Powering the Nigerian Economy through Foreign Investment in Power Sector for Sustainable Development and Growth.

By Chinedu Okoye 

Summary:

• Trade and investment have undeniable impacts on the growth of any economy. As such, Investments in a resource rich economy like Nigeria should be prioritized.

• Foreign investment, particularly in strategic sectors like agriculture, power, and mining, can boost industrial production.

• The power sector impacts consumers and businesses. However it is plagued by a number of challenges.

• The government has a crucial role to play in attracting foreign investment in the power sector.

The impact of Trade and Investment partnershios on a Resource-Endowed Developing Economy:

Investment deals offer advantages for a developing country like Nigeria, abundant in resources but lacking in industrial development. In contrast to trade deals, which often center on exchanging finished goods, investment deals entice foreign capital to construct infrastructure and industries within the country.

Nigeria encounters FX liquidity challenges due to its excessive dependence on imports and reliance on crude receipts. This stems from the underdevelopment in other industries, leading to an overreliance on crude oil receipts.

With a restricted set of goods and services exported, there exists a ceiling on the economic gains from international trade. The focus should shift toward attracting investment through various policies—Financial and Monetary Policy, industrial policies, IP Laws, etc.—aimed at supporting local investment and drawing foreign investors for both standalone and partnership ventures in highlighted strategic industries.

This dual focus on local and foreign investment can catalyze job creation, technology transfer, and skill development, contributing to sustainable economic growth. 

Moreover, diversifying the economy through investments aids in mitigating dependence on a narrow range of exports, rendering the nation less susceptible to fluctuations in global commodity prices.

However, not all industrial development goals are equally important and viable. The following sectors should be prioritized:

• Agriculture and Allied Industry: The government could build on past efforts to support agriculture, increase yields as we strive to attain food security. 

• Power: A stable power supply supports economic activities and has a more direct economic impact

• Mining: Improved industrial metals production capacity and supports local production and reducing reliance on imported metals.

The Nexus Between Industrial Strength, Foreign Investment, and Future Trade Growth:

The trade prowess of a nation hinges on the production capacity of its local industries. In an equitable scenario, industrial capacity and growth are intrinsically tied to the availability of resources—be it cash, real capital, natural, and skilled labor—and the facilitative backdrop of supporting policies and infrastructure.

Consequently, a strategic focus on enhancing industrial strength through the attraction of foreign investment becomes imperative. This emphasis becomes crucial not only for fostering future trade growth but, significantly, for the specific industries and sectors into which these investments are directed. 

One cannot sell what one does not possess, and this makes targeted industrial development a linchpin for sustained economic success.

The Power Industry:

The removal of petroleum subsidies and the subsequent increase in electricity tariffs have elevated the cost of living for average Nigerians, significantly impacting the production costs for local businesses.

Compounded by foreign exchange (FX) liquidity issues and exchange rate devaluation, which escalate the costs of importing finished and component goods, inflation has soared.

Given the limitations on the trade side, the administration's pursuit of foreign investment is well-conceived. However, there is a critical need to prioritize specific industries/sectors.

The power sector holds paramount importance, as highlighted by analysts at Zero Analytics. Its significance extends beyond households to directly influence businesses through increased supply and resulting energy price stability.

The Under-capitalization of the Electricity Sector:

On January 4, 2024, Bloomberg reported a critical shortage of capital faced by Nigerian electricity companies, necessitating new investors to rejuvenate an industry grappling with the challenge of adequately supplying power to its 200 million population.

This emphasizes a significant hurdle despite the vast market potential, as the industry struggles to attract the essential capital required for enhancing its power-generating capacity.

The article further elucidates that these companies find themselves in a precarious situation, being both over-leveraged and under-capitalized. 

This predicament severely restricts their ability to invest in the vital task of distributing electricity to households, as underscored by Olu Verheijen, adviser to President Bola Tinubu on Energy.

The evident need for capital and technical expertise underscores the imperative for Nigerian electricity companies to enhance production capacity and stimulate growth. 

The far-reaching repercussions of this situation on the local economy emphasize the urgent requirement for strategic interventions and investments in the power sector.

Foreign investment in the power sector and Industrial Production:

Attracting foreign investment through mergers and acquisitions in the power sector can positively impact industrial production in the following ways;

1. Infrastructure Development: 

Foreign investment often comes with a commitment to upgrade and expand existing power infrastructure. This can lead to improved reliability and increased capacity, providing a more stable and abundant power supply for industrial activities.

2. Technology Transfer: 

International (institutional) investors in the sector may bring advanced technologies and best practices to the power sector. This technology transfer can enhance the efficiency of power generation, transmission, and distribution, ultimately benefiting industrial production processes.

3. Job Creation: 

Mergers and acquisitions may lead to the creation of new job opportunities within the power sector. A well-functioning power industry can stimulate economic growth, and the employment generated can contribute to an overall increase in consumer spending and demand for industrial goods.

4. Cost Reduction: 

Efficiency gains from foreign investments can lead to cost reductions in power generation and distribution. Lower energy costs can positively impact the competitiveness of industries, making them more attractive for further investments and stimulating industrial production.

5. Diversification of Energy Sources: 

Foreign investments may facilitate the diversification of energy sources, such as integrating renewable energy solutions. This diversification can make the power supply more resilient and sustainable, supporting continuous industrial production.

It is essential for the host country to ensure – through policy and structural reforms - that the terms of mergers and acquisitions are fair and attractive to the investors and aligns with its long-term economic interests. Regulatory frameworks should be in place to safeguard against potential negative impacts, such as monopolistic practices or exploitation of resources.

Financial Challenges and the Crucial Role of Foreign Capital in Nigeria's Power Sector:

Local investors and lenders are exhausted and unable to fund this deficit. Consequently, foreign capital becomes pivotal as the money supply is currently constrained. 

On the flip side, private and institutional investors may be cautious about injecting capital through equity or bonds, given political and economic risks like exchange rate volatility.

Despite these concerns, power companies might perceive an opportunity due to their expertise and access to funding from global financial markets. With both financial and human capital at their disposal, mergers and potential acquisitions are more feasible. 

However, effective government support, including policies and infrastructure (both tangible and intangible), is imperative for success.

The Role of the Government in Facilitating these Investment Deals:

The federal government must wield its regulatory powers judiciously to catalyze these deals, offering targeted incentives and elucidating the profit potential and upsides.

This necessitates a concerted effort from all stakeholders; the electricity distribution and generation companies, federal ministries, relevant departments, and agencies. Collaborative action is imperative in implementing a suite of favorable policy actions designed to attract prospective investors, particularly power companies. 

This approach ensures a comprehensive and well-coordinated strategy to create an environment conducive to investment and economic growth.