North Africa round table – Through the gate

With North Africa becoming a regional hub for international clients doing business on the continent, we teamed up with Bennani & Associés to debate the practicalities of servicing clients in Algeria and Morocco.

For the avoidance of doubt, Africa is not a single market for international firms to crack. Not only is it a continent comprising 54 distinct legal jurisdictions, but there are also numerous entry points for global legal service providers to service their clients.

North Africa has become an important gateway. Casablanca has established an early lead as one of the primary entry points into Africa, whereas for many years Africa, as far as international firms were concerned, began and ended with Johannesburg. But while Morocco and neighbouring Algeria look to achieve a position of genuine global influence, Paris, London and also Dubai remain the places where many African transactions are executed.

As such, many UK and US-based firms doing business in North Africa need to work with local firms that have an understanding of the nuances of the domestic markets. To mark our North Africa Insight report in association with Bennani & Associés, published this summer, we gathered together partners responsible for the Africa practices at a range of Global 100 and Legal Business 100 firms to share their experiences in doing business in Morocco and Algeria, and to provide their perspective on the significance that the region is going to play for their clients going forward.

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Mark McAteer, Legal Business: Mehdi, could I just ask you first to maybe set the scene for us, to provide an overview of the market currently in North Africa from an on-the-ground perspective?

Mehdi Bennani, Bennani & Associés: What I have witnessed over the years is a real shift in how companies that come to us, either directly or through international firms, would look at the African market. The shift is built on the premise that the economic growth in the world now is mainly in Asia and in Africa. We are talking here about Africa. For a very long time the idea was that you could only look at the African market through South Africa. Obviously, this was extremely disrespectful for the other countries, but it was a reality.

The change started at the point where companies started to look again at the economic growth in Africa and ask themselves: ‘How can we access this continent? From where can we access this continent other than through South Africa?’ North Africa, and especially Morocco, became very quickly a point of entry.

Mark McAteer: Just taking the point that you make, to what extent is North Africa as a region a microcosm of Africa as a whole in the sense that it is far from homogeneous?

Mehdi Bennani: The north of Morocco has nothing to do with sub-Saharan Africa. It is completely different. Each one of you knows that very well because you have experienced that and know that working in Kenya is not working in Morocco, is not working in Ghana, is not working in the Ivory Coast. It is completely different. At best, you can group some of these countries by common language or the legal system, if anything, but even then there are still so many disparities between countries.

I recall the last five acquisitions we did. For example, last year we did the Etisalat transaction, where it acquired Vivendi’s stake in Maroc Telecom. Obviously, Etisalat’s idea was not to acquire Maroc Telecom just for Maroc Telecom. Even though it is obviously a great company, the idea was to be immediately present in multiple African markets where Maroc Telecom had already invested. We keep seeing this paradigm where foreign investors will come to Morocco and team up with a Moroccan player that has already done the groundwork of investing in other African countries.

Mourad Seghir, Bennani & Associés: We have worked in the past for a European vehicle manufacturer – which invested in several plants in Algeria jointly with the Algerian government – and an investment fund in order to build or modernise assembly facilities aimed at the Algerian market but also at the African market, with the help of the Algerian government having a friendly relationship with some African countries. The intent was to supply the local market first and then the African market from a long-term perspective.

However this is an exception, generally speaking, for Algeria. Restrictive export regulations, exchange control regulations and investment regulations do not currently encourage big foreign investments coming to Algeria in order to serve the African market, except where you have the state involved in a joint venture or in a huge project such as with the automotive industry. Outside of this, I do not see a single foreign investment in the private sector coming to Algeria and going on to serve the African market.

Christophe Asselineau, Shearman & Sterling: That is interesting, because the Algerian government earlier this year made a number of declarations which seemed to position Algeria almost as a competitor to Morocco for investors eager to expand into sub-Saharan Africa and encourage them to penetrate these markets.

Mourad Seghir: Yes, but the reality is different from the political declarations. I hope this will change in the near future because the Algerian government can use its very strong political diplomacy ties with some African countries (at least for Francophone Africa) to encourage investments toward the sub-Saharan countries.

Mark McAteer: Why has Morocco emerged as the commercial hub in the region? Algeria has mass and greater resources, so does it just simply boil down to culture, attitude and political stability?

Jeremy Brittenden, Hogan Lovells: Algeria has effectively come from a very socialist-oriented place, where effectively their view is: ‘We do not really want to go and influence the world and we do not want the world to come and influence us. We want to just do our own thing.’ They have also been able to get away with not engaging with the outside world to a point because they have so much wealth. They do not take on any debt. If they want to buy something, they pay cash. They have not got themselves involved in the whole international investment cycle and they have not needed to.

