The size and scale of opportunity are enormous. Critical

infrastructure, like electricity and telecommunications, does not work.

When the telecommunications sector was deregulated, it spawned a

cellular industry that grew from nothing to three million customers in

a little more than two years. Ambitious plans to address the country’s

housing backlog – estimated at up to eight million units – presents a

massive construction opportunity valued at up to $170bn, not to mention

stimulating industries supplying materials to the building trade.

If the government’s much-vaunted economic reform programme yields

results, accelerating economic growth from a pedestrian 3% per year to

a targeted 7%, the ultimate prize will be the awakening of Nigeria’s

130 million-strong consumer market. With an underdeveloped consumer

goods sector, the potential at all stages of the supply chain is vast.

Singapore-based Eurochem Technologies is at an advanced stage of

planning a $1.85bn petrochemicals plant, capitalising on low cost

access to abundant natural gas supplies to produce methanol. The

methanol will be further processed into polymers for export and for use

in plastics. Nigeria currently imports all its plastic.

Unavoidable truths

However, there are some unavoidable truths about Nigeria that

investors cannot ignore. First, corruption is real, it exists at all

levels and is difficult to avoid. Government rhetoric is staunchly

anti-corruption and it continues to increase resources to

anti-corruption agencies but, despite small victories, the practice

remains widespread.

Second, security is a problem. Crime is an issue, particularly in the

commercial centre Lagos. The British Foreign Office warns that violent

street crimes, armed robberies, muggings and car-jackings are

“prevalent” in Lagos while hostage-taking for ransom may occur in the

states of Delta, River and Bayelsa.

The situation is not as bleak as the travel advisories warn – being

sensible and suitably cautious eliminates most dangers – but many

companies still consider it necessary to provide beefed-up private

security to their employees. Intimidation and Mafia-style tactics are a

concern – a factor allied to corruption. Factional violence in outlying

areas rarely affects the main urban centres but operations in those

regions could be at risk.

Third, the quality of infrastructure is dire. Power failures are

routine – often two or three times a day. The fixed line telephone

network is totally inadequate. Market distortions in the refining and

petroleum industry mean fuel supplies to outlying areas are irregular.

The ports are chaotic, while clearing goods through customs can take

months. The transport infrastructure is creaking, which presents

difficult logistical challenges. All of this pushes up the cost of

doing business in Nigeria.

New stability

Crucially, however, the country and its political system are

largely stable. Earlier this year, democratic elections were held for

the second time since civilian rule was restored in 1999. Despite

accusations of irregularity and predictable logistical hassles, the

results were accepted and President Olusegun Obasanjo won a second

term.

Following nearly four decades under successive military regimes,

Nigeria has walked out of the shadows and into the spotlight.

Increasingly, the country is an important continental player. Mr

Obasanjo was a key architect of the New Economic Plan for Africa’s

Development (NEPAD) along with South Africa’s president Thabo Mbeki. Mr

Obasanjo is also a leading figure in the Commonwealth and earlier this

year he received US President George W. Bush in the capital, Abuja, a

sign of Nigeria’s growing international status.

But it will come to nothing if Mr Obasanjo cannot remedy the country’s

economic ills. Despite the world’s eighth largest proven reserves of

oil and fifth largest proven reserves of gas, 60% of the population

lives below the poverty line. An unproven but widely believed statistic

is that there are more dollar millionaires in Nigeria than there are in

the UK, indicative of the yawning gap in income and wealth equality.

Depending on the source, unemployment runs at between 20% and 30%, and

what little income Nigerians do generate is being eroded by inflation.

The country’s once efficient education system is now in decline,

prompting many wealthy Nigerians to send their children abroad to be

educated.

Citizens let down

Why did this resource-rich country fail to deliver prosperity to

all its citizens? Professor Mfon Amana, chairman of the Nigerian

Investment Promotion Commission, places the blame squarely at the door

of the former military rulers. “The military do not know how to govern;

they only know how to plunder and steal. It was an attitude that

filtered down to all levels of government and the public sector.”

Mfon Amana: the military do not know how to govern

Apart from a few pockets of success, Mr Obasanjo’s first term in

office was mediocre. Supporters contend that his hands were full

holding together a fractious country and more far-reaching reforms were

impossible. Critics would prefer him ousted from office.

Undeterred, Mr Obasanjo is stepping up the pace of reform. The

centrepiece is a far-reaching economic reform programme. The first step

is narrowing the budget deficit from the current level of 4%-5% of GDP,

which is designed to lower debt costs and unlock funds for capital

investment. Aggregated expenditure will be planned on the basis of an

“oil price-based rule”, which is intended to ensure predictability of

government revenues and in turn restrict expenditure programmes to be

in line with revenues. Debt will be serviced as part of a wider

campaign to improve Nigeria’s reputation among international creditors.

At the same time, there are plans to reform the public sector,

ultimately reducing payroll expenses and general overheads. Capital

expenditure will be exclusively targeted to priority areas:

infrastructure, education, healthcare, security and improving the

quality of national statistics.

