07 October 2013 at 11:09 BST

Doing business in Africa

Africa is finally the land of opportunity for businesses. James Merklinger, ACC General Counsel, assesses growth and risk and what it all means for in-house lawyers.

Africa: The land of opportunity Galyna Andrusko

Doing business in Africa presents endless opportunities. From new discoveries in the oil and gas industries, to growth in banking, mobile technology and tourism, countless reports show that Africa is on a growth trajectory.
According to the Economist, Africa is now the fastest growing continent in economic terms. In addition, a 2012 Goldman Sachs report, Africa’s Turn, highlights the opportunities, particularly for consumer businesses. The continent is also experiencing a growing middle class — estimated to exceed 100 million people by 2030.

The demand for natural resources

Africa is developing new commercial models but underpinning the many rapidly-developing economies is demand for natural resources. Africa now accounts for 11 percent of the world’s fuel and mining exports, according to Goldman Sachs. Nigeria, Angola and Gabon lead Africa in oil production; Zambia and Morocco are major copper producers; Botswana, Zimbabwe and South Africa dominate the nickel trade; while Algeria is a key strategic gas supplier to Europe, via the Medgaz pipeline to Spain. Tanzania and Mozambique have dramatic potential as major liquefied natural gas (LNG) producers.

Outside investment

With natural resource availability comes outside interest and investment. Multinational companies, especially those headquartered in the United States, United Kingdom and France will take a closer look at Africa, considering whether or not to establish or deepen their footholds.
African consumer spending is projected to rise to US$1.4trn by 2020; by 2030, there may be 18 African cities with populations greater than 10m; and by 2040, Africa’s working age population is expected to rise from around 500m to 1.1bn.

The risk factor

Cold analytics nonetheless mask the disparate nature of the continent. Africa’s potential for opportunity is great, but in many regions, geography and a lack of adequate infrastructure limit development rates.
And that’s not all. While Africa offers vast opportunity for investors and corporations, doing business in Africa also presents significant risk for general counsel and the companies they represent to assess. From crisis management in dire hostage situations that serve as a reminder of the region’s unpredictability, to keeping tabs on the regulatory nuances of 54 sovereign states, to remaining abreast of anti-corruption laws in both African nations and their home countries, in-house lawyers across the continent must keenly weigh risks and benefits for their companies to do business there.

Security issues

For example, this week’s Nairobi, Kenya mall siege that killed dozens was a reminder that for the increasing number of businesses expanding into Africa, risks much graver than economic considerations are paramount. Businesses must weigh their desire to be players in the continent’s rapid development with the security risks and preparations necessary to safeguard operations and employees.

The Westgate Mall attack was the deadliest in Kenya since the bombing of the U.S. Embassy in 1998. The perpetrators selected a mall frequented by Kenya’s expanding middle class and the wealthy. Analysts worry that because the attack “exactly fit[s] the new al Qaeda playbook,” coupled with the fact that a hostage situation followed the assault, the attack could be a sign of more to come.

In addition, a legacy of internecine civil wars has led to shattered or simply non-existent road, rail or air infrastructure across much of Africa. Things are improving, most notably in nations leveraging natural resource wealth, but such investments are large and long-term, and still out of reach of many countries.

South Africa aside, Africa also dramatically differs from the BRICS economies that have attracted so much emerging markets investment, because it is not comprised of central economic, planning or regulatory powers but instead 54 sovereign states and nine territories.

Collaboration between countries

This is changing, however, as shared language, culture and geography are prompting the creation of Regional Economic Communities (RECs), which are themselves driving greater economic, legal and regulatory integration. Countries may have overlapping memberships, and some RECs may be more effective than others, but some are also harmonising as a result of common colonial legacies — with English, French or Portuguese as the default business languages and with administrative and legal systems modeled on their former rulers.

Governments are also embracing realpolitik, as they know that international investors seek legal certainty as much as political and economic stability. Angola and Mozambique are basing their new projects, finance and tax systems on Portuguese and Brazilian models; much of East and West African legislation is derived from the English common law system; and the French civil code is predominant in the Maghreb and Central African countries. Last year’s accession of the Democratic Republic of the Congo to OHADA (L'Organisation pour l'Harmonisation en Afrique du Droit des Affaires) brought the number of African states that now share a common commercial legal framework to 17.

Choosing markets

While international companies may wish to capitalize on the evident economic changes across Africa, business leaders need to choose their markets wisely and understand that socio-political liabilities are often more grave than economic ones. Countries across Africa are developing at different rates and even if financial risks are diminished, physical risks can remain high.

Despite the unique challenges of doing business in Africa, corporate survival and success will come down to the ability of in-house lawyers to implement best practices, and identify, manage and control risks.

James Merklinger is the vice president and general counsel of the Association of Corporate Counsel. In this position, he represents the organization on all legal issues and advises the association on meeting the needs of the in-house counsel profession around the world. For the latest developments on ACC’s “Investing in Africa: Current Trends” panel, including the next sessions on Oct. 10 in Paris and Dec. 3 in London, visit www.acc.com/africa.

 
   
 
 
 

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