Rising Japanese Investment in Africa Prompts Law Firms to Ramp Up Africa Practices

In August, Japanese Prime Minister Shinzo Abe took a delegation of over 1,000 Japanese business leaders to Nairobi, where they met with 30 African heads of state. Abe was there for the sixth Tokyo International Conference on African Development, which was held last year in Africa for the first time in its 23-year history. At the end of the conference, known as TICAD, Abe pledged that the Japanese public and private sectors will invest $30 billion in African counties over the next three years—a promise that highlights Japan Inc.’s growing interest in tapping the continent’s enormous potential.

Japanese Prime Minister Shinzo Abe at sixth Tokyo International Conference on African Development, which was held this year in Africa for the first time in its 23-year history.
Japanese Prime Minister Shinzo Abe at sixth Tokyo International Conference on African Development, which was held last year in Africa for the first time in its 23-year history.

With 76 memorandums of understanding signed after the conference, the Nairobi meeting marked a high point for Japanese investment in Africa. But Japan’s focus on opportunities in Africa has been growing steadily in recent years. It just went largely unnoticed—until now.

Japan invests

In 2010, Mina Arai-Ito, a lawyer with Baker & McKenzie, returned to Tokyo after spending three years working in the firm’s Cairo office. During her time in Egypt, Ito saw waves of Chinese investments into Africa, but little from her native Japan. “People [in Japan] hadn’t realized that Africa had so much potential,” she says. “I thought that we really needed to do something about this.”

Ito set out to work with government departments and agencies, including the Japanese Ministry of Foreign Affairs and the Japan External Trade Organization (JETRO), as well as large investment banks, holding conferences and seminars to encourage Japanese corporations to go to Africa.

The efforts soon saw some positive results. In 2012, Baker & McKenzie represented Toyota Group’s trading arm, Toyota Tsusho Corp., on a $750 million investment in the Compagnie Française de L’Afrique Occidentale, or CFAO—a French trading company that focuses on distributing in Africa.

Around the same time, Magic Circle firm Linklaters, which represents many project investors and funders, also noticed that its Japanese clients were showing increased interest in the natural resources, energy and infrastructure sectors in Africa. “Funding from Japan is typically well coordinated with private-sector activity,” says London partner Andrew Jones, who leads the firm’s Africa practice.

Japanese investment in Africa grew so quickly that in June 2013, at the fifth TICAD gathering, held in the Japanese city of Yokohama with 41 African country leaders attending, Abe announced a commitment of $32 billion in public and private funding to Africa over five years. Ito refers to that conference as a “huge success,” and says that Japanese investors had finally understood Africa’s potential.

Risk, reality and reason

But as global law firms were getting inquiries from Japanese clients about investing in Africa, the investment climate quickly took a turn for the worse. In 2014, the outbreak of the Ebola virus quickly spread into several countries in West Africa; the terrorist group Islamic State creeped into North Africa; and most devastating of all for those looking to bet on the energy sector, oil and other commodity prices sank into a still-ongoing slump.

The crises significantly reduced outside investors’ appetite for risk in the region, says Andrew Skipper, the London-based head of Hogan Lovells’ Africa practice. “Putting money into Africa remains challenging because of issues such as currency, corruption and certainty,” says Skipper, referring to an ongoing currency liquidity crisis in Nigeria that was prompted by the oil price dip . “[It is difficult to get] dollars out or have dollars at all,” says Skipper. “There remains corruption, there remains a lack of certainty in areas where you need the certainty of government.”

Paradoxically, that need for certainty, Skipper says, could make Japanese investments appealing. Following the 2016 TICAD conference, the organizers released the Nairobi Declaration , stressing the longevity and sustainability of Japan’s plans in Africa. The document identified economic transformation, resilient health care systems and social stability as the “three pillars” of Japan’s ambitions on the continent.

Skipper says that he is both realistic and optimistic about the growth of Japanese investments in Africa. In early 2015, he led a team of lawyers from Hogan Lovells’ Africa practice to Japan to visit with clients there. “There was a lot of interest, a lot of optimism about putting money into Africa,” he says of the client feedback. “That intention remains, and has been confirmed by TICAD in Nairobi.”

Linklaters’ Jones agrees that holding the TICAD conference in Kenya was a powerful affirmation of Africa’s importance to Japan. “The important thing to understand—which is something sophisticated Japanese investors do—is that Africa is a fragmented market comprising 54 countries,” says Jones, noting that not every country was hit by Ebola or the commodity price fall.

“In fact, many import-dependent countries that don’t have any natural resources benefit from lower commodity prices. And infrastructure needs are huge and not directly related to commodity prices,” he says.

Ryutaro Nakayama, a Tokyo partner with the Japanese firm Nishimura & Asahi, echoes that point, noting that clients are interested in building manufacturing facilities in East African countries such as Kenya, which hasn’t been affected by drops in commodity prices. Portuguese-speaking Mozambique is also attractive to Japanese clients, Nakayama says: “It has relatively less connection with France and Britain, and is easier for Japanese companies to have a big presence.”

Despite the setbacks, there already has been growth. In recent research , Linklaters found that Japanese funders committed $3.54 billion in project finance in Africa in 2014, up 576 percent from five years earlier. And that sum was about three times the amount committed by Chinese project finance sponsors.

