Chinese investments and contracts in sub-Saharan Africa totalled $299 billion from 2005 to 2018, according to the China Investment Global Tracker, and in 2018, China said a further $60 billion would be invested into African nations. We speak to lawyers about what the hot countries and sectors are, and the challenges that Chinese companies face.
China's investment story in Africa can be traced back to the 1980s. "China made its early-stage investments in Africa in the early 1980s. Back then, the investment scale was rather small, with an average investment of approximately $500,000 per project," Lin Wei, partner in charge at P.C.Woo & Zhonglun W.D. tells ALB.
In the early 1990s, this investment expanded. "In addition to offering aid to Africa, China started to facilitate Chinese enterprises in setting up joint ventures with African enterprises. In 1995, the Chinese government reformed its foreign aid approach, encouraging and supporting more Chinese enterprises to play a more important role in China-Africa cooperation, and gradually shifting from trade-based investments to resource development investments," Lin continues.
In his view, the establishment of the China-Africa Cooperation Forum in 2000 indicated that China's investments in Africa had entered a stage of gradual maturity. At this stage, more and more new measures, such as the China-Africa Development Fund, were introduced. Lin cites some data: according to Chinese customs statistics, China-Africa trade volume reached a record of $208.7 billion in 2019, and South Africa, Angola, Nigeria, Egypt, and Algeria have been the top five trading partners of China in Africa for seven consecutive years. Construction, manufacturing, leasing and business services, mining, and wholesale and retail are the top five industries of China's investments in Africa.
But in the eyes of Noor Kapdi, CEO of Dentons Africa, China’s investment in Africa is still in the early stage compared with that of key European economies, such as France and the UK. “In fact, the FDI stocks sourced respectively from the UK and France into Africa are each still larger than that from China. The main difference lies in that Chinese capital is accommodating African demands and development strategies at a national level,” he says.
Kapdi continues: “For example, Projects such as the Chambishi Multi-Facility Economic Zone in Zambia involved a large-scale investment and the potential to generate thousands of local employment opportunities and millions of dollars in local procurement contracts.”
Mohamed Abayazid, founding partner of CAA Law Firm in the Republic of Djibouti, provides a vivid example of his own country. “Djibouti has a unique strategic position as it controls access to the Red Sea and acts as port of Ethiopia, a major regional economic power without a sea front.”
“Today, almost a third of the maritime traffic passing through the Strait of Bab-el-Mandeb is of Chinese origin, this is why consequently the Chinese investments in the field of port and rail infrastructures and logistics have just exceeded $10 billion in the countries of the Horn of Africa region,” he adds.
Over the past 40 years, the profiles of active Chinese investors in Africa have also changed greatly.
"More than 70 percent of Chinese investments in Africa are from Chinese private enterprises in terms of the number and the amount. The State-owned enterprises are more interested in infrastructures and energy fields such as construction and mining; while private enterprises mainly invest in manufacturing and service industries, and gradually become the main force exploring this market."
--Lin Wei, P.C.Woo & Zhonglun W.D.
Lin points to 1995 as an important dividing line, when China's investments in Africa started to gradually change from "government foreign aid" to "investments by enterprises". Meanwhile, the identities of Chinese enterprises investing in Africa also changed. "From 1990 to 2003, most Chinese investors in Africa were large State-owned enterprises. More and more Chinese private enterprises participate in the game since 2003. At present, more than 70 percent of Chinese investments in Africa are from Chinese private enterprises in terms of the number and the amount," Lin says.
And Chinese State-owned enterprises and private enterprises focus of different areas of investment. "The State-owned enterprises are more interested in infrastructures and energy fields such as construction and mining; while private enterprises mainly invest in manufacturing and service industries, and gradually become the main force exploring these markets," Lin adds.
According to Kapdi, active Chinese investors also include major investment agencies such as Hillhouse Capital, GaoRong, IDG Capital, Sequoia China and GSR Ventures, as well as TMT and internet heavyweights such as Huawei, ZTE, China Telecom, Meituan-Dianping, Transsion and NetEase.
Another surprising category is “a significant number of Chinese start-ups and entrepreneurs flocking into Africa and driven by the opportunity to test their ambitions outside of their home country.” In Kapdi’s words, “Chinese businesspeople are looking at Africa as something of an entrepreneurial renaissance.”
Lin echoes Kapdi's observations and adds that China's economic and trade cooperation zones in Africa have made it possible for small enterprises to enter. "Up to now, China has built around 25 economic and trade cooperation zones in Africa. Unlike other countries, China's foreign investments usually include both large companies as well as small and medium enterprises, with the later relying heavily on platforms like economic and trade cooperation zones that provide relatively concentrated and well-established infrastructures."