Craig Tevendale, Herbert Smith Freehills: In terms of the impact of the oil price in Algeria, if you look at the evidence from the fourth licensing round last year when you had 31 blocks up for grabs and five bids for the 31, that tells you something about the oil price and the viability of those investments. It also makes a broader comment about the perception of the stability of investments in Algeria, particularly in oil and gas. There is more that can be done by the government to attract more interest and also to attract interest from more of the type of investors that would really help to improve the economy.

Akshai Fofaria, Pinsent Masons: I suppose one of the fortuitous things about having an oil price crash is that the politics are then trumped by the economics. The politics simply cannot function. When you have a lot of money, you can play politics and say: ‘We will close our borders. We will not allow foreign investment. We will remain socialist.’ With a 30% structural deficit, that becomes incredibly difficult.

Mark McAteer: Dan, you were involved in a deal [advising VimpelCom on the sale of a 51% stake in Djezzy GSM to the Algerian National Investment Fund], which was in some ways a template for relations with foreign investors in Algeria. Having gone through that, how do you perceive the current situation?

Daniel Walsh, Akin Gump Strauss Hauer & Feld: I am not sure economics trumps politics. We found the politics, from an outsider’s view, to be very complicated. What we did there was because of the law that a foreign investor cannot control a majority stake in an Algerian company, which makes it difficult for companies to come in and invest money. In our case – I do not know if this becomes a paradigm or not – although we only own 46.5%, we structured the transaction through a shareholders’ agreement to keep control of the company, so my client is able to consolidate that investment now. I am not sure that had been done previously in Algeria or has been done since, because it took us a number of years to get everybody comfortable with the fact that, although the Algerian National Investment Fund would own 51%, they would not have majority of the board and actually control the company. They have significant influence, of course, through veto rights, but at the end of the day we consolidated.

The question is really, is that a way forward? I am not sure they will be anxious to repeat that paradigm. In that case, remember there was a big arbitration. This really was in settlement of arbitration. It is really a question: do you think this is a way forward in Algeria for foreign investors?

Mourad Seghir: In public projects it is very rare to find this structure. This was a particular case with huge economic impact for the different players. Public entities are usually not willing to give the control or the management to a foreign investor; however, we do it quite often in the private sector.

Mark McAteer: In our North Africa Insight earlier this year, 50% of international firms surveyed would consider opening an office in North Africa. Of that 50%, 75% said that they would open it in Casablanca or Morocco. How much of a role has the Casablanca Finance City played in establishing Morocco as a business and legal centre?

Mehdi Bennani: The question is whether the international firms that opened in Morocco did the right thing in opening an office on the ground in Morocco. My own reading on that is that this is an industry where people panic, like any industry in the world, and when you panic you start doing things that maybe do not always make sense. For some of the firms that have opened, it was more as a reaction to the economic crisis in Europe that lasted too long. We just talked about the ability of Morocco versus Algeria to attract foreign investors. I am positive about that, but in terms of using Morocco as a platform from a legal services standpoint to assist your clients in the rest of Africa, tell me what is the added value of using a guy in Casablanca to do a deal in Ghana versus a guy in Moscow? I do not see one. That is why we will never venture into opening an office in the rest of Africa: because we do not think we have any added value. We have added value in Algeria and in Tunisia, and we hope to have one in Libya, because it is a huge market, but that is it.

Christophe Asselineau: I had heard from another law firm that they considered using their Moroccan office as some sort of a lower-rates platform to service the rest of Africa and Europe. It is a message that has come back a number of times. However, given the calibre of some of the international firms that are opening in Morocco, I am not sure that equating their legal services with call-centre-type costs arrangements is a viable proposition.

Jeremy Brittenden: We have found that North Africa can stand European rates, but not heavily discounted rates. Unlike some parts of Africa, we have found that North African clients do recognise the value that they get from an international firm and they also recognise the value that they get from an international firm working with a local firm. Actually, the local firms seem to have similar rates to the international firms in a lot of cases.

Christophe Asselineau: I must be the only one getting all the clients that ask for discounts then!

Craig Tevendale: It comes down to the nature of the work as much as anything else. If you have someone in Algeria who is a genuine oil and gas expert with the right kinds of interactions and connections with Sonatrach, close enough but not too close, then that is a very valuable resource. That is worth a great deal to foreign investors in that industry. In the same way, if you are dealing with an arbitration against the Algerian state, that is premium work.

I would not underestimate the optics of being able to say you have a presence in Africa, because for a lot of clients, although it is not very sophisticated, the question is: ‘What do you have in Africa?’ If the answer is nothing at all, that provokes a different reaction from, ‘We are in Casablanca’. The specific mandate might have nothing to do with Casablanca, but you can see that setting up in Casablanca to be able to say, ‘Yes, we have an African presence’ might have some appeal.

