Events in Nigeria this summer could hardly have inspired confidence in foreign capital source markets. In August, an announcement from Emirates, stating that the Central Bank of Nigeria had trapped $85m of the airline’s funds, signalled the realisation of investors’ greatest anxieties over the West African country’s crippling shortage of foreign exchange.
Inflows of foreign direct investment (FDI) into Nigeria have experienced a prolonged and acute descent since peaking at $8.84bn in 2011. In 2021, FDI inflows totalled just $699m. But as Nigeria’s struggle to attract FDI reaches its apogee, an oft-overlooked structural factor continues to unnerve potential investors: the law.
African lawyers go global
The London office of Lagos-based Olaniwun Ajayi LP (OALP), launched in December 2021, hopes to induce a significant reversal in Nigeria’s FDI woes and help build investor confidence in projects across the African continent.
Making the step up to an international practice is a significant landmark for Nigeria’s largest law firm as it strives to position itself as a key conduit for capital imports. Chuks Ibechukwu, who chairs OALP’s corporate practice in London, tells African Business that “We have an amazing task of trying to convince international investors that a Nigerian firm can provide English law services. Overcoming the limiting perceptions of the past will be a challenge, so finding the right talent and deploying a confident business model will be crucial.”
For private equity firms and venture capitalists looking to acquire African assets, accessing appropriate legal instruction which covers both cross-border and local jurisdictional regulations has historically been a convoluted process. Ibechukwu explains: “The traditional model meant that an African sponsor or business looking to attract international investment had to approach two law firms: one based in the UK or US, which provides cross-border legal services, and another one that is comfortable operating within the local jurisdiction being targeted.”
Ibechukwu hopes that by establishing a single point of contact for African investors under an English law regime the new office will make this system an anachronism. “For the first time”, he says, “we are able to sit down as a single team with clients going in, and have a discussion which takes into account both the English law framework of their investments and the commercial and regulatory risks that will impact their investment in Nigeria.”
It is hoped that this model will help foreign investors to structure their capital inputs and ensure that target businesses and borrowers have foreign currency liquidity. Lenders who have been wary of startups that generate naira revenue will now be able to act in the confidence that their activities will not fall foul of cross-border or jurisdictional regulations and that they will be able to realise the dollar value of their investments, he says.
“Fintech and healthtech investors especially are looking not just for local support, but for guidance on how to structure their offshore investments in hubs like Mauritius and how to funnel FDI into Nigeria while remaining confident that they will be able to get their investment returns and exit the market.”
Can regulators keep pace with the digital revolution?
As Nigeria’s capital-hungry startup scene looks to attract FDI and bring increased dynamism to the flailing economy, lawyers have a further role outside of coordinating cross-border investments. Recent years have yielded notable improvements in the regulation of commercial activities, but much work remains to be done on the domestic front.
In an era of rapid technological transformation, Nigeria’s traditionally turgid regulators are facing unprecedented challenges in keeping up with a changing business environment. Nosa John Garrick, managing partner at Lagos-based F.A. Garrick & Co., tells African Business that lawyers play an indispensable role in modernising the regulatory domain.
“By continuing to engage in conversation with regulators and identifying loopholes in existing regulations, lawyers can advise the government on how to make changes where necessary. This gives the regulators a sense of direction as to what is necessary in the business space. We interact more with the people that the regulations affect, and are able to leverage this to create a more inclusive business environment. This will help attract foreign direct investment by making it easier to establish companies in Nigeria and propel the economy forward.”
Open consultation with regulatory stakeholders has been a key feature of Nigeria’s ongoing commercial transformation, which has gathered pace under the auspices of the federal government as Muhammadu Buhari’s second and final term as president approaches its conclusion. Garrick recounts that town hall meetings, where regulators call for advice from stakeholders including commercial lawyers, played an instrumental role in the development of the 2020 Companies and Allied Matters Act.
As a result, Nigeria’s biggest commercial law shakeup in three decades bears all the hallmarks of thorough public consultation: much-needed provisions for single membership companies, a simplified registration process and consistent auditing procedures have injected life into the country’s startup ecosystem.
Energy sector will be crucial
Ibechukwu and Garrick concur that the energy sector must be a focus for Nigeria’s federal government as startups look to modernise both renewable power sources and service delivery across the industry.
The government has long recognised the value of its domestic energy sector as a driver of economic growth but has historically failed to provide effective leadership to the industry. Power generators and distributors have long suffered from the effects of poor policy enforcement, regulatory uncertainty, a fluctuating gas supply, transmission constraints and oversights in centralised planning which have held back the establishment of commercial viability.
Distribution is the sector’s greatest weakness: Nigeria has extensive reserves of oil and gas, and a national grid capable of generating 12,522 MW, but on most days can only deliver around 4,000 MW to its population of over 200m people. Eighty-six percent of connections are in urban areas and 40% of the population lives off-grid. This is the state of play more than a decade after the inauguration of the federal government’s Renewable Energy Master Plan, designed to fill in gaps in rural electrification by encouraging solar, wind and hydroelectric projects.
But where there are shortfalls, there are opportunities for startups. Ibechukwu points to the high proportion of domestic stakeholders in the energy sector as a cause for optimism: “The oil and gas sector is much more robust in terms of local participation than other sectors. In Nigeria, content regulations have meant that a significant local capacity has been developed over many years in terms of service delivery in that industry.”
Garrick, who works with startups delivering power to rural areas, says that private service deliverers can access profits and scalability, so long as they can navigate a convoluted patchwork of generation, distribution and trading licences at the state and federal levels. Directing sales away from cities and towards rural areas with deficient transmission infrastructure will be a “major issue”, with operators wary of becoming entangled in the regulatory net.
So long as they can navigate regulations, operators offering renewable solutions will not struggle to attract financing. In the runup to Cop27, Nigeria is looking to attract $10bn foreign investment to kickstart progress towards its target of reaching net zero by 2060. Ibechukwu, who headed up the International Finance Corporation’s advisory unit for private equity in Africa before joining Olaniwun Ajayi, is optimistic that investors will heed the call.
“At the World Bank, I saw a lot more investment being directed towards climate projects including renewable or offgrid solutions to electrification as large investors look to satisfy their own net zero objectives.”