Defying Perceptions – Exceeding Expectations

For decades, international investors shunned Africa, deterred by a variety of myths about working in this vast and complex market. The risks are still significant. But, with exposure and experience, investors have begun to see a new reality, argues Tim Scales.


It’s not precisely clear at what point the attitude of international investors to Africa changed, but it seems that the global financial crisis played a pivotal role.

Some even argue that Africa “had a good crisis”. With the markets that investors had come to regard as safe-bets plunged into turmoil, investors were forced to take stock of the balance of risk and reward across their portfolios, and Africa, though still significantly risky, suddenly looked like a much better prospect than of old.

The inward investment story was at first mostly about commodities and much sought-after natural resources. But in recent high growth years investment appetite has picked up in a very short space of time. There’s now an increasing focus on energy and other essential pieces of infrastructure – whether pipelines, ports, roads, railways or efficient ICT networks. There’s also huge excitement around urbanisation in key African economies and the emergence of an ever-strengthening consumer market, with all the investment opportunities that will bring.

Through our well-established presence within Africa and through our global network, we have been well placed to see these trends develop both from a regional and international perspective.


Take intra-regional trade within Africa, for example. Notoriously weak compared with other developing economies – thanks largely to chronic under-investment in essential transport infrastructure – there is now a real buzz around the potential to build this trade.

Increasingly that is supported at an institutional level with the strengthening of cross-market bodies like the 19-nation Common Market of Eastern and Southern Africa (Comesa) which is now operating its own shared competition commission. And it’s significant that law firms across the continent’s 54 countries are now clubbing together to help their clients seize the opportunities here, a trend we see through our network of relationship firms across the region.

It’s a similarly dynamic picture from a global perspective. That fundamental re-assessment of risk post-crisis and the growing focus by investors on African markets have created a kind of snowball effect, with interest coming from investors right around the world.

China was a pacemaker here, particularly in the hunt for valuable commodities, and that activity continues apace. Mostly it continues to invest via bilateral deals at state level rather than equity investments, although Chinese construction groups are increasingly dominant in multiple markets. But now there is also significant interest from other Asian markets, notably Japan, Korea and Singapore. U.S. and European investors are intensifying activity and we are carrying out significant work from our Perth and Sydney offices with Australian investors, notably in mining, and working on significant African transactions with Latin American clients, such as Vale and Odebrecht.

Leading international development banks and agencies – such as the International Finance Corporation, the U.S. EXIM bank, the African Development Bank, the EIB and other European institutions – represent a very global network of clients who are all mobilising capital to invest in Africa, which we see within the continent and through our offices in Paris, London, New York and Washington DC.

Likewise there’s growing interest from the Gulf in a variety of sectors, including energy, infrastructure, healthcare, and real estate and financial services, often led by powerful Middle Eastern Sovereign Wealth Funds. And, separately, leading PE Houses, including KKR, Carlyle and Helios , have set up dedicated Africa investment funds to build a portfolio of assets in the region.

So the investment picture has been transformed in a relatively short time.

In fact, at the moment there is probably more capital available to invest than assets to invest in, but we would expect this demand/supply gap to correct itself over time as economies develop.

Real risks and myths

There are still considerable risks in this market and wise investors need to be clear-sighted about them.

But it is clear that, as their exposure to Africa grows, investors are learning to distinguish between the real risks and the old myths that once acted as such a powerful deterrent.

Take the legal system, for instance. There has always been a perception that the legal framework for investment is under-developed and overly complex. That is true to an extent.

But it’s important to note that virtually all African countries have legal systems derived from familiar origins – whether that is common law, civil law (either Napoleonic or Portuguese) or some form of hybrid. They have all drawn on well-established systems that investors can recognise and that familiarity transfers to the commercial sphere as well.

Regulation continues to be an issue. It needs to be developed much further to encourage inward investment. But governments across Africa are certainly more aware of this issue these days. They are getting much better at appointing advisers who can help build a regulatory and contractual framework that will allow investment to prosper. Regulators in different countries and sectors are also talking to each other about the issues that need to be confronted, and, as we’ve noted, cross-border markets and institutions are developing to help apply common standards in crucial areas such as anti-trust.

