Africa: Should businesses and law firms still be investing in this emerging market?
In simple terms an emerging market is a country which is shifting away from their traditional economy and developing their productive capacity. However, it is difficult to come up with a comprehensive definition, so emerging markets are typically defined by five key characteristics.
- Lower than average per capita income (less than $4.035)
- Rapid economic growth
- Highly volatile – stemming from natural disasters (especially if reliant on agriculture), external price shocks and domestic policy instability
- Less mature capital markets (in comparison to developed economies)
- Higher than average return for investment
Why are businesses and law firms drawn to Africa?
Economic Growth: According to a PWC survey, the primary driver of investor interest in African markets is the continents rapid economic growth, forecast at 3.2% this year and 3.5% for the next (up from 2.4% the previous). The top performing economies of the continent being Ethiopia with growth of 8.5%, Ivory Coast with 7.4% and Rwanda at 7.2%. Although this growth is not the high double-digit growth we used to see, it is still substantially higher than many of the BRICS economies. For instance, Brazil experienced merely 1.3% growth in 2017-8 and Russia at 1.5%. High economic growth is attractive to an investor primarily as it is an indicator of increased market demand, so there is an incentive to invest in order to satisfy this increased demand and capitalize on the potential profits.
Population Growth: Closely linked to economic growth is Africa’s growing population, set to grow 50% by 2030 to 1.5 billion. Moreover, Africa has a rapidly growing middle class. This is attractive for business as there is an increased consumer base with more disposable income to sell goods and services to.
Natural Resources: Natural resources are abundant in Africa; it’s estimated to contain 90% of the entire world supply of platinum and cobalt, half of the world\’s gold supply, two-thirds of world manganese and 35% of the world\’s uranium. It also accounts for nearly 75% of the world\’s coltan, an important mineral used in many electronic devices. This is a big deal for investors as much of these resources are untapped and in need of investment to be fully utilised. For example, in fully explored countries the average square kilometre of territory has beneath it $114,000 of known subsoil assets, whereas in sub-Saharan Africa this is merely $23,000. This is unlikely to be due to merely a difference what is actually there, but rather represents a rich untapped market and potential for future rapid economic growth.
The New Low-Cost Manufacturing Hub of the World: China’s long-lasting reputation as the world’s factory has dwindled in recent years. The labour pool has shrunk as a result of a generation under the one-child policy and hourly manufacturing wages rose by 12% annually since 2001. According to Justin Yifu Lin, a former chief economist at the World Bank, “China is on the verge of graduating from low-skilled manufacturing jobs… That will free up nearly 100 million labour-intensive manufacturing jobs, enough to more than quadruple manufacturing employment in low-income countries”. Africa, on the other hand, is experiencing a population boom set to reach 2 billion by 2050, and is projected to be the largest global labour pool. Equally, labour-cost is low across Africa, for instance a low-skilled factory worker in Ethiopia costs about 25% of the pay of a comparable Chinese worker. Africa seems to be the natural destination for low-cost manufacturing jobs being priced out in China. This is highlighted by the fact China has significantly increased its manufacturing investment in Africa, most recently having announced it will be investing $60 billion in financial support to Africa at the China-Africa Cooperation Forum.
Increasingly favourable regulation: Another factor is Africa’s constantly improving regulatory landscape. According to this year’s Doing Business Report a record number of 83 regulatory reforms were made across 36 of 48 economies in Sub-Saharan Africa. This represents the largest ever number of reforms recorded by the report and 31% of global regulatory reforms.
So where should law firms be investing? – An overview of the Continent\’s Legal Market
As a result of the sheer size of the continent there is no obvious central hub to invest into be connected to the entirety of African business. This means the most appropriate location to invest in Africa will ultimately depend on the individual firms’ specialties. In the North African legal market, Morocco has taken great strides to become an international financial centre through passing favourable business laws, tax incentives and simplified visa and work permit procedures. This has led firms like Baker McKenzie, DLA Piper, Dentons and Clifford Chance to set up offices there.
The Tunisian, Libyan and Egyptian legal markets are less attractive now. Tunisia is still recovering from the Jasmine Revolution, while Egypt is dominated by local firms make it extremely difficult to break into.
The Sub-Saharan legal market is renowned for its rich natural resources but is taking steps to develop its telecoms and financial services. In West Africa, many firms have been drawn to Abidjan as it is the headquarters for many businesses including the African Development Bank, while Cameroon could be a hot destination for IP specialists as the African Intellectual Property Organisation is based in Yaounde.
