The rebirth of Africa? - Scott Appleton

A key market for multinationals eager to capitalise on global demand for natural resources and cater to rapidly urbanising populations, the continent of 54 states at varying stages of economic and legal development nevertheless presents unique challenges.

Angola and Mozambique in Sub-Sahara Africa share a common recent and colonial history but remain at opposite ends of this investment spectrum. The former is Africa’s second-largest oil producer after Nigeria, having experienced double-digit growth over the past decade, placing it firmly on the radars of multinationals. Mozambique meanwhile remains one of Africa’s smallest economies, largely reliant on international donors, but recent exploration has revealed some of the continent’s largest gas reserves, offering the prospect of a wave of multi-billion dollar investment.

With economies in Europe and the US experiencing considerable uncertainty even five years on from the start of the financial crisis, ever-greater investor interest is focused on the so-called ‘emerging markets’ of Latin America, Asia and particularly Africa, which are experiencing increased political stability, population growth, rising consumer demand and an expanding middle class.

‘There is no doubt that countries like Angola, and particularly Mozambique, have much to gain from increased international investment. Both have significant natural resources and a need to develop their infrastructure, but significant in any success is confidence in their respective investment regimes, which are evolving to encourage more sophisticated and longer-term commitments,’ says Claudia Santos Cruz, Managing Partner of the Lisbon and Maputo offices of AVM Advogados, and Senior Vice-Chair of the IBA European Regional Forum.

To this extent, she sees a growing focus being placed on new legislation meeting international expectations in areas such as finance and investor protections and national demands in revenue collection.

‘Good regulation helps encourage investment and both Angola and Mozambique are clearly open to learning from the success of other countries, across Africa and elsewhere. Each is following its own path but there is already a common goal to encourage greater transparency in the way investment decisions are being made. Challenges remain but there is a strong momentum towards embracing foreign influences and international practices.’

Peace dividends
The economic success of Angola is even more striking given that it is celebrating only a decade of peace. The country saw almost constant conflict in the second half of the 20th century, including a bloody civil war following the end of Portuguese colonial rule in 1975. An end to the fighting was finally called in 2002 by which time the country’s infrastructure had been devastated and it had seen an exodus of most of the professional class.

‘The civil war not only brought a halt to most foreign investment, except notably in the oil sector, but it also had a profound effect on the country’s legal institutions, prompting the migration of many lawyers and freezing most laws in the colonial era,’ says Alberto Galhardo Simões, Partner at Portuguese law firm Miranda Correia Amendoeira, which has been involved in projects in the country in association with local firm Fátima Freitas Advogados for almost 20 years.

Foreign oil companies paid in US dollars for their Angolan oil with the payments channeled through offshore accounts…very little of the revenues generated went through Angola’s financial system
António Vicente Marques
Founder, AVM Advogados

Since the cessation of violence, Angola has however recorded almost consistent double-digit growth as it has sought to capitalise on abundant, oil, diamond and copper reserves. The country is now Africa’s second largest oil producer, and China’s major supplier, with the sector accounting for an estimated 85 per cent of the country’s $120bn GDP.

But even with such riches Angola has not proved immune to the global downturn. A drop in royalty payments as a result of reduced demand for the country’s oil prompted a hiatus of many government construction projects, but also proved to be a key driver behind the a drive to diversify the economy and to rewrite of much of the investment framework, say lawyers.

The oil sector has always stood out, in legal terms, because the multinational oil companies exert a strong influence over the way deals are done. But the fall in tax revenues led the Government to reassess not only the types of investment the country had been receiving, and which it wanted to encourage going forward, but also the adequacy of the legal frameworks this would require, adds Galhardo Simões.

‘The goal is to promote greater economic development beyond the oil sector, to speed-up the rebuilding of the country’s infrastructure and, crucially, to encourage international companies to reinvest more of their profits back into Angola.’

