• Enterprise zone

    Advisory services that can help companies make their move into new markets have experienced the growing interest in investing on the continent.

    Enterprise zone

    ‘Right now Africa offers what is probably the most compelling investment climate in the world,’ says Anthony Thunstrom, chief operating officer for KPMG Global Africa Practice.

    Over the past decade, six of the 10 fastest-growing countries have been African, with a number of the continent’s countries expecting growth of between 6% and 8.5% this year. EY’s 2014 Africa Attractiveness Survey sums up the positives: ‘The most striking observation is how far Africa’s perceived attractiveness has improved. In less than five years, Africa has risen to become the second most attractive investment destination in the world, tied with Asia.

    ‘Some of the world’s largest and most-admired companies, emerging multinationals and regional growth companies are successfully executing growth strategies in Africa. This should instil confidence in the potential of Africa’s growing markets,’ it states.

    While this is a real drawcard, Thunstrom believes the reasons for investing in Africa go beyond growth figures.

    ‘The real opportunity is driven by the relative lack of competition in most of these economies. There is definitely still a degree of first-mover advantage to be had and there are numerous examples of newly established businesses enjoying annual average growth rates in excess of 35%,’ he says.

    Mehmood Khan, field services director of SAP Africa, says there is a real desire in Africa to leapfrog traditional maturity curves to compete on a regional and global level.

    ‘This has resulted in a spike in demand for services across the board, from defining business strategies to implementing infrastructure and finally to utilise technology to efficiently support this infrastructure.

    ‘Skills development is a key topic to ensure a consistent business environment in African countries. We are ramping up our education offerings across the continent to ensure that we create a sustainable skills market for our customers who want to expand,’ he says.

    Companies need to have local knowledge of the legal and regulatory environment

    PwC senior partner for Africa, Suresh Kana, says the global megatrends – demographic shifts, changes in global economic power, accelerating urbanisation, resource scarcity and climate change, and technological breakthroughs – have created great opportunities for investors in Africa.

    This was echoed by Thiru Pillay, managing director of Deloitte Consulting for Africa. ‘A large consumer base, mostly untapped; a growing middle class; high penetration of mobile communications; a huge amount of arable land; a serious infrastructure backlog and, of course, huge amounts of resources.

    ‘You put all that together and it’s an opportunity not available anywhere else in the world. For many companies, it is the next frontier of growth. In turn, chasing that big deal, investors are seeking financial and legal advice to navigate their way through often unfamiliar territory. For, while the opportunities abound, so do the complexities,’ says Pillay.

    The market can be fragmented and, with 54 countries, regulatory environments can differ. ‘The single biggest challenge investors and businesses face in Africa is lack of accurate, up to date local knowledge,’ says Thunstrom. ‘The reality is that there are huge differences in terms of regulatory environments, tax/fiscal regimes, labour law, investment incentives and local content regulations between countries in Africa.’

    Another obstacle reported by companies is the significant difference between sometimes out-of-date legislation and actual business practice. Respected consulting and advisory firms, which have seen their roles expand from the more traditional auditing and tax services, agree that it is key to offer professional advice from local experts, who have an understanding of the market.

    Consultants also need to advise investors to make an effort to tap into the language and business culture of the countries they’re investing in. ‘Companies often do not take sufficient time or make enough effort to get a real understanding of these issues before moving forward,’ says Thunstrom.

    Global legal firms are also very much in demand as consultants, particularly with some of the major infrastructure transactions and projects on the continent.

    ‘Our clients are demanding specialist legal advice made relevant to the sectors in which they operate, and tailored to their African expansion plans,’ says David Lancaster, senior partner of Webber Wentzel.

    ‘As a result, we recently reorganised our internal structure, gathering our legal expertise into five key areas (banking, projects and regulatory law; commercial law; corporate law; dispute resolution and tax law) and overlaying this with a sector-based approach to the market.

    ‘We feel that this structure best matches our clients’ needs for legal expertise. However, as foreign direct investment into Africa, particularly sub-Saharan Africa, continues to increase, we have felt the need to strengthen our offering to support our clients on multi-jurisdictional projects and transactions in the region,’ he says.

