Weighing up the risks and rewards of four new emerging markets

Many developing countries are planning to invest billions in infrastructure upgrades   to support their changing economies, Control Risks looks at the risks and opportunities in Nigeria, Iran, Colombia and Ethiopia

Exponential growth in urban areas and the associated rise in urban middle-class populations present major opportunities for investors, developers and engineers involved in infrastructure around the world. Indeed, the United Nations recently estimated that 60% of the urban area projected for 2030 is yet to be built.

Yet in order to capitalise on these opportunities, particularly in emerging markets, organisations need a firm understanding of the risks. Opportunity and risk are in a constant state of flux, leaving many with an understandable mismatch between their perception of risk in a country and the reality.

Taking two countries that have made headlines in recent months – Nigeria and Iran – and two countries that can still be perceived as hidden gems – Ethiopia and Colombia – we will give examples of the interconnection of infrastructure opportunities and risks, and how strategic risk mitigation can ensure the maximisation of opportunities.

Nigeria – how significant is the Buhari effect?


Infrastructure investment a policy priority  

Proposed budget of more than 6 trillion naira ($30bn)


Effect of oil price slump 

Anti-corruption drive – investor uncertainty owing to potential contract reviews or new regulation

In Nigeria, President Muhammadu Buhari’s administration has identified infrastructure as a policy priority. Major projects under way include the Eko Atlantic Economic City ( pictured), being built on reclaimed land near Lagos.

Lawmakers are discussing a proposed budget of more than 6 trillion naira ($30bn), up 20 per cent from the 2015 spending plan, of which the president aims to earmark around a third for capital expenditure. 

Basic infrastructure will be a key element of the government’s plan: Buhari appointed Babatunde Fashola as the minister responsible for roads, power and housing. He is known as a technocrat with a record of improving public services in Lagos, Nigeria’s commercial megacity, during his tenure as governor there. His new role will be a huge challenge, as electricity failures and transport difficulties are still among the biggest drags on productivity and economic growth. 

The budget has yet to be approved. While it is already coming under intense scrutiny, and there is no guarantee that the building projects Nigeria needs will be commissioned this year, his appointment is a sign that the new administration recognises the severity of the country’s infrastructure deficit and intends to address it. Unlike under the previous president, Goodluck Jonathan, oil-dependent Nigeria does not have the luxury of selling crude at upwards of $100 a barrel, and the reduced level of government revenue is one of the key risks to the Nigerian outlook. But as long as pressure builds for a currency devaluation – which has so far been resisted by the president and the central bank – appetite among commercial lenders for lending the amounts Nigeria needs may be limited. 

The president’s anti-corruption drive is also likely to add uncertainty to the investment outlook, with the possibility of contract reviews and new regulation. In the longer term though, Nigeria’s clearly identified need for a large infrastructure-building programme will open opportunities. Nigeria – how significant is the Buhari effect?


Colombia – will stability bring prosperity? 


Long-term prospects for security situation – peace process with FARC

Government conducting ambitious overhaul of road, rail and river infrastructure


Short-term deterioration in security environment if peace process succeeds

Acquiring environmental and operating licences

Colombia’s transformation from a country on the brink of collapse in the late 1990s to one of the region’s most vibrant economies has gone handin-hand with considerable shifts in the risk exposure for infrastructure companies.

Aggressive government policies concerning the Revolutionary Armed Forces of Colombia (FARC) and the 2003-06 demobilisation of rightwing paramilitary groups have reduced politically motivated attacks and driven considerable improvement in many indicators of security, including rates of kidnap and homicide. With peace negotiations between the government and the FARC, further improvements are likely, but considerable security challenges persist. 

A new generation of armed criminal groups known locally as bacrim continue to present a threat to companies, especially where infrastructure projects stand to upset the local status quo or reduce the remoteness of certain areas, which benefits the criminals. Likewise, some guerrillas will return to their lucrative illegal businesses. 

Potentially far more critical will be other aspects of a peace deal. Questions over land ownership, issuing of environmental and operating licences and prior consultations with local communities will all be central to the government’s political agenda. This means that companies will continue to be attracted to infrastructure projects in Colombia – in fact the government is embarking on the most ambitious effort ever to overhaul the country’s crumbling road, rail and river networks – but project implementation will take place in a more volatile political environment. 

