GTR gathers together three top lawyers to discuss the difficulties of structuring trade deals in Sub-Saharan Africa and how much progress has been made in implementing legal reforms.
Divine Letsa, partner, head of commercial and property practice, Bentsi-Enchill, Letsa & Ankomah, Accra
Paul Bugingo, partner and director of Africa development, Denton Wilde Sapte, London
Christopher Czarnocki, partner, Gide Loyrette Nouel, Moscow
GTR: What is your firm’s Africa trade strategy and how has this changed over recent years?
Bugingo: Our firm’s Africa strategy is to grow our practice through close collaboration with our Africa associate offices and ‘best friend’ law firms elsewhere in Africa.
Czarnocki: Our strategy on the African continent (as elsewhere in the world) has fundamentally not changed over the years. Broadly, we have established offices and undertaken transactions in jurisdictions where either an established client of the firm has entered the market, ‘taking us’ with them, or where a market was sufficiently underdeveloped to facilitate entry by a ‘new’ law firm, allowing us to compete on an equal footing with competitor firms.
In the case of Africa, and especially Francophone Africa, having a history of doing deals and being present has, of course, assisted us in developing the African practice. But, we have not necessarily focused on French clients (and this is especially the case for Gide London, where we largely focus on non-French clients). The current client base is broad and includes a large proportion of non-French clients, particularly on the financing side, where the London office has played a key role in developing relationships with non-French lenders.
Letsa: To obtain knowledge of trade finance transactions while at the incubation stage and to find ways of providing legal assistance in structuring and eventual implementation of the transaction. Strategy has not changed.
GTR: How much real progress has been made in Africa regarding legal and regulatory reforms?
Czarnocki: Systems are improving and we have seen fair arbitrations conducted, some of which we have advised on.
Letsa: Real progress has been registered in the enactment of legislation for making business activity more ‘friendly’. The politicians call it providing an “enabling atmosphere”. These include new or amending legislation on exchange control, investment promotion, stock exchange, banking reform, company formation and administration, customs procedures, public procurements, and so on.
State constitutions have specifically provided guarantees against expropriation of foreign investments and dispute settlement using international arbitral agencies such as Icsid, Uncitral, ICC, and so on.
Judicial systems and procedures have been reviewed to reduce delays in prosecuting cases and to enhance enforcement of judgments.
In some jurisdictions, model commercial courts have been established to speed up the resolution of commercial disputes. Exchange control and banking legislation is intended to remove controls that affect foreign currency transactions and free transferability of proceeds of investment; and trade and investment promotion legislation have streamlined investment requirements and incentives available to the investor.
Bugingo: There has certainly been progress (we, as DWS, have been involved in such reform programmes). Governments have been committed and donor bodies (like the World Bank, DFID and PPIAF) have supported such efforts.
GTR: How different is Sub-Saharan Africa for structuring trade deals?
Czarnocki: It isn’t the documentation which makes doing deals in Africa different – the documents are typically no different substantively to those used in other developing (and maturing) countries.
In cross-border deals driven/arranged by international financial institutions, the lenders or investors are conscious of the same commercial issues as in other jurisdictions and typically want the same types and extent of protections as they would require when doing a deal elsewhere.
However, doing business in Africa is to some extent different in two respects in my experience. First, deals often take longer to come to fruition, both in the commercial planning and run-up before legal documentation is commenced and in the actual documentation process.
Progress through issues and documentation can be slower than in many other regions. Partly, this is driven by the fact that, as in other developing jurisdictions, documentation and negotiation often involves a degree of educating the other side in what we may otherwise consider ‘standard’ form or practice but which may be new to the African counterparty.
Second, in my experience, a higher proportion of deals than in other regions (for instance CEE or CIS) do not close, but fall by the wayside, often because a critical partner sponsoring the project has fallen away, because the commercial realities have shifted affecting the viability of a deal or project, or due to political unrest or a change in government which results in a project losing government support.
GTR: What still needs to be done and where?
Letsa: Different factors include: enforcement of laws and removal of petty administrative bottlenecks and red tape, and the reduction of turnaround time in all public sector regulatory agencies.
Also, the computerisation of administration systems, record-keeping and retrieval, licensing procedures, land titling and administration, and the effective judicial systems. Intra-Africa trade – the implementation of inter-regional trade protocols, customs procedures, single currency and monetary union agreements.
