As expected (see feature, issue 26), Africa withstood the global downturn comparatively well. “Perhaps one of the least noticed aspects of the global downturn has been the resilience of the Sub-Saharan African region,” says the IMF’s World Economic Outlook: Sub-Saharan Africa 2010.
Taken as a whole, Africa avoided recession: Africa’s GDP growth slowed from 6.1% in 2007 to 5.4% in 2008 and 2.2% in 2009, but is expected to rebound to around 5.5% in 2010.
Africa’s dislocation from global trade, often blamed for its underdevelopment, nevertheless protected it from the shocks of the financial crisis. “One advantage of being a backwater is that you don’t get hit by the problems affecting other countries,” admits David Mpanga, partner at Uganda’s AF Mpanga.
There was much variation around the continent, however. South Africa, the most developed economy in Africa and subsequently the most exposed to the financial crisis, experienced its first recession since the Apartheid era in the wake of the financial crisis.
The result was a slowdown, if not a total stop, in transactions for South African law firms. “M&A in South Africa declined in value by around 60% between 2008 and 2009,” says Kevin Cron of Deneys Reitz. “We were fortunate enough to have a couple of large existing deals to keep us busy, but new instructions slowed substantially.”
The worst affected economies were those exposed to the precipitate drop in the price of oil. In the second half of 2008 the price of a barrel of crude oil dropped from above $140 to below $40. The flurry of projects activity that had accompanied the high prices (see feature, Client Report 24) screeched to a halt.
“We’d spent the previous three or four years pushing to be appointed on a string of projects: deep sea ports, LNG facilities and so on,” recalls Lawrence Fubara Anga of Nigeria’s Aelex. “But just as we obtained a clutch of appointments, the oil price plummeted, and most of the projects were delayed or even cancelled.”
The oil crash was especially frustrating for Uganda, which was busily preparing to start production on the more than 700 million barrels’ worth of oil discovered in the mid-2000s in Lake Albert in the East of the country.
“When the oil price fell to $40 a barrel, we were afraid Ugandan oil might not be viable,” recalls David Mpanga of AF Mpanga. “But as the price recovered, projects started up again.” The threshold for profitable drilling in Uganda is believed to be around $50; oil has been at above $50 a barrel since early 2009, and now stands at around $70.
Probably the most jarring economic disruption, however, took place in Angola. The West African nation’s oil and rapid reconstruction after decades of civil war, helped it to a remarkable real growth rate of 21% in 2007. That dropped to 13.2% in 2008, and plummeted to -0.6% in 2009, according to the CIA World Factbook.
In addition to the oil slump, Angola was badly affected by the decline in the price of freshly-mined diamonds.“Most of Angola’s industry is dependent to some extent on the diamond price,” says Dr. Antonio Vicente Marques, a partner at Angola’s AVM Advogados.
Overall, though Africa’s economic woes were less than other regions’, the crisis was still a tough time for African law firms, and international firms operating in Angola. “2008-09 was the first year our Africa practice hasn’t expanded,” admits Rui Amendoeira of Portugal’s Miranda Correia Amendoeira & Associados.
Back to growth
But as Africa’s economy has quickly righted itself, so too are workflows for lawyers returning quickly to pre-crisis levels. “It’s remarkable how quickly a lot of the negative trends have gone into reverse,” says Karim Anjarwalla of Kenya’s Anjarwalla & Khanna. “Now there’s a high level of investment interest again.”
In oil exporting countries such as Uganda, Nigeria and Angola, the recovery of the oil price has meant a revival in exploration and refining projects work. “We went from staring at our laptops waiting for work, to working flat-out, in a few months,” says Dayo Okusami of Nigeria’s Templars. Templars recently advised London-listed African oil company Afren on a $450 million loan backed by its Nigerian oil reserves.
At the same time, across Africa, heavy government investment in infrastructure is helping fuel the recovery – and providing work for local firms. In South Africa, the flurry of construction in preparation for this summer’s World Cup is largely finished, but investment is continuing in other areas.
“The government has persisted with most of its pre-crisis plans for infrastructure investment, partly to mitigate the economic slowdown,” explains Deneys Reitz’s Kevin Cron. “There are projects in the pipeline building hospitals, prisons and railways, and an enormous amount of work upgrading and building roads.” Deneys Reitz recently advised Rand Merchant Bank on the arrangement of financing for one of the bids to build a ZAR1.3 billion new headquarters for South Africa’s Department of Rural Development and Land Reform.
The next area expected to generate a lot of work is energy. Following power shortages in recent years, the energy utility Eskom is investing billions of rand in the next decade to upgrade the country’s power infrastructure. It has received over $6 billion in loans from the African Development Bank and The World Bank for the projects.
“These are major, multi-year projects with the potential to generate a lot of legal work,” says Jonathan Lang of South Africa’s Bowman Gilfillan. The firm advised Eskom recently on the €530 million first portion of financing for its new power plant in Limpopo province.
In Kenya, too, infrastructure investment is high, aided by a $7 million loan from China announced in January. Private investment is also increasing. “We’re seeing a lot of interest from investment funds in infrastructure projects, particularly private equity funds,” says Karim Anjarwalla.
Private equity funds are expected to provide much of the funding for a planned 800 MW upgrade to the country’s electricity grid.
Increased attention
The rapid return to pre-crisis levels of opportunity is good news for African law firms. But it has also not escaped the notice of international firms, who have eagerly seized on the relative strength of activity in Africa as a solution to decreasing workloads in Europe and the US.
