East Africa special report: Fuels paradise
24 June 2013 | By Joanne Harris
14 February 2013
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East African law firms are benefiting from a boom in natural resources such as oil and gas in the region
Around 20 years ago, heads of state from three East African countries – Kenya, Tanzania and Uganda – came together for a summit that was the first step on the road to establishing what has since become the East African Community (EAC).
What began as a group of countries co-operating on issues such as double taxation has grown into a fully fledged customs union, with plans to develop the group further. Burundi and Rwanda are now also members and there are hopes to further expand the EAC into other countries in the region such as South Sudan.
The EAC is in many ways a -response to the growth potential of the region. Although Kenya, the region’s biggest economy, has long been a business hub for East Africa, recent discoveries of natural resources in its neighbours have prompted a surge of interest in all the EAC member states.
That interest has come from many quarters – foreign investors from around the world, notably China, but also within the legal market, from international law firms desperate to pick up a piece of what looks like a particularly rich and tasty pie.
“There’s now a lot of cross-border trade between the various countries – a lot more than there used to be,” says James Kamau, managing partner of Iseme Kamau & Maema Advocates in Kenya.
Kenya held elections earlier this year, resulting in a win for Uhura Kenyatta over prime minister Raila Odinga. The election result was confirmed by the Supreme Court -after challenges to the vote and -despite protests during the campaign, generally it was much more peaceful than previous elections
Lawyers believe the outcome was a positive one for the country and the region.
“After the elections the position of Kenya as a regional hub has
been enhanced,” says Anjarwalla & Khanna managing partner Karim Anjarwalla.
“I’m optimistic about the new government, the policies they’ve said they will implement and the people they’ve chosen to do jobs in government. Generally, the mood is very optimistic in the country,” adds Hamilton Harrison & Mathews partner Paras Shah.
Anjarwalla says there are “obvious” reasons why Kenya is a regional hub. As well as its geographic -location along the coast, the country has arguably the best-qualified workforce at both blue- and white-collar level and also the most developed infrastructure.
“Increasingly Nairobi is becoming the entry point for a number of multinational businesses, not just for their East Africa operations where that’s an obvious choice, but also perhaps for their Africa operations more generally,” says Anjarwalla. He believes that Kenya is starting to compete on this level with the other African ‘hubs’ of Egypt, Nigeria and South Africa.
Coulson Harney director Richard Harney says there has been growth recently in cross-border activity.
“The amount of business set-ups and branch offices that we’ve dealt with ourselves is testament to a huge increase in that,” he says.
Kaplan & Stratton partner Nigel Shaw says the elections held up a few transactions, as investors waited for the results, but since then M&A has picked up once more.
Shaw points particularly to the entrance of private equity firms from around the world, including less obvious places such as Finland, as a source of foreign investment. He says the investment houses do not seem to mind what they are planning to invest in.
“I keep on asking them this question and they don’t seem to be very particular,” Shaw says.
According to Kamau, businesses wanting to invest in East Africa are interested in making the most of the regional opportunities. They may want to use Kenya as a hub, but work in several countries.
“When you talk to multinationals coming in they’re looking at a bigger market than just one country and that makes it worthwhile to come and invest in the region. We see an increase in the number of -acquisitions at a regional level,”
Like many other things in the region, much of this activity is driven by natural resources, particularly oil and gas.
“There’s quite a lot of movement in the oil industry,” says Shaw. “We’ve been instructed to provide services to companies bringing in oil rigs to establish businesses in Mombasa and Nairobi with the aim of operating around the region. It’s rare for these companies to go to Tanzania or Kampala.”
Harney agrees that oil and gas work is on the up but says for the time being the really interesting bits of it are not coming to local firms.
“Many people are getting excited about oil and gas work – there’s quite a bit of it around but the interesting bits are being done in London or New York or Houston and we’re doing the local law advisory work here. It’s certainly putting a lot of bread on our table but it’s not high-end-value stuff,” he says.
However, he is confident this will change, adding, “There’s a lot of -exploration work going on. Once they actually find economically -viable resources and get started putting in the infrastructure, I think there’ll be a lot of local work. Much of it will be finance and infrastructure-related but we’re still a year or two away from when these projects start happening.”
March of the middle class
A similar story is told in other EAC countries. In Tanzania, East African Law Chambers partner Stella Ndikimi also reports an increase in regional commercial deals.
“The most active industry sector over the past year or so has been oil and gas,” Ndikimi says. “This is attributed to the recent discoveries in petroleum in the region. Tanzania is currently seen as a major gas producer and there’s a lot of activity on this front.”
She also points to mining as an active industry sector.
Norton Rose Fulbright director Adam Lovett agrees.
“The thing people talk about in Tanzania is potential, in terms of natural resources and the growing middle class and consumer class.”
Lovett says this potential was the reason Norton Rose Fulbright legacy firm Norton Rose chose to launch its own Tanzanian office last autumn, making it one of the few international firms to be present in East Africa under its own name rather than through an association.
The firm is focusing predominantly on Tanzania rather than the region, with “the vast majority” of deals local, according to Lovett, -although it is likely to look at regional expansion in the future.
A similar story of an uptick in work and more cross-border activity is told by David Mpanga, a partner at Kampala Associated Advocates in Uganda.
“With the discovery of oil, a number of Ugandan businesses are looking to upscale what they do. The nature of the business and transactions and deals that are coming into the market is getting more complex and therefore the lawyers are stepping up,” says Mpanga.
