The Nigerian government has suspended an $8.3bn contract with the China Railway Construction Corp (CRCC) to modernise a north-south line across the country, highlighting the risk of governmental intervention faced by foreign companies investing in the country.

CRCC said in November that Nigeria’s transport ministry had taken control of work on the 1315-kilometre line between Lagos in the south and Kano in the north, while the scope of the contract is being redefined.

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The Lagos-Kano line deal was signed in 2006 and represents about 14% of CRCC’s outstanding contracts in the country.

A Nigerian presidential spokesman told news agency Reuters in November that the government had suspended the execution of the Chinese railway contract because the administration had discovered that it was over-inflated. “Everything about the contract was wrong. There was no funding allocated for the project other than a promise by the previous administration to give the Chinese company an oil block,” he said.

CRCC, formerly the railway-building unit of the People’s Liberation Army, has also signed a $300m road deal in Nigeria.

In a separate move, further highlighting risks for foreign investors, in Nigeria the government is to pass new laws to overhaul the country’s oil and gas sector before the end of the year, prompting fears among Western oil companies that the reform could cost them billions of dollars.

President Umaru Yar’Adua’s intention of reviving the declining oil sector after pipeline attacks and constraints on investment may backfire as Nigeria’s biggest energy producers – which include ExxonMobil, Royal Dutch Shell, Total and Chevron – have voiced concerns that the new operating terms will deter investment rather than encourage it.

Emmanuel Egbogah, a senior adviser to the president, told the Financial Times that the proposed legislation would soon be submitted to the National Assembly for approval. “For the first time, the Nigerian petroleum industry will be able to reach its full potential,” said Mr Egbogah.

Nigeria’s new Petroleum Industry Bill aims to restructure joint ventures between the Nigeria’s state oil company, National Petroleum Corporation (NNPC), and Western oil companies to allow them to raise private capital, rather than rely on an unreliable annual injection of capital from Nigeria’s government.

The oil companies have blamed slow decision making by NNPC, for the lack of development of one of the world’s largest untapped oil reserves available for Western companies to exploit.