Tuesday, March 27, 2012

Nigeria business environment study

As part of my MBA, I was asked to conduct a study into the business environment of Nigeria. Not an easy task when you have a few Nigerian classmates looking over your shoulder!
How difficult is it to invest and repatriate profits from Nigeria? Is the context more or less beneficial for certain types of industries?
In 1995, Nigeria adopted a new set of regulations, under which it permitted foreign ownership in local businesses with the exception of the arms and drugs trade, and the petroleum sector, in which foreign participation is only allowed in conjunction with a local partner. At the same time, the Nigerian Investment Promotion Commission Act established the Nigerian Investment Promotion Commission (NIPC). The NIPC has since been the promoter and facilitator of foreign investment in Nigeria.
In 1992, the Nigerian Free Zone Act (NFZA) was passed. These so established Free Zone areas do show improved infrastructure, facilities, and transport while at the same time grant exporting business exemption from export duties, local taxes, and foreign exchange restrictions.
The NFZA grants companies incentives that include:
  • No personal income tax
  • 100% repatriation of capital and profit
  • No foreign exchange regulation
  • No pre-shipment inspection for goods imported into the free zone
  • No expatriate quota
  • Initial tax holidays extension
  • Investment capital allowance increase
  • All dividends distributed during tax holidays are tax free
The so implemented economical tools to improve investment opportunities have created prosperity, at least to some extent, in Nigeria. This can be also observed when looking at Nigeria’s real GDP growth rate over the last few years, adjusted for inflation:
Nigeria’s GDP growth of an average of around 6% over the last few years does compare favourably to the average world GDP real growth rate of almost 4% (index mundi) and should therefore prove to be an adequate incentive for foreign investment into Nigeria in combination with the stable investment framework provided by the NIPC and NFZA together.
However, policy lapses by the Nigerian government made the International Monetary Fund decide to end its support program in 2001. Furthermore, in 2003, the Nigerian government raised protective tariffs to up to 150% to protect local industry. Hill argues that the implementation of protective tariffs do generally have an adverse affect on the economy. It would therefore seem that the Nigerian government is under internal pressure and hence does not possess the final legislative authority, making it uncertain investment grounds for foreign inflows.
In addition, Nigeria knows a complex tax system. Corporate tax is set at 32% with numerous tax incentives in place. Nigeria’s legal system is based on a combination of statutory (legislative) law, English common law, customary law, and, in the north, Islamic law (sharia). Nigeria knows a bankruptcy law, yet this is hardly ever exercised.
This mix of different proven, yet not necessarily interchangeable law systems, would seem to be a hurdle for foreign direct investment (FDI). After all, without local legal representation, it becomes an almost impossible task to comprehend the exact rulings on different legal matters since every aspect could be judged from a different legal background. Furthermore, the UNCTAD report shows that agricultural, mining and public transportation assets know especially favourable initial year allowances. These regulations could very well lead to discrimination amongst investors in different sectors, further making potential investors hesitate to put an effort into Nigeria.
This current political-economical climate in Nigeria seems to lead to an uncertain situation with regards to a decision making process on investment issues in Nigeria. While on the one hand the current civilian government of Nigeria is trying hard to establish its nation as a modern, developing country clearly severing its links with the corruption affairs of the past, Nigeria still seems to have a long way to go before it can be truly regarded as a valid alternative to other developing countries, mainly in Asia and South America, for foreign investment.
Yet, Nigeria’s FDI reached USD11 billion in 2009, making the country the nineteenth greatest recipient of FDI in the world. So apparently, the implemented steps by the Nigerian government, such as the “One-Stop Investment Centers (OSIC)” that were set up by the NIPC in March 2006 and provide investors with a single point of contact for all dealings with the Nigerian Government, do have a positive effect on investors’ strategies for Nigeria. Double Taxation Treaties (according to the Blue Book fifteen are signed at present) further enhance the attractiveness of Nigeria as an investment receiving party.
As per the Foreign Exchange Act of 1995, any investor is guaranteed the unconditional transferability of funds in the event of sale or liquidation of the enterprise or any interest attributable to the investment. However, the coverage of the NIPC’s guarantee is limited to investments above Nigerian Naira 10 million (an equivalent to US Dollar 63,543.3 on March 22, 2011), creating an unclear financial legislation. Again, it would seem that Nigeria has a valid and workable framework in place that should attract foreign investment into the country; yet, the political stability of the government still needs to improve in order to satisfy lower risk investment strategies into Nigeria.
In order to compensate this to some extent, the Nigerian government has authorized the following incentives to attract FDI:
  • Pioneer Status, providing a tax holiday for eligible companies;
  • Tax relief for research & development in Nigeria;
  • Tax concession for industries that attain minimum local raw materials utilisation;
  • Tax concession for labour intensive productions;
  • Tax concession for locally added value to products and services;
  • Tax concession for in-house training;
  • Tax concession for export oriented companies;
  • Tax deductibility for production needed infrastructure works;
  • Tax holidays for investment in rural areas;
  • No excise duties;
  • Re-investment allowance;
  • Investment tax allowance.
If we take the above incentives as a guideline, the following sectors would experience wider tax benefits:
  • Research and Development
  • Production / Engineering / Construction
  • Investment / Financial Services
  • Import-Export companies
As can be seen from the above map, the one sector that is missing prominently in the incentive scheme of the Nigerian government is the general services sector. This sector usually requires high expertise while at the same time being relatively low resource intensive. With the current lack of higher educated locals, the taken strategy by the Nigerian government seems indeed to be the more adequate one. Yet, by so excluding the tourism sector might work counterproductive since the country itself does provide an abundance of possibilities once the political situation, especially in the Niger Delta region, has been resolved.

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