-

On April 6 of last year, Nigerian economists officially announced what the world had long suspected — namely, that Nigeria possessed not only Africa’s largest population, but also its largest economy. Nigeria’s first GDP rebasing in over 24 years prompted this announcement.
The new GDP figures, totaling $510 billion, represent an almost 89 percent increase over the prior year. Nigeria’s GDP has grown at an average rate of 7 percent each year for the past 10 years, and Nigeria’s economy is predicted to become one of the world’s 15 largest by the year 2050.

Nigeria’s Growth, Past and Future

Nigeria’s revised GDP figures reflect a growth story that has been well under way for over 20 years. However, this growth had until recently remained outside of official figures.

GDP is measured by picking a reference point, known as the base year, and calculating changes in the real (versus nominal) value of each sector of the economy for each month, quarter, or year from that baseline. In most countries, a new base year is set approximately every five years. Prior to this recent exercise, Nigeria used 1990 as its base year.
By waiting over 20 years to rebase its economy, Nigeria’s official GDP figures in recent years ignored new inventions and did not fully account for growth in new or previously less important sectors of the economy. In other words, Nigerian economists had calculated GDP with outdated assumptions about the size and importance of certain sectors of the economy, including services, film, e-commerce, banking and telecom. The telecom industry alone accounts for over a quarter of the GDP increase.

Nigeria has begun the transition from an agriculture and extraction-dominated economy into a more diversified one. A number of factors favor Nigeria’s strong growth over the next decade. It has a population of around 170 million people — almost one in five sub-Saharan Africans is Nigerian. The country is young — 44 percent of Nigeria’s population was under the age of 15 in 2012. Nigeria has the second largest amount of proven crude oil reserves in Africa, and Lagos has sub-Sahara’s second largest and most liquid stock market.

Despite its promise, the main barrier to Nigeria’s future prosperity is a continued deficit in investment and personal security. Nigeria faces terrorism concerns in the northern part of the country that have accounted for the deaths of more than 1,500 people just this year. Piracy, crime and violence have plagued other parts of the country, while port delays, uncertain land rights, and unemployment also increase the investment risk of the country.

Anti-Corruption Risk in Environment in Nigeria

Of the legal risks facing businesses wishing to invest in Nigeria, corruption is among the most significant. For businesses and investors wishing to enter or expand their exposure to the growing Nigerian economy, it is important to recognize the anti-corruption risks that are prevalent in these areas. Nigeria has historically been regarded as a country that presents heightened anti-corruption risks, and it has long received poor rankings in Transparency International’s Corruption Perceptions Index. In 2013, Nigeria was ranked 144 out of 177 countries ranked — in the bottom 20 percent. Bribery allegations involving Nigerian government officials have also been featured in several high-profile investigations by the U.S. Department of Justice and the Securities and Exchange Commission.

A quick examination of two of the growing sectors of the Nigerian economy — power generation and telecom — demonstrates some of the inherent corruption risks facing businesses.

Power Generation

The current Nigerian electric power system continues to limit the country’s potential. According to the World Bank, only 48 percent of Nigeria’s almost 170 million people had access to electric power in 2011. For those who have access to power, near daily blackouts and brownouts frustrate consumers and businesses. In order for the economy to continue to grow, this infrastructure crisis will need to be addressed.

Seeking to harness the private sector in an attempt to solve this crisis, Nigeria is in the midst of privatizing and expanding its electric power system. The Nigerian government has privatized the country’s power distribution and generation assets, and has granted a concession to a private company to run the transmission system. Numerous new power plants will need to be built over the next several years, and the transmission and distribution system will likewise need to be modernized and expanded. In order to fuel this new power generation capacity, new natural gas pipelines will need to be built to transport supplies to generation facilities.

Companies that wish to gain exposure to this enormous growth opportunity will need to factor in the anti-corruption risks presented by this situation. Interactions with entities of the Nigerian government are an inevitable aspect of an investment in this area. For example, operating an electric generation plan in Nigeria requires a license from the Nigerian Electricity Regulatory Commission. Other licenses from the NERC are needed in order to trade bulk power across the grid, and the NERC has approval power over tariffs. Close or frequent interactions with any regulator or government agency present risks that bribery will occur.

