Africa Business News: Entrepreneurs. Investments. Banking & Finance. Emerging Markets. Start-Ups
Tuesday, 8 April 2014
Growth outlook of the Nigerian services sector
The prospect of Nigeria becoming the leading economy in Africa is being realized. For two straight years (2011 and 2012) Nigeria led other African countries as the top destination for Foreign Direct Investment (FDI). Divestment of assets by the International Oil Companies (IOCs) resulted in Nigeria’s slip to second position in 2013 – the year global FDI flows also took a tumble as a result of weak economic conditions around the world. Remarkably though, much of the sold assets by the IOCs were snapped up by Nigerian indigenous entities, as local participation in the country’s oil and gas sector has increased. While this is cheery news, the truth is that Nigeria has made even more impressive progress with structural transformation of the economy. The nonoil sectors are now the key drivers of the country’s GDP growth, which is expected to rise to 7.3 percent in 2014.
Until recently, South Africa had for years maintained the status of the top destination for foreign investment on the continent: it was the top FDI recipient country, as well as the gateway for foreign investments into other African countries. Also, Nigeria had usually trailed Egypt in attracting foreign direct investment. But now, the signs are clear; whereas opportunities in South Africa have been significantly tapped, Nigeria has only recently come under the radar of global investors because of its frontier opportunities in several sectors including power, infrastructure, agriculture, solid mineral, retailing and services. Egypt is embroiled in a problematic political transition, while Nigeria is strengthening in democratic governance. Besides, Nigeria’s population of 170 million makes her the biggest market in the African region. This being the case, Nigeria looks set to be the lead destination of private investment in Africa for a long time.
Peep into the Scenario
Last year, investment opportunities in Nigeria were headlined by the power sector privatization programme, which has benefitted tremendously from strong political will of the Administration of President Goodluck Jonathan in pushing through one of the most important sectoral reforms in the country. Since 2011, reform of agriculture has gathered pace. The reform agenda was codified in the Agriculture Transformation Agenda, which places emphasis on value chain development.
Over a decade ago, sales of mobile licenses to local and foreign investors introduced wider scope in the structural transformation in the Nigerian economy. Private investment in telecommunication, after a transparent licensing round, saw rapid deployment of infrastructure in the sector. Modern mobile services rolled out quickly and dramatically increased access to mobile communication by all classes of Nigerians. Soon after this was the banking industry reform which has seen Nigerian banks rapidly transform from small entities to some of the biggest banks in Africa and the world. We also remember the sparkle of modernity in the aviation sector, where private sector management of a key infrastructure has taken place.
Today, the current Administration has brought infrastructure investment to the forefront of its commitment to improving the Nigerian business landscape. It is revamping and expanding road, rail and aviation infrastructures.
Beneficiary Services Sector
Investment fund flows into these and other sectors in recent years have triggered a huge demand in the services sector. For instance, the banking sector has witnessed significant growth over the past decade as Nigeria opened up for investment. Unlike in the past, Nigerian banks are funding private sector investments in the power sector and other infrastructure projects. Until now, the capital and appetite for this was simply not there as the Nigerian economy was seemingly helmed in. But there is burst of pent up demand, and thanks to much bigger capital, Nigerian banks are committing to the longer term lending needs.
Financial services sector growth itself has triggered demand for ICT services, particularly high-speed internet bandwidth and software. Policy support to unlock these sub sectors of the services industry are in place. They include clear regulatory framework which incentivizes private sector participation. Huge investments in fibre optic networks are linking the major cities to deliver high speed internet connection. Coverage of the entire country with modern telecommunication services are becoming a reality. As would have been known to interested parties, the entrepreneurial drive of Nigerians is part of the facilitation of investments in technology as with other services. Nigerian software services companies are doing well in meeting the demand arising from rapid growth in the financial services value chain involving (pension) fund custody and administration, asset management, fixed asset management, payment system, human resources management, etc.