Reversing the resource curse
With the extra-territorial application of legislation such as the US Foreign Corrupt Practices Act and the UK’s Bribery Act, multinationals more than ever need to ensure that their business dealings are transparent. In Angola the issue is particularly acute, admit lawyers. President José Eduardo dos Santos has ruled the country since 1979 and political and economic power in the country are often closely linked – already Africa’s second-longest serving leader after Equatorial Guinea’s Teodoro Obiang Nguema Mbasog, August saw dos Santos win a further five-year term.

Last year however saw Angola enact a new Foreign Private Investment Law, while 2012 has seen significant regulatory changes intended to open up the country’s banking and finance sector and a major reform of the tax laws; intended to encourage larger-scale investment and to keep more of companies’ revenues and profits within the country.

The Foreign Private Investment Law significantly altered the ability of foreign companies to repatriate profits, transforming a largely opaque system in to one that now sets minimum investment level thresholds ($1m). A new Exchange Law for the oil and gas sector was also published in January, which means that from October this year state-oil company Sonangol, its associates and operators, are required to make payments for services through Angolan bank accounts; and by 2013 to make payments to local Angolan suppliers in the national currency, the kwanza.

‘Historically the standard structure has seen foreign oil companies paid in US dollars for their Angolan oil with the payments channeled through offshore accounts. This meant that very little of the revenues generated actually went through Angola’s own financial system,’ says António Vicente Marques, the Angola-based Founder of AVM Advogados. ‘One of the main drivers behind the banking and foreign exchange law changes is to ensure tax is paid on revenues generated in the country and to replace US dollar transactions with local currency. It is also likely that these measures will increase the domestic banks’ sophistication, transparency and technical capabilities, vital if they are to compete better internationally.’

Most of Angola’s leading banks were originally local subsidiaries of Portuguese institutions but the impetus of new banking rules brings the potential for a wave of consolidation as they look to build deeper corporate expertise. A larger pool of capital is also bringing renewed talk of an Angolan Stock Exchange, reflecting greater stability also in the international capital markets as well as wider investor interest in taking equity in Angolan banks even as new players begin to enter the market. South Africa’s Standard Bank recently announced its intention to expand its corporate operations into Angola.

Portugal’s colonial legacy means that it remains a major point of reference when it comes to developing and interpreting new Angolan legislation. Much of the country’s existing regulation still dates from before 1975 but the recent success of other Portuguese-speaking (Lusophone) economies, including Brazil, is having a growing influence.

Angola’s civil war brought a halt to most foreign investment, except notably in the oil sector, but it also had a profound effect on the country’s legal institutions…freezing most laws in the colonial era
Alberto Galhardo Simões
Miranda Correia Amendoeira

‘For some years Angola has been looking to develop its own capital markets. The financial crisis across Europe and the US may have helped stall things but the rules governing the operation of an Angolan Stock Exchange are already written; much of this is influenced by Portuguese securities rules but also that of Brazil’s Bolsa de Valores, Mercadorias & Futuros de São Paulo,’ says Vincent Marques.

Likewise the reform of the country’s tax system, introducing concepts such as transfer pricing, stamp duty and the potential for a VAT-style sales tax for the first time, is strongly influenced by the Portuguese system. The new framework was announced in February but took retrospective effect commencing 1 January. The coming year may also see Angola sign its first-ever double taxation treaty, with Portugal.

‘This transfer of legislative know-how means not only that as lawyers we are comfortable with developments, and can advise multinational investors accordingly, but it also presents the potential to use Portuguese jurisprudence and structures as a starting point for the interpretation of the new rules,’ says Tiago Marreiros Moreira, Head of Tax at Vieira de Almeida in Lisbon, and who leads its VdAtlas which coordinates operations in both Angola and Mozambique.

Mozambique’s gas-powered growth
Mozambique may this year be celebrating 20 years since the end of its civil war, which also escalated following the end of Portuguese rule, but the country’s subsequent economic trajectory has proved far less dynamic when compared to Angola.

