Shaping Asia’s Infrastructure: Investing in Africa - the risks and opportunities for Asian project stakeholders

Africa is in an era of significant growth and transformation: its population is expected to double by 2060, while economic growth in Sub-Saharan Africa is projected to reach 4% in 2025/2026. Infrastructure projects are estimated to be worth nearly $620 billion, ranging from road construction to energy infrastructure, such as the Nigeria-Morocco gas pipeline, the Namibia green hydrogen project, and the East African crude oil pipeline. 

This blog is the fifth in our series: “Shaping Asia’s Infrastructure”, which explores legal developments shaping infrastructure across Asia. We explore the trend in outbound Asian investment in Africa, which remains a key growth market for Asian industrials, some of the challenges that investors can meet, and protection under treaties and in contract, as well as some points to bear in mind when making investments in North Africa in particular.

Is the trend in outbound Asian investment in Africa still alive?

In a word, yes. With the Asian Infrastructure Investment Bank continuing to expand its investments and partnerships across the continent, Africa remains a key target market for Asian industrials. 

Between 2022 and 2023, Chinese investment in Africa increased by 114%, while South Korea signed 47 cooperation agreements in mining, energy, and manufacturing, and Japanese investors renewed their interest in technological development in African projects.

Furthermore, Mauritania has been made eligible for concessional financing by the Japan International Cooperation Agency (JICA) after meeting their lending criteria. Mauritania will now have access to preferential loans to finance infrastructure and development projects. This comes after JICA determined the issuance conditions of the 83^rd and 84^th JICA bonds, called “Africa-TICAD Bonds”. With bonds issued in two tranches of JPY 15 billion with a 3-year maturity and JPY 8 billion with a 5-year maturity, the proceeds will be allocated to finance JICA’s operations in Africa. This signal of intent is supported by recent JICA partnerships in Egypt, Ghana and Morocco related to infrastructure projects. 

What are the challenges?

To ensure the success of these projects, it is crucial for investors to effectively manage investment risks through investment and contractual protection and a thorough understanding of the African market and civil law systems. If this is not done properly, the consequences can be severe. For example:

• Governments may revoke long-held licences, as happened with Nigerian oil exploration licences issued to a consortium including the Korea National Oil Corporation, allegedly due in part to delays in construction. Risks relating to local ownership laws and other restrictions on foreign investors can also be significant, as shown by (i) the DRC’s decision in 2022 to temporarily suspend the mining operations of Chinese-owned China Molybdenum due to allegations of unpaid royalties and circumvention of local ownership laws; and (ii) the withdrawal by Guinea of over 100 mining permits earlier this year.
• Governments may enact laws radically altering the commercial and legal arrangements struck with private investors. For example, Mali introduced a new Mining Code in August 2023, granting the government a mandatory 10% stake in mining projects and the option to purchase an additional share, significantly altering the balance between state and private interests.
• Local laws can even determine which dispute resolution mechanisms are available, as with South Africa’s Protection of Investment Act which mandates mediation as an initial dispute resolution procedure and only allows international arbitration with the government’s consent. It is therefore crucial to ensure investors have thoroughly considered their position in the local jurisdiction and have taken appropriate steps to manage investment risks (including by agreeing specific dispute resolution mechanisms by contract or ensuring they benefit from a favourable bilateral investment treaty) before a dispute arises. 

Seeking investment protection under investment treaties and/or contracts with African State entities 

Many African States are parties to investment treaties ensuring both substantive and procedural protection to foreign investors. Such treaties typically include clauses requiring the State to treat the investor as favourably as local and foreign competitors, prohibiting expropriation of the investment without compensation, and providing for dispute resolution mechanisms, such as arbitration. 

To qualify for protection, an investor must be a national of a contracting State and hold a qualifying investment in another contracting State. The definition of an investor can include individuals and companies, whose nationality is determined based on incorporation, principal place of business, corporate seat, and / or control. In this regard, investors should ensure that their corporate structure allows for treaty protection. They should also pay close attention to “Denial of Benefits” clauses, through which host States can deny treaty benefits to entities that meet formal nationality criteria but lack substantial business activities in their claimed home State.

