East Africa: frontier spirit

Africa is the final frontier market. With its abundant natural resources and young population, there is huge potential for business – if only it could be tapped.

The flip side is well documented: entrenched corruption, political unrest, Ebola, disputed land rights, rural poverty and a lack of infrastructure. In his 2014 address to the Young African Leaders Initiative summit, Barack Obama pointed out: ‘You have a strong infrastructure to send flowers from Kenya to Paris. But it’s very hard to send tea from Kenya down to Tanzania.’

East Africa’s messy colonial legacy is reflected in different legal systems. Former Belgian colonies Burundi and Rwanda use Francophone civil law, while the British influence in Kenya, Uganda and Tanzania means that those countries retain the common law system. Mozambique is the gateway to Lusophone Africa.

The legal market is equally varied. UK, Portuguese, US, South African and domestic firms all feature in the region’s leading deals. ‘There is increasing interest in the region, particularly in Kenya, Uganda and Tanzania,’ Martin Kavanagh, partner and co-head of Herbert Smith Freehills’ Africa group, says. ‘However, the field of law firms is still small and is focused on those interested mostly in energy and infrastructure projects. Each of these countries has strong growth potential in these areas and so they are a key focus. Ethiopia and Rwanda are second-tier.’

Kenya has the largest economy in the East African Community (EAC); the International Monetary Fund predicts that it will grow by 6.5% this year. Dampening the outlook somewhat is the security situation: in 2014, there was a significant dip in GDP after the attack on Nairobi’s Westgate shopping mall by Al-Shabaab led to a fall in tourism. This year the militant group struck again, at Garissa University.

The country has a young, well-educated population with a growing middle class, and an increasingly significant IT sector, as well as developed markets in commodities, fast-moving consumer goods, property and private equity investments. fDi Magazine has put Kenya seventh in the top 10 African countries of the future.

‘Kenya has a very ambitious government,’ says David Church, international development partner at DLA Piper UK. DLA is one of the few UK firms to have a presence in Kenya, through DLA Piper Africa Group member firm Iseme, Kamau & Maema Advocates (IKM) in Nairobi. ‘The East African Community seems to be working well and there is a strong trend for international businesses to set up in Nairobi, the east African hub for development across the region,’ Church adds.

The region’s largest businesses are headquartered in Nairobi: including Kenya Airways and Nation Media Group, as well as multinationals Google, Coca-Cola and Toyota, and the Nairobi Securities Exchange, Africa’s fourth-largest exchange in terms of trading volumes.

DLA Piper’s contacts on the ground have brought in significant work: disclosable projects include acting for development finance institution-backed lenders on the Akiira two-phase 140MW geothermal power project, utilising steam resources in the Kenyan Rift Valley. This project is in its early construction and exploration phase. ‘We think the quality of the lawyers on the ground is excellent and find that it works well to marry this very good national firm with our global experience,’ Church says.

However, for a business nexus there are surprisingly few UK or international law firms with a presence in Nairobi. Kavanagh explains: ‘Firms are greatly affected by practice restrictions: they cannot open in their own name in Kenya, which would be the main market, and there are restrictions elsewhere too. Law firms need to create a model which works within local bar rules, and even then be aware of sensitivities within the local bar. This usually requires the partners of the office to be locally qualified, which can be a challenge.’

Neighbouring Tanzania, by contrast, is home to several large international players. Clyde & Co has had an association with local firm Ako Law for over 15 years; Norton Rose Fulbright opened an office in Dar es Salaam in 2014 and is growing its practice; while DLA Piper has an association with IMMMA Advocates. ‘I see very few “cons’’,’ says Peter Kasanda, the partner managing Clyde & Co’s Dar es Salaam office. ‘The economy is growing at 7% each year. The market is not yet over-lawyered. There are, of course, the usual challenges of working in an emerging market, but this is normal.’

It is not entirely straightforward. Kasanda observes: ‘There are certainly restrictions on practice. However, English-qualified lawyers can still take the bar exam in order to become Tanzania-qualified. We are told that this window may close in the next few years.’

Type of work

East Africa has a very small market for M&A, even in the largest economies of Kenya and Tanzania. However, this year there has been an upturn. ‘In the first half of 2015 there was around $500m of M&A, with value up considerably year on year. Most deals were in financial services, manufacturing and real estate rather than oil, gas and mining which dominate a number of other African economies,’ says Gary Senior, chair of Baker & McKenzie in Europe, Middle East and Africa.

