In recent times, foreign investors, startups and larger technology companies have identified countries like Nigeria as providing good investment opportunities. Investors, however, hesitate to invest in the Nigerian market due to certain risk factors, including uncertainty about the relevant regulations for their desired sectors, arbitrary government policies and difficulty in researching into the environment given the fragmented nature of laws and regulations.
The Nigerian government continues to emphasise its interest in attracting foreign investments into Nigeria evidenced by tax incentives, the Nigerian Investment Promotion Council One-Stop Shop, amongst other initiatives. However, acts such as the recent ban on the operations of commercial motorcycles and tricycles (including bike ride hailing startups such as Opay, Gokada and Max.ng) have amplified the fears of investors and probably reinforced their hesitation in coming into the Nigerian market.
The question that now arises is if Nigeria is too high-risk for foreign investments. Our response to this is NO because there are a lot of opportunities in Nigeria and the risks can be managed with the right advisers and partnerships.
We have set out below certain steps that investors may take to manage the risks associated with investing in Nigeria.
How can investors better protect their interests?
- Regulatory/Policy Due Diligence: It is important for any intending investor to conduct thorough due diligence on the applicable laws, policies, directives and regulations relevant to their sector of interest, including those that have not been enforced. Due to the fragmented nature of laws and regulations, the due diligence must go beyond online research and involve visits to regulators to seek clarity. Where possible, Letters of No Objection to the proposed business should be obtained;
- Review the Government’s Masterplan and Seek Government Participation: To manage the risk of arbitrary government intervention, investors can study the government’s masterplan regarding the relevant industry and propose a mutually beneficial partnership with the government. Such partnership may mean allocating some shares of the business to the government or partnering with government agencies to offer the services to the public. The inclusion of the government in the operations of the business makes them invested in its success. This step was recently taken by Uber with the UberBOATS’ and Lagos State Waterways Authority collaboration. It is, however, important to note the risk of a change in government affecting the collaboration;
- Building Practical Relationships with Government Agencies: It is always useful to build good relationships with government agencies whose activities will affect the business. A compliance personnel could be hired to liaise with the government and advise the business/investors as required;
- Insurance Policy: Investors, especially foreigners seeking to do business in Nigeria, can consider protecting their investments against adverse government intervention through Political Risk Insurance.
Nigeria remains a good environment for investments. Our suggestions above are not exhaustive; however, they should help investors manage the risk of government intervention. Like any other investment decision, protections put in place against risks are never failproof, but with high risk typically comes high returns.