While Nigeria’s oil and gas sector has historically attracted the majority of inward foreign direct investment (FDI), focus is broadening significantly to non-oil sectors. Slow progress in passing legislation to reform the hydrocarbons sector has delayed decisions on larger projects, while the broad domestic market is attracting investors seeking higher yields in frontier markets. “Inward FDI has been driven primarily by a stable macroeconomic situation and consistent growth,” Supo Olusi, the special assistant to the coordinating minister for economy and minister of finance, told OBG.

With non-oil sectors driving growth, investment has increasingly flowed from emerging economies, like BRICS countries (Brazil, Russia, India, China and South Africa) – though to a lesser extent from Russia – and other large emerging economies. Meanwhile, Western investment has diversified, with significant interest from an expanding pool of private equity funds increasingly based in-country.

GROWING VOLUMES: While foreign portfolio inflows (FPI) continue to outpace FDI, with a 76.78% share of capital inflows in the year to June 2013, according to Central Bank of Nigeria figures, the country achieved two record years of inward FDI from 2011, when it became Africa’s largest recipient for the first time. FPI, which rose from $3.82bn in the first quarter of 2012 to $6.82bn in the first quarter of 2013, has grown much faster than FDI, which dropped from $1.74bn to $1.29bn in the same period. However, the stock of FDI reached $76.8bn by year-end 2012, according to the independent investment advisory firm the Financial Derivatives Company (FDC), close to a four-fold increase on the $23.8bn in 2000. Positive outlooks from the three rating agencies and a search for high-growth markets have driven both portfolio and direct investments.

With a sanitised banking sector, a new economic management team and new policies, non-oil FDI has expanded. The value of FDI grew around 46% in 2011 to a record $8.9bn, driven by non-oil investment from traditional investors as well as relative newcomers. This has since moderated – inflows grew 5% in Africa as a whole in 2012, amidst an 18% drop in global FDI and 5% dip in West Africa. Nigeria attracted a lower $7bn, “weighed down by political insecurity and the weak global economy”, according to UNCTAD’s “World Investment Report 2013”. Yet it retained its lead over African peers such as South Africa (with $4.57bn in 2012), Ghana ($3.29bn) and Egypt ($2.79bn).

BROADER APPEAL: Efforts to legislate a Petroleum Industry Bill have been postponed as the legislation continues to be debated in parliament, delaying larger oil projects by major players (although Total, ExxonMobil and Shell projects are going ahead). Alternative investments continue to flow in, however. Chinese investment especially has increased significantly. Sinopec’s acquisition of Addax’s worldwide exploration and production assets in August 2009 for $7.3bn gave it a strong foothold in Nigeria. China National Offshore Oil Corporation seems likely to follow, as in early 2013 Canadian and US regulators approved its planned $15.1bn acquisition of Canada’s Nexen, present in Nigeria since the late 1990s. By 2012 Nigeria was the third-largest recipient of Chinese FDI after South Africa and Sudan, according to UNCTAD, with investments in construction, airport infrastructure, telecoms and other segments. A Nigerian presidential delegation to China in July 2013 secured a commitment for $3bn in loans at 3% interest to fund its infrastructure drive.

SOUTH-SOUTH: Non-oil FDI has grown in the past decade, particularly South-South partnership with BRICS countries, but also through forums like the D-8 (Bangladesh, Egypt, Indonesia, Iran, Malaysia, Nigeria, Pakistan and Turkey). “Worldwide, we are seeing a growing appetite for emerging economies to invest in their peers, rather than the traditionally dominant North-South investment flows,” Kingsley Obiora, special assistant to the chief economic adviser to the president, told OBG. “Regional integration is also playing a growing role.”

Traditional investors such as the US have also expanded investments to other sectors, with US firms like Cargill and General Electric announcing large investments in agriculture and manufacturing, respectively. In total, the stock of US FDI rose 54% from 2000 to 2012, reaching $8bn by 2012, according to FDC. Manufacturing, particularly in agro-processing and energy-related processing, has attracted a growing share of FDI.

