Is Nigeria the Next India?
An exotic and culturally unique location, a long history of Western colonization and independence, a grow ing population of educated [...]
January 30 2009 by Tom Iseghohi
An exotic and culturally unique location, a long history of Western colonization and independence, a grow ing population of educated young professionals, a third-world infrastructure, a tremendous business opportunity: 10 years ago, if you asked an expert in the global business community to associate a country with these statements, “India” was the reply you could expect. Fueled by seemingly insatiable demands for outsourcing and technology services from the big players in the global economy, the economic and development boom India experienced over the last 10 years resulted in huge returns for investors—both within the country’s borders and around the world.
Today, a similar opportunity exists in Africa. Nigeria, in particular, is poised to make massive strides in the global business world. Is it presumptuous to state that Nigeria is the next India? At first glance, the two nations may seem worlds apart. Closer analysis, however, suggests certain trends and conditions in Nigeria bear similarities to those in India prior to and following its economic and development boom. As a result, there exists a growing buzz in the business community about the economic and development opportunities in Nigeria.
Interest Amid Apprehension
Generally speaking, uninformed investors who use the mainstream press as their only source of information about Africa think of the continent as a poor, faraway place where everyone is hungry and disease is rampant. They see Nigeria as a place that is unbelievably unsafe, financially risky and politically unstable, where massive corruption is the order of the day—in other words, a place that prudent investors should avoid. However, the country is currently undergoing a massive political and economic transformation. Growing pains do occur, but the last eight years have brought political stability and a peaceful transition to a new government. Similarly, prior to India’s economic boom, many foreign investors were wary of investing in the country due to perceived risks and cultural barriers.
Currently, Nigeria draws a similar combination of interest and caution from investors—particularly in Western countries—not unlike the scrutiny given to India just a decade ago. Associates at Nova Capital Partners, an emerging markets investment bank with extensive experience in Nigeria, have observed that hesitancy in the market stems from concerns about transparency in Nigerian companies. To combat this perception, Nigerian management teams have acknowledged the importance and benefits of implementing global best practices in these areas. Companies in Nigeria are increasingly learning the importance of transparency and of providing a high degree of financial, operational and other information to international investors and strategic partners to assuage investor’s concerns.
Additionally, Nigerian professionals who have served as executives in the U.S. and other major markets are quickly spreading their knowledge of international business standards throughout their home country. Along with their expertise come valuable relationships in the global business community. As partnerships develop, investment in Nigeria is steadily gaining momentum.
Nigeria by the Numbers
According to a recent report by the United Nations Conference on Trade and Development, foreign direct investment (FDI) in Africa overall has grown from $2.4 billion in 1985 to approximately $36 billion in 2007. The top two recipient countries, South Africa and Nigeria, accounted for 37 percent of the continent’s inward FDI stock in 2006. Between 1995 and 2005, FDI inflows to Nigeria increased from $1.27 billion to $3.4 billion, and in 2006 the total spiked to nearly $6 billion. GDP continues to rise, with a growth rate of 6.3 percent in 2007.
CASE IN POINT:
Investing in Nigeria
TransCorp, a growing industrial conglomerate with significant assets in telecommunications, real estate and energy, started in 2004 and raised $1 billion within its first year based on a business plan and no operating history; 99 percent of the money was raised domestically in Nigeria. Fundamental analysis indicates that TransCorp’s market capitalization could approach $60 billion in less than five years. First Bank, one of the largest banks in Nigeria, has delivered capital gains of more than 2,300 percent to investors during the last five years. First Bank recently went to the market to raise $1 billion, and was offered $4 billion by investors. UAC returned 1,800 percent to investors during the same period. Glaxo returned 900 percent. Cadbury returned 658 percent and Texaco returned 515 percent.
The Nigerian stock exchange has experienced incredible growth during the last several years. Market capitalization has grown from approximately $76 billion to $380 billion in a five-year period—a 500 percent growth rate. During the same period, the Dow Jones Industrial Average grew by less than 30 percent.
India experienced a similar growth spurt during the 1990s. Fueled by economic reforms in the early 1990s, India has emerged as one of the largest economies in the world and is poised for continued growth.
Demographic Similarities with India
Demographically, Nigeria bears some key similarities to India, most notably, a growing middle class and a substantial pool of educated English speakers. With a population of 138.3 million (roughly equivalent to that of the United Kingdom), Nigeria displays these characteristics on a smaller scale than India, which is home to more than a billion people.
According to the National Council of Applied Economic Research, India’s middle class more than tripled between 1984 and 2001. As India’s middle class grows, the demand for infrastructure and economic development follows suit, resulting in a need for capital and a host of investment opportunities. The same is true in Nigeria, where the middle class is emerging as a class of consumers, creating substantial opportunities in sectors like telecom. The telecommunications industry is growing by one million new subscribers per month from a base of 40 million subscribers and a very low relative penetration of 30 percent. Penetration rates of 75 to 85 percent are typical in mature markets.
Due in large part to their previous status as British colonies, India and Nigeria boast substantial English literacy rates. While Hindi enjoys primary official language status in India, English is spoken widely, particularly in the business arena. In Nigeria, native tribal languages are still spoken, but the country’s official language is English.
