Hidden hurdles: Is it still worth investing in Nigeria’s growth story?

Hidden hurdles: Is it still worth investing in Nigeria’s growth story?

Kyle Wales shares his thoughts on investing in Nigeria in an article written by journalist Sasha Planting, published in Business Maverick on 29 Aug, 2021

Investment in Africa’s most populous country is not for the faint-hearted, and among South African companies there are more failures than successes. Is it worth the risk?

South Africa’s second-largest telecommunications operator, MTN, believes that Africa, and in particular Nigeria, offers a compelling growth story. Its Vision 2025 strategy sees the telco exiting the Middle East specifically to focus on its 18 markets across the continent.

But is it the only South African brand that believes in Nigeria’s compelling growth story? This week’s events in the continent’s largest economy may make even the most determined investor think twice.

Nigeria’s tax tribunal ordered MultiChoice to pay $2.2-billion in alleged tax arrears before it will allow the matter to be heard in court. According to the tax authority, MultiChoice owes $4.4-billion in arrears and in July asked lenders to freeze MultiChoice’s Nigerian bank accounts. Predictably the market did not take kindly to this development and MultiChoice’s share price fell 7% on the news, though it has since recovered some of the losses.

This is not the first time that a South African business with an essentially clean track record of regulatory compliance elsewhere has fallen foul of Nigerian authorities.

In 2015, MTN found itself in the firing line of Nigeria’s communications authority, which fined it $5.2-billion for failing to disconnect unregistered SIM cards. An agreement was finally reached in terms of which MTN had to pay a $1-billion fine.

It was not just Nigeria’s communications authority that decided to take aim at MTN. Its tax authority, the same tax authority that is making the current allegations against MultiChoice, also had it in its sights. In 2018, it claimed that MTN owed it $2-billion in unpaid taxes. Fortunately for MTN, this claim was eventually dropped.

“What is it about Nigeria that causes otherwise good corporate citizens to run amok and flout local laws?” asks Kyle Wales, global portfolio manager at Flagship Asset Management. “Or are these allegations simply allegations that are designed to extort money from foreign companies to balance government budgets?”  

It seems it’s not just the Nigerian government that has tried to extract its pound of flesh but Nigerian businessmen as well.

Another JSE-listed company to encounter problems in Nigeria was Tiger Brands, which, perhaps rashly, acquired a 65% stake in Dangote Flour Mills for $200-million in 2012. Just three years later, Tiger sold it back to Aliko Dangote, Africa’s richest man, for $1. Why would they do this?

Tiger Brands was scant on the details, but a version of events has circulated that suggests there may have been some corporate skulduggery involved. Once the mills had been sold to an eager Tiger Brands, port and electricity charges were apparently increased to a level that made an already struggling (for other reasons) business unviable. Aliko Dangote, who had a stake in the port and electricity companies concerned, was there to snap up the mills when Tiger beat a hasty retreat.

Shoprite, which The Economist once referred to as the Walmart of Africa, sold its 25-store Nigerian business in 2020, after 20 years of investment in that country. In the same year, Mr Price withdrew as it executed its strategy of exiting underperforming or legislatively onerous jurisdictions, and Woolworths and Truworths pulled the plug in 2013 and 2016, respectively. South Africa’s banks and construction companies have scars too.

And it’s not just South African companies. British conglomerate PZ Cussons, which earned handsome profits in Nigeria as recently as 2015, saw those profits disappear when the Nigerian government put palm oil on a banned import list. Palm oil was the primary ingredient in its Nigerian soap and detergent business and was not available in the country. It is perhaps worth noting, says Wales, that when this unfolded, there were 71 tax audits against PZ Cussons, most of which were probably based on claims as spurious as those levelled against MultiChoice and MTN.

“Retailers and manufacturers know that Nigeria is a complex market. They know that government interference, erratic customs and formal and informal currency markets make the playing field uneven. But they believed they could navigate that terrain. What they miscalculated was the size of the market,” says Ben Longman, MD of Trendtype, the specialist African market intelligence company.

Growth across African economies accelerated between 2005 and 2014 on the back of higher-than-average commodity prices, causing the likes of the African Development Bank to make optimistic growth predictions. Yet volatile oil prices from 2014 onwards and a fall in the value of commodities saw the edge coming off many of these countries’ growth.

“The dangling carrot was market size, but the potential as measured in GDP or population size has never been felt because of other cultural, social and political issues that are preventing the full potential from being unlocked,” says Zwelakhe Mnguni, CIO at Benguela Fund Managers.

Volatile politics, economics and currencies as well as difficulties with repatriating dividends inhibit Nigeria as an attractive investment destination.

“I think the question that should be asked is: Why venture into Africa?” says Reuben Beelders, CIO at Gryphon Asset Management. “The tendency of South African management teams is to look elsewhere for ‘easy’ money when the local environment becomes more difficult. In the 2000s, they assumed this was Africa, and in the 2010s, when [then president Jacob] Zuma was pillaging the country, they assumed they ‘had to’ get offshore. Both moves were not kind to shareholders.”

Yet there are companies, like Pick n Pay, that are bucking the trend and have quietly invested in Nigeria. But spokesperson Tamra Veley cautions that this is far from “bucking a trend”. Pick n Pay opened one test store as a pilot on Victoria Island in Lagos in March this year, she says. The store is a limited-range supermarket, tailored to the needs of the local community, and is providing the group with valuable insights.

“We have a seasoned local partner in AG Leventis, who provide us with local knowledge and expertise, but our priority is very much to focus on supporting our very good businesses outside South Africa, like Zambia.”

Local partnerships, and a local listing, appear to have benefited MTN, which is on the right side of the regulators for the time being.

The reality is that Lagos and Abuja are the megacities of tomorrow and Africa will be home to 25% of the world’s population by 2030.

There are some positive trends to watch, according to Longman. For one, Nigeria climbed 15 places in the World Bank’s Ease of Doing Business Index in 2019. The ranking is a lowly 131/190, but the direction is forward. Development of the Africa Continental Free Trade Area could also ease bottlenecks in Nigeria and across the continent.

And Dubai is emerging as the “gateway to Africa” with a growing African skill set. DP World’s offer to acquire Imperial Logistics for $890-million is part of this skills expansion, Longman says. “Changes won’t happen overnight, and hidden hurdles will remain. But broadly the trend is positive, and the investment in infrastructure can only help.”

Is there potential in Nigeria? “Absolutely. But until the governance systems are more transparent and functional it will remain an unattractive investment destination for most companies,” says Mnguni

Credit to Sasha Planting