The South African Market is considered the most mature. What differentiates this legal market is the well-established infrastructure which is lacking across most of the continent. On top of this there are high levels of PE and M&A activity, attractive levels of FDI, growing technology and telecoms industries, strong capital markets (home to Africa’s biggest lender Standard Bank Group) and the traditional natural resource sector saw massive growth in 2018. However, the legal market is saturated particularly in Johannesburg, which makes it a difficult market to tap into. For instance, international heavyweights such as DLA Piper, Hogan Lovells, Allen & Overy, Baker McKenzie all have offices there. Not only this, but prospective firms have to consider the competition from the ‘Big Five’ which are considered the most sought-after firms in South Africa – Bowman Gilfilan, Cliffe Dekker Hofmeyr, ENSafrica, Norton Rose Fulbright and Webber Wentzel.
Country Focus: Angola
Angola is set to become an attractive destination for law firms seeking to invest in Africa. It has experienced huge economic growth in the last decade, propelled mainly by its huge oil exports and ranks today as the third largest economy in sub-Saharan Africa. The country has shifted away from civil war and now enjoys relative political stability, increasingly favourable regulations and a wealth of investment opportunities.
Relative political stability: Angola has regained relative political stability since the 27-year civil war ended in 2002, shifting from -1.5 to 0.29 on the World Banks political stability index. This has been enhanced by an established parliamentary system and limitation of presidential terms introduced in 2010, removing the old direct popular vote. Although, the World Bank ranked Angola 20th on its political stability index across Africa, it has not experienced the same level of violent protests as other African countries and is continuously improving. For instance, Cameroonian President Paul Biya’s re-election bid admits a constitutional crisis in the Anglophone regions escalated tensions, while, Tongolese citizens continue to protest for the end of the 50-year Gnassingbe dynasty.
Rich Natural Resources: Angola is a member of OPEC and the second largest producer of oil in sub-Saharan Africa and the fourth largest diamond exporter. Moreover, there are several untapped mineral sources including, manganese, copper, gold, granite and marble, which could have huge potential for long-term economic development. For instance, the government estimated that over 5,000 cubic metres of marble could be extracted annually.
Population: Angola has the third largest market in sub-Saharan Africa at 29,784,193.
Increasingly Favourable Regulation: Angola has recently revised the notorious Private Investment Law, to boost investment. This law previously required foreign investors to grant a 35% share in the capital of the company to Angolan companies or citizens. The revision has completely removed this requirement, which will make the country far more attractive to invest as businesses can retain their entire share capital.
Oil Dependency: Angola’s oil exports account for 95% of its exports and 45% of it’s GDP, meaning it is currently incredibly dependent on oil for economic growth and in turn is vulnerable to price fluctuations.
The Workforce: Angola’s workforce is mainly unskilled and has an unemployment rate of 26%, which sustains a high rate of poverty. While unemployment is not necessarily a problem for business, as this simply represents easy access to labour resources, the main issue is that the workers need training. Moreover, the problem is exacerbated by restrictive employment laws, as fixed-term contracts are disallowed and the minimum wage of $126 is one of the highest across Africa.
Transport infrastructure: Angola’s poor infrastructure is a major obstacle for investment and diversification of the economy, ranking 127/140 in 2017-18 for overall quality of infrastructure. This is problematic, as infrastructure is reliant on reliable delivery and manufacturers are also at high risk of losing their goods in transit.
Underdeveloped capital markets: Currently Angola does not have a stock exchange, which is a major gap in its economy. Stock markets are crucial for businesses looking to raise capital through selling shares, meaning financing options are severely limited in Angola, holding back non-oil growth.
Corruption:A deterrence from investment in Angola has been the plague of corruption that has swept the nation. It currently ranks ask one of the most corrupt nations in the world, at 163/167 on the Corruption Perception Index. This has manifested itself in varying forms, from a lack of transparency and political corruption to embezzlement of public resources and entrenched patronage systems. Corruption generally deters investment, as it creates uncertainty of investment outcomes and decreases the expected returns. However, the new president Joao Lourenco has recently pledged to fight the “cancer of corruption” and has taken some big steps already by dismantling his predecessors’ families influence over key sectors of the Angolan economy. For instance, he fired the previous president’s daughter Dos Santos, the chairwoman of the state oil producer and dismissed his son Jose Filomeno, as head of the country’s sovereign wealth fund. Jose was later arrested for money-laundering, embezzlement and fraud, following an investigation concerning a suspicious $500 million overseas transfer from the country’s own sovereign wealth fund.
Renewable energy projects: Renewable energy projects are currently gaining a lot of traction across Africa. This is largely due to the projected tripling of African energy demand by 2030 and an increasing concern over the damage of carbon emissions. The environmental concern is highlighted by the fact that all but three countries in Africa have ratified the Paris Agreement. Moreover, access to power is crucial to the national development of nearly all African nations, as nearly 600 million residents do not have access to electricity.
