigenous oil and gas new entrants, Exxon Mobil is treading a very different path. It has quietly and assiduously put together a $1.1 billion funding package for the Qua Iboe IPP which, in turn, leverages a further $1.4 billion of investment in the offshore gas pipeline that will feed the power plant.
The same scenario can be observed in other sectors of the real economy. In January 2014, SABMiller announced a $110 million investment in its Onitsha brewery, tripling annual capacity by Q1 2015 and creating 400 jobs. In March 2014, Procter & Gamble commissioned a $250 million manufacturing plant at the Agbara Industrial Estate, Ogun State, which now employs thousands of direct and indirect staff. In June 2014, Olam International commissioned the country’s largest rice mill, a 36,000-metric-tonne facility in Nasarawa State requiring a capital investment of $115 million and generating work for 20,000 smallholder farmers.
Last month, BUA Group, which has invested $500 million in a 3mt/yr capacity plant in Okpella, Edo State, announced that the facility is scheduled for commissioning during the first quarter of 2015 and will require a direct labour force of more than 1,000 employees. US multinational, General Electric, on its part, has been quietly building a major facility in Calabar, Cross River State, for the manufacturing and servicing of equipment used in the petroleum, health and power generation sectors. The CBN, meanwhile, is expanding its focus on SMEs and is strategically facilitating their growth. These are just illustrative examples of the dynamic changes that are taking place across the country’s non-oil value chain.
In my capacity as the co-MD of Azura Power, I speak to many people, both at home and abroad, who are surprised by the high levels of investor interest that Nigeria continues to attract, notwithstanding the multiple challenges that have beset our country these past 12 months: the fight against the Ebola virus; the fight against terrorism; the fight against poverty; and the daily fight to retain our patriotism and civic pride. On each occasion, I respond by pointing out that the resilience of investor confidence is only surprising or counterintuitive to those who forget where the fundamental strength of our economy now resides: namely, its huge and fast-growing population; its rapidly expanding agricultural, manufacturing, service and power sectors; and the ebullience and ingenuity of our human capital.
DAVID LADIPO
Ladipo is the Co-Managing Director of Azura Power West Africa Limited, promoter of Nigeria’s first grid-connected and project-financed Independent Power Project.
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