Efforts to improve the investment climate are being made at macro level

– improving the macroeconomic fundamentals – but also at micro level

where, for instance, the aims are to lessen bureaucracy and provide

targeted incentives and concessions. Priority economic sectors include

oil and gas, agriculture, manufacturing, solid minerals mining and

beneficiation, and tourism. The focus is on completing projects and

ensuring accountability.

“The president is fully backing this and we have started sensitising

the party,” says Agusto Bode of the Finance Ministry’s Budget Office.

“Nigerians believed they could spend their way out of economic decline.

But if you go to the grocery store with N100, you cannot spend N140.

This is all about doing more with less. We have to spend less but

improve the quality of spending.”

In Nigeria, it is taboo to suggest the economic plan has the look of an

IMF structural adjustment or fiscal austerity plan. Such a description

is the kiss of death in a country suspicious of the motives of the

multilateral agencies. But that is what it is: decrease the size of

government, improve the quality of spending, narrow the deficit, shrink

government debt and increase capital spending on infrastructure.

A good plan

By the standards of prevailing economic orthodoxy, it’s a good

plan, and the president has enrolled a legion of independent-thinking

technocrats to implement it who are largely unsullied by the past. Mr

Bode is a veteran of the private sector, with stints at

PricewaterhouseCoopers and Citibank behind him. But the challenge is

less in the design of the plan than in its implementation.

The government’s plan has been attacked in the press, getting short

shrift from some commentators. “The problem is that the government is

trying to do too many things, achieve too much, and it will end up not

achieving anything at all. It should be focusing on getting a few of

the important things done,” says Frank Aigbogun, publisher and CEO of

Business Day newspaper.

The government is squaring up for a fight, however. Recently it began

deregulation of the downstream oil sector to howls of protest from

consumers. Controls on the retail price of fuel have been removed, a

tactic designed to stimulate investment in new refining capacity.

Because the government-set pump price was lower than the cost of

production, there was under-investment on the supply side, leading to

frequent fuel shortages. With this control eliminated, prices are set

by the market. This led to a spike in prices in the short term but

ultimately provides the economic incentive to increase capacity.

Though hailed by economists, deregulation has sparked widespread anger

from consumers, who now have to shoulder higher fuel prices. It is easy

to dismiss this as a simplistic misunderstanding of the economics of

supply, but the bitterness against the policy stems also from

deep-seated distrust of government and its ability to fulfil promises.

The fear is that fuel prices will rise but the supply of fuel will not.

Yet, in the face of criticism, the government’s resolve has not wavered.

Funsho Kupolokun: mandate to deregulate the market

In similar a vein, the appointment of Funsho Kupolokun to head up

the Nigerian National Petroleum Corporation (NNPC), the state oil

company, is instructive. This former special adviser to the president,

known for his strong push for deregulation, was handpicked by Mr

Obasanjo. Mr Kupolokun’s express mandate is to deregulate the market

aggressively, increase production and improve transparency.

Targeting foreigners

This is part of a wider objective to increase dramatically foreign and

domestic participation in the oil and gas sector. Pragmatically, the

government has realised that the best way to break the culture of

cronyism and the cabals of influence is to throw the market wide open.

Oil and gas account for 20% of GDP, 95% of foreign exchange earnings

and up to two-thirds of government revenue.

The government faces many more stern tests. The pace of privatisation

must be stepped up. The botched attempt to sell off Nigerian

Telecommunications Limited last year, when the preferred bidder failed

to raise financing, seemed to confirm fears that the government was

incapable of effectively arranging the sale of its largest state-owned

companies. Privatisation of key enterprises, such as the Nigerian

Electrical and Power Authority, the NNPC, refineries and steel

companies, is absolutely crucial, not just to meet objectives of

shrinking the public sector but, more importantly, to ensure adequate

provision of these most basic services.

Julius Bala: privatisation critical to government’s economic agenda

Doctor Julius Bala, director general of the Bureau of Public

Enterprises, is emphatic that privatisation is a critical aspect of the

government’s economic agenda, and that transparency and accountability

will be key factors in implementing the programme. Privatisation will

go ahead, he says.

Pot of gold

In Abuja and Lagos, there is a distinct mood of anticipation. The flood

of potential investors that swarmed to the country in 1999 with the

advent of civilian rule has slowed to a gentle stream, not because of a

dearth of opportunities but rather because capitalising on these

opportunities needs experienced hands. The challenges are great but

equally there is a mood that to sit on the sidelines for too long would

risk missing the pot of gold.

It is Friday night at Murtala Mohammed international airport outside

Lagos and flights to the UK, Italy, France, Germany, Holland and South

Africa are all departing within an hour of each other. The passengers

are mostly Nigerians – the country’s flag carrier, Nigeria Airways,

collapsed under huge debts, mismanagement and rumoured corruption

earlier this year. But there is more than a smattering of non-Nigerians

and many of these reveal themselves to be prospective investors,

expatriate managers and salespeople. Some show near indecent glee at

the potential they have struck in Nigeria; many are reluctant to share

their story of good fortune for fear of letting slip their secret. For

these pioneers, sitting on the sidelines was not an option.