“Electricity failures and transport difficulties are still among the biggest drags on growth”


Ethiopia – will shift to manufacturing create Africa’s next economic powerhouse?


Per-capita income tripled in last eight years 

Investment in road, rail and power planned as part of five year plan GTP II


EPRDF party unlikely to reform complex business environment

Land ownership issues


Despite experiencing some of the world’s highest economic growth since 2000, Ethiopia remains a lesser-known opportunity. Initial growth can be attributed to the expansion of services and agriculture. However, growth in these sectors has slowed, and Ethiopia needs to shift towards manufacturing-led growth – supported by rapid infrastructure expansion – to sustain momentum.  The government’s economic policy is anchored in five-year Growth & Transformation Plans (GTP). 

The first GTP (2010-15) failed to drive a sufficient shift from agricultural- to manufacturing-led growth, but succeeded in laying foundations for future manufacturing growth, a key element of GTP II (2015/16-20). Transportation and energy infrastructure has expanded rapidly, including a new railway to Djibouti, and the $4.7bn Grand Renaissance Dam on the Nile. 

The government has also made progress in revising investment laws, establishing a one-stop shop for investors, and is setting up industrial zones. There are a host of opportunities for foreign investors as the new GTP II aims to progress the strategic transformation of the economy, with plans to double the GDP share of manufacturing to 8 per cent by 2020. Under GTP II, Ethiopia also plans to almost double the network of allweather roads, construct 1,545km of rail network and increase power generation capacity more than seven-fold. 

As a result, investment opportunities will likely remain strongest in the infrastructure sector, while slowly increasing in manufacturing. Foreign investment will however be obstructed by a variety of factors. 

The absence of multinational banks capable of providing the sort of credit and financial expertise required by large investors will likely remain a particularly significant obstacle. Despite pledges of economic liberalisation, privatisation has slowed – and in some sectors been restricted to domestic investors – and land ownership remains vested in “the state and the people” under the constitution. 

Despite donor pressure, the government appears reluctant to yield control and ownership of its biggest state-owned enterprises. It has also been criticised for overpricing assets or withdrawing them from sale when bids were lower than expected. Progress in addressing some of these issues will be slowed by a lack of leadership within the ruling EPRDF party.

Policy making will likely remain slow and confused, resulting in a complex business environment with many unofficial and official barriers.


Iran – easing of sanctions means brighter prospects but problems remain


 Sanctions – lifting or easing of most, thanks to JCPOA 

 Investment – Ministry of energy introduced projects worth $28bn 


Opaque business environment 

Remaining sanctions

Prospects for Iran’s infrastructure have significantly improved, with the majority of economic sanctions against the country being lifted or suspended following the nuclear deal (JCPOA) reached in 2015. Iran’s improving economy and the opportunity of increased foreign investment, coupled with a new climate of co-operation with the West, are expected to drive infrastructure growth. The country’s most acute infrastructure needs are in the power, aviation and rail sectors. In 2015, the Ministry of Energy introduced projects worth $28bn to attract foreign investment into Iran’s power, road and railway construction and renewable energy sectors. 

However, infrastructure projects will continue to present significant challenges to investors, stemming from political and regulatory risks, some remaining international restrictions and Iran’s macroeconomic weaknesses. Despite Iran’s efforts to attract foreign direct investment, contractual terms for projects typically remain vague, reflecting the volatile regulatory environment. Plans for project 

financing also frequently lack clarity. Domestic investment in infrastructure is likely to remain limited, constrained by budget limitations stemming from low oil prices, Iran’s limited ability to monetize its gas resources, and uncertain GDP growth expectations. Moreover, despite the easing of nuclear-related sanctions, sanctions relating to terrorism, human rights and Iran’s ballistic missile programme remain in place. However, understanding and monitoring these risks will allow businesses to comprehend how such changes could influence the trajectory and success of their business, and allow them to review their posture and adapt their market entry strategy and compliance procedures accordingly.

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