Investors may also protect their investments through investment agreements with host States or State entities. In such cases, investors should obtain representations and warranties ensuring that their counterparty is entitled under the applicable law to enter into the investment agreement and act on behalf of the host State government. Investment agreements may contain stabilisation clauses, addressing how any future changes to laws and regulations in the host State will affect the contractual rights and obligations of the foreign investor. While this is no guarantee against changes in legislation, such clauses usually impose an obligation for the State to act in good faith when enacting new laws, and compensate the investor in case of breach. 

Finally, investors should bear in mind the rules of international law regarding State immunity, which preclude national courts from exercising adjudicative and/or enforcement jurisdiction over another sovereign State. An arbitration agreement generally constitutes a waiver of immunity from suit, whereas rules on immunity from execution depend on the domestic law of the place where the enforcement is sought. It generally advisable to negotiate a waiver of immunity provision in any contract with a State to ensure both immunity for suit and from execution have been adequately waived.   

Being aware of legal barriers to entry in North Africa

North African countries can impose complex licensing processes, often involving multiple government agencies as well as sector-specific regulations that can be difficult to navigate, notably in the telecommunications, banking, and energy sectors. To access the markets in certain sectors, foreign companies might be required to partner with local firms or have a certain percentage of local ownership, or might face foreign investment caps. 

By way of example:

• In 2019, a French multinational retail corporation attempted to expand its operations in Morocco, but was required to form a JV with a local partner, and to hold no more than 49% ownership. 

• In 2018, a Qatari telecommunications company faced significant delays and high costs due to the need to obtain multiple licences from different government agencies in Algeria. The process involved extensive documentation requirements and compliance with local regulations, which were not clearly defined, leading to operational challenges and increased entry costs.

Understanding the civil law system of North African States

Most North African States operate under civil law systems. 

These systems are generally based on a comprehensive, codified legal system which includes detailed codes and statutes. Case law can be persuasive but it is often limited and not binding; the statutes play a core role. This is in contrast to the common law system which exists in several dozen countries, largely as a legacy of the British Empire, and is based on precedents. Past decisions bind future ones, subject to new legislation. 

The differences between these two systems carry practical contractual and risk management considerations. For example:

• Unlike most common law jurisdictions, civil law systems impose a general duty to act in good faith during both the negotiation and performance phases of the contract, potentially broadening the obligations of the investor and the State beyond the contract’s express terms. 

• Furthermore, in civil law systems the parties’ conduct during the negotiations is relevant to the interpretation of the contract, meaning that investors should be cautious when exchanging correspondence or making statements to other parties. In common law jurisdictions, by contrast, pre-contractual negotiations are generally not relevant to contractual interpretation.  

• Common and civil law systems approach liquidated damages differently: courts in civil law systems can, even of their own initiative, moderate or increase the penalty agreed by the parties if it is manifestly excessive or derisory, whilst common law systems do not allow penalties (but rather liquidated damages that must be at least notionally compensatory in nature, else they risk being struck out). 

Anticipating potential disputes 

When contracting with a foreign State, it is important to choose a neutral dispute resolution forum, such as arbitration, which will often be provided for under investment treaties or investment agreements. Investors should pay close attention to the drafting of the arbitration clause at the time of contracting. In francophone North Africa, many States negotiating arbitration clauses will seek to impose their local law (or, sometimes, French law) as the applicable law, as well as an African seat. When negotiating the arbitration clause, parties should be particularly cautious when it comes to the seat, , the arbitral institution and the law applicable to the dispute. More generally, investors should ensure that the arbitration clauses are clear, detailed and tailored to the parties’ interests and circumstances. 

Throughout the project, investors should keep a good record of all events through documentary evidence. Should a dispute arise, before filing their claims, investors should make sure to satisfy any conditions that may be found in the contract (for instance, time-bar provisions and notice requirements). 

Investors should also consider enforcement of an arbitral award at an early stage: where enforcement is possible and realistic, how to enforce, and against what assets. For example, to enforce an award under the New York Convention, (for states which have retained the reciprocity condition) both the seat and the jurisdiction of enforcement need to be signatories to the Convention. If a dispute is against a State-owned entity, there may be political implications of enforcing an award which should be considered in advance. The presence of local courts should be considered as well, particularly if they have a history of interference in arbitration proceedings. 

In summary, Africa continues to offer compelling opportunities for Asian investors, but success depends on careful structuring, robust investment protection mechanisms, and a thorough understanding of local legal and regulatory environments. By anticipating those challenges, investors can better manage risks and ensure the long-term viability of their projects across the continent.