The size of Nigeria’s population and its as-yet largely untapped demand is the primary reason that international investors have succeeded in building businesses in the country. And the government is encouraging them to come in as part of its overall reform commitments to supporting private-sector led economic growth and providing jobs.
Foreign investors helped to make the Nigerian Stock Exchange one of the world’s best performers between 2000 and 2004, although admittedly from a very low base.
Two brewers dominate the market’s capitalisation – Nigerian Breweries, producer of the ubiquitous Star brand, and Guinness Nigeria. In recent months, however, several banks have listed in an attempt to rack up their capital bases ahead of the central bank’s end-of year deadline.
The government’s privatisation plans should provide further opportunities for investors. However, there are some concerns at the level of supply – bank issues are yet to finish and NITEL and NEPA are still to go public. Already this year the stock market’s index has stumbled under the weight. Then there are concerns about whether or not the security and the strength of the regulatory and infrastructural system are enough to cope with the boom in capital market activity over the last five years.
“The ongoing consolidation programme in the financial sector has placed enormous responsibility on the stock market,” say Dr Ndi Okereke-Onyiuke, director general/chief executive officer at the Nigerian Stock Exchange in Lagos. “We are confident that with the levels of investor’s awareness, we will continue to achieve a high level of investor patronage of issues.”
As positives, she points to pension reform and the appointment last year of a senior stockbroker as director general of the SEC.
Pension reform will entail at least 15% of the national pay roll being available for investment in bonds, stocks and property. Even if only one-third goes into stocks, that is still a lot of money, says one investor.
There are now 35 banks listed on the stock market – IBTC was the last in April – effectively financing most banks’ capitalisation requirements in the last year. That has surprised observers, who expected much more of the activity to come from buy-outs or mergers. So far there have been no foreign strategic investments in Nigerian banks. That kind of activity has been reserved for other sectors, notably telecommunications.
Telecom explosion
The four global systems for mobile telecommunications (GSM) operators in the country have changed the way that Nigerians operate – in the cities at least.
Gone are the wasted journeys to check if someone is in, leave a message, wait for the reply and then come to an agreement about when and where to meet; gone too is the enslavement that one had to endure at the hands of NITEL, the state-owned fixed-line operator. The latter is about to be privatised – and few are mourning the loss of that particular piece of the family silver.
MTN, a South African mobile phone network operator, has become well known in Nigeria for spearheading this communications explosion. It secured a licence in February 2001 and three months later became the first company to make a call on its network; it now has about 4 million subscribers and has become perhaps the biggest success story of foreign direct investment (FDI) in Nigeria.
“We are investing in excess of $1.4 billion in the Nigerian economy, a substantial level of investment that is second only to the oil industry in Nigeria,” says S. Dabengwa, MTN Nigeria’s chief executive officer. It is building base transceiver stations, switches, and erecting a major transmission backbone between the major regions of Nigeria to facilitate the transmission of calls from city to city. It employs over 1,500 people and provides coverage to 85 cities in 31 of Nigeria’s 36 states.
MTN Nigeria is 76%-owned by Mobile Telephone Networks International Limited, 20%-owned by Nigerian partners, with the balance of 3% shareholding residing with the International Finance Corporation, the infrastructure investment arm of the World Bank.
“In years to come MTN will be a how-to-do business case study in how to move something from nothing into something enormous very quickly,” says Simon Millett, managing director/chief executive at Standard Chartered in Lagos. “The telecommunications experience is extremely positive for investors to see, and not only has it provided a new level of service in reforming the economy but it has been done in a way that has ensured that every one wins.”
The customer, the investor and the government all benefit, providing a huge impact to the economy. Aggressive competition among the four mobile operators has injected a freshness into business activity. MTN’s success has opened the doors for a number of other South African companies in particular, such as Protea Hotels.
“MTN came in and brought the business opportunities to the attention of other companies, and the links between the two countries have just grown,” says Hywel Rees-Jones, partner at Actis, the private equity firm that was spun out of Commonwealth Development Corporation, in Lagos. “If you are going to invest in Africa, Nigeria is just obvious.”
If you exclude the billions invested in oil and gas in Nigeria and millions invested in telecoms, Rees-Jones concedes that Actis is probably the largest investor in the country. Not that he is best pleased to be personally profiled in a local magazine under the headline ‘The man with the dollars’. Actis manages a series of funds that that will invest $400–$500 million over the next three years in Africa.
Actis returned to Nigeria in 2000, following chief Olusegun Obasanjo’s presidential election victory the year before. To begin with, Actis’s brief was to “watch the market and get comfortable to the fact that it was a place with standards where we are willing to operate,” says Rees-Jones.
In the last year it has taken the plunge and invested in three projects: a $70-million investment in the Palms Shopping Centre, an unprecedented world class complex being built on the outskirts of Lagos; a $21-million stake in StarComs, a private telecoms operators active in three states, including Lagos; and a $25-million shareholding in listed UAC Nigeria, the company that was originally Unilever before it exited in the 1990s as a result of the government’s introduction of regulations that insisted on the majority holding being Nigerian.
