Investment Climate in Nigeria

A Hot Tip about Foreign Direct Investment in Nigeria

Last updated: 13 Mar 2011

Openness to Foreign Investment

Overview

Nigeria is Africa's most populous nation with an estimated population of over 150 million. It offers investors a low-cost labor pool, abundant natural resources, and potentially the largest domestic market in sub-Saharan Africa. Despite these advantages, much of that market potential is unrealized. Impediments to investment include inadequate infrastructure, corruption, an inefficient property registration system, an inconsistent regulatory environment, restrictive trade policies, and slow and ineffective courts and dispute resolution mechanisms.

 

Potential investors will need to understand the Nigerian business environment and engage in problem-solving with local staff, Nigerian partners, and government officials. There were at least three prominent cases in 2009 where the judicial system or law enforcement agencies were manipulated by local companies or government officials in order to exert undue pressure on U.S. companies and individuals for commercial or personal advantage. In all three cases, arrest warrants were issued and senior officials of the U.S. companies were detained with the understanding that the cases would be dropped if certain conditions were met. Potential investors will also need to cope with poorly maintained power, road, and port infrastructure, and arbitrary policy changes, such as the reversal of privatization efforts in the power and downstream oil and gas sectors. Security is of special concern due to high rates of violent crime. Kidnapping for ransom has expanded beyond the Niger Delta where it originated to roughly half of Nigeria’s states. Attacks on oil installations and the associated kidnappings of oil workers in the oil-rich Niger Delta region have significantly declined since the implementation of a government amnesty, but tensions remain because promises made for the post-amnesty period have not yet been implemented. Inadequate law enforcement compounds the country's high crime rate, and sporadic outbreaks of communal violence due to ethnic and religious conflicts continue.

 

Military rule ended with the inauguration of a civilian administration in May 1999. Nigeria conducted its last general election in April 2007, resulting in a civilian-to-civilian hand-over of power from former President Olusegun Obasanjo to President Umar Musa Yar'Adua. However, the elections were characterized by significant irregularities and many of the results were challenged in electoral tribunals and courts. The presidential election outcome was challenged as well, with the Supreme Court in December 2008 upholding President Yar'Adua's election. The courts overturned the announced results in six of the 36 governors’ races, are still responding to appeals in five additional cases, and forced re-runs in others.

 

The Nigerian government (GON) embarked on a medium-term economic reform program in late 2003 called the National Economic Empowerment and Development Strategy (NEEDS) for 2003-2007. NEEDS focused on privatization, good governance, macroeconomic stability, anti-corruption, and public service reforms. NEEDS has been modified to incorporate President Yar'Adua's "Seven Point Agenda," which focuses on power and energy, food security and agriculture, wealth creation and employment, mass transportation, land reform, security, and education system. An economic reform document called “Vision 20:2020” has been presented to the Federal Executive Council (the Cabinet) and is expected to be unveiled soon to the public. Vision 20:2020 programs aim to make Nigeria one of the top twenty economies in the world by the year 2020. The GON also plans to reform how oil and gas business is conducted in Nigeria. In a bid to achieve this, the GON has introduced the Petroleum Industry Bill (PIB) that would change existing contracts and increase the GON’s share of oil and gas revenues from mandated joint ventures. Stakeholders in the sector, including oil and gas production and service companies, have been advocating changes in the fiscal and non-fiscal terms of the PIB to make it more attractive to private sector investment. Both houses of the National Assembly have passed the PIB, which is expected to be submitted to the National Assembly for a final reading in early 2010.

