"People have always underestimated the Nigerian economy" - African Business Magazine
“People have always underestimated the Nigerian economy”

“People have always underestimated the Nigerian economy”

Gloomy predictions about the future of Africa’s biggest economy often overstate the downside, according to energy and power entrepreneur Tonye Cole. 

Tonye Cole is staying calm – seemingly a tough act for an entrepreneur whose principal interests are in Nigeria’s oil and gas sector, which has been decimated by a slump in the oil price and the country’s political turmoil.

It’s complex, but they’re interesting times as well. Once you get into complexity, you always find opportunities, Cole says. The challenge for anyone who manages a business is whether or not they can see the opportunities in the complexities.

Cole’s Sahara Group is, by the standards of the current crop of Nigerian domestic energy companies, one of the old guard. Founded in 1996, the company began as a trader and middleman, before moving upstream into exploration and production and, latterly, downstream into the power sector.

Although the company has moved out into other parts of the continent, it is still heavily exposed to Nigeria and, consequently, to its political uncertainty and its vulnerability to the current oil price shock. With investors typically jumpy around election time, the electoral commission’s decision to delay the poll by six weeks, from 14th April to 28th March, caused no small panic in the markets.

Worse still, it comes against a backdrop of near economic crisis, precipitated by the halving of the oil price over the past six months. With 70% of its government revenues derived from the hydrocarbon business and its currency buttressed by oil money, the country’s fiscal position has deteriorated rapidly.

The naira has fallen sharply from its target rate of 160-178 to the US dollar to hover close to 200, creating funding challenges for banks, many of whom have borrowed internationally, and now face the prospect of servicing dollar-denominated debt with naira incomes.

Upstream oil and gas businesses have suffered badly. Last month, Seplat CEO Austin Avuru admitted that the industry was in “survival mode”, while analysts predicted widespread consolidation. The stock market has plunged as international investors dump shares. Hundreds of millions have been wiped off the value of the country’s largest lenders.

However, Cole says, Nigeria has been here before. International analysts and observers are periodically gripped with the notion that the country is on the verge of collapse, but the business community carries on regardless.

“The bottom line is that people have always underestimated the Nigerian economy and they have always underestimated the Nigerian people,” Cole says. “They tend to be quick to judge in the negative what the reality is. There is a perception-reality gap which is as wide as the Grand Canyon.”

Fiscal and macroeconomic indicators only tell half of the story of the Nigerian economy, according to Cole. “When you ask Nigerian businesses, people who are invested in Nigeria today, who are going through an economic blip during this political transition, most of them are certain that they will overcome whatever is going on. It’s a readjustment of reality. Life continues.”

Power play

Cole’s company has put its cash behind the long-term development of the Nigerian economy, taking advantage of the government’s liberalisation of the power sector to invest in a 1,300MW thermal plant in Lagos State. The company also has a majority stake in the Ikeja Electricity Distribution Company and First Independent Power, which owns four power plants  in Rivers State.

Nigeria’s perennial shortages of electricity have long been a drag on its economy, but it is only in the last few years that a concerted push towards privatisation has imparted a new momentum to the sector. Liberalised tariff regimes and the unbundling of generation and transmission of electricity have enticed international and domestic players into power.

However, with the privatisation process still incomplete, some analysts have warned that the country’s tightened fiscal situation means that the government could struggle to meet its own obligations to invest in infrastructure, while the consumer-facing distribution companies could get caught out by the tumbling currency.

Cole, again, believes that this could throw up further opportunities, as the government turns to the private sector to solve its problems.

“Infrastructure has always been best developed by private organisations who can look into the long term, find a way to fund it, then create a model that makes that infrastructure make money and pay back,” he says.

That’s a model that can only come to pass when difficulties exist, where governments find it extremely hard to fund great, huge projects for political reasons.

“Perhaps it’s not a bad thing that we don’t have a free-flowing, $150 oil market, with too much money to spend on projects. I think the long-term prognosis for me is probably a better one.”

Sahara is one of a small number of Nigerian corporates – outside the banking sector – that have moved out into the rest of Africa. The trading business, which is the quickest and easiest way to enter any market, is already up and running in Ghana, Côte d’Ivoire, Gabon, Angola and Tanzania, and the company is still actively looking for opportunities to move upstream into production and exploration assets.

It is also looking to invest in the power sector outside of Nigeria, and has announced plans to build a 2,000MW thermal plant in Ghana.

“Where there is a will and an opportunity, we will go,” Cole says. “Where we can find people who are brave enough to come with us.”

Finding finance for capital intensive projects such as power infrastructure and oil and gas production not always easy, even for established players like Sahara, Cole says.

The expansion of stronger banking groups out of Nigeria and South Africa across the continent has helped, he says, but is not a solution in and of itself.

Global financing

“They understand the dynamics, they understand the politics, they know the people, they can quickly de-risk… The unfortunate thing is that they are not deep-pocketed enough to finance the big infrastructure projects, the oil and gas projects, so you still need international funds.”

Cole sits on the board of Atlas Mara, the banking vehicle formed by former Barclays CEO Bob Diamond and entrepreneur Ashish Thakkar, and says that he hopes the institution will work towards filling this gap.

“The whole thinking behind Atlas Mara, why it’s such a good proposition, is that there is this huge gap, this huge need for local financing that can attract international [backing],” he says. “Atlas Mara will play in that gap, and hopefully will be able to spur like-minded investors or financiers to come in and finance.”

International banking groups flooded into Africa in the late 2000s, looking for transactions that could offset the slowdown in developed markets.

Some have moved away again, while the rest are mostly chasing a small number of deals – typically involving either sovereigns or a narrow pool of ‘champion’ companies, with strong corporate governance and international reputations.

This has left the next tier of African businesses and entrepreneurs without access to finance.

“It’s a big concern. A big concern,” Cole says. “It’s very easy to identify companies that have put in place good corporate governance principles, who are doing good business, who are growing, and create champions out of them. But if you are not careful, you begin to create a wider and wider gap between the haves and have nots.”

Those champions – like Sahara – do have a responsibility to address the structural inequities in the system, according to Cole. It was partly this that led Sahara into the power business,
he says. “It was clear to everyone that if you’re going to develop an economy and make the economy thrive, then there’s an absolute need to develop the power sector… every sector of the economy is impacted one way or another if it’s done properly.

“It’s almost beyond imagination what is possible.” 


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Written by Peter Guest

Peter is a journalist, specialising in reportage and investigative feature writing. Having reported from more than 30 countries around the world, mainly in Africa, the Middle East and East Asia, for publications including the Wall Street Journal, the Financial Times, WIRED, the Guardian and African Business Magazine. In 2008, he was the editor for the Financial Times Ltd’s This is Africa magazine. He works as a political and economic analyst for professional services firms—including the Economist Intelligence Unit—and a number of private, public and non-profit bodies.

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