NEW FOCUS: While FDI in the past decade has focused on oil and gas, manufacturing, infrastructure, and consumer goods and services, analysts such as FDC expect to see a broader emphasis in the next two years, with more investments in shopping malls, hospitality, tourism and agriculture. For instance, the Eko Atlantic development in Lagos is expected to attract $15bn in private investment, much of it foreign.

Large investments announced since 2011 include South African firm Tiger Brands’ acquisition of a 63.35% stake in Dangote Flour Mills for around N30bn ($189m) in September 2012, alongside its investments in UAC Foods; the minority investment (for an undisclosed stake) in local aluminium can producer GZI by Standard Chartered Private Equity and UK-based investment manager Ashmore in January 2013; General Electric’s $1bn investment in power sector components production facilities in the Calabar free trade zone, with construction launched in the first half of 2013; Siemens’ announcement of a N175bn ($1.1bn) investment in 10,000 MW of new generating capacity; and Indorama’s $1.8bn investment in a new fertiliser plant adjacent to its existing Eleme Petrochemicals, announced in 2011. With ongoing privatisation of power assets in 2013, FDC forecasts that 40% of total funds in the power sector will be from foreign sources.

INVESTMENT POLICY: With 22 bilateral investment treaties in force, Nigeria has a few caps on FDI. The Nigerian Investment Promotion Commission (NIPC) Act No. 16 of 1995 allows for full foreign ownership outside of hydrocarbons and sectors related to security. Under its sector-specific investment incentives policy, introduced by the NIPC in 2012, the administration expects FDI to play a key role in funding its Transformation Agenda. The 2012 incentives include immigration support; state enterprise status for specific businesses; and five-year export expansion grants, renewable once for industries such as chemicals, agricultural production, and processing plants with investments of more than $100m in steel and oil and gas component manufacturing.

Pioneer status is conferred on firms investing in more remote locations and in less developed sectors like manufacturing; this ranges from seven to 15 years. The government is also proposing duty waivers for imports of machinery to encourage more productive investment. Tax relief is granted for industrial establishments that engage in research and development for the improvement of their processes and products.

With a stricter emphasis on local content development in the oil and gas industry since 2010, the carrot of incentives comes on top of restrictions on the import of strategic goods. Similarly, in the agricultural sector higher duties on imports of rice, wheat and sugar have started to generate more FDI in local production. In sugar production alone, the Federal Ministry of Agriculture and Rural Development expects higher tariffs on raw and refined sugar imports to catalyse $3.1bn in investment over the next three years.

CHANGING APPROACH: The newly created Federal Ministry of Trade and Investment (FMTI) embodies a more concerted approach to streamlining regulations and promoting investment, although the various bodies involved often perform the similar tasks. “There is significant overlap between the NIPC’s work and that of other government departments and agencies,” Ladi Katagum, the director of investment relations at the NIPC, which falls under the FMTI, told OBG. “The restructuring of ministries, departments and agencies following the 2012 white paper will help, as would passage of an amended NIPC Act that would strengthen the commission.” While the NIPC Act has been under review in recent years, a draft of the reform bill could be presented to parliament in 2014 with key provisions to strengthen the body, which already operates a one-stop investment centre. The draft bill is also expected to restrict FDI in certain sectors like retail and manufacturing in a bid to protect Nigerian businesses, although the government is intent on preserving the liberal nature of its investment climate. Meanwhile, the administration’s drive to restructure its 500-plus ministries, departments and agencies into 300, following the recommendations of a 2012 committee on rationalising government parastatals, could improve clarity for investors and streamline bureaucratic processes.

With encouraging signs of the gradual diversification of FDI, Nigeria’s ambitious reform programme and its vast untapped market are powerful draws for a new breed of foreign investors. While the economy is still overwhelmingly reliant on hydrocarbons for its macroeconomic stability, the government is making concerted efforts to streamline its procedures and further incentivise investment. Sustaining the reform momentum to 2020 will be key to continued FDI inflows, which in turn will be crucial to ensuring a stable balance of payments and reducing Nigeria’s dependence on FPI.