 

Freedom of expression and of the press is broadly observed, although most publications practice self-censorship regarding sensitive issues. Human rights violations have been reduced from the time of military rule, but the country's overall human rights record remains poor. Controls over foreign investment have been loosened, and military government decrees inhibiting competition or conferring monopoly powers on public enterprises have been repealed or amended. The policymakers' protectionist bent remains strong despite these actions. Trade policy is inconsistent and the GON prohibits the importation of many goods, ostensibly to foster domestic production. In a bid to further support domestic production, the GON has introduced the Local Content Bill (LCB) that would require oil and gas production and service companies to use local resources for the delivery of services that are currently sourced from outside the country. Concerns about the LCB include its restrictive trade practices in violation of WTO agreements as well as transfer of technology requirements that would violate a company’s intellectual property rights. Both houses of the National Assembly have passed the LCB, which is expected to be submitted to the National Assembly for a final reading in early 2010.

 

Table: Nigeria’s Selected Indices and Rankings

Year: 2009

Index/Ranking

Transparency International Corruption Index – 130

Heritage Economic Freedom Index – 117 (World); 19 (Region)

World Bank Doing Business Index – 125

MCC Govt. Effectiveness – 35%

MCC Rule of Law – 22%

MCC Control of Corruption – 29%

MCC Fiscal Policy – 84%

MCC Trade Policy – 29%

MCC Regulatory Quality – 42%

MCC Business Start-up – 43%

MCC Land Rights Access – 11%

MCC Natural Resources Management – 23%

 

Openness to Foreign investment

The GON continues to solicit foreign investment and has implemented various reforms to attract it. Legal Framework: With a few exceptions, the Nigerian Investment Promotion Commission (NIPC) Decree of 1995 allows 100-percent foreign ownership of firms outside the petroleum sector, where investment is limited to existing joint ventures or production-sharing agreements. Industries considered crucial to national security, such as firearms, ammunition, and military and paramilitary apparel, are reserved for domestic investors. Foreign investors must register with the NIPC after incorporation under the Companies and Allied Matters Decree of 1990. The decree prohibits the nationalization or expropriation of foreign enterprises except in cases of national interest.

 

Nigerian laws apply equally to domestic and foreign investors. These include the Central Bank of Nigeria Act of 2007, the Money Laundering Act of 2003, the Securities and Exchange Act of 1999, the Foreign Exchange Act of 1995, the Banking and Other Financial Institutions Act of 1991, and the National Office of Technology Acquisition and Promotion Act of 1979.

 

Privatization: The Privatization and Commercialization Act of 1999 established the National Council on Privatization, the policymaking body overseeing the privatization of state-owned enterprises (SOEs), and the Bureau of Public Enterprises (BPE), to implement the program. BPE has focuses on the privatization of key sectors, including telecommunications and power, and calls for core investors to acquire controlling shares in formerly state-owned enterprises. The GON repealed or amended decrees that inhibited competition or conferred monopoly powers on parastatal firms. From 1999 to date, BPE raised over $4 billion by privatizing and concessioning more than 140 enterprises, including cement manufacturing firms, banks, hotels, a petrochemical plant, aviation cargo handling companies, and vehicle assembly plants. No substantive SOE has been privatized Since President Yar'Adua's inauguration in 2007. The Infrastructure Concession Regulatory Commission (ICRC) was inaugurated in 2008 with the goal of identifying greenfield infrastructures for concessioning. The Lagos-Ibadan Expressway, a major highway in the southwestern part of the country, was concessioned to Bi-Courtney Highway Services under a Design-Build-Operate-Transfer scheme for 25 years. The GON also plans to use a Public-Private-Partnership Framework for future infrastructure provision.

 

The passage of the Power Sector Reform Bill in 2005 created the Nigerian Electricity Regulatory Commission (NERC), a power regulator with responsibility for tariff regulation and economic and technical regulation of the electricity supply industry. The NERC has issued twenty nine licenses to independent power producers in the electricity industry since its inception. Three IPP plants were operational by the end of 2009. Major hurdles facing the IPPs are the failure to fully implement the Electric Power Sector Reform Act of 2005 and the insufficient supply of natural gas to power the plants.

