A Brief Overview Discussed Through the Binoculars of a Soccer Game
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An investment opportunity and a soccer game might have more in common than meets the eye. For starters, both involve goals. For experts, both activate the spirit of competition and require strategy implementation. A soccer game can be a useful framework for understanding some of the legal risks involved in investing in the continent of Africa. Imagine watching a soccer game by using a pair of binoculars. What is likely to be your frame of reference in identifying the features of the game? How will your frame of reference influence your enjoyment of the game?
There are three primary features of a soccer game that are worth noting: 1) the environment: stadium/arena; 2) the participants: players, coaches, referees, and spectators; and 3) the law: game rules and customs.
The Environment
Every investment opportunity is different based on a variety of factors including location and industry type. However, investment opportunities[1] in most parts of Africa[2] share at least one similarity — political risk. Understanding the legal issues of investing in Africa demands an appreciation of the political environment in which the targeted investment will be effectuated. As the old East African saying goes when translated, “it’s hard to win an outdoor soccer game during a thunderstorm”.
The Participants
Oftentimes in Africa, a soccer game can become more than just a game as the 2010 World Cup in South Africa demonstrated time and time again. Similarly, an investment opportunity can often implicate the interests of third parties beyond the two parties to the investment agreement. So categorically, who are the participants in an investment opportunity? In identifying these participants, it is important to draw one useful distinction between an investment opportunity and a soccer game. Unlike soccer games where the general idea is for one team to defeat the other, the best investment opportunities strive to create a win-win for all the participants involved. Participants include the investor (e.g. a private equity firm located in the United States and interested in investing in Africa); the investee (e.g. an African startup or operating company located in Nigeria); the national government (e.g. Federal Government of Nigeria); the International governing bodies and organizations (e.g. United Nations; World Bank); the local population (e.g. residents of the town in which investee’s business is located); and consulting firms specializing in Africa. Each of these participants has at least one overarching interest.
Teams
- The investee is like the first team (or home team) that runs unto the soccer field. The investee’s overarching interest is in profit maximization (which makes them eager for foreign capital)
- The investor is like the second team (or visiting team) that runs out unto the soccer field. Its overarching interest is in realizing a return on its investment.
Referees
- The national government is like the main referee. Its interest is in maintaining its power. In order to maintain its power, the national government may have to balance encouraging foreign investment on one hand and looking out for its nationals on the other hand.[3]
- The international governing bodies and organizations are like the sideline referees. Their main interest is in peace and security.
Spectators
- The local residents are like the spectators. Their main interest is that their human rights (civil, political, economic, social, and cultural) are upheld with dignity.[4]
Coaches
- The different groups of consultants that advise the investor and investee are like coaches. Their main interest is the commitment to their respective client’s needs.
- Side note- perhaps a political risk consulting firm can have a branch of its business dedicated to lobbying. Can consultants be lobbyists?[5]
The Law
The law can be seen as the guidelines that manage the interactions between all of the participants in a given environment. These guidelines can be broken down into two segments: legally-binding rules and cultural/industry customs.
Legally-binding rules can be understood from two different angles: duties and rights. Like the two sides of a coin, each right has a correlating duty[6] attached to it. For example, a local tribe’s right to freedom of religion[7] invokes a duty that obligates the national government not to trample on this right by allowing the pollution of a river the tribe considers sacred. If an investee, in light of a cozy relationship with the national government, were to pollute such a river, the national government might have to answer to an international tribunal.
Like the rule of good sportsmanship in a soccer game, there may be additional guidelines that are not necessarily legally-binding but may still be relevant to how an investment opportunity plays out in the court of public opinion. Local customs and industry practices may be thought of as factors that mold the duties and rights embedded in the legally-binding rules. Some of these factors can be observed in an investee’s advertising campaign, community service, or the perceived professional ethics or reputation of the investee’s industry.
From an investor’s standpoint, after identifying the other participants in a specific investment opportunity, it may be worthwhile to consider the important guidelines, legally-binding or not, that may shape the investment. This consideration will be more valuable if processed from the perspective of what rights and duties are at play for each of the participants. Once an investor has considered the rights and duties at play, the next step is to frame each of the legal issues in their appropriate political context. Framing the legal issues in their appropriate political context is a critical step to any political risk management strategy. In essence, the way an investor frames the legal issue either becomes part of the problem or it becomes part of the solution. As an illustration, imagine an investor faced with a situation where the national government threatens to shut down certain businesses including the investee because of protests following the results of a recent election. If the investor chooses to frame the legal issue of the situation as civil disturbance caused by the local residents, this may limit the investor’s ability to seek recourse in a bilateral investment treaty[8] to stop the national government from shutting down the investee. However, if the legal issue is framed as state interference in private affairs, the investor has more latitude in pursuing an action against the national government.
A soccer game is not without rules and Africa is not without laws. Most African countries have a British or French based legal system as a result of colonization. (See, Private Equity in Africa – Lessons Learned). The British legal system is grounded in common law, and the French system is grounded in civil law. Civil law is characterized by laws that are written collectively and codified while common law is characterized by laws determined and interpreted by judges. Once an investment opportunity has been located, an investor can easily match it up with the applicable law regime that will likely govern the transaction terms and the potential litigation details.
[1] Specifically, private equity investment
[2] Case in point, Sub-Saharan Africa
[3] Consider that a National Government has to deal with regulations in light of the national currency, trade, taxation, and corporations that may impact the investment climate. Case in point – consider the tax hike the Zambian government placed on the Zambian mining industry; see https://www.miningweekly.com/article/zambian-president-to-negotiate-proposed-mine-tax-increases-2007-07-27
[4] Preamble, Universal Declaration of Human Rights, see https://www.un.org/rights/50/decla.htm
[5] https://www.tcpalm.com/news/2009/mar/22/consultants-are-lobbyists-too/ (an article that discusses how consultants-lobbyists are hired by corporations to influence the same legislators who pay the consultants-lobbyists for political help and advice).
If Political Consultant firms focused on Africa will inevitably seek legislative help to augment the political environment for their clients and if the legislators in African governments will inevitably seek expertise on certain aspects of a given legislation, can a strategic partnership be erected? Would it make good business sense for a PC firm to have a lobbying component in its consulting portfolio? On the other hand, does the PC firm run the risk of pushing its special interests ahead of legislation that can benefit the local population which would worsen, and not augment, the political environment?
[6] Also referred to as a “negative right” – a right that obliges inaction.
[7] Article 18, United Nations Covenant on Civil and Political Rights. A covenant comes from a UN convention which is a legally binding treaty; the convention can be enforced upon ratification by a certain number of States or if such convention becomes customary international law.
[8] A bilateral investment treaty (BIT) has the force of law when two countries each agree to give certain protections and benefits to investments made by citizens of one country and companies of the other country. For a qualifying investor, a BIT may provide additional protection beyond what the investor is entitled to contractually or under its political risk insurance policy. BIT also allows the investor to have recourse against the host country. The rights under a BIT exist as a matter of international treaty law and do not depend on the investor being in a contractual relationship with the host country. The goal of a BIT is to secure a stable environment in which foreign investors, corporations, or individuals, feel safe to run a business operation in a specific country.
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