IF YOU WANT TO PROSPER, FIRST BUILD ROADS
People have some fixed ideas or impressions about foreign investment activities in Africa. In the view of lawyers, things have changed in recent years, but those ideas or impressions still reflect to a certain extent the current status of investments in Africa as well as the needs of African countries.
“Investment in Africa has always been a story of infrastructure and that has not changed in 50 years. Among African leaders, there has been a strong consensus that the infrastructure impediment must be addressed so as not to restrict increased trade integration.” Wildu du Plessis, Baker McKenzie’s head of Africa, tells ALB.
Kapdi adds: “If you want to prosper, first build roads - this is a Chinese proverb and particularly relevant in a continent such as Africa. The African Development Bank put the continent’s minimum infrastructure needs at $130 billion to $170 billion per annum. At least 50 percent of that requirement is currently unfunded.”
“Over the past two decades, China has assisted in meeting a number of Africa’s infrastructure financing requirements and is now the single largest financier of African infrastructure in sectors such as energy, mining, power, property and real estate, shipping and ports, transportation and technology and telecommunications,” he continues.
Du Plessis pointed out that in 2018, Africa got around $25 billion infrastructure investment from China and of the overall amount, 40 percent went to energy infrastructure. “This is much more sophisticated outbound lending than the cliché about China investing in African minerals and rail to get commodities to feed manufacturing – the data clearly shows Chinese lending predominantly shifting towards African power projects,” he adds.
Apart from this, in recent years, China’s overseas direct investment has also increasingly focused on Africa’s construction, manufacturing and financial services sectors. “Chinese companies have supported the construction of three major economic zones in sub-Saharan Africa, including Zambia-China Economic and Trade Cooperation Zone, Eastern Industrial Zone in Ethiopia and China-Nigeria free trade zone. Such investments have been helping to create jobs and develop local industry,” du Plessis says.
NOT SPEAKING THE SAME LANGUAGE
The growth of Chinese investments in Africa poses increasing demands for legal services. Chinese enterprises not only have to navigate the law, but also the culture, and both are diverse in a continent o this size.
“When doing business in Africa one must be mindful that the continent is comprised of 54 diverse countries each with its own cultural, social, political and commercial nuances,” Kapdi warns.
Du Plessis echoes his observation: “Investors can never assume one country is the same as any other in Africa. Even if they are geographical neighbours, each country is vastly different to the next.”
Abayazid shares the story of Djibouti International Free Trade Zone as an example. “There is the coexistence of the Djiboutian legal system and those of neighboring within the perimeter of the Free Zone, for example the Djiboutian legal system is of the tradition of the civil law, opposed to the legal system of Kenya which is of the tradition of common law.”
Du Plessis points out the risks: “As a result, cross-border legal compliance has become so complex… Communication in multi-jurisdictional matters and deals can also sometimes be overwhelming, particularly where differing terms are used in different jurisdictions, making it difficult for investors to understand the large volumes of communication coming in from varying advisors.”
Facing this challenge, lawyers point to the advantages of their firms' global networks – Baker McKenzie has more than 100 practicing lawyers in Africa and Dentons has the world's largest coverage network in Africa – which not only lay a solid foundation for providing local services, but also enable the firms to provide smooth cross-jurisdictional legal services.
Another solution is by the help of legal networks. For example, Baker McKenzie has an extensive cooperation network of law firms in Africa, which includes many top-tier African law firms; Zhonglun W&D relies on two legal networks, Interlaw and GLA; and CAA led the establishment of a Pan-African network of business lawyers which is called the African Business & Legal Expertise (ABLE Network).
Abayazid also points out the benefit for a local firm to maintain a long-term cooperative relationship with a Chinese law firm, which allows the local law firm to provide stable and high quality legal services to Chinese clients. Taking CAA as an example, in the past five years, the firm and a team led by Zheng Chenghai, partner of Chinese firm Jingtian & Gongcheng, have worked together on a series of major Chinese infrastructure investment projects and achieved remarkable results.
For any overseas investor, doing business in a foreign country is not only about the business and the law, but also about cultural and social challenges in a new environment.
“There are many challenges facing Chinese investors in Africa, including political risks, social and economic instability. Poor governance, currency risks, complex regulatory systems and high levels of corruption pose hurdles to investors in Africa.”