Increase in foreign capital flow for investment in Nigeria, has meant increase in inbound international aviation traffic. The need for linkages to the States has fuelled rising demand in the domestic aviation industry. Since Nigerian businessmen are also leading the charge of investment in other African countries, Nigeria is steps closer to being the hub for regional air travel; not only in the West Coast, but predictably in Africa. This trend is also pushing up demand for road transportation to open up access to the vast land and mineral resources across the country.
The hospitality industry is a key beneficiary of the surging domestic and foreign investments. Data collected by W-Hospitality Group affirms Nigeria as the fastest-growing hotel industry in sub Saharan Africa. Demand for luxury hotel rooms in Nigeria’s political capital, Abuja, and commercial hub, Lagos, is complemented by rising demand for lower cadre hotel facilities in secondary hotel markets including Port Harcourt, Ibadan, Enugu, Abeokuta and Kano, according to W-Hospitality Group.
The big services frontiers
In line with Nigeria’s status as the biggest consumer market in Africa, and “Africa rising” being a recent phenomenon, it is very easy to distil investment opportunities in the services sector to key frontiers of education and healthcare: the two areas I intend to limit this discussion. Nigeria’s demographic structure, which features large youth population, and government encouragement of private investment in education, create a huge opportunity. Indeed, private sector investment has complemented government resources in education across the tiers. But gaps still remain for high quality science, technology and vocational education as well as adequate number of such institutions to train and retrain the teeming Nigerian youth population. In the meantime, unmet demand has resulted in patronage of foreign institutions by Nigerians that can afford it. But this will scale down in the long run; the government is prioritizing local supply and is keen to mitigate capital outflow in paying expensive school fees in foreign institutions.
Today, one of the areas of smart investment would be educational institutions and related facilities in Nigeria. We have the population to support sustainable enrolment. We have proven affordability. We also have growing industries to absorb graduates from the institutions. On its part, the current Administration has maintained commitment to investing in public educational institutions. Fallen standards are attracting policy attention. But limited public resources have created opportunities for private sector investment.
The health sector shares some similarities with the education sector as service- and knowledge- driven endeavours. Healthcare services constitute a huge market and frontier investment area. Many country-investment analyses have identified healthcare as a viable area for investment in Nigeria. For this reason and based on its own study, the International Finance Corporation (IFC), the private sector lending arm of the World Bank Group, has been working to unlock private investment in healthcare services in the country. The IFC has made some impact investments in this regard. Its investment is an influencer in developing countries. Accordingly, we have seen more interests and more private investments in healthcare. Again, the critical enabler is government policy. A few years ago, government addressed the big question of affordability of consumers of healthcare services with the introduction of health insurance. It is one of several reforms that have proved successful and impactful in Nigeria. Tens of millions of Nigerians who have subscribed to health insurance have constituted a steady funding source for the healthcare providers, even as patients now pay just a fraction of what otherwise they would have paid.
Investments in healthcare will be driven in large part by the commitment of the government to reverse the current trend of health and wellness tourism and strengthen delivery of secondary healthcare in the country. (We have done remarkably well with primary healthcare.) Also, the huge demand will continue to play a role. Indeed, this factor has accounted for the leap in investment, extending to pharmaceutical and food production by both local and multinational businesses in Nigeria including Procter and Gamble, GlaxoSmithKline, Sanofi Aventis, Cadbury, Nestle, etc.
NEXIM Bank’s Commitment
Nigerian Export-Import Bank (NEXIM Bank) has been drawn to the investment opportunities in the Nigerian services sector. Since our mandate entails attraction/generation of foreign exchange for the country, we have significantly invested our resources in the hospitality and transportation segments. The Bank has made total funding disbursement of N15.6 billion in the services sector, which accounts for 16.4 per cent of total loan disbursement by the Bank. We hope to scale up the investments and also look into other segments where government seeks to make more impact and the private sector requires some of the resources we are able to deploy which include guarantee and advisory services.
The services sector is the second “S” in our MASS Agenda, which sees NEXIM Bank focus on the manufacturing, agro-processing, solid mineral and services sectors. NEXIM Bank will continue to support the transformation of the services sector as part of the multi-dimensional factors that are driving the sector to the forefront of the Nigerian investment opportunities.