Similarly, companies should ensure that they are comfortable with any local agents or business partners they enlist. Much of the preexisting infrastructure in the power sector was sold to a wide spectrum of Nigerians and foreign corporations. Any business wishing to partner with these actors will need to carefully examine whether it is comfortable with how these potential partners secure any assets they bring to the table. Many enforcement actions initiated by the U.S. government have involved payments made by third-party agents to Nigerian government officials.

Telecom

The Nigerian telecom sector also illustrates the complicated risk/reward ratio facing companies operating in Nigeria. Nigeria’s rebased GDP figures show that the industry grew from virtually nonexistent in 1990 to comprise 8.69 percent of the country’s GDP in 2013. There are over 120 million active mobile phone subscribers in a country of 170 million people. However, given that Nigerians commonly have multiple mobile phone subscriptions on different networks due to poor service, analysts believe that there is substantial room for growth in this sector. Nigerian authorities have also launched various pilot projects to encourage the use of mobile banking and cashless transactions.

To tap this potential wellspring of growth, business investors will need to work closely with various actors in the Nigerian government. For example, wireless spectrum auctions will be a source of corruption risk in the Nigerian telecom sector. Within the next few years, Nigeria is expected to migrate its television broadcasts from analog to digital service, freeing up large and valuable portions of the wireless spectrum for potential sale.

As the country continues to make sections of its wireless spectrum available to companies, bidders will need to consider how to approach potential corruption risks in participating in any auctions. Corruption in an auction context can result from both bid rigging and from the distortion of bid evaluations and quality rankings. For example, an employee of a bidding entity may pay a regulator for inside information on how best to structure a bid. Alternatively, the entity may be tipped off that its bid is not the lowest, allowing for it to be dropped.

Petty corruption — a risk factor present in many industry sectors across the globe — is endemic in Nigeria and is likely present in its telecom sector. Local investigative journalists have recently alleged that mobile phone operators in Nigeria have provided employees of the Nigerian Communications Commission with free mobile phone service. According to these accounts, this free service has been provided in order to head off enforcement of quality of service regulations against mobile phone carriers.

Risk Mitigation Strategies for In-House Counsel to Consider

In light of the potential investment opportunities that are available in Nigeria, businesses and investors should familiarize themselves with these corruption risks and should take prudent steps to minimize potential exposure to them. According to Dr Isaac Ogbodu of Greysone Law and Risk LLC, "risk minimization starts with an appropriately rigorous due diligence plan, and is reinforced by a strong compliance program tailored for the country".

Conduct Due Diligence Commensurate With the Risk

With due diligence, a one-size-fits-all approach should be avoided. SEC, DOJ, and the U.K.’s Serious Fraud Office have all urged companies to conduct due diligence into potential partners, acquisitions, and business opportunities with a vigor that matches the potential corruption risk presented by the opportunity. A key aspect of performing diligence is to gain familiarity with Nigerian customs, terminology, and known risk areas. For example, small cash bribes or tips are called “dash” in Nigeria. Similarly, Nigeria has historically had a tout system. These unofficial intermediaries operate outside of the official bureaucratic process, and can be an omnipresent part of dealing with some agencies.

Adopt and Enforce Strong Compliance Programs Tailored for Nigerian Conditions

After contracts are signed, it is important to design and implement a strong compliance program tailored for local conditions. The compliance program should cover any third party agents retained by the company to work on its behalf. The program should include a robust training program that educates both company employees and certain third party agents. The Foreign Corrupt Practices Act and U.K. Bribery Act contain a number of concepts — such as the very broad interpretation of who constitutes a “government official” — that may need clear explanation.

—By Alexandre Rene, Patrick Welsh and Nicole Durkin, Ropes & Gray LLP

Alexandre Rene is a government enforcement partner in the Washington, D.C., office of Ropes & Gray. Patrick Welsh is a government enforcement associate in the firm's Boston office. Nicole Durkin is a litigation associate in the firm's Washington office.