The 1990s were a difficult time for foreign multinationals. Many left rather than surrender ownership control. But several have weathered the storm and – sharing similar joint venture structures – have become household names in Nigeria, names such as Cadbury, Nestle, Unilever, Guinness and Nigerian Breweries and Coca-Cola.
“There are not that many new entrants to Nigeria. People here are reinvesting and building their business rather than pulling out,” says Rees-Jones. “The improvements in the macroeconomic environment [over the last year or so] have been hugely significant; it has become a lot easier to understand what may happen in the economy, and that is crucial going forward.”
Nigerian Breweries, which is majority-owned by Heineken and whose managing director is chief Festus Odumegbu, has opened the state-of-the art Ama Brewery in Enugu state. Constructed by Dragages Engineering, it is regarded as one of the most modern and technically advanced breweries in the world and can generate its own power, thus avoiding dependence on the National Electric Power Authority. It cost $300 million and is the biggest in Africa.
Arch-rival Guinness Nigeria – the former dominates the lager market, the latter the stout market, though both compete in the other’s core market – has invested Naira N3 billion ($22.5 million) in a new bottle design for Guinness launched in July. “Nigeria is the first major market where the new bottle design is being distributed,” says Keith Richards, managing director of Guinness Nigeria in Lagos,. “The redesign involved dumping 120 million old bottles and bringing in 120 million new ones – of which 100 million were produced locally.”
Nigeria, incidentally, is the third largest market for stout after the UK and Ireland, and ahead of the US, a fact that highlights the potential of Nigeria’s huge consumer demand and explains why Richards is probably one of the most recognized men in the country.
Both brewers, however, have seen sales fall in the last year. Nigerian Breweries has just closed a brewery in Aba, and Richards has just returned from the same state to reassure workers that Guinness has no plans to close its own facility, though he admitted he could give no categorical assurance that it never would.
These results are intricately linked up with Nigerians’ love affair with mobile phones. When mobile operators first came in, it allowed Nigerians to complete their jobs more quickly and efficiently. But with competition between the GSM operators, prices have come down: a simpack that cost N10,000 three years ago is now available at N500 with N500-worth of pre-loaded airline time. That means the telecoms revolution has seeped right down throughout the economy and is dominating consumer spending.
With people spending their money conducting business meetings and family conferences on the phone, life has become more expensive for Nigerians, believes Amina Ibrahim, senior special assistant to the president in Abuja. Ibrahim goes on to point out that some people buy three or four phones because NITEL’s landline does not normally connect with MTN’s mobile, and the different mobiles rarely connect with each other.
The mobile phone phenomenon is still good for the economy, says Guinness’s Richards. After the bank restructurings are complete, he believes, there will be a huge amount of money that will come out in two or three years’ time that will lead to a substantial pick-up in the consumer economy.
Investment
Virgin Nigeria is due to take to the air this month – providing Nigeria with a national flagship carrier for the first time since the liquidation of Nigeria Airways Ltd (NAL) in 2003.
“Nigeria is a huge, really important country with no major flag carrier and an absence of aviation links – that has hugely hindered the economy because they are a key backbone to a country developing,” says Simon Harford, chief executive officer of Virgin Nigeria in Lagos. “It will be a potentially even more important country with a substantial quality airline.”
Not only does the venture bode well for the economy but its approval is another symbol of the government’s forward thinking and determination to engage the private sector: the airline is an entirely private-sector joint venture between Nigerian institutional shareholders and Virgin Atlantic of the UK.
“It is an absolutely unique model, and the government – especially the two instrumental figures in this process, the president and the aviation minister, Mallam Isa Yuguda – deserves massive applause for commitment to this,” says Harford. The unprecedented element is the government’s decision to resuscitate NAL with not its own but private money — a recognition that the private sector, with its deep pockets, tends to run successful airlines while the public sector tends to run them to seed.
Not only is the government handing a 49% stake to Virgin; it has sold its majority stake in a private placement to 21 Nigerian institutional investors, led by African Capital Alliance, a private equity firm, and Davtata, a major conglomerate based in the north of the country, as well as a number of banks. The deal was 100% oversubscribed in only five weeks — a rapid timeframe for Nigeria — despite restrictions to attract only the cream of domestic institutions.
The 51/49 split is typical of bilateral arrangements for airlines where the national flagship is involved, but the appointment of a board of directors with zero government control is rare. In March, Virgin Nigeria appointed Felix Ohiwerei as chairman. He has 37 years of experience at Nigerian Breweries and was chairman of Unilever – both companies that represent a typical example of how to combine Nigerian and international joint ventures.
“The calibre of the whole package is a function of the government staying out of it,” says Harford. “As soon as the government is on board, there is a perception that there is a less clear basis for decision making.”
“The government’s zero control is the crucial first step and our goal now is to base our expansion on international standards,” he continues.
