Managing Stranded Assets in Nigeria
My article was originally posted in the International Security Observer on 12 February 2015.
Firms and individuals operating and investing in Nigeria may soon see their assets stranded or otherwise impaired due to political turmoil and regional security issues. Nigeria’s contentious presidential election was recently postponed until March 28th, stoking tensions amidst Boko Haram’s takeover of the country’s northeast. Security concerns will likely intensify as a result of these two factors, amidst a host of other difficulties facing Nigeria, including expected depreciation of the naira against the dollar. Firms should monitor electoral violence and Boko Haram’s activities to determine impacts on their operations and investments. Likewise, asset management contingencies should be developed to address possible consequences such as loss of access, loss of revenue, expropriation, theft, and other impairments.
Nigeria’s election was previously set to occur on February 14th. The date was changed on February 7th, however, when the electoral commission postponed the vote until March 28th, citing security concerns. The delay was widely criticized as politically motivated. Critics argue that the presidential incumbent, Goodluck Jonathan, pushed for the postponement because it is unclear if he has enough popular support to secure victory. Jonathan’s electoral prospects have been harmed by his failure to contain Boko Haram, as well as by rampant corruption and economic woes that have occurred under his watch.
The delay has stoked political tensions. Even before the postponement, the election was sure to be controversial and almost certainly result in violence. This has happened after each of the previous elections – in 1999, 2003, 2007, and 2011 – since Nigeria’s transition to civilian rule. After the 2011 election, which Muhammadu Buhari lost to Jonathan, 800 individuals were killed in sectarian violence and approximately 65,000 were displaced. Now, Buhari is again competing against Jonathan, but the heartland of Buhari’s political support in Nigeria’s north has been destabilized by Boko Haram.
Voters in Boko Haram-held areas may be unable to cast their votes, and internally displaced people who have fled from the group may not be able to vote. Add to this that Boko Haram has carried out attacks throughout the country, including in the capital of Abuja, and voters in all regions may be reluctant to vote for fear of attacks. These security concerns, combined with undermined faith in the electoral process, mean that the vote’s results will likely be contested both internally and on the international stage.
Boko Haram is a complex terrorist threat similar to ISIS. By some estimates, the group controls up to 20 percent of the country, primarily in the northeastern states of Borno, Yobe, and Adamawa. This figure amounts to more than three times the territorial holding of ISIS in Syria and Iraq. Similar to the regional aspirations of ISIS, Boko Haram aims to create a caliphate spanning parts of Nigeria, Cameroon, Chad, and Niger. The group has attacked military installations and personnel not only in Nigeria, but also in neighboring Cameroon and Niger.
Established in 2002, Boko Haram has expanded dramatically since 2009. Its current leader, Abubakar Shekau, has overseen Boko Haram’s increasingly frequent attacks against symbols of the state and the group’s consolidation of territorial control. Under his leadership, Boko Haram has been described as initiating an insurgency, moving away from its initial focus on attacking local politicians and religious leaders.
In January, Boko Haram advanced into the town of Baga in northeastern Nigeria, killing hundreds of individuals. The group also seized a nearby military base, which was to serve as the headquarters to an international task force with troops from Chad, Niger, and Cameroon for containing Boko Haram. These countries’ militaries are beginning to cross and amass along Nigeria’s borders to counter Boko Haram, which may create a humanitarian crisis and disrupt cross-border commerce.
Risk factors to consider
Consequentially, foreign investors and firms with operating assets in Nigeria should initiate strategic intelligence programs to monitor the ground situation and develop mitigation plans. It is true that much foreign investment, particularly in the energy sector, is near the coast or offshore, and as such has been shielded from Boko Haram activities. The confluence of expected electoral violence and Boko Haram’s increasing ambitions means that there may no longer be such safe zones in the country.
On a macro level, investors should understand where violence is likely to occur. General violence could destabilize infrastructure networks by increasing insecurity along major transport routes or by disrupting electricity generation. In these scenarios, although investors’ assets may not be directly targeted, they may become isolated and be unable to operate or transport their product to market, negatively impacting profitability. If violence along major roads becomes commonplace, for instance, a refinery may be unable to offload oil products and will have to temporarily halt operations.
Investors should also be aware of the backgrounds of their counterparties in Nigeria. They should pay particular attention to understanding their local counterparties’ religious and political affiliations, which were divisions of conflict during previous electoral violence. Although as a matter of course, investors should have already conducted pre-transactional due diligence, they may not have a nuanced understanding of the complicated societal networks in which they are investing. If investors are working with a local Christian counterparty in a predominantly Muslim area with sectarian tensions, for instance, this counterparty could be targeted by post-electoral violence.
A third risk factor that investors should be aware of is their counterparties’ potential association with individuals or entities tied to the current government, as well as those with ties to the subsequent government. This risk is especially important for US, UK, and Canadian investors given their national laws relative to bribery and corporate graft. In the Nigerian context, considering potential government ties warrants extra scrutiny since Boko Haram has a history of targeting symbols of the state. The group has attacked police officers and schools, and foreign businessmen perceived as being tied to local politicians could also be prime targets.
Managing stranded assets
If investors analyze the risk factors described above and believe that their assets are at risk, they should develop a stranded asset management plan. First and foremost, they should continue to monitor ground conditions and local government response. It is important for investors to effectively communicate to their financial backers how long assets will be impaired by local conditions, and documentation of such impairments has significant tax implications. If shareholders fear that an asset is permanently lost, rather than just temporarily stranded, they may abandon investors and leave them in financial ruin.
Investors should also take measures to avoid losing stranded assets. They can, for instance, build positive relations with locals on both sides of the aforementioned sectarian and political fault lines. Two possibilities for such community engagement are providing employment opportunities or improving electricity access for local communities. Reaching out in this way will reduce the likelihood of assets being physically attacked or taken over by hostile forces. It will also allow investors to quickly reestablish operations after the expected fallout of the election.
Preparing for the inevitable
Investors should monitor political and sectarian tension, as well as the ongoing security threat posed by Boko Haram. They should identify how these risk factors may lead to asset stranding or impairment, and then take measures to clearly understand how long assets will be stranded. They should also, if possible, try to reduce the likelihood of asset impairment or loss. With a strategic intelligence program in place, meeting these requirements is possible. Investors without such programs are inviting financial hardship by ignoring the inevitable.