A lot more needs to be done and development agencies like the World Bank and the African Development Bank are working hard to build capacity in this area. As a firm we’ve also been active in building capacity in key markets too, notably in Rwanda. And we recently brought a group of lawyers, bankers, developers and regulatory experts together for a week-long workshop to write a detailed, book-sized guide for governments, regulators and other stakeholders on the sort of contractual arrangements international investors look for when investing in power projects.

These are all small but important steps, and they will take time to bear fruit. But it is clear to us that, in many African countries, the environment is becoming increasingly investor-friendly.

Other important changes include an unprecedented increase in the number of

investment-treaty arbitrations in the last few years as investors have begun to take advantage of the range of protections afforded by investment treaties. Between 1965 and 2002 only 114 arbitration cases had been registered with ICSID. However, as of 31 December 2013 a total of 459 cases have been registered, demonstrating a clear shift in practice and understanding.


Africa is also proving itself much more resilient to risks that once weighed heavy on investors’ minds.

Constant instability was, for many, the distinguishing feature of African politics. That’s why investors watched Nigeria’s presidential elections this year with such bated breath. Would democracy be held sacrosanct? If beaten, would the incumbent president concede defeat and hand over power? When that happened there was almost a sense of elation. Investment, which understandably got put on hold in the run up to the election, has not only resumed but has been given an additional boost. People clearly feel emboldened by the political situation.

South Africa’s economy remains relatively rocky and, as an advanced economy, it does not have the potential to grow at the rates we are seeing in other sub-Saharan African countries. Yet it continues to be a hub for investors and interestingly is increasingly being used by banks and companies as a base to pursue investment opportunities further north across Africa, in countries as diverse as Namibia, Malawi, Zambia, Zimbabwe, Tanzania, Mozambique, Kenya and Uganda.

The awful ebola crisis proved another huge test. But its impact was successfully contained by those countries most affected and appears to be finally subsiding. Investment was certainly interrupted by the crisis, but again people have clearly taken a long-term view, even in the worst affected countries like Guinea.

An era of opportunity

The intense activity around energy infrastructure and project financing plays to a particular strength for Allen & Overy and we’ve led the way among international law firms in establishing a strong presence across the continent, achieving a first-mover advantage in opening our Casablanca and Johannesburg offices.

With our Morocco and South Africa hub offices, and the support of a network of best friend firms across the region built up over the last decade, we are well set to support investors wherever they choose to deploy capital across the continent.

Casablanca is ideally placed to help us serve clients in francophone Africa in markets as diverse as Senegal, the Ivory Coast, Algeria and Tunisia. But with a number of Moroccan institutions now aggressively pursuing pan-African investment strategies, we are supporting them on transactions as far south as South Africa and Angola.

South Africa remains for many investors a natural gateway to the wider region and our newly opened Johannesburg office is enabling us to provide close support for both South African and international investors looking to invest northwards across the continent.

So the current spike in activity in the energy and infrastructure space is very exciting. It’s an excitement that was palpable in President Barack Obama’s recent visit to Kenya and Ethiopia, where we heard encouraging progress on his own Power Africa programme, launched two years ago to connect more Africans to electricity supplies.

But huge challenges lie ahead. Demand for energy and infrastructure is so huge it can seem overwhelming. Historic under-investment in these sectors is clearly doing more than anything else to hold back further, much needed, economic development.

But when you look at the sources of capital now flowing into and across Africa, and the growth in interest from both institutions and companies, it’s clear to us that the reticence investors showed in the past is now dissipating fast.

And now that they are taking a realistic view of the hurdles they must overcome, we think there is every chance they will increasingly succeed in grasping the phenomenal opportunities on offer.

Tim Scales, a partner based in Paris and London, is chairman of Allen & Overy’s Africa Group.


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