Both India and Nigeria have seen an increase in formal education among their citizens, although the means by which the majority of people acquire education differs. While many of India’s college and advanced degree graduates attended universities within the country, Nigerian citizens tend to go abroad for higher education. In the past several years, Nigeria has seen an influx of its expatriates returning to their home country with diplomas from leading institutions in the U.S. and Europe. Many of these individuals have also launched careers in other countries, bringing their diverse array of experiences and global business contacts back to Nigeria with them.
India and Nigeria share a heritage as former British colonies that gained their independence and subsequently built new democracies. Both countries have faced political turmoil and corrupt government practices that make the international news.
While some investors have been alarmed by such reports, Nigeria’s current government has displayed a commitment to reform and a devotion to economic development. The government has implemented strict regulations focused on corporate governance, due process and transparency. Land use reforms are under way, as well as a strong focus on infrastructure development. The government has exhibited a focus on strong growth in agriculture through public and private sector partnerships to drive commercial agriculture and agro-allied industries. Unlike India, which embraces a socialist ideology in its constitution, Nigeria’s government supports a more Western-style, capitalist economy. While tribal divisions exist in Nigeria, the country lacks a rigid caste system and greater opportunities for upward mobility exist.
Room to Grow
In both nations, government reform has contributed to an increase in business opportunities and economic growth. In particular, the governments of India and Nigeria have taken steps to privatize major government- owned assets by selling majority interests to public com panies and private investors. In the 1990s, the Indian government opened its fully state-run airline industry to private enterprise, resulting in enormous growth over a short period of years.
In Nigeria, privatization efforts have recently been focused on the oil and telecommunications sectors. In telecom, the rapidly growing Nigerian middle class is driving unprecedented growth. Currently, only 500,000 of the country’s 140 million citizens have fixed telephone lines; on the mobile side of the business, 40 million lines are active in the country with an annual growth rate that exceeds 40 percent, and the telecom sector is growing at three and a half times the global average.
CASE IN POINT:
Telecommunications in Nigeria
Five years ago, South African telecommunications company MTN was a tiny, insignificant player in the industry. After researching opportunities in Nigeria, a market major competitor Vodacom dared not enter, MTN invested $281 million to get a license and extend its operations to Nigeria. Last year, MTN had sales of almost $2 billion and earned $1 billion dollars of profit. Thus far this year, MTN’s profit is up 79 percent, and the company continues to invest aggressively in Nigeria, including a $2 billion outlay in telecommunications infrastructure. From a competitive perspective, MTN recently surpassed Vodacom, boasting more than 20 million subscribers on the continent, with 16 million of them in Nigeria alone. In 2008, MTN rejected a $50 billion takeover bid.
India and Nigeria also share fundamental similarities in the area of real estate. In both countries, demand for housing continues to exceed supply, with new apartments filling to capacity long before they’re completed, according to Nova Capital Partners. The biggest obstacle to growth in these and other sectors is a lack of sufficient infrastructure. When faced with similar hurdles, India opened infrastructure projects to private capital based on the government’s inability to finance the huge demand for roads, airports, power networks and other infrastructure.
Patel Engineering, which has since built 25 percent of India’s hydropower capacity, enjoyed an operating margin of 15 percent in 2006; Nagarjuna Construction has seen revenues increase at an annualized 56 percent over five years, to $584 million in 2006. In Nigeria, immediate demands for basic infrastructure elements, like roads and housing, present similar opportunities for investment and development.
While Nigeria’s economy remains heavily dependent on oil production, non-oil sector growth continues to increase. Investments in agriculture and solid minerals are up 178 percent from a year ago. Technology and outsourcing services are up 350 percent relative to 2007. Other sectors of the economy, such as retail and real estate, are also significantly up versus last year.
It is clear that the rest of the world is becoming interested in the opportunities in Nigeria. Major investment banks such as Morgan Stanley, Merrill Lynch, Renaissance Capital and Goldman Sachs have all set up operations during the last year. A lot of capital is now flowing into the market. However, there are risks. Political and execution risk, as well as access to the right deal flows remain the main challenge for international investors. How can these challenges be overcome? Find and partner with a local organization that understands how to manage the local issues but is also committed to international transparency and corporate governance standards.
As Americans, we are often late to the table when it comes to investment opportunities in emerging markets. The strategic criticality of Africa to the world has dramatically increased. Excluding the energy sector, American investors are underinvolved in Africa. The Asians, Europeans and Russians have recognized opportunities on the African continent significantly ahead of us. Africa is experiencing an economic gold rush—and American investors who continue to think of Africa as a charity case and Nigeria as a place to avoid because of fraud will miss out.
From a business and investment perspective, Nigeria’s current potential for growth and development in many ways parallels that of India prior to its recent outsourcing and technology boom. Nigeria and India each exhibit their own unique cultures, histories and characters; but for investors who found themselves wishing they had recognized the opportunities in India 10 or 15 years ago, Nigeria is gaining ground as the next emerging market to watch.
Tom Iseghohi is group managing director and CEO of TransCorp. He previously held leadership positions at American Express, Ford Motor Company and Pepsi-Cola.