Weighing up Nigeria and Ghana

Two West African countries are attracting the lion's share of investor attention - but for dramatically different reasons.

By Paul Kalu, advisor and analyst working for clients in the private and non-profit sectors on investments in Africa. He is based in Lagos, Nigeria

Ghana and Nigeria appear to be at the forefront of the new scramble to tap the vast resources and economic potential of Africa. World Bank data shows Nigeria was at the top of the list in Africa for private sector investments in utilities including water, telecommunications, roads, and energy from 2001 to 2009. Ghana was in position seven.

West Africa is dominated by Nigeria in terms of population and sheer market potential, but it is only in the last ten years that steady economic growth and an influx of foreign investments has unlocked this potential and brought it to the point where it can now be considered along with other key developing nations as a serious destination for investment by foreign companies.

Nearby Ghana with its much smaller population and economy has always been in Nigeria's shadow, though it has traditionally received attention and development aid from the donor community. But the recent discovery of oil off Ghana's coast also brings it into the international private investment arena.

This is evident in the fact that private sector investments in infrastructure were barely US$70m over the last ten years of military rule in Nigeria (1990-1999), compared with US$600 million in Ghana during the same period. However, the tables turned in the next ten years as Nigeria saw private sector investments in infrastructure in excess of US$23 billion while Ghana's investments rose by a healthy - albeit small in comparison - 500 percent to US$3.8 billion. The majority of infrastructure investment has been in telecoms sector, generating phenomenal growth rates.

Mobile phone penetration in Ghana and Nigeria reached 65 and 50 percent respectively in 2010, up from virtually nothing in 2000. So although growth in many African countries is hindered by infrastructural constraints such as poor roads and inadequate power supply, the rapid growth in mobile phones have helped overcome some of these hurdles and given many countries the opportunity to surge forward. It is estimated that a 10 percent rise in mobile phone penetration can increase the GDP of developing markets by as much as 1.2 percent.

All that glitters
Africa's growth has also come from more traditional primary sector sources, not least due to recent high prices for mineral and agricultural commodities. Ghana's gold mines have been the main driving force of its economy for the best part of a century and its cocoa industry has also contributed its fair share, but in 2008 the country's long search for that elusive black gold finally paid off with the discovery of a reserve of 15 billion barrels of oil off the country's coast, and in 2010 the country produced its first barrel of oil.

As a result, Ghanaian GDP growth, which averaged 5.4 percent between 2000 and 2010, is forecast to surge to almost 14 percent in 2011. This is driven by oil-related investments and it is anticipated that Tullow Oil's US$120 million IPO on the Ghana Stock Exchange in June will be the first of many.

Although Ghana was until now often seen as an investment backwater, it is increasingly on many an investor's travel itinerary. Atose Emmanuel Aguele, managing director of Union Petroleum, a regional leader in the liquefied petroleum sector, maintains that the allure of Ghana is growing. "Ghana runs a relatively efficient refining and distribution oil and gas sector," says Aguele. "When I joined the industry 20 years ago, Nigeria LPG consumption was 150,000 million tonnes per year, Ghana's was 12,000 million tonnes," says Aguele. "I had visited Ghana with a view to invest in that country, I remember walking away saying the market in Ghana was too small and concentrating my efforts in Nigeria. Today the Nigerian market stands at 70,000 million tonnes and Ghana is nearly at 150,000 million tonnes."

Big brother
However you look at it, Ghana still presents a small investment opportunity next to Nigeria, its regional big brother. Nigeria has many strikes against it in the international investing community, and it is certainly not for the faint of heart, as Aguele attests. Nigeria is often at the top of corruption league tables. Priorities are often askew here; a UN report on oil spills in the Niger River Delta, caused by vandalism and aging pipelines, claims it will take 30 years to clean them up. But with these high risks come high returns, as Nigeria's GDP growth of 400 percent over the 10 years to 2009 demonstrates. Add to this a young and growing educated population, estimated to hit 250 million by 2050, and a burgeoning middle-class with an increasing appetite for consumer goods and services, investors are overcoming their fear of the country.

Confidence in the consumption capacity of Nigeria is well illustrated by significant investments in the cement and drinks industries, alongside the now commonplace investments in telecommunications. The Dangote Group, for instance, is pumping US$3.9 billion into new cement plants across Africa with a combined capacity of 50 million tonnes of cement over the next two years. More than half of this is being invested in Nigeria where the company aims to more than raise its production capacity from 8 to 20 million tonnes. Dangote's CEO, Aliko Dangote, once quipped to journalist that, "If I have any money in this life, I would invest it in Africa." The irony is that Dangote is already ranked the wealthiest man in Africa by Forbes.

South Africa's SABMiller has also announced that it is investing US$100 million in a new plant in eastern Nigeria to boost its brewing capacity in the country. SABMiller only entered the Nigerian market in 2009 with the acquisition of a small brewery in Port Harcourt; now the company plans to give the current market leaders - Heineken with 70 percent of the market, and Guinness with 20 percent - a run for their money. But even they are not resting on their laurels - Heineken announced in January the acquisition of five existing breweries in the country for an estimated US$750 million, and Guinness announced in March a US$350 million investment to expand its biggest plants.

Size isn't everything
For all its size, Nigeria is, on a per capita basis, still on a par with Ghana on many things. Both countries have seen GDP per capita virtually triple in the last ten years from less than US$400 per head to over US$1,200, and electricity production in Nigeria may be 2.5 times more than Ghana but amounts to slightly less than 20 watts per person, compared with 50 watts per person in Ghana. Hence, Ghana may be relatively small next to its big brother Nigeria, but on a like for like basis, it holds its own.

Ghana's projected GDP growth of 14 percent this year coupled with the relative ease of doing business (the World Bank's annual Doing Business report, ranked Ghana at No.67 in 2011, compared with No.137 for Nigeria) makes this an attractive combination for some investors.

Another oil industry executive with extensive experience of both countries recognizes the attractions of Nigeria in the form of market size, natural resource wealth, and an energetic workforce. But he is deterred by the lack of infrastructure and the high levels of fraud and corruption he has experienced in Nigeria. "I would invest in Ghana for the short-term while waiting for Nigeria to organize itself," says the insider, who asked not to be named. "But I wouldn't be there for long, Nigeria still has all the opportunities."

But Ghana's positive factors probably lend themselves better to investors looking to set up and run a business in Ghana, than to those just looking to make a financial investment. In Nigeria, the reverse is the case; the market is deep, wide, and liquid enough to sustain significant financial investments. For instance, the Nigerian stock market is currently worth US$50 billion and lists 215 equities with a turnover ratio in 2010 of 13 percent; Ghana's stock market on the other hand lists 35 equities and is currently valued at US$3.5 billion and had a turnover ratio of just 3 percent last year.

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