There have been instructions related to liquefied natural gas offshore in Tanzania and Mozambique, and port and infrastructure schemes in Kenya, Kavanagh says: ‘The main transactions are power deals in Kenya and Uganda and the main firms advising are Herbert Smith Freehills, Ashurst and Allen & Overy.’

Private equity also featured strongly, with investors from Scandinavia, the UK, Middle East and China. According to Mergermarket, the largest Kenyan deal of 2014 was the acquisition of a 30% stake in Ramco Plexus, an IT and office supplies conglomerate, by Amethis France. DLA Piper advised Ramco. In Tanzania, the most significant deal in the past two years was Millicom International Cellular’s acquisition of an 85% stake in Zanzibar Telecom for $1 and total debt obligations of $74m. Allen & Overy and local firm ATZ Law Chambers advised Millicom.

‘Infrastructure is still a focus,’ Senior notes. ‘Three of the five East African Community members are landlocked countries, making transport infrastructure particularly important.’ Mozambique – although not in the EAC – is the busiest market, followed by Kenya and, at some distance behind, Tanzania.

Anadarko’s LNG liquefaction terminal in Mozambique is the most significant ongoing project in east Africa, with international firm King & Spalding acting for the company. Newly announced projects include the Lamu coal-fired power plant in Kenya, a $2bn project at preferred bidder stage.

There are also the Mozambique floating LNG platform (at mandate-won stage), the Dar es Salaam-Musongati Rail PPP, the only major transport project over $5bn since 2014, and various port projects for Dar es Salaam. Another project well under way is the $10bn construction of Bagamoyo Port in Tanzania, which will be the largest in Africa with capacity to handle 20 million cargo containers a year. DLA Piper’s alliance partner IMMMA Advocates is advising the government of Tanzania on the deal.

Many projects have significant Chinese involvement. According to the Chinese Ministry of Commerce, China’s direct investment in Africa (excluding finance) increased 71.6% to $2.54bn in the first 10 months of 2013. ‘It remains to be seen what the impact of the downturn in global commodities will be,’ Church cautions. ‘The downturn in China will have some impact, as will the drop in oil prices, but there is not much indication so far that it is causing any difficulties.’

Integration

Obama has talked about the need to promote intra-African trade, and ‘find ways to integrate Africa’. The EAC – which comprises Kenya, Tanzania, Uganda, Burundi and Rwanda – is the warm-up act for the East African Federation, a political union of five sovereign states. Since 2010 there has been a common market allowing free movement and goods across the five countries, and there are plans for a single currency between states by 2024. The emphasis on integration had led to signs of convergence in the countries’ disparate legal systems.

‘The Law Society has a long history of working in east Africa independently and with government or local law societies, to promote English law and the services of UK-based law firms,’ Stephen Denyer, head of City and international at the Society, says.

‘The evolution of the east African economic union has prompted a shift away from the use of civil law and towards common law in traditionally Francophone countries in the region. So, for example, Rwanda made this move five to six years ago, also moving from French to the English language to allow for better integration with other east African countries and to access the common law skills of English lawyers and firms.’

At present there is no law firm covering the entire EAC region. South Africa firms ENSAfrica and Bowman Gilfillan both have substantial pan-African offerings, with offices in six African countries, while the Africa Legal Network, an alliance of leading independent African firms spearheaded by Kenya’s Anjarwalla & Khanna, covers 12 countries: Botswana, Burundi, Ethiopia, Kenya, Malawi, Mauritius, Nigeria, Tanzania, Uganda, Rwanda, Sudan and Zambia.

Looking to the future, will western firms create a footprint or just drop in for deals? ‘There is a big difference between targeting more international work involving a country or a region and wanting to open offices on the ground, or to practise local law,’ Senior says. ‘We have no current plans to open an office in the region.’

Kavanagh predicts continued interest from international firms, ‘but until there is regulatory change, little direct investment in terms of offices. Smaller players may open associated offices but real “on the ground” presence will wait until the regulations change’. This picture appears unlikely to change significantly until there is further economic integration in the region.

Possible EAC members

In July 2011, South Sudan seceded from the Republic of Sudan to create an independent state. This followed a brutal civil war and the conflict continues, in sporadic fashion. South Sudan is not just politically separated from its northern neighbour, but it also has a Christian majority, sharing more in common with many east African nations than those of north Africa.

South Sudan applied to become a member of EAC after becoming independent but its application was rejected. If it were accepted into the EAC at a future date, this would signify an important shift in the community’s focus towards its south-east neighbours.