In the last year White & Case has transferred a number of London partners to its small Johannesburg office, Canada’s Fasken Martineau has raided White & Case to launch its own Johannesburg office, and the US’ Crowell & Moring has opened an affiliate office in Cairo.
“The next few years are going to see more and more infrastructure PPP work in East Africa,” says Philip Stopford of White & Case. “We see Johannesburg as a hub through which we can co-ordinate work throughout English-speaking Africa, and eventually in Lusophone Africa.”
Other international firms are deepening their African presence through alliances. South Africa’s Routledge Modise has added “Eversheds” to its name to reflect its deepening integration with the UK national firm, while rival DLA Piper has established exclusive relationships with firms in six African countries.
“In Europe and the US there is no shortage of lawyers chasing deals,” says Grant Henderson of DLA Piper. “Africa is one of the last places where there’s an opportunity to get out in front.”
Henderson was hired by DLA Piper in 2005 to build up its African network; he is based on ‘permanent secondment’ at its Zambian ally Chibesakunda & Company. DLA intends to continue expanding the network and, ultimately, “when the time is right, the aim is for the group firms to become fully integrated DLA Piper offices,” says Henderson.
Even independent European firms are getting in on the act. Several Iberian firms already have offices in Angola and Mozambique (see feature, issue 24). In recent years Morocco has become the focus of attention, with Garrigues and Cuatrecasas, as well as France’s Gide Loyrette Noeul and Jeantet Associes, opening offices.
Even the mid-size Portuguese firm Raposo Bernardo has associate offices in Angola, Mozambique, São Tomé, Cape Verde and Guinea- Bissau. “Many lawyers from Lusophone Africa study in Lisbon,” explains Joana Correia, co-head of M&A at Raposo Bernardo. “We hire them and train them in our Lisbon office, and then after two to five years they return to Africa. So we can offer consistent quality across Lusophone Africa.”
Scepticism on the ground
Some international firms, such as Norton Rose and Linklaters, are recognised by local firms for their longstanding practices in Africa. But African law firms express scepticism at the commitment to Africa of some of the more recent arrivals.
“95% of their talk about Africa is crap,” says one African partner. “Just because things are tanking in London, some firms have suddenly developed a deep abiding interest in Africa where previously there was nothing.”
Local African firms naturally enjoy the referral work that comes from the increased interest of international firms in the region. “Often in the last year we’ve found that three or four UK firms email us within a half-hour period, because they’re all going through a beauty parade and all need a Nigerian firm,” says Lawrence Fubara Anga of Aelex.
The less developed a country’s legal market, the more opportunity for leading firms to receive large amounts of business from international firms. “Our firm works with most of the larger UK firms, including Eversheds, DLA Piper and Clyde & Co,” says MH Kébé of Senegal’s Cabinet Géni-Sankalé-Kébé.
But some African firms say that working with international firms can be a minefield. “In our experience we sometimes find that we or another local law firm do all the work, but the international firm does most of the billing,” says Alan Shonubi of Uganda’s Shonubi, Musoke & Co.
As the recession bites, say practitioners, international firms are attempting to change the basis of their collaboration with local firms. “A few firms are so desperate for work that they’re doing more and more of the work from African deals themselves and leaving less to local counsel,” says one practitioner. “It’s completely against the clients’ interest: they’re paying more and getting less local expertise.”
African alliances
Similarly, despite the growth of DLA Piper’s network, most African firms say they have no interest in joining deeper, exclusive alliances with local firms. “I don’t think there’s any chance of local firms agreeing exclusive relationships in Nigeria,” says Dayo Okusami of Templars. “We talk to other firms and they say ‘not now, and not any time soon.’”
Instead, many African firms are developing their own networks. There are now a number of such networks, including Lex Africa, led by South Africa’s Werksmans, and the Africa Legal Network (ALN), led by Kenya’s Anjarwalla & Khanna.
At the same time, South African law firms such as Deneys Reitz and Webber Wentzl have established dedicated African divisions practising English law with a view to doing deals across Africa.
Lex Africa, founded by Werksmans in 1994, was the first alliance of independent African law firms. “We’ve found that clients like to use Johannesburg as a gateway to the rest of Africa,” says Chairman Des Williams. “If a client has a transaction or project in several African countries, we can arrange legal services all over Africa for them through the network.”
The signs are that, over time, such alliances are becoming a credible alternative for international clients’ African legal needs. Lex Africa now has members in 27 African countries, while the smaller ALN has members in ten jurisdictions. ALN has a full-time chairman, former Denton Wilde Sapte partner John Miles, and has acted for most of the top ten international law firms.
A bright future
For the time being, most African firms intend to avoid deepening alliances of any kind in favour of working together with each other, and international firms, on a deal-by-deal basis. But as international investment into Africa increases, local firms seeking to benefit may need to transition from working with, to competing with, international law firms.
This may mean increasing in size. “Many magic circle firms have ‘Africa desks’ that are no bigger than my firm,” says David Mpanga of Uganda’s AF Mpanga. “But they can do larger deals because the firm itself is so huge. We’re the people with the local expertise: if we can build up more capacity, we could compete favourably with them on even the biggest transactions.”
Of course, the whole market could change if more international firms opened their own offices. But despite tentative launches in North Africa, like that of Crowell & Moring, African firms don’t expect a serious assault by international firms for some years yet.
“I can’t see any Western law firms opening offices in Equatorial Africa any time soon,” says Alan Shonubi of Shonubi, Musoke & Co. “But five years from now? I wouldn’t rule it out.”