Angola is particularly well positioned to benefit from this increasing demand in renewables, due to a combination of its government policy and its favourable natural environment. The Angolan government is strongly committed to renewable energy and has launched a strategy to generate 70% of its power by renewables by 2025 (one of the highest in the world). As a result, the government has taken steps to enhance the attractiveness of FDI into renewables, by establishing subsidised tariffs and reforming the regulatory framework. Equally, Angola is a prime location for renewable energy projects, as mapping has identified a potential of 55GW of solar power and 18GW of hydropower in the country.
A surge in energy project demand is great news for law firms – as lawyers will be required from all manner of departments such as projects, finance, litigation and corporate to facilitate the developments. Lawyers are required for tasks such as negotiating and drafting agreements, providing regulatory advice and representing either the developers or the financiers to allocate risk in the financing of a project.
Opening of the Angolan Stock Exchange: The potential opening of the much-anticipated public stock exchange would create a wealth of opportunities for businesses and law firms. In a general sense, a public stock exchange would provide much needed alternate financing options for businesses, which would assist in diversifying the economy. This would create a long-term increase in economic activity. Equally, a public stock exchange would mean many businesses would be seeking legal advice regarding IPOs. However, the downside is that the public stock-exchange has been continuously delayed since 2002 due to inadequate corporate-governance practices and a lack of an educated financial culture. So, it is questionable whether it will ever actually materialise. Although, in 2016 Angola did begin trading in government bonds, which investors have considered an important first step.
As the Angolan economy is so dependent on oil, falls in oil prices can be disastrous to the economic well-being on the country. This was highlighted in March 2016 when crude oil went to its lowest level in nearly a decade, causing a rapid decline in the flow of US dollars into Angola and in turn the national currency the Kwanza to depreciate by 35%. The knock-on effects of which caused food prices to rise (the price of a bag of rice increased fivefold!) and a health crisis emerged as medicine became scarce. This means a business’s success in Angola is dependent in part on a stable or rising oil price to ensure economic activity does not fall. However, the Angolan government is taking steps to reduce its oil dependency. Most significantly, the IMF recently approved a $3.7 billion fund facility to support the country’s economic reforms. This includes the National Development Plan for 2018-2022 to address “structural bottlenecks and promote human development, public sector reform, diversification and inclusive growth”. The National Development Plan aims to achieve diversification through introducing VAT, eliminating subsidies, clearing domestic arrears and undertaking structural reforms, such as restructuring state-owned enterprises and reducing corruption. This is promising for Angola’s long-term economic future, as, for instance, the fund could be used to fuel much needed investment into the countries agricultural sector. Angola has the potential to become one of the leading agricultural exporters in Africa if enough investment is made, considering only 10% of its 58 million hectares of arable land is currently being exploited. Equally, as Angola makes strives towards economic diversification it will, in turn, become a more attractive place to invest, both due to the reduced risk from oil price fluctuations and the new projects that emerge from the diversification policy.
So How Should Law Firms Invest in Africa? – Best Friend Networks vs International Offices
There are 5 main ways law firms can invest internationally.
- Merge with a local firm;
- Acquire a local firm;
- Use an international hub and operate on a ‘fly in’ basis;
- Establish independent new offices; or
- Establish “mutually beneficial” alliances or “best friend networks”
In the infancy of the international African legal market the work was traditionally conducted from international hubs in Paris, London and Dubai. Clients then hired local lawyers to work on the transactions. However, as the markets matured the most popular trends became the establishment of independent offices or the establishment of best friend networks.
There is no one size fits all when it comes to how firms should invest, and each method has its own sets of pros and cons. Ultimately how a firm should invest will come down to three main factors. First, where they are investing? Considering the saturation of the market, if its already dominated by local or international firms, is it worth setting up a new office? This may depend on whether the firm has existing clients, which are seeking advice in the area, making it easier to penetrate a saturated market. The capital available to the firm – law firms are generally not capital intensive and need to seriously consider whether the cost of setting up a new office is commercially viable. Second, the firm’s international strategy – is the firm seeking to establish a consistent global brand or is the firm trying to remain flexible while delivering the best possible legal service to its clients?
Best Friend networks are essentially relationships between international law firms whereby they refer work which matches their expertise. This has the big advantage of flexibility, Law firms using these networks are free to refer their work to whoever they believe is most capable, which arguably allows them to offer clients the best local advice on an issue. However, the biggest downside to this is that there is no way the firm can guarantee a consistent culture and international standard across its ‘network’ and risks bring in local dead wood from other firms. This has led many firms to favour setting up their own offices to guarantee clients a consistent service, wherever their issue may arise.
Oliver is a member of TCLA’s writing team. He is a recent law graduate from the University of Nottingham.