-- Wildu du Plessis, Baker Mckenzie
“There are many challenges facing Chinese investors in Africa, including political risks, social and economic instability. Poor governance, currency risks, complex regulatory systems and high levels of corruption pose hurdles to investors in Africa.” du Plessis concludes.
As a result, for Abayazid, local counsels not only advise and issue legal opinions in the light of local law, but also assist and represent Chinese clients with local public authorities.
Kapdi adds: “Like China, African countries are culturally rich and doing business is all about relationships. We assist clients by leveraging our strong relationships with African regulators and political bodies to assist with breaching the gaps culturally, socially and commercially.”
Sometimes legal counsels could even help clients to play active roles in building local legal systems. “Where Chinese investors enter new or unregulated business models in local markets, they need solutions on how they can interact with the public sector in order to understand the approach taken by local government, as well as act as a stakeholder in the development of new regulations.” Du Plessis says.
In order to ensure that clients continue to achieve business success after the completion of the transactions, "Some companies hire us to serve as directors of local companies and to continue to play the role of legal counsel in the day-to-day business activities of the companies to ensure that Chinese enterprises continue to achieve business success after the completion of the M&A transactions," Lin adds.
What standards do Chinese companies generally follow when selecting legal advisers for their investment projects in Africa?
Dentons has participated in a number of investment projects of Chinese enterprises in Africa over the past few years. "Chinese clients require their legal counsels to understand the law and can leverage the relevant business or government relationships; to demonstrate competence in the relevant practice area and/or sector; they also want legal services to be cost savings," Kapdi concludes.
“The reputation and representation criteria of Chinese clients are decisive and are key requirements for a Chinese company when selecting a local law firm.”
-- Mohamed Abayazid，CAA Law Firm
For Abayazid, “The reputation and representation criteria of Chinese clients are decisive and are key requirements for a Chinese company when selecting a local law firm.”
Zhonglun W&D also represented Chinese enterprises in their projects in Africa. Based on his past experiences, Lin suggests that a Chinese company should hire a team of experienced Chinese lawyers to lead the projects and use local lawyers as helpers. "On the one hand, Chinese lawyers can accurately understand the client’s business objectives and demands; on the other hand, we are familiar with the services and the ways of thinking of foreign law firms. Therefore, we can effectively coordinate and facilitate the communication between clients and foreign law firms."
In addition, law firms can also utilize technological means to provide related services.
“Dentons leverages various technological resources to cooperate with our clients, such as video conferencing, intelligent file sharing portals, electronic messaging systems and more. We also use bespoke technological resources for specific deals, such as artificial intelligence due diligence software is used in M&A deals),” Kapdi says.
Du Plessis adds: “Baker McKenzie has adopted a global e-discovery and investigations platform and has also employed document analytics tools… Tools such as these can enable the effective implementation of multinational projects spanning 60 or 70 countries at a time at a surprisingly rapid pace – an incredibly useful tool in a continent with so many different legal systems.”
Kapdi mentions the importance of the 2018 Beijing Forum on China-Africa Cooperation when talking about future trends. “China’s commitment ($60 billion) remains strong, but cautious. China has shifted from identifying its financial contribution as development assistance to development finance,” he says.
“Projects such as China’s ‘Digital Silk Road’ ambition to link emerging markets with hi-tech telecommunications hardware infrastructure continue to be more relevant than ever in African economies and we see an increased focus in the ‘digitalization of Africa’.”
-- Noor Kapdi, Dentons
Speaking of specific highly pursued sectors, Kapdi mentions digital technology and high technology infrastructure. “The number of active tech hubs in Africa has almost doubled over the last couple of years — from 314 in 2016 to 618 in 2019. Projects such as China’s ‘Digital Silk Road’ ambition to link emerging markets with hi-tech telecommunications hardware infrastructure continue to be more relevant than ever in African economies and we see an increased focus in the ‘digitalization of Africa’ by leaders on the continent and their investors.”
Another opportunity lies in Africa’s rapid urbanization. Abayazid tells ALB that he has already seen feasibility plans for two airport projects and construction of a business district and also large-scale commercial and residential buildings.
Even with the COVID-19 pandemic lingering, law firms believe 2020 has a great deal of opportunities. “A new report participated by Baker McKenzie, BRI Beyond 2020, shows that the ripple effects of COVID-19 are affecting the nature, pace and scope of China’s Belt and Road Initiative activity in Africa,” Du Plessis says.
He continues: “The report highlights that one key area of potential for the BRI is in projects focused on strengthening the health systems of low-income countries. China’s MedTech sector may similarly find opportunities abroad.”
To contact the editorial team, please email ALBEditor@thomsonreuters.com.