Saudi’s $2bn deal offers FDI lessons for Nigeria

Saudi Arabia has signed deals worth over $2 billion from the Future of Investment Initiative (FII) summit in Riyadh, offering Nigeria, attending the event to seek foreign capital, useful lessons in the kinds of reforms that attract investment dollars.

Investors are flocking to the Arab country almost twice Nigeria’s economy though with less than a quarter of Nigeria’s population, for several reasons key among which is its market size, state capacity and a willingness to undertake necessary reforms, analysts say.

After the FII summit, Saudi Aramco, the kingdom’s national oil company, signed a $1 billion deal with Tubacex Group to invest in CRA pipe threading and weld overlay and cladding manufacturing facilities in the kingdom, according to a government statement.

It also reached an agreement worth $230 million with Baker Hughes on investment and development of artificial intelligence and digital transformation, an MoU for a joint venture with APQ valued at $600 million and a $200 million deal with Dassault Systems aimed at collaborating on data analytics, project management and smart cities.

Foreign direct investment into Saudi Arabia has been almost steady at around $4 billion annually over the last two years. This is significantly lower than countries with similar population like Morocco (around eight times the figure) and Malaysia (around 10 times the figure), yet far better than Nigeria’s $2.2 billion last year.

A World Bank study found that political stability, security and regulatory environment are leading factors for decisions to invest in developing countries. Equally important is the size of a market which can help spread upfront overhead costs such as gathering information about the host country and making the right legal arrangements thus allowing investors to exploit economies of scale.

With a huge market of $700 billion against Nigeria’s $400 billion, the scales are tipped in Saudi Arabia’s favour. However, the Arabian country offers investors lower taxes (20 percent corporate income tax). Even with vast oil wealth, it is keen to diversify its economy and has kept government efficient by cutting subsidies.

Saudi Arabia has Islam’s holy sites and the Umrah and Hajj visas are free but these pilgrimages bring in around $12 billion in revenues. With over 1.7 million expected yearly, hotel, transportation and other costs for travellers help drive a religious tourism sector boosting the country’s total GDP by 7 percent.

Apart from electricity and fuel subsidies, Saudi Arabia had 50 percent subsidy applied to port services, passport fees, car driving licence fees, car transfer fees, traffic fines and renewal of residence permits for domestic workers. The country began phasing out these subsidies in 2016 after oil prices crashed to less than $30 a barrel and these reforms have made government processes efficient.

But Nigeria further undermines its ability to compete by subsidising petrol to the tune of over $3.9 billion yearly. It has kept electricity tariff at a rate that does not guarantee commercial returns and has had to pay out over $5 billion as bailouts since 2014, according to BusinessDay calculations.

President Muhammadu Buhari’s government didn’t begin the inefficient subsidy system but has continued with it. Backed into a corner due to rising debts to sustain consumptive subsidies and high cost of governance, it has resorted to protectionist policies including border closure, currency controls and multiple taxes on citizens whose purchasing power is being eroded.

“An exotic currency combined with an opaque central bank terrifies investors as they will wonder if they will be able to repatriate their profits and possibly their capital,” said Omar Al-Ubaydli, economist and researcher at Derasat, Bahrain, in an article for an investment journal.

Rather than currency controls, Saudi Arabia pegs its currency, the riyal, to the US dollar helping to assuage investor concerns. Like Nigeria, its chief export is crude oil traded in international markets using the dollar, making it very unlikely that the banking system will run out of greenbacks. The jury is still out on Nigeria’s currency deal with China.

“A country’s investment competitiveness goes beyond attracting FDI. It is determined by the country’s ability to bring in, retain, and leverage private investment for inclusive and sustainable economic growth,” said Anabel Gonzalez, Trade & Competitiveness senior director, and Ted H. Chu, IFC chief economist, in the Foreword to the Global Investment Competitiveness Report 2017/2018.

Countries that attract FDI also show high capacity in retaining it by building and managing quality infrastructure, enacting fair and forward-looking regulations, and developing a strong, effective legal system. They also eschew corruption and show high levels of transparency.

To make themselves attractive for FDI, countries like Kazakhstan, Uzbekistan and Kyrgyzstan have now adopted revised foreign investment laws that offer investors essential guarantees and protection.

The Kyrgyz Republic’s new Law “On Foreign Investments” provides foreign investors with a just and equal legal regime, full and continuous protection, guarantees of non-discrimination, protection against expropriation of foreign investments, and the right to freely dispose of their investments and of income from them, as well as compensation for losses to foreign investors in the event of armed conflict or other such circumstances, said U.T. Isayev, general director, Foreign Investment Agency, Kyrgyz Republic.

Buhari’s government is betting on ramping infrastructure as part of a strategy to attract FDI. In its 2020 budget proposal, allocation for capital expenditure was 20.72 percent of the total of N10.33 billion. Key capital spending allocations include Works & Housing N262bn; Power N127bn; Transportation N123bn; Universal Basic Education N112bn; Defence N100bn; Education N48bn; and Health N46bn.

Analysts say this spending has to be backed by forward-looking fiscal systems. The 2020 budget includes a finance bill with five strategic objectives including promoting fiscal equity; reforming domestic tax laws to align with global best practices; introducing tax incentives for investments in infrastructure and capital markets; supporting MSMEs; and raising revenues for government.

“The introduction of a Finance Bill to amend various tax laws is a positive development to make the tax system dynamic and responsive to changes in the economy,” said analysts at PwC Nigeria, led by Taiwo Oyedele, in their review of the 2020 budget plan.

However, they warned “the projected growth continues to be fragile while revenue remains a challenge with rising debt although the benchmark crude oil price and production are more realistic than in previous years”.

ISAAC ANYAOGU