Uganda’s move into oil will be more complex than similar developments in Kenya and Tanzania -because it is a landlocked country and therefore a pipeline to the sea – in all likelihood to the port of Lamu in Kenya – will be required.
Taking the lead
The pace of development means that while some of the trickier legal work, which is often based on English law, is going overseas, local firms are getting more instructions from foreign clients.
Jonathan Lang, head of the Africa group for South African firm Bowman Gilfillan, is a believer in the ability of local firms to lead work in East Africa.
“Rather than people defaulting to a US or UK law firm to lead on these transactions, they see law firms in Africa do have the competence – and they’re a lot cheaper,” he notes.
Gilbert Nyatanyi, a Burundi-based lawyer at South Africa’s ENS who heads up that firm’s Africa group, echoes what Lang says.
“More clients, instead of coming through international law firms, are contacting us directly – we’re no longer just the local counsel, we have become the lead counsel,” Nyatanyi explains.
Both ENS and Bowman Gilfillan have approached the question of how to deal with the myriad of issues across their continent by developing a network of associated and best friend firms. ENS has its own offices in Burundi, Rwanda and Uganda as well as South Africa, and works closely with other firms in other jurisdictions, while Bowman Gilfillan’s Africa Group has members in Kenya, Uganda and Tanzania, and a relationship with Nigeria’s Udo Udoma & Bela-Osagie.
Lang says that in an ideal world all the firms would carry the same branding, but local regulations prohibit this. “We’re trying to establish a network of offices around the continent but there are regulatory hurdles. We couldn’t open Bowman Gilfillan in Kenya – that’s what we wanted to do – so we had to structure it as Coulson Harney.”
The other big pan-African network is the Africa Legal Network (ALN), an independent alliance of firms mainly in East Africa and managed out of Kenya.
Anjarwalla says clients increasingly want his firm to advise them on setting up in a number of countries, and believes ALN is a helpful thing to offer them.
“We’re able to easily co-ordinate under one quality standard and brand services across our membership,” he explains.
Whether this model will in the future lead to mergers across Africa’s borders is dependent upon the market and also on regulatory hurdles being lifted. Lawyers are mostly in favour of integration, and, indeed, some believe it is inevitable.
“To some extent we have to go down that pathway because the large multinational clients expect that. They’re looking for one-stop shops where they get the same level of service from country to country. The market is pointing the way,” says ALN chief executive Michael Gera.
Kenya is one of the more protectionist countries, with foreign firms prohibited from opening and many of the smaller, less internationally focused local firms fairly resistant to any change in the regulatory environment.
Shah believes change might be on the way soon, pointing out that the country’s attorney general has informally indicated he is in favour of Kenya being a regional centre for cross-border legal work. “For that reason international law firms might be allowed to practice at least foreign law in Kenya,” he says.
International firms have also gone down the network and association route. Big players include DLA Piper, whose Africa Group includes Iseme Kamau & Maema, Rwandan firm Equity Juris Chambers, Ishengoma Karume Masha & Magai in Tanzania and Sebalu & Lule Advocates & Legal Consultants in Uganda.
Kamau sees his firm’s three-year membership of the group as a “differentiator” in the market.
“The fact that we have DLA just helps us to move very fast where we see an opportunity. There are a lot more clients that use us than before. It helps us to pick up work from the multinationals,” he says.
Mpanga and Shah’s firms are in a non-exclusive relationship with Dentons, legacy firm SNR Denton having formed an African alliance several years ago. Both are similarly enthusiastic about the benefits, referring, like Kamau, to the advantages of carrying an international brand as the local markets become more international.
“We have the flexibility to call on them as the need arises and that’s quite comforting. We feel we’re better off with them than without,” says Mpanga, adding that his firm refers work to Dentons as well as getting referrals in.
“There’s a lot we’ve gained. I think the entire Africa network that Dentons has helped to set up has been a huge benefit to all the member firms from an African point of view. We work together on many deals that involve other jurisdictions,” adds Shah.
All expect more international firms to move in or expand their networks.
Lovett says the locals will have to become used to this and it will bring more pluses than minuses.
“There’s a good deal of suspicion to it and I think firms do feel threatened but it’s also raising the bar, which is definitely good. During the five years that I’ve been in Tanzania I’ve definitely seen an improvement in standards,” he says.
“In the short and medium term I’m expecting a few international firms to try to be present on the ground – it gives a serious advantage over competitors,” adds Nyatanyi.
Eversheds is one international firm wanting to expand what it does in the region. Litigation partner Stuart Dutson, who has worked in both Ethiopia and Malawi, describes opportunities across Africa as “exciting” and says the interest from clients particularly in Asia is immense.
“All these countries are booming,” says Dutson. “When you go there you really feel dynamism in these markets.”
The potential benefits of the EAC are also considerable, with free trade being explored and free movement across borders. Kenyans are perhaps more enthusiastic about this last option, as those in other countries are nervous that Kenya’s more skilled workforce will take jobs from locals.
But ultimately, as in the legal market, international investment is most likely to bring up skill levels across the region. Consolidation of law firms within markets and across borders is certainly possible, as is the return of lawyers from East Africa to take advantage of the changing market at home.
With natural resources set to be the driving force behind a growing consumer economy, all will be keeping an eye on East Africa for some time to come.
Key figures: East African Community countries
GDP (US$, current prices, 2011): 84.7bn
Population (2011): 135.4m
Source: East African Community