 

The expected privatization of the Power Holding Company of Nigeria (PHCN) through the Electric Power Sector Reform Act of 2005 appears to no longer be a priority. The GON is rehabilitating existing power infrastructure and is investing in new power projects, with the aim to meet the GON’s 6,000 Megawatts (MW) target by the end of 2009 and 10,000 MW target by the end of 2011. The 2009 goal was missed with only 3,600 MW generated at the end of the year. Nigeria also needs an effective transmission and distribution system since its current grid is in need of repair and upgrade.

 

The GON has substantially opened Nigeria's telecommunications sector. The Telecommunications Act of 2001 authorizes the Nigerian Communications Commission (NCC) to issue licenses to existing and prospective service providers. Nigeria’s state-owned telecommunications operator, Nigerian Telecommunications Limited (NITEL) and five private companies, including Etisalat, which commenced operations in 2008, have licenses. Globacom won mobile, fixed, and international gateway licenses as Nigeria's second national telecommunications operator in mid-2002. According to the NCC, the estimated total number of phone lines (both mobile and fixed line) in Nigeria at the end of September 2009 was 70.3 million with a teledensity of 50.24. This is an improvement from the September 2008 figure of 57.07 million lines and a teledensity of 40.77. Licenses for the 2.3GHz spectrum, which were awarded through a competitive bidding process in May 2009, were cancelled due to alleged administrative procedures that were not adhered to by the NCC. A fresh bidding round will be initiated by the NCC and full details are expected soon. Three carriers in the 800MHz spectrum band were awarded to Visafone Communications in a competitive auction process in July 2007 that included Visafone Communications, GiCell Wireless Limited, Multilinks Telecommunication Limited, and TC Africa Telecoms Network Limited. Four licenses for a 10MHz lot in the 2GHz spectrum were also issued to Alheri Engineering Co. Limited, Celtel Nigeria Limited, Globacom Limited, and MTN Nigeria Communications Limited in March 2007.

 

The NCC commenced the unified licensing regime in May 2006, awarding the first batch of unified licenses to four telecommunications service providers. The unified license permits telecommunications companies to offer services across-the-board in telecommunications, including fixed line, wireless, data services, etc. This marks the end of the five-year exclusivity incentive granted the mobile telephone licensees in 2001.

 

Telecommunications deregulation has led to the issuance of licenses for fixed wireless networks, internet services, and VSAT (very small aperture terminal) satellite telecommunications equipment services. However, the GON's hefty fees and infrastructure deficiencies such as inadequate power supply slow the impact and implementation of these technologies.

 

The ICT sector should receive a boost in May 2010 when two broadband cables, from Glo and MainOne, are expected to land in Lagos. Current bandwidth in Nigeria is through the SAT-3 cable of 350 gigabits. The Glo and MainOne cables will increase the broadband capacity by 2.6 terabits for a total of almost 3.0 terabits for the entire country.

 

Glo-One is an initiative of Globacom Limited. MainOne will offer a 1.92 terabit facility that will provide the largest bandwidth in the region. Glo-One is expected to be commissioned in early 2010, while Main One is scheduled for commissioning in June 2010. Both projects will provide broadband data and internet capacity, which will increase the country's Internet density and capacity. They will likewise break NITEL’s fiber-optic-cable quasi-monopoly and will reduce the cost of broadband to one-tenth of the current cost. .

 

Damage to the SAT-3 cable, Nigeria's only link to the global communications system, in July 2009 affected 70 percent of the country’s bandwidth and crippled bank services and Internet access nationwide.

 

Conversion and Transfer Policies

The Foreign Exchange Monitoring Decree of 1995 opened Nigeria's foreign exchange market. In February 2006, in accordance with its plan to liberalize the foreign exchange market, Nigeria adopted a Wholesale Dutch Auction System (WDAS). The WDAS provides greater control of the foreign exchange market, although the Central Bank still retains its supervisory role over the market. Foreign companies and individuals can hold non-naira-denominated accounts in domestic banks.

