Nigeria - A Rugged Road To High Returns

Bomb blasts, gun attacks, airline crashes, kidnappings, industrial-scale oil theft, armed robberies and fraud costing billions of dollars.

Such things might give pause to anyone thinking of opening a business. In Nigeria, they happen with alarming frequency, and yet investors just keep coming.

The reasons are many: alluring returns in this high-risk frontier market; a huge and growing population with latent potential for a consumer boom; light crude oil ideal for making motor fuel; and sophisticated financial markets.

"We know it's not risk free," says Charles Robertson, global Chief Economist at Renaissance Capital. "But look around the world and find another economy with 160 million people growing at 7 percent with such potential. It's a struggle to find them."

Nigeria can look like it's teetering on the cusp of chaos, but it is also Africa's second biggest economy and top oil producer.

"Nigeria is the best kept secret in the world. Anybody who doesn't invest in Nigeria only has himself to blame, going forward, if he misses out," industrialist Aliko Dangote told reporters in an interview at his Lagos office.

"I don't really know of any place where you can make as much money as you make in Nigeria."

As Africa's richest man, he should know. Last year, the cement tycoon's Nigeria investments boosted his personal fortune more than fivefold - a bigger rise than anyone else on the Forbes list of world billionaires - to $13.8 billion.

Dangote is from northern Nigeria, where Islamist insurgents of the Boko Haram movement have killed hundreds in daily gun and bomb attacks this year in a bloody anti-establishment offensive.

Dangote, whose interests are mostly in the south, with some exposure to the north, does not let the violence affect his business decisions.

"Boko Haram have not destroyed any business here. They have not gone to any factory and planted a bomb," he said.

"Because of drugs barons fighting with the Mexican government, does it mean no one will go and invest in Mexico? No. People are rushing there."

"DEMOGRAPHIC DIVIDEND" TRUMPS INSTABILITY?

Still, if you want an example of how violence and political instability in Nigeria can slice millions of dollars off your profit margin, look no further than PZ Cussons.

The soap maker announced two profit warnings in the first quarter of this year, blaming a hit to sales from social unrest in Nigeria, its biggest market, where it makes a third of its revenue.

The country erupted into strikes and protests in January when President Goodluck Jonathan's government made an abortive attempt to end a popular fuel subsidy. The strikes lasted only a week, but the central bank said they cost $617 million a day.

The violence in the north also worsened around that time.

"Insurgency in the north clearly had a detrimental impact on PZ's business, and on (food maker) UACN, which has distribution hubs there," Matthew Pearson, Standard Bank's head of African Equity Product, told reporters on a visit to Lagos.

But in the longer term, both firms are betting Nigeria's big population will turn into a massive consumer market.

"The demographic dividend is colossal," Pearson said.

A failure to recognise such long-term opportunities in emerging markets astounds Stephen Jennings, CEO of investment bank Renaissance Group.

"Whether we are talking about political evolution in Russia, or economic development in Africa, there remains a clear overemphasis on current difficulties and constraints, and an under-appreciation of the pace and magnitude of modernisation and structural change," he told an investor conference this week.

Some clearly appreciate it. The CEO of South Africa's Shoprite, Whitey Basson, said in February he saw scope for 700 stores in Nigeria, up from two now, arguing that even if 60 percent live in poverty, the other 40 percent still outnumber South Africans.

And oil companies like Shell are making enormous profits in Nigeria - and renewing onshore licences - despite the fact that armed gangs steal a growing portion of their oil.

Foreign direct investment into Nigeria has hovered between $6 billion and $8.5 billion since 2007, World Bank figures show, apparently unresponsive to its various crises.

Business people say the risk from such insecurity pales compared with that of government interference.

Jonathan's administration says it is working to remove impediments such as corrupt officials and onerous bureaucracy, but they admit it is a huge task.

"Look at the port. That's a bigger investor concern than bomb blasts or plane crashes," said Tony Elumelu, chairman of Lagos-based Heirs Holdings, a fund that invests across Africa.

Corrupt officials at Lagos port - one of the busiest in Africa - slow down deliveries to extort money from importers, a bottleneck to growth and cause of Nigeria's high living costs.

"For many businesses, the difficulty of getting goods cleared ... is their biggest complaint," Elumelu said. "The good news is the government is now taking action to improve it."

Such "official risk" is what oligarchs like Dangote can use political ties to mitigate. Not everyone has such connections, but players with dominant positions in markets that don't require much government cooperation can still fare well.

"If you look at Nigeria Breweries, short of expropriation, it's going to continue to effectively print money, because of the size of the market ... irrespective of the management of the country," said Fola Fagbule, Vice President of Origination and Coverage at Africa Finance Corporation.

Other sectors, such as infrastructure, face daunting hurdles from obstructive officials. Telecoms firms need licences. They need land to put up masts. They need permits to set up base stations.

All complain of extortion by officials to keep stations open.

The downside was enough to persuade Vodacom to pass up investing in Vmobil - now owned by Bharti Airtel - in 2005, citing an "inappropriate level of risk".

Yet telecoms is now one Nigeria's most profitable sectors, and Nigeria is Bharti's most profitable African market.

In his last year as Vodacom CEO in 2008, Alan Knott-Craig said he regretted the decision not to set up shop in Nigeria. Vodacom is now making moves to come back.

Rival MTN had no such qualms, and today it is Nigeria's leading operator.

Among the risks it faces are "poor infrastructure, lack of security, vandalism, multiple taxation, over-regulation ... unlawful interference with telco infrastructure by government agencies and ... prejudicial court judgments," says Funmilayo Omogbenigun, MTN Nigeria's corporate affairs manager.

Despite that discouraging litany, Nigeria remains MTN's biggest cash cow, making $2.5 billion in core profit in 2010 and again in 2011.

The telecoms success has raised hopes for Nigeria's moribund power sector, if the government gets round to privatising it.

"Nigeria's often surprised on the upside, and telecoms is a classic example. People are looking at power in the same way," Fagbole said.

"It looks messy, it looks difficult, but if you sit on the sidelines and it turns out to be this massive honeypot, you'll live to regret it."