While South Sudan retained the lion’s share of oil reserves, because it is a landlocked country the only viable route to take oil to the world market is through the Republic of Sudan. As the two countries are mired in an interminable conflict, this is problematic. In 2013, international law firm Skadden, Arps, Slate, Meagher & Flom assisted South Sudan in the recovery of oil assets misappropriated by the Republic of Sudan.

For this work, Skadden won the African Legal Awards Dispute Resolution Team of the Year award. London-based disputes partner David Herlihy comments: ‘It was satisfying to recover significant oil proceeds for a client in acute need of those funds, but even more so to see Sudan and South Sudan resolve their differences peacefully through the rule of law and negotiation.’

The South Sudan government’s long-term intention may be to bypass the northern route altogether, and build a pipeline to take oil out to the Indian Ocean, via Kenya; the Lamu Port Southern Sudan-Ethiopia Transport Corridor. This would be a significant step towards integrating South Sudan with the east African business community, but would be a bitter blow to the Republic of Sudan. The building of the pipeline is contentious and brings huge political risk. The project also includes a road network which would link Kenya to South Sudan, Ethiopia and Uganda. If the project comes to fruition, then these countries will be physically linked with east Africa, even if not in the EAC, bringing their economies closer together.

Although it remains one of the world’s poorest countries, Ethiopia has experienced vigorous economic growth, averaging 10.8% per year for the past 10 years, according to the World Bank, compared with the regional average of 5.3%. The IMF ranks Ethiopia as among the five fastest-growing economies in the world. An infrastructure boom has enabled the building of many schools and health centres, widened access to drinking water and seen a net reduction in the percentage of people in poverty. There is a burgeoning middle-class too.

China is a key infrastructure investment partner in Ethiopia, helping to build new roads, dams and railways as the government attempts to add industrial impetus to an economy reliant on agriculture, which currently accounts for more than 40% of GDP. Coffee is the country’s largest export.

Chinese-backed projects include a $475m metro in Addis Ababa, which will cover a distance of 32km, carried out by China Railway Engineering Corporation and financed mostly through a loan from the Export-Import Bank of China; contracts for road construction projects worth $6.5bn, which were awarded by the Ethiopian Road Transport Authority to three Chinese companies; and a $300m infrastructure project to expand the capacity of Bole airport, due to complete in 2018, backed by Beijing-based China Communication Construction Company.

‘Ethiopia is positioned in close proximity to two regions, Africa and the Middle East, so it has the potential to achieve the same “mega-hub” status as the airport in Dubai,’ says a partner at an international law firm. According to figures from the International Air Transport Association, Ethiopian Airlines is the largest airline in Africa and one of the few profitable airlines in the sub-Saharan region.

Clifford Chance acted on the biggest deal in Ethiopia in 2014, one of the largest in the east Africa region. The firm, which operates in Africa from its office in Casablanca, Morocco, advised Kohlberg Kravis Roberts & Co Partners, the US private equity firm, on its first foray into Africa: acquiring a stake in Afriflora, the Ethiopian and Netherlands-based rose grower, for an estimated value of $200m. Afriflora has the largest rose-growing facility in the world based in Ziway, Ethiopia.

James Kamau, managing partner at IKM Advocates in Nairobi, comments: ‘Ethiopia has the second-largest population on the African continent and therefore represents a huge market for any business. Until recently, the economy has largely been closed to foreign investment, but we are now witnessing increased FDI. This will lead to greater specialisation by Ethiopian lawyers as they position themselves for increased legal work and greater participation by regional and international law firms.’

On the downside, the Ethiopian government has repeatedly been criticised for its authoritarian stance. Before the election this year, the opposition party held one seat in government. After the election, on 24 May, it held none. Meles Zenawi’s Ethiopian People’s Revolutionary Democratic Front, which has been in power since 1991, won 100% of the parliamentary seats. Human Rights Watch has highlighted major concerns, including the silencing of dissent among opposition supporters and the media by using arbitrary arrests and excessive force.

The trend towards ‘one-party democracy’ and away from a multi-party system can also be seen in Uganda, where president Yoweri Museveni of the National Resistance Movement has remained incumbent. Meanwhile, the recent elections saw outbreaks of violence, allegations of repression, media restrictions and limited access for independent observers.

East Africa’s role in the global economy faces some serious challenges, not least the lack of investment capital from within and abroad. When it is as easy to send tea from Kenya down to Tanzania as it is to send flowers from Kenya to Paris, then that potential could be unlocked, and a new phase in the history of the region could be written.

Katharine Freeland is a freelance journalist