Chiraag Shah, Kirkland & Ellis: You find this a lot, where a client comes across and says: ‘We have someone else who is going to match your rates, but who also has an actual physical presence on the ground. As far as we are concerned, that makes more sense for us, because it is the same firm we are using that actually has a local presence.’

It sometimes may not actually be a local presence in the precise jurisdiction that they are interested in, but the fact that you have an actual office or physical presence in Africa can quite often be a turning point.

Mark Barges, Linklaters: There is a perception, which is sometimes different from reality, that international firms with a Moroccan office are better placed to serve Moroccan clients on a Moroccan deal. I suppose there may be an element of truth to that, but that depends on the individuals being in that Moroccan office. If they are actually half the time in Paris and in London then, actually, it takes just as long to get to a meeting as it does from Paris.

Helen Griffiths, Slaughter and May: Clients are getting more sophisticated about this. They want to know exactly which individuals are going to be doing the work, where they are based and how available they will be. They are getting more sophisticated in the way they think about African politics and geography as well. They know what a complex place it is.

Adam Cooper, Simmons & Simmons: We need to consider the question from a client’s perspective. Clients will carefully consider their requirements for their legal teams to help with particular transactions. How do they put their teams together? If they believe that in the particular jurisdiction they will need lawyers who have relationships with key local institutions – the people who can help you read the politics and help you to work with state-owned enterprises in the jurisdictions – then it will be about picking the best individual lawyers to be part of their team. Sometimes they will be part of an integrated firm, sometimes they won’t be. It depends what’s needed for that particular transaction.

Richard Mugni, King & Wood Mallesons: What the client likes is that you can show that you have the knowledge of the environment, irrespective of having an office on the ground or not. That is what sells, basically. My belief is that you have two types of lawyers on the ground. You have the lawyers who open the doors and you have the lawyers who are technicians. If you need technicians, you have technicians on some very specific issues and you have door-openers. You have to know who you are going to use for what purpose. You can say: ‘This lawyer knows everybody.’ That is a fact, but at some point, if you ask a technical question, this lawyer will not know.

Daniel Walsh: Egypt is a perfect example of that. When my client goes into Egypt, it often uses two firms. One firm has the connection but has a small staff and really cannot do the nuts-and-bolts corporate work. The other firm has the technicians. In the three or four transactions they have done successfully, they have hired both: one to open the doors and the other one to make sure the laws are complied with.

Mark Barges: One of the biggest challenges in Morocco, other than needing more financial institutions, is actually having the right people with the skills. A lot of these firms have opened, but actually, if you look at the Moroccan skillset, we have found it very hard to find people who are good enough to do the types of transactions we do. Generally, they are in Paris or in London; they are not in Morocco. If you talk to a lot of firms who have offices there, they are finding it really hard to recruit quality people.

Karel Daele, Mishcon de Reya: A lot of these deals are legally and technically very sophisticated. A problem that sometimes occurs is that the investor is represented or assisted by specialists, for example mining or oil and gas lawyers from London or Paris who do nothing but that, while the host country or the African company is assisted by a local counsel who is more often than not a generalist. Specialists and general practitioners do not speak the same language.

Christophe Asselineau: It was definitely hard ten or 15 years ago, but there has been a new generation of lawyers, often trained in Paris or London or the US, that are actually going back to Africa, or going to Africa. The financial crisis, as well as the increased difficulty of securing a partnership has partly led that.

Craig Tevendale: In Algeria I find it is not so much the frontline quality that is difficult; it is more the strength in depth. There are some very good local firms and I agree that, like many international firms, we are exporting back wonderfully talented people that train in London or Paris and have great experience, and now we are working closely with those former colleagues. It is a great success story, but they are all small firms. They are often family firms. Because the best people in the market are obviously very much in demand, it does not take too much until their availability is completely shot. It is that strength in depth that is the greater challenge for me.

Jeremy Brittenden: One of the problems is none of the local firms can grow to a size that overcomes that issue because the private sectors and the local markets are not big enough to support them. If you develop a relationship with one international firm, they will not be able to feed something that provides that strength in depth. That is a structural problem that makes it difficult for an international firm to tie up exclusively with a local firm.

Mark McAteer: What about North Africa as a forum for resolving disputes, and the general principles about the operation of the rule of law and how that works there?

Daniel Walsh: If you were acting for a non-Algerian investor you would not advise your client to agree to a contract that had Algerian law arbitration. It is not at that stage yet for arbitration. The preference will be French or English law, in my experience. I do not see that changing.

Karel Daele: What are the selling points of the local centres? Will they be cheaper or perhaps faster, or can they rely on better institutional arbitration rules? Where will they make the difference and add value compared to the more traditional centres? This is particularly important taking into account that today most of the actors involved – the arbitrators, the lawyers, the translators, the transcribers, etc – still have to fly in anyway.

Daniel Walsh: If you are going to lose, it does not matter how cheap it is.