    ‘Some countries have not dealt with complex collateral packages for a multiplicity of lenders before, and there is often no precedent’

    Global company, DLA Piper Africa, has 14 firms on the continent, from Algeria, Burundi and Egypt to South Africa, Tanzania and Mauritius, advising leading international and African companies across all aspects of business law. Chris Ewing, chairman of DLA Piper Africa, says: ‘Africa’s key development sectors, which are demanding specialist legal skills, include mining, banking and financial services, telecommunications, insurance and hospitality and leisure.’

    The continent’s burgeoning renewable energy sector is getting some play too, with investor and advisory interest in tidal power generation, offshore wind farms as well as solar energy.

    With 10% of the world’s oil supply now found in on the continent, consulting in oil and gas is still very much a key interest. Although historically most investor interest has come from Europe and the US, increasingly investment is flowing from China, India and the Middle East.

    As new projects come on board and others expand, DLA Piper Africa is finding there’s more demand for legal expertise in intellectual property, competition, regulation and compliance, employment and dispute resolution.

    Ewing says dispute resolution and international arbitration are particularly sought after, as African countries begin to attract substantial investment and international interest.

    ‘For this reason, cross-border disputes are becoming increasingly common and involve different cultures, legal systems and business concepts. More often than not, they are time-consuming and costly. This is part of the reason many organisations are turning to international arbitration procedures as a way of resolving disputes.’

    Deon Wilken, director and head of finance and banking practice at DLA Piper partner firm, Cliffe Dekker Hofmeyr, says his legal firm is frequently asked to advise on investment in Nigeria, Kenya, Ghana and, to some extent, Mozambique.

    He says these are examples of countries with a high degree of legal certainty, offering security for lenders, and tend to do well in terms of cross-border investment.

    South African lenders mostly focus on Southern and East Africa where the legal systems may be similar to those found in South Africa. Further north in Africa, parties still tend to use mostly English law, while the francophone legal system is followed in the west.

    As investment increases, Wilken says experts are asked to handle more legal challenges, especially involving cross-border deals. These include the scrutiny of tenders and permitting processes as well as the structuring of collateral packages for secured deals.

    ‘Some countries have not dealt with complex collateral packages for a multiplicity of lenders before and there is often no precedent,’ says Wilken. Advisory firms usually partner with their offices throughout Africa when doing cross-border deals.

    Ewing says a big difficulty faced by offshore-based multinationals when doing finance deals in Africa is that they have not built relationships with law firms in Africa.

    He says much of the company’s time is spent building these relationships to help multinationals across Africa. It is also vital for consultants to get the buy-in of the people in the countries in which they work.

    Tax remains a major issue across the board. ‘Almost every cross-border transaction or investment will trigger a number of new tax implications, such as transfer pricing and duties,’ says Thunstrom.

    Thunstrom says KPMG provides clients with a comprehensive range of services on market entry, which includes filtering regional, country and major-city investment opportunities to pull together a comprehensive list of viable investment destinations. It also prioritises these.

    ‘The prioritisation is increasingly being seen as important, as in many cases the scale of the overall investment opportunities in Africa as a whole are so large that companies cannot afford to spread themselves too thin, and need to focus on the most attractive options.’

    Once whittling down the priorities, a shortlist of potential local partners can be identified and targets evaluated. So where do some main consulting firms see the opportunities in Africa?

    ‘While mining has to be recognised as being among Africa’s most important economic sectors the mistake is thinking that the resources sector is the only one to watch. Telecommunications, retail, oil and gas and financial services are showing unprecedented growth on the continent, and the business hubs of Lagos and Nairobi will become increasingly important as investment platforms after Johannesburg,’ says Lancaster.

    All agree that Nigeria, which has recently surpassed South Africa as the continent’s biggest economy, is an obvious choice.

    ‘West Africa, especially Nigeria and Ghana, offer some unbelievable opportunities. Nigeria has by far the single-largest consumer goods market potential in Africa based on its population and growing GDP,’ says Thunstrom.

    Ethiopia, Mozambique, Zambia – and tentatively Zimbabwe – among others are on EY’s radar, while PwC has added Angola, Kenya, Tanzania and South Africa to the list.

    Pillay says there are both long-term and short-term opportunities, depending on the investing company’s strategy, but companies need to have local knowledge of the legal and regulatory environment.

    No matter the strategy and investment focus it is imperative that companies ‘do a proper assessment of the fundamentals and base their decisions on good facts, not assumptions’, he says.

    By Kim Cloete
    Image: Gallo/GettyImages