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The time is now
By Joe Whitfield, published 27 October 2005 in Legal Week
Africa is often perceived as a ‘risky’ place to do business – a perception that often seems to be borne out by media reports. But how accurate is this stereotype from a legal risk perspective?
Undoubtedly, investment in Africa carries a greater degree of legal risk than in developed markets – and this impacts on the level of investment activity. United Nations (UN) figures show Africa lags well behind the rest of the world in terms of foreign direct investment (FDI).
By contrast, Asia received the largest inflow of FDI and achieved the highest percentage increase in FDI in the developing world. While the reasons for this imbalance are complex, concerns over the applicability of the rule of law, transparency, regulation and accountability all affect prospective investors’ appetite to do business in Africa.
Legal risk is naturally inherent in emerging markets generally, not just in Africa. Investment and legal processes are often unclear, enforcement can be unpredictable and red tape onerous. Conversely, the returns can also be higher. The Ghana Stock Exchange, for instance, has been one of the world’s highest performing stock markets, offering returns of up to 144% in recent years.
Africa is arguably no riskier than many other emerging markets and can be just as rewarding. In fact, there are many examples of private enterprise and foreign investment flourishing all over Africa, prompting the recent Commission for Africa to conclude that "Africa is far from the hopeless continent so often portrayed in the media".
Recent deals include Barclays’ acquisition of a majority stake in South African bank Absa and the sale of telecoms business Celtel to Kuwaiti company MTC, each for upwards of £2bn. Meanwhile, major corporates such as Unilever and Diageo and banks including Standard Chartered and Citibank have long been present in Africa, while a number of leading South African brands, including Standard Bank and mobile phone provider MTN, have made significant inroads into Africa.
Clearly, Africa can work for investors – as long as the risks are carefully managed.
Pre-investment
Undertaking comprehensive due diligence can be a challenge. Publicly available information is often extremely limited in these jurisdictions and may be unreliable. Public registers, such as companies or land title registers, are often out of date or materially inaccurate. Assets may be subject to unrecorded third-party rights – securities, for example, or even customary prospecting or grazing rights over land. It can therefore be difficult to ascertain exactly what an investor is buying and whether it is unencumbered. Given the size of these markets, maintaining confidentiality can also be an issue.
Implementation
Implementation can be protracted and uncertain. It may be difficult to establish the applicable regulatory or legal process, either because the process has not been fully established or because there is insufficient activity in the market for the process to have been applied or tested.
It may also be difficult to achieve the level of protection usually expected by an investor in legal documentation, such as warranties or indemnities, owing to local market practice. In some cases, transparency can also be a concern – the rules in a bidding process may change without notice or a title to a key asset may be difficult to establish.
Post-investment
Legal risk can continue after the investment has been concluded. Registration of security or title is often complicated and time-consuming. During disputes, enforcement of contractual rights may be unreliable as the judicial process can be lengthy and expensive and the outcome unpredictable.
Ongoing maintenance and exits
Maintaining and exiting an investment can be demanding. The amount of red tape involved in obtaining necessary business permits or licences can be extremely onerous. Labour laws can be restrictive and liquidation processes complicated.
While by no means applicable to every investment or jurisdiction, these types of legal risk will be familiar to most investors in Africa. Although risk can never be eliminated, it can be materially mitigated if investors adhere to some fairly simple guidelines:
- Be aware of the market and pick your jurisdiction carefully. The business environment and level of legal risk may differ significantly. In countries such as South Africa and Botswana, it may not be significantly greater than in some developed countries.
- Do not compromise investment standards and avoid taking short cuts in both due diligence and legal processes, particularly in light of increasingly stringent international laws and standards governing foreign investment practices.
- Be prepared to innovate. Solutions from a different market may not be effective, so develop an African solution to an African issue. Familiar legal investment documents may need adapting to suit the market.
- Enlist support from advisers familiar with local business and the legal practices of your target market as well as your own investment standards. Be aware of market-specific solutions, such as if a bilateral investment treaty exists between a target jurisdiction and your home jurisdiction which could give you beneficial enforcement rights in the event of a dispute.
- Be prepared to walk away from a deal. If it does not feel right, do not proceed.
It is difficult to generalise about the long-term investment environment in Africa. Yet with democratic reform sweeping the continent, many suggest that Africa is moving in the right direction.
It is increasingly acknowledged that prosperity will not be achieved through aid alone. Although focused aid programmes play a critical role, another key driver to economic development is investment and trade. This in turn, will only be achieved if progress is made with democratic and institutional reform. Western governments must also deliver reform of the world trade rules. It is surely no coincidence those countries that have sought to apply the democratic process and rule of law most effectively – such as Botswana, Ghana and South Africa – also happen to be the most successful economically.
With good governance a precondition to development, African states have begun to implement a number initiatives such as the New Partnership for African Development. Progress has varied between countries, with reform often proving difficult, but those nations that have been most committed in seeking to entrench democratic institutions, the rule of law and good governance are reaping the benefits of foreign investment.
Many countries have some way to go. The relevant legal and regulatory institutions simply may not exist or their independence may be compromised. Resources may be inadequate. Yet the trend has begun and will be difficult to resist. Investors should therefore expect the risks of doing business in Africa to reduce considerably over time.
Africa is too important for the international community to ignore. With abundant natural resources and large untapped markets there are extraordinary opportunities in many sectors, including telecoms, construction and financial services. Its market potential is vast. Yet Africa is the only continent to have become poorer in the past 25 years. Investors and governments should therefore recognise that business opportunities in Africa are real and keep the risks in perspective. Indeed, many African states have already committed themselves to democratic and institutional reform, creating more business-friendly legal and regulatory environments.
Forecasting future FDI trends, the UN reports that "the prospects are positive for Africa". Now indeed may be the time to look at those African opportunities with fresh eyes.
The time is now - in PDF format 
Africa Legal Team
The Africa Legal team includes English solicitors, South African attorneys, and French, Hong Kong and Zimbabwean qualified lawyers. All team members have extensive pan-African deal experience and share a special interest and expertise in Africa. Click on the names or faces of the team members to see their résumés.