 

Account holders have unlimited use of these funds, and foreign investors are allowed unfettered repatriation of capital. There is a $4,000 quarterly Personal Travel Allowance for foreign exchange and a $5,000 quarterly Business Travel Allowance per individual for naira-denominated accounts. Foreign exchange for travel is usually issued in cash by commercial banks while some authorized dealers also issue pre-paid credit cards that can be used on ATM machines worldwide. Purchase of foreign exchange for business purposes, such as importing equipment and raw materials, and for paying school fees abroad, must be routed through banks, Nigeria’s only licensed foreign exchange agents. This can only be done with proper documentation, such as filling out the Form M and presenting copies of the certificate of incorporation of the company.

 

The NIPC guarantees investors unrestricted transfer of dividends (net a 10 percent withholding tax). Companies must provide evidence of income earned and taxes paid before receiving remittances. Money transfers usually take not more than 48 hours if the necessary documentation is provided. All transfers are required by law to be made through banks

 

Expropriation and Compensation

The GON has not expropriated or nationalized foreign assets since the late 1970s.

 

Dispute Settlement

Investment Disputes: Nigeria's civil courts handle disputes between corporate bodies and the GON as well as between Nigerian businesses and foreign investors. The courts occasionally rule against the GON. However, the settlements in these cases are not always expeditiously paid. Nigerian law allows the enforcement of foreign judgments after proper hearings in Nigerian courts. Plaintiffs receive monetary judgments in the currency specified in their claims.

 

Legal System: Nigeria has a complex, three-tiered legal system composed of English common law, Islamic law, and Nigerian customary law. Most business transactions are governed by "common law" as modified by statutes to meet local demands and conditions. At the pinnacle of the judicial system is the Supreme Court, which has original and appellate jurisdiction in specific constitutional, civil, and criminal matters as prescribed by Nigeria's constitution. The Federal High Court has jurisdiction over revenue matters, admiralty law, banking, foreign exchange, other currency and monetary or fiscal matters, and lawsuits to which the federal government or any of its agencies are party. The Nigerian court system has too few court facilities, lacks computerized document-processing systems, and poorly remunerates judges and other court officials, all of which encourages corruption and undermines enforcement. Debtors and creditors rarely have recourse to Nigeria's pre-independence bankruptcy law. In the Nigerian business culture, businessmen generally do not seek bankruptcy protection. Claims often go unpaid, even in cases where creditors obtain a judgment against defendants.

 

The public increasingly resorts to the court system and is more willing to litigate and seek redress. However, use of the courts does not automatically imply fair or impartial judgments. In the World Bank's publication, Doing Business 2010, which surveyed 183 countries, Nigeria was ranked 94 out of 183 countries on the enforcement of contracts, compared with its 2009 ranking of 92 out of 181 countries surveyed. In addition, the report revealed that contract enforcement required 39 procedures and an average of 457 days, the cost of which averaged 32 percent of the value of the contract, compared to contract enforcement in OECD countries that required 30.6 procedures, spanning an average of 462.4 days at a cost of 19.2 percent of the cost of the contract, and sub-Saharan African countries that required 39.2 procedures, an average of 643.9 days, and 49.3 percent of the claim.

 

Alternative Dispute Resolution: The Arbitration and Conciliation Act of 1988 (the Arbitration Act) provides for a unified and straightforward legal framework for the fair and efficient settlement of commercial disputes by arbitration and conciliation. The Act established internationally competitive arbitration mechanisms, established proceeding schedules, provided for the application of the UNCITRAL (United Nations Commission on International Trade Law) arbitration rules or any other international arbitration rule acceptable to the parties, and made the Convention on the Recognition and Enforcement of Arbitral Awards (New York Convention) applicable to contract enforcement, based on reciprocity. The Act allows parties to challenge arbitrators and provides that an arbitration tribunal shall ensure that the parties are accorded equal treatment, and that each party has full opportunity to present its case.