Jeremy Brittenden: I agree with what is being said, but to mount a small defence, in my experience the laws are actually very good. The judges are actually very good. The difficulty is that it comes back to politics and politicised cases, and where the government is involved in practically everything, it is very difficult to keep that out. The other problem with it is that, throughout the region, the justice system needs major overhaul. You will get a judgment in four years with tea stains and cigarette stains, and it may be a good judgment, but it is four years later than you would have liked it.

Mark Barges: The only deals where you tend to see local arbitration are where you have an African group investing in another African country.

Adam Cooper: When you are talking about forums for disputes, it is a two-sided conversation. The government is in the transaction, the government is going to have a view, and the view and the instructions coming from central government will be to avoid arbitrations going offshore. A number of North African countries are pretty busy in various offshore forums at the moment and there is a big push back against that.

Christophe Asselineau: I have noticed that there is definitely more of a push back from African states to have local arbitration rather than international arbitration. It is something that ten or 15 years ago we would either save for the end of the negotiation or cut to the chase, with the result being almost invariably local law but international arbitration.

Karel Daele: I have seen deals collapsing because the host country insisted on an arbitration clause referring to a domestic arbitration centre whereas the investor preferred an international centre. To actually convince your client to accept an arbitration clause with an African based arbitration centre is difficult; the deal is going to be a challenge.

Mourad Seghir: Sometimes, foreign investors are also involved in important litigation before local courts against local administration, such as customs and tax administration, where you cannot use international arbitration as a dispute resolution forum. Even when the parties are involved in international arbitration proceedings, they may try to introduce local claims, such as criminal claims, in order to suspend the arbitration. Therefore, local courts may be directly or indirectly involved.

For the lower courts, it is very difficult sometimes to find very sophisticated reasoning in very complex litigation, but at the supreme court level, we often have very good reasoning in judgments. The reasoning of the courts is quite sophisticated at the very high level, even when the case is against the state.

Hamish Lal, Jones Day: When we have arbitration or disputes, we go to local counsel, and often it is an individual who gives us a piece of advice – on a local issue, on local law – and we piece it together. We are not looking for a massive law firm – we are just looking for sensible legal advice. It is just an observation, because [the earlier discussion] implies that everywhere one has a dispute, one has to have a law firm that knows everything, which patently they will not.

Karel Daele: Another thing that I have experienced is the availability of the legal material, for example on jurisprudence. They will ask you: ‘What is the position of the courts on this or this?’ It is often not published, or you do not find it. For example, I practised in Tanzania. We had a legal journal that was reporting on the case law of ten years earlier. There was nothing more recent.

Maurice Kenton, Clyde & Co: I could not agree more and, when you are asking somebody to invest in a five-year dispute process, it is quite difficult when you cannot give them any predictability of outcome.

Mark McAteer: But on the dispute side, there is plenty of work to be had representing North African states in investor treaty arbitrations.

Craig Tevendale: It is a dubious honour, but North Africa is the leading region of Africa when it comes to investment treaty disputes. The evidence and the statistics back that up.

Christophe Asselineau: Maybe it is simply a reflection of the fact that they attract most of those investments. That is also the positive thing that this is saying about South and North Africa.

Maurice Kenton: Do you think that is because the stakes are higher in North Africa? Obviously, South Africa seeks to make itself immune from some of its more contentious policies, in that it has remained outside ICSID [International Centre for Settlement of Investment Disputes] and has renounced a number of BITs [bilateral investment treaties], but it does not have oil either.

Craig Tevendale: You do not want to be too critical, but a lot of it is to do with the stability of investment. You go into a jurisdiction with your eyes open and you do your due diligence, but nevertheless, if host states act in particular ways and then have difficulties in terms of political decisions that were made not necessarily in the smartest way, then even if they were the right political decisions from the domestic perspective, that gives rise to claims. Of course it does.

Adam Cooper: That’s a really interesting point. But is it expressing an idea that applies to major resource-exporting countries generally, or is it something that’s a feature of North Africa?

Craig Tevendale: It depends. Is it something that is a North African issue because it is happening in North Africa, or is it something unique to do with North Africa? It is to do with the politics. It is to do with the way in which government works in Algeria and the way in which political decisions are taken, and actions flow from that very directly. Not to be patronising or overly critical, but it is something to do with a lack of a civil service or politicians who are going to say ‘no, this is not the right way in the long term’, or alternatively, ‘this might be the right decision for the country, but this is not the smartest way to do it. This is a way that is inevitably going to lead to investment treaty claims because you are just not thinking it through’. No-one is in a position to challenge this and say: ‘If you pass a windfall tax law in such a crude way and you do not analyse all of the PSAs [production sharing agreements] that you have in place before you do so, then claims are inevitable’. LB

mark.mcateer@legalease.co.uk