As anyone who has been the victim of overbooking from London to Lagos or Abuja knows, demand is so vibrant that it will take some time for supply to fill the gap, but Virgin Nigeria will take it step by step.
“It will be frustrating at first; we could take 50 planes tomorrow but if we did that it would topple us over — we need patience to be able to achieve the high quality we want,” Harford continues.
Certainly in terms of numbers, it would seem that the airline cannot fail. The intrinsic demand can create a virtuous circle between economic growth and regional integration: Nigeria has the biggest GDP in the region, is becoming more important and increasingly linked to South Africa; and aviation is driven by GDP growth, population and then trade.
British Airway’s (BA) operations to Lagos are its most profitable route per air mile in the world, and the second most profitable route in all apart from transatlantic flights.
Other factors, however, suggest that Simon Harford is in for quite a ride. After all, he heads up an almost unprecedented venture: a national flagship/international strategic investor combination, operating within the fractious arena of global airline competition.
Virgin Nigeria has been subject to a barrage of criticism within the country, accused of: pilfering the nation’s crown jewels (although the sight of rundown unused Nigerian Airlines planes at Lagos airport would suggest otherwise); potentially putting other private regional operators out of business; and having an unfair monopoly on international routes.
There is, however, the question of ownership. Is it Nigerian or is it Virgin, the UK airline in seemingly constant battles with the industry’s regulators across many jurisdictions?
Before it got off the ground, the US had banned the airline from flying in or out of the country, claiming that it is a UK company. The Nigerian authorities retaliated by banning Continental Airlines just as it was about to start the first direct flights from New York. [All visitors from the US fly via Europe – a fact that highlights the huge untapped potential of the US-Nigeria market.]
Is this all tit-for-tat sabre-rattling or a serious, potentially damaging trade war? “We have always believed that Nigeria and America have strong links and are major trading nations, and I think it is inconceivable that the governments won’t want the airlines flying to each others’ countries,” says Harford.
Harford points out that Virgin Nigeria is 51%-owned by Nigerian investors, 24.9% is held by the Virgin group and the rest by Singapore Airlines. That should be enough to assuage the US, bearing in mind that the American government has explicit policies for Africa that invoke the importance of both private sector and foreign ownership of airlines on the continent.
Virgin Nigeria is the first subsidiary airline run specifically by Virgin Atlantic, rather than Virgin group, because it needed to draw on its technical expertise as a start-up outfit. “We are launching faster than any other full-service airline in the world,” he says.
In this context, Harford has the right credentials. Having been an investment banker and a strategy consultant in a variety of countries, he joined Virgin’s bitter rivals BA, to co-found budget airline Go. A director of Go for five years, while also on BA’s executive board charged with responsibility for e-business, he left in 2000 to assume entrepreneurial roles in airlines in Germany and the Middle East. Last year he took up Virgin’s offer to look at the approach made by the Nigerian government to invest in an airline to replace the liquidated Nigerian Airways.
Three things are driving the initiative, says Harford: the personal relationship between Branson and Obasanjo, following Virgin’s Atlantic’s arrival in 2001 as one of the handful of airlines servicing Nigeria; the success of those operations and the way the company is increasing its business; and the positive attitude to the steps that the government is taking to develop the economy and the country.
But how transparent was the decision to give Virgin Nigeria a monopoly for seven years on a number of international flights? And for a country emerging from decades of military rule and one-on-one strongman meetings that result in contracts, is the relationship with Branson and Obasanjo such a great idea? And with the venture tied in with a head of state and an aviation minister, what of the political risk further down the line?
“Virgin Nigeria has not been privy to the discussions with other airlines and has been subject to great scrutiny and demands for information,” Harford counters. And the company is clearly banking that nothing much will change after elections in 2007.
As for the monopoly: “There is little to compare to us,” says Harford. “We offer a choice for the customer and better opportunities for Nigerians to travel to other parts of the continent and the rest of the world.”
Few air travellers in Nigeria would disagree. The scepticism about a private sector flagship with a foreign component will fade when people experience the advantages of being able to get from A to B much more easily. “When people buy tickets, it will no longer be a concept,” says Bismark Rewane, managing of Financial Derivatives in Lagos, a consultancy that advised the government to take the private-sector route, evaluated the international carriers and came up with process of building a flagship carrier for Nigeria with some routes gifted as an incentive.
Airlines are a tough business sector and the private sector is better suited to mixing in it. “There is no meaningful precedent for this. It is a particularly farsighted and economically sensible decision,” says Harford. “But looking forward, there is a need for the government and all parties — for the good of the country and the private sector — to protect that decision and urge the private sector to develop business.”
Ultimately, Nigerians will be able to own the airline. “The intention is that there will be an IPO as soon as the business is ready for it, but in the early days we believe it is better run by a start-up,” says Harford. The board will decide, ideally within the next two or three years.
Supported by: The Federal Ministry of Finance, Nigeria