 

Performance Requirements and Incentives

Nigeria regulates investment in line with the World Trade Organization's Trade-Related Investment Measures (TRIMS) Agreement. Foreign companies operate successfully in Nigeria's service sector, including telecommunications, accounting, insurance, banking, and advertising. The Securities and Exchange Act of 1988, amended and renamed the Investment and Securities Act in 1999, forbids monopolies, insider trading, and unfair practices in securities dealings.

 

To meet performance requirements, foreign investors must register with the Nigerian Investment Promotion Commission, incorporate as a limited liability company (private or public) with the Corporate Affairs Commission, procure appropriate business permits, and register with the Securities and Exchange Commission (when applicable). Manufacturing companies are sometimes required to meet local content requirements. Expatriate personnel do not require work permits, but they are subject to "needs quotas" requiring them to obtain residence permits that allow salary remittances abroad. Larger quotas are allowed for professions deemed in short supply, such as deepwater oilfield divers. U.S. companies often report problems obtaining quota permits. The GON maintains many different and overlapping incentive schemes. The Industrial Development/Income Tax Relief Act No. 22 of 1971, amended in 1988, provides incentives to pioneer industries deemed beneficial to Nigeria's economic development and to labor-intensive industries, such as apparel. Companies that receive pioneer status may benefit from a non-renewable, 100-percent tax holiday of five years (seven years if the company is located in an economically disadvantaged area). Industries that use 60 to 80 percent of local raw materials in production may benefit from a 30-percent tax concession for five years, and investments employing labor-intensive modes of production may enjoy a 15-percent tax concession for five years. Additional incentives exist for the natural gas sector, including allowances for capital investments and tax-deductible interest on loans. The GON encourages foreign investment in agriculture, mining and mineral extraction (non-oil), oil and gas, and the export sector. In practice, these incentive programs meet with varying degrees of success.

 

Technology Transfer Requirements: The National Office of Industrial Property Act of 1979 established the National Office of Technology Acquisition and Promotion (NOTAP) to facilitate the acquisition, development, and promotion of foreign and indigenous technologies. NOTAP registers commercial contracts and agreements dealing with the transfer of foreign technology and ensures that investors possess licenses to use trademarks and patented inventions and meet other requirements before sending remittances abroad. In cooperation with the Ministry of Finance, NOTAP administers 120-percent tax deductions for research and development expenses if carried out in Nigeria and 140-percent tax deductions for research and development using local raw materials. NOTAP has shifted its focus from regulatory control and technology transfer to promotion and development. With the assistance of the World Intellectual Property Organization, NOTAP has established a patent information and documentation center for the dissemination of technological information to end-users. The office has a mandate to commercialize institutional research and development with industry.

 

Import Policies: Tariffs provide the GON its second largest source of revenue after crude oil exports. The GON issued the 2008-2012 Common External Tariff (CET) Book that harmonizes its tariffs with its West African neighbors under the Economic Community of West African States (ECOWAS) Common Economic Tariff (CET), in September 2008. The CET has five tariff bands and import duties were reduced on a number of items, such as rice, cigars, and manufactured tobacco. The five CET tariff bands are: zero duty on capital goods, machinery, and essential drugs not produced locally; five percent on imported raw materials; ten percent on intermediate goods; 20 percent on finished goods; and 35 percent on luxury goods and in certain sectors that the GON wants to protect. The fifth band proposed by the GON has been accepted by ECOWAS member countries as part of the CET, but each member country can include products it deems appropriate. The reduction in the number of tariff bands has been accompanied by an increase in the number of import taxes in recent years.

 

The tariff policy reduces the number of banned tradable imports from 44 to 26 items, and there is a reduction in tariff on a wide range of items. Items that remain banned include: frozen poultry; pork; beef; cassava; pasta; fruit juice in retail packs; toothpicks; soaps and detergents; refined vegetable oil; beer and non-alcoholic beverages; some textiles; and plastics. The Nigerian Customs Service (NCS) and the Nigerian Ports Authority (NPA) have exclusive jurisdiction over customs services and port operations. Nigerian law allows importers to clear goods on their own, but most importers employ clearing and forwarding agents.