Nonetheless, recent years have seen it open up to greater international investment and influence, say lawyers. Mozambique has significant coal reserves, Africa’s largest hydroelectric plant – the Cahora Bassa Dam – and is a major aluminium producer. But a lack of transportation and communications infrastructure has meant that much of the country’s development to date has been underwritten by international donors, including The World Bank, IMF and African Development Bank, which this summer announced a willingness to part-finance the $1.8bn construction of new electricity grid connecting Cahora Bassa to the capital Maputo. Currently much of the country’s electricity network passes via neighbouring South Africa and Zimbabwe.

However, change may be coming. Significant investment has already been made in the country’s coal sector – Brazil’s Vale began operations in 2009 and in 2011 announced a $6bn expansion of its Moatize coal project doubling output to 22 million tonnes per year – and in the aluminium sector, where Anglo-Australian BHP Billiton is a majority shareholder in the Mozal Smelter Major, Africa’s second largest. But it is the nascent gas sector that holds the potential to transform the country’s economic direction.

In the last two years gas reserves estimated in excess of 100 trillion cubic feet have been found off of the country’s eastern coast – among the largest recent finds anywhere in the world – with new finds being reported monthly. ‘There have already been sizeable investments in Mozambique’s coal industry. Coal and the scale of the gas finds are potential economic game-changers. Mozambique may evolve from a net importer of energy to one of Africa’s largest exporters,’ says Markus Weimer, a Research Fellow with Chatham House who specialises in development issues in Angola and Mozambique.

Realising the gas finds will however first require building the necessary, transport, storage and distribution networks. The location and scale of which will require significant international expertise as well as capital, adds Santos Cruz at AVM Advogados. ‘Major investments are already being made but a challenge is to ensure that the legal frameworks are in place to truly enable the country to move forward, in terms of developing Mozambique’s infrastructure and to facilitate the types of investment that need to be made. In this sense much of the current regulation simply does not contemplate the scale of what is required or the nature of modern project finance, concessions or development models.’

As companies look to protect or capitalise on increasingly valuable exploration and production licences legal issues are already emerging. UK-based Cove Energy which holds an 8.5 per cent stake in one of the largest offshore gas finds, the Rovuma Basin, put itself up for sale at the end of 2011 attracting a $1.6bn bid from Royal Dutch Shell and a rival $1.8bn bid by Thailand’s PTT. The Mozambican government subsequently announced it would apply a capital gains tax (CGT) in relation to the sale – Cove having acquired its Mozambican rights for $11m in 2009. ‘The decision is part political, part economic, but has doubtless clarified the issue for future investors. The government had previously received criticism for failing to apply CGT on natural resources-related sales but has now set out its position going forward,’ says Santos Cruz. ‘This decision may have been perceived by some as controversial but the application of CGT arguably represents a first step in the government capitalising on the wealth the gas sector may generate.’

CGT is not putting new investors off of Mozambique. Another major player in the gas discoveries, ENI, has put up for sale 20 per cent of its stake in the offshore Area-4 field – described as the largest gas find in the company’s history – with bids expected to be around $4bn.

Countries like Angola, and particularly Mozambique, have much to gain from increased international investment… there’s already a common goal to encourage greater transparency
Claudia Santos Cruz
Managing Partner, AVM Advogados;
Senior Vice-Chair, IBA European Regional Forum

US oil and gas company Anadarko, which has also made major discoveries, has likewise announced plans for a liquefied natural gas (LNG) plant in Mozambique with an estimated project cost of $18bn. Many expect the government to contribute financially and to help facilitate the development of the transport infrastructure required to support the plant, which will be located in the north east of the country. Nonetheless the cost of the project, which is expected to be in operation by 2018 and will be the first on Africa’s east coast, is almost double the $10bn GDP of the country itself.

