Economic Development, Foreign Direct Investment, and the Rule of Law in Nigeria

Economic Development, Foreign Direct Investment, and the Rule of Law in Nigeria

Nigeria is in a development crisis. The indices of national development suggest that the country is a barrel of disaster waiting to explode. With 69% of the population living below the poverty line, huge infrastructure deficit, ailing health sector and a failed public education system; the country is in dire need of an appropriate web of interventions. Indeed, recent efforts are yielding results – evidenced in the country’s improvement in the ease of doing business ranking. However, the country’s unenviable 158th position in the Human Development Index ranking, reveals that a lot still needs to be done. 

One of the important elements for development in Nigeria is the attraction and retention of Foreign Direct Investment (FDI). FDI is one of the most important contributors to economic growth. It augments domestic capital; creates jobs; enhances efficiency through the transfer of technology and expertise and stimulates the growth of domestic firms. In fact, on the 4th of February 2020, the President justified the country’s new Visa policy by emphasizing its potential to attract FDI into the country. Strategies like this and tax incentives reflect Nigeria’s standard approach to the attraction of FDI. However, the country seems to be missing an important factor – The Rule of Law

The Rule of Law – The missing link

Essentially, the supremacy of the law in any society, the indicators of the Rule of Law, according to the World Justice Project are Constraints on Government Powers, Absence of Corruption, Open Government, Fundamental Rights, Order & Security, Regulatory Enforcement, Civil Justice and Criminal Justice. The Rule of Law connotes equality before the law, legal certainty, avoidance of arbitrariness, and procedural and legal transparency. 

In the 2017/2018 Global Investment Competitiveness Report, Political stability and a business-friendly regulatory environment were identified as the most important in investors’ decision making.  In this report’s survey, 81 per cent of investors rate country legal protections as important or critically important in their investment decisions. This reveals a major gap in Nigeria’s development strategy and approach to FDI. In Nigeria, the availability of legal protection, guaranteed by a respected judicial mechanism is constantly undermined by the actions and words of the government and its agencies. Investors seek both strong legal protections and predictability and efficiency in implementing laws and regulations. Over 90 per cent of investors rate various types of legal protections, including the ability to transfer currency in and out of the country as well as legal protections against expropriation, against breach of contract, and against nontransparent or arbitrary government conduct as critical. All investors, regardless of sector, source country, or FDI motivation, find these guarantees of greatest value. These policies are bigger deal-breakers than investment incentives, preferential trade agreements, and bilateral investment treaties. Essentially, the presence or otherwise of the Rule of Law in a country is a deal-breaker for investors. 

In Nigeria, the Rule of Law is all but absent, and ironically, the same government supposedly pursuing development objectives, consistently undermines the Rule of Law. As chronicled by the Punch Newspaper in September 2019, President Buhari has consistently disobeyed court orders. Mr Femi Falana SAN emphasized that there are about 50 cases where court orders have been disregarded by government agencies in Nigeria. In fact, President Muhammadu Buhari, exhibiting some economic naivety while addressing the general conference of the Nigerian Bar Association stated that the Rule of Law must be subject to the country’s security and interest. This confusion or ignorance on the relevance of the Rule of Law in National Development in government circles needs to be corrected. There is an apparent need to emphasize that the Rule of Law is, in fact, a pre-requisite for National Development and consequently, National Security.  The relevance of the Rule of Law to Development is so trite that as far back as the eighteenth century, Adam Smith in his work – The Wealth of Nations emphasized that “Commerce and manufactures can seldom flourish long in any state which does not enjoy a regular administration of justice, in which the people do not feel themselves secure in the possession of their property, in which the faith of contracts is not supported by law, and in which the authority of the state is not supposed to be regularly employed in enforcing the payment of debts from all those who are able to pay. Commerce and manufactures, in short, can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government”.

In 2012, The United Nations General Assembly adopted a resolution noting that the Rule of Law and development are strongly interrelated and mutually reinforcing and that the advancement of the rule of law at the national level is essential for sustained and inclusive economic growth, sustainable development, the eradication of poverty and hunger. 

Two major billion-dollar arbitral awards currently hang over Nigeria due to the arbitrariness of government conduct and disregard of contracts. In 2003, the Nigerian Ministry of Power awarded a Build, Operate and Transfer (BOT) contract of the Mambilla hydropower project to Sunrise Power and Transmission Company Limited (SPTCL). Three years later, the same project was awarded to a group of Chinese companies. In November 2012, a general project execution agreement (GPEA) was signed with SPTCL; while in 2017, the same ministry signed another engineering, procurement and construction (EPC) contract with Sinohhydro Corporation of China and the initial Chinese companies to form a joint venture for the execution of the project — excluding SPTCL. SPTCL claims to have spent millions of dollars on financial and legal consultants in a bid to secure financing for the project and it has dragged the federal government and its Chinese partners before the International Chamber of Commerce (ICC) in Paris, France, over an alleged breach of contract; an action which could lead to a 2.3 billion dollar award against Nigeria. 

The second potential multi-billion dollar liability flows out of a similar set of facts characterized by a disregard for the Rule of Law. The P&ID case is one with several twists and turns as surreal as a movie plot. The undisputed facts, however, reveal that Nigeria flagrantly defaulted in its obligation under the contract to build a gas supply pipeline to a P&ID facility. Consequently, P&ID, which claims to have spent about $40 million on the project instituted arbitration proceedings against the country. This proceeding, sprinkled with the usual government disregard for institutions, has snowballed into a 9.6 billion dollars arbitral award against Nigeria. 

Unsurprisingly, Nigeria currently ranks 106 in the 126 countries ranked in the Rule of Law index – evidence of regulatory bottlenecks, elusive justice and apparent disregard for existing frameworks for legal protection. This status represents risks to potential investors which continental trade agreements, new visa regimes and tax incentives cannot erase. Investors are simply averse to climates where contracts are not respected by the government and civil modes of redress in the event of disputes are disregarded by the same government. 

The Panacea 

Essentially, the Rule of law is necessary to create the conditions for private sector-led growth, job creation, and attracting foreign investment. Five of the eleven indicators used by the World Bank in its annual Doing Business report are related to the strength of legal institutions because, without strong, impartial legal institutions and respect for the rule of law, private sector actors – local and foreign, cannot make the investments needed to grow economies and create employment opportunities. Consequently, for sustainable development in Nigeria, the Rule of Law and the Independence of the Judiciary have to be strictly pursued, not simply as governance ends in themselves; but as key items in the development toolkit. 

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9 thoughts on “Economic Development, Foreign Direct Investment, and the Rule of Law in Nigeria

  1. This is brilliant. The Rule of law is the foundation of any society. It ensures stability and stability ensures development. No stability, no FDI; no FDI means no jobs, no new technology, no active international trade, and consequently an increase in poverty, which further leads to an surge in crime rate.. It goes on and on.

  2. We must start by improving the quality of our politics, that’s what gives rise to respect to Rule of Law, not the other way round.

    Courts don’t enforce judgements, so even when you have noble judges, if the political class is singing a different song, you haven’t achieved anything.

    The attorney Attorney General is a political product, the police that enforces law is funded by politicians, so by underfunding it alone, they can render it incapacitated.

    We don’t need to look farther or think too much, the politics determines everything, neither intellectualism nor sophistry; just send decent humans to executive and legislative positions, then Nigeria will fly!


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