Bugingo: Legal and regulatory reform is most urgent where countries are opening up to investment from the private sector (especially overseas investors who will expect a regime that allows and protects private sector participation). What is certain is that Africa is increasingly an attractive investment destination.
The funding of legal and regulatory reform should not only be left to donor bodies (like the World Bank) but the private sector should be more involved in funding such reforms (after all they are the potential principle beneficiaries). We have and continue to play our part in pro bono efforts to reform legal regimes in Africa.
Czarnocki: In my view, and I am perhaps generalising here, we should pursue greater transparency and commercial and legal certainty, and total (and visible) adherence to ‘rule of law’.
I think too often there is a risk of a perception existing that deals in Africa seem to hinge on personal relationships. To a large extent this will naturally be ‘corrected’ when the depth and breadth of transactions increases, when the markets develop, and when the pool of business and business opportunities becomes bigger and more accessible to a broader circle.
Commercial and legal transparency and certainty needs to go hand in hand with these developments. The legal structures are largely already there (again, generalising) but they need to be perceived by the international business community to be there, to be transparent and to be certain, and not perceived to be susceptible to arbitrariness. Unfortunately, even if legal structures and processes are already in place, there is too often a perception by those outside of Africa that those structures and processes are either not there or are too weak – changing that perception will doubtless assist in generating new and further interest in Africa, and consequently result in further foreign investment.
GTR: How much litigation is coming out of Africa now regarding trade and project finance? Is it increasing and why?
Letsa: It is difficult to say how much litigation is coming out of Africa. A more thorough negotiation and preparation of agreements, implementation of internal dispute resolution mechanisms and strong commitment of the parties to complete the transaction, will lead to fewer unresolved breaches which could result in full blown litigation or arbitration.
Bugingo: Increased trade and investment inevitably leads to an increase in disputes. The key issue is whether effective systems are in place to deal with disputes when they arise – whether this is in the form of efficient commercial courts or appropriate arbritation and mediation procedures.
GTR: Where are the bad spots?
Bugingo: It is inappropriate to categorise places as ‘bad spots’. That tends to simplify Africa’s problems. Some countries that may be viewed as ‘difficult’ politically (eg, where corruption is viewed as high) may ironically be attractive investment destinations.
So, it depends whether you are asking politicians/governments or investors. With the exception of Somalia, most African states are at different stages of economic development.
Letsa: The unpaid sellers or financier debt recovery; use of the judicial systems for recovery and enforcement of judgments; land as security – disputed titles.
GTR: How is the present credit crunch affecting the legal industry as regards African trade?
Bugingo: From what we hear from our colleagues, contacts and clients in Africa, the credit crunch is having less of a negative impact on Africa trade. A lot of trade in Africa is not underpinned by borrowing – which tends to be very expensive if you are borrowing locally and few businesses will be able to source financing in the international capital markets – the exception being for major commodities, eg cocoa, minerals, horticulture, and so on.
Czarnocki: Like in other parts of the world, it is undoubtedly more difficult for companies to bring new funds on line; lenders and investors have become more cautious and retreated in their activities. Nonetheless, deals are being done – albeit with greater caution, lenders are still lending and investors are still investing in local businesses.
By way of example, we are acting for a private equity fund making a debt and equity investment in a greenfield project, a government and DFI-sponsored investment fund lending to an existing business, and a sponsor in a substantial oil and gas deal which is being financed by commercial banks.
I also think that over the last couple of years Africa has attracted a lot of (positive) exposure as an increasingly potentially attractive investment region – local resources and commodities, relatively cheap labour, a developing and increasingly confident business community and an increasingly stable legal and commercial environment have contributed to attracting investors and lenders in growing numbers to the more politically stable parts of Africa.
This is especially so in the case of investors and lenders who have been attracted by the, on average, higher margins and potential returns than in many other parts of the world (as margins and potential returns in other developing or maturing regions such as CEE and CIS have come down).
However, all said, there is little doubt that the credit crunch has had an impact – business has slowed, lenders and investors are more cautious and doubtless Africa, and African business, would be a bigger recipient of foreign investment were it not for the currently unstable financial markets.
Letsa: It’s too early to say.