Maturity attracts local talent
Mozambique and Angola may share a common language, colonial history and post-independence experience, but lawyers familiar with both countries also emphasise the differences, including in the way each is looking to develop new legislation and attract major new investment.

Investors in one country cannot assume a similar experience in the other cautions Vanda Cascão, Co-Head of the Projects, Energy & Infrastructure Practice at Vieira de Almeida and who has worked on deals in both countries. ‘Angola and Mozambique have a common Portuguese legal background but the countries are obviously different in both legal and socio-economic development terms and clients need to take that into account when structuring projects. Obviously the recent gas discoveries in Mozambique will impact positively in the development of new projects.’

In response to the prospects facing Mozambique, the government has in recent months put out to public consultation or published new Mining, Oil and Gas and Project Finance Codes, while a revision of the Foreign Investment framework is underway. But the source of investment funds has also impacted on the way infrastructure projects are undertaken in the two countries, note others. Mozambique has to date been the recipient of much more donor-led investment which brings with a more established formula for doing business. Angola meanwhile has been able to finance much of its new infrastructure off of the back of the country’s oil wealth, and where a more idiosyncratic approach has been developed.

Nonetheless Mozambique is looking to learn lessons from Angola in relation to exploration and production issues and the two countries have signed a number of cooperation protocols, including in relation to environmental issues. There is also a common push towards promoting ‘local content’, the use of local companies for supply and services and setting employment quotas for nationals, say lawyers. ‘In the past in Angola there simply wasn’t the local technical expertise to facilitate the deep water drilling undertaken by the oil companies but, as the economy and the industry has matured there has been a clear move by the Government and the multinationals themselves to recruit more local talent,’ adds Galhardo Simões at Miranda. ‘Arguably however companies don’t need regulation to make them do this, it also makes sense economically. Angola remains a very expensive place in which to do business and it can be significantly cheaper to develop local employees’ expertise than continue to pay ex-pat compensation packages.’

Major traditions merge
Africa’s borders are in any event proving increasingly porous in terms of both the flow of technical and legal expertise. Legislators are increasingly open to learning and applying the lessons learnt elsewhere. Portuguese jurisprudence may still exert a major influence on both Angola and Mozambique, but common law concepts are playing an increasing role, while arbitration remains the preferred dispute resolution method for foreign investors. ‘Across Africa we see three major legal traditions – common law, Napoleonic French law and mixed Roman Dutch/common law – but there is a clear movement towards common law, and these legal family distinctions are quite blurred when it comes to specific industry sectors such as mining’ notes Camille Astier, who coordinates the Africa practice at global firm Hogan Lovells. ‘At the national level we also see a growing willingness to incorporate international best practice into legislation in order to better compete for investment.’

Rwanda has notably transformed its entire legal system from civil law to common law since 2010, a model that neighboring Burundi may also follow. Less extreme, but no less significant, was the announcement in July 2012 that The Democratic Republic of Congo is to adopt OHADA (Organisation pour l’Harmonisation en Afrique du Droit des Affaires) – a French-law-influenced initiative harmonising business rules and institutions that now encompasses 17 African states.

Angola and Mozambique will likely retain their Portuguese-influenced legal models, but the two countries’ desire to attract increased international investment will see a continuation of the evolution of their legal systems. ‘In order to commit the tremendous sums required to enable Angola to diversify its economy or to build the necessary infrastructure Mozambique requires, investors want certainty. This means that regardless of who is in power investments are safe, there is transparency of decision-making and companies are able to repatriate profits,’ says Santos Cruz.

‘Angola and Mozambique also want to build sustainable economies and the only way to meet the ambitions of both governments and investors is through the rule of law – the two countries may be on different economic trajectories and there will always be a strong local veneer to any new legislation, but both are increasingly open to outside guidance in order to help achieve their goals.’



Scott Appleton is a freelance journalist. He can be contacted at