Linklaters is currently advising lenders, including the Japan Bank for International Cooperation (JBIC) and the Nippon Export and Investment Insurance—both Japanese government agencies—on a $4.4 billion project jointly developed by Japan’s Mitsui & Co. and Brazil’s Vale S.A. to build infrastructure in Mozambique. The firm is also representing JBIC and other commercial lenders on an $800 million winning bid by Japanese trading house Marubeni Corp. and Korean steelmaker POSCO to build a coal-fired power project in Botswana.

The increasing involvement of organizations such as JBIC, a major financier of Japan’s overseas projects, will expand the scope of interested Japanese investors beyond infrastructure, says Mark Weeks, Tokyo managing partner of Orrick, Herrington & Sutcliffe. “The trend is that you are going to see companies that weren’t historically investing in Africa—for example the B2C companies—starting to look at Africa,” says Weeks, adding that clients in the food and pharma industries have shown interest. Some renewable energy clients, who historically have invested in wind farms and solar projects in Western Europe, are now looking at places such as Morocco and also West Africa for possible investment opportunities, he says.

Agribusiness is also a promising area. “The trading houses have significant expertise,” says Hogan Lovells’ Skipper, who adds that there will be a need for farm supplies ranging from fertilizer to machinery. “You’ve got an enormous part of the world’s undeveloped agricultural land in Africa,” he says.

Where clients go, law firms follow

Global and local law firms have ramped up their practice in response to their clients’ interests, building up cross-office practice groups to ride the wave of rising Japanese investments into Africa.

Since returning to Japan in 2010, Ito has led a 10-lawyer Middle East and Africa practice group within Baker & McKenzie’s Tokyo office, with 40 percent of the work related to Africa. Her experience in Cairo has helped her advise Japanese companies as they navigate the system, Ito says. She can tell clients which local investment authority to contact first, for example, and whom to talk to at the embassy and at JETRO. “I know how local people [in Egypt] think when they are negotiating a deal, when to push and when to pull back,” she says.

Ito and her team in Tokyo now work closely with Baker & McKenzie’s offices in Cairo, Johannesburg and Casablanca and a network of “African relationship firms” in countries where it does not have an office.

Linklaters has also assembled a group of Tokyo-based lawyers who regularly work on African matters. Led by the firm’s Tokyo managing partner John Maxwell, a project finance lawyer, lawyers based in Japan have developed expertise on matters related to countries such as Morocco, Mozambique and Botswana. Jones says the Africa expertise in Tokyo is now very much a part of Link­laters’ overall Africa practice, which is based in London, Paris and Lisbon to take advantage of historical linguistic and legal ties to Africa.

Both Hogan Lovells and Orrick have launched in Africa within the past few years. In Johannesburg, where Hogan Lovells merged with local firm Routledge Modise in 2013, the combined firm now has more than 100 lawyers. Before taking over as head of the Africa practice three years ago, Skipper had led the global corporate practice at legacy Lovells’ and later at the merged Hogan Lovells. He says that the Africa practice team communicates regularly with other offices, including Tokyo. In November, the firm sent Dubai partners Sohail Barkatali and Christopher Cross and London-based counsel Christopher Healy to speak at the Japan Institute for Overseas Investment, a trade association, about investing in Africa.

Orrick chose to place its African base in the Côte d’Ivoire capital of Abidjan, where the African Development Bank is headquartered. Africa practice head Pascal Agboyibor, originally from Togo, leads the practice from Paris. Weeks, who co-heads the firm’s global Japan practice, says the Japan-to-Africa work relies on the firm’s Japan practice partners across offices. George Rigo, Simon Ratledge and Jean-Pierre Martel in Paris and Colin Graham and Shawn Atkinson in London are all active in both Japan- and Africa-related matters. Will the Big Four Japanese firms—Nishimura & Asahi; Mori Hamada & Matsumoto; Nagashima Ohno & Tsunematsu; and Anderson Mori & Tomotsune—also set up in Africa? Robust Japanese investment in Southeast Asia has already prompted Japanese law firms to open in key markets such as Vietnam, Myanmar and Indonesia. Nishimura’s Nakayama says that his firm might consider an African office in the future.

For the near term, his firm will second lawyers to firms in Africa; at present the firm’s five-partner, 15-lawyer Africa practice is run mostly out of Tokyo. An additional half-dozen lawyers from the resource and energy practice team are also active on Africa matters. Mori Hamada has a similar setup for its Africa practice.

While an office in Africa may not be imminent, Nishimura opened a Dubai office in December —the first of Japan’s Big Four to launch in the Middle East. Nakayama says that about one-third of the work handled in Dubai will be Africa-related, since many Japanese clients run their African businesses from Dubai.

“It’s going to take a while for the level of Japanese investments in Africa to ramp up to levels similar to those in Southeast Asia, which is closer geographically and culturally to Japan,” says Weeks. “But Japan demographically has a declining [and aging] population; the middle class is not getting larger. Companies have to go out.”

Baker & McKenzie’s Ito says that she is confident too. When she practiced in Taipei in the 1990s, she saw the same kind of caution among clients.

“Many of my Japanese clients were telling me that it was too risky to invest in China or Southeast Asia,” she says. “But we all know what happened later.”

Now she tells this story to Japanese companies who see Africa as too risky.

“I say, this is what has happened in Asia. I’ve seen it; I’ve done it,” Ito says. “If you want to put your leg out there, you better go now.”

Source: Law.com

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