 

Many importers under-invoice shipments and engage in currency arbitrage to minimize tariffs and lower their landed costs. Others ship their goods to ports in neighboring countries, after which they are transported overland. The GON began a destination inspection regime in January 2006, which had been shelved on four occasions between 2002 and 2005. Under the destination inspection scheme, all imports are inspected upon arrival into Nigeria, rather than at the ports of origin. Guidelines for the new scheme were announced and three companies were awarded a seven-year contract to act as inspection agents at Nigeria's seaports, border posts, and airports. The companies are Cotecna, SGS, and Global Scan. The exclusive contract will expire by 2012, if NCS officials have completed training on the new scheme and on the handling of the scanning machines, which would be handed over to the NCS at the expiration of the contract.

 

Shippers report that efforts to modernize and professionalize the NCS and the NPA have reduced port congestion and clearance times. These efforts include an ongoing program to achieve the stated goal of 48-hour cargo clearance, particularly at Lagos' Apapa Port, which handles over 40 percent of Nigeria's trade. Nevertheless, bribery of customs and port officials is common, and smuggled goods routinely enter Nigeria's seaports and cross its land borders. Efficient functioning of concessioned container terminals has significantly reduced container ship wait times, but the final release of containers still can take four weeks or longer due to delays in NCS container-processing and clearing.

 

Export Incentives: Most export incentives have been abolished. However, the Nigerian Export Promotion Council continues to implement the Export Expansion Grant scheme to improve non-oil export performance.

 

The Nigerian Export-Import Bank provides commercial bank guarantees and direct lending to facilitate export sector growth, although these practices are underused. The Nigerian Export-Import Bank's Foreign Input Facility provides normal commercial terms of three to five years (or longer) for the importation of machinery and raw materials used for generating exports. Agencies meant to promote industrial exports remain burdened by uneven management, vaguely defined policy guidelines, and corruption. Nigeria's high production costs because of inadequate infrastructure also leave Nigerian exporters at a disadvantage.

 

Government Procurement: The GON awards contracts under an open-tender system, advertising tenders in Nigerian newspapers and a “tenders” journal, and opening the tenders to domestic and foreign companies. Procurement has become slightly more transparent, but corruption persists in the awarding of government contracts.

 

Procurement for capital projects is often subject to over-invoicing, which permits improper payments to private and public sector officials. Many U.S. companies claim they are disadvantaged in obtaining GON contracts, even when they appear to have the best bids in technical and financial terms. Unsuccessful U.S. bidders sometimes allege collusion between foreign competitors and key GON officials.

 

The Bureau of Public Procurement, the successor agency to the Budget Monitoring and Price Intelligence Unit (BMPIU) after the enactment of the public procurement legislation in May 2007, acts as a clearinghouse for government contracts and procurement, and monitors the implementation of projects to ensure compliance with contract terms and budgetary restrictions. Procurements above N50 million (about $333,333) are subject to full "due process," as the process is called. An amendment to the public procurement legislation is being considered by the National Assembly. The proposed amendment contains provisions for decentralizing government procurement and increasing the procurement authorization limits for ministries, departments, and agencies, unlike the earlier legislation which centralized government procurement. It is expected that the public procurement legislation would also be passed at the lower tiers of government.

 

Visa Requirements: Investors sometimes encounter difficulties acquiring entry visas and residency permits. Foreigners must obtain entry visas from Nigerian embassies or consulates abroad, seek expatriate position authorization from the Nigerian Investment Promotion Commission (NIPC), and request residency permits from the Nigerian Immigration Service. Investors report that this cumbersome process can take from two to 24 months and cost from $1,000 to $3,000 in facilitation fees.

 

Right to Private Ownership and Establishment

In accordance with the NIPC Decree of 1995, the GON supports competitive business practices and protects private property.

 

 

 

 

Read the full market research report


Posted: 11 May 2010, last updated 13 March 2011

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