Ayuli Jemide

Private Investment in Africa’s Infrastructure seems to be a regular song and topic for discussion by private equity funds and project developers in many commercial capitals of the world. This opportunity should be contextually viewed against the facts that by year 2015, 50% of the twenty fastest growing economies were African countries and despite this pace of economic growth the world-bank still…

One great underpinning of the legal practitioner’s trade is the often used phrase “the dignity of the profession”. Against this backdrop the highly esteemed profession considers certain acts an infraction on the dignity of our high calling as lawyers – advertising, marketing and other “unacceptable” conduct.

One that has been a subject matter of many debates is whether it is an infraction on lawyers’ dignity to queue up at a clients’ door with the intention of knocking heads together in a competitive bid-seeking the lowest bidder.

There are myriad of perspectives on this issue:

Competitive Law

In as much as our competition law in Nigeria is non-existent (or is a frozen Bill at the National Assembly) there is the argument that lawyers should be subjected to competition like any contractor bidding to supply office stationery or furniture. After all, do Lawyers have a halo on their heads that exempts them from the rigours that inform the commercial world? Interestingly, US competition law has a few old cases where people sued the lawyers association (Bar Association) in the US for anti-competitive acts on the grounds that the regulations governing the lawyers, the scale of fees, and other acts were tantamount to price fixing and collusion. For the record, the plaintiffs lost these cases.

Apples for Apples

There is a school of thought that opposes bidding simply from a value standpoint. They argue that intellectual property cannot be commoditised like gold or silver – X dollar per tonne. According to this school, the remuneration of a lawyer is a balanced matrix consisting of three things: the intricacies and the professional input required; the antecedents and the experience of the firm; and the amount of time expended on the matter. If these inputs are considered there may not be two firms that are identical (as gold on the commodities market) and the disparities increase even more as we begin to weigh strengths from a practice area perspective. This school posits that hiring certain law firms to do some categories of work is high risk, because when they bungle the client ends up losing more money than they have ”saved” on lower legal fees. In such a situation vertical benchmarking is near impossible!

Overheads Differ

One of the ironies in the legal landscape is the fact that law firms who have invested in their practices are often not rewarded by the domestic institutions that forms the usual ring of clients. How do I mean? In a competitive bidding, the law firm that has a very functional office and a sizable number of lawyers is definitely unable to “compete” in a price war with a one man firm running out of a residential garage. What the legal services “customers” do not realise is that when the chips are down the law firm with a few lawyers in their barn will not only provide a rounded job (two or three heads better than one theory) but will ensure that if one person has the flu the work does not suffer epilepsy or come to a halt. The question is: How many users of legal services realise this and are willing to pay a premium to the law firm with greater overheads?

The irony with the “heavy” overheads law firms is that sometimes market perception robs them of an opportunity to compete. The client simply says “Do not bother asking X law firm we cannot afford them”. The greater irony is that very often the client ends up paying more to the one man business than they would have paid if only they asked. Hmmm!

Hourly Billing

I once told a client who was vociferous about knowing how long it would take to produce a first draft of a shareholders’ agreement: It is not how long, but how well that counts! I knew where he was going in his pricing techniques – to find out how many hours and then multiply by our hourly rates and tell me what the bill should be. When he insisted on pursuing that line of argument, I came back strongly saying “Lawyers are not London taxi cabs with a meter running”. The point is that a competitive bidding based on an hourly rate system does work a grave injustice to lawyers who can work fast because they have the propensity to deliver on target. In other words: the man who snails through a brief, may get paid more handsomely than the person who delivers at jet speed. We also know for a fact that hourly rates are subject to gross manipulations. No wonder one of the highest earning firms in the world (Wachtell) does not as a rule accept a brief on hourly rate billing system. They size up the work and give lump sum exclusive of expenses. They are not cheap but their clients attest to the fact that they deliver good work and on target.

Commoditising Agent

In the Nigerian legal landscape today certain institutions have developed a scale of fees for the lawyers that they utilize doctrinally. In other words they have commoditised the provision of legal services and boxed every transaction into that “in-house” scale. The thinking from these quarters is that “Lawyers are a dime a dozen, so be happy that we use you from time to time at whatever price we offer”.  It is a reverse type of bidding system that says “we do not care what you think, this is what we would pay and only those who can fit in get work from us”. The banks and other financial institutions are the ring leaders in this game – aided and abetted by lawyers who accept whatever the cards deal (and many for good reasons arguably). Many established firms can simply not compete in this game which is for them a test of one’s ability to sell at less than value line. What is value line? It is the price a firm fixes on its time based on the value they believe they bring to the table.

Outsourcing

The price war in many countries particularly the US has led to the US firms seeking ways to cut down their overheads so they can compete with the other firms who pull down the prices for legal services. Outsourcing to India has become a veritable tool for achieving this purpose and believe it or not, it is now a huge market running in millions of USD. The emails are flying in and out of India – work billed at a cheaper rate (50%-60% discount on Associates billing rates in the US) are being churned out daily. Many firms have been able to stay afloat with the outsourcing option because their overheads are less, as the Indian lawyers are only used on a call basis. Nigeria is not there yet – or so I think?

Regulatory Issues

If you have done any work in the Public Sector recently in Nigeria the 2007 Procurement Act is right in your face. The Federal Government Ministries, Departments and Agencies (“MDA’S”) believe that by virtue of the Procurement Act lawyers need to bid like any other contractor. On the other hand lawyers and some of the in-house counsel at the MDA’S argue that the Procurement Act provides for single sourcing where the expertise you seek does not reside with many firms. They posit that lawyers who are experts in their field should be engaged by a single source negotiation process and not a bidding process because the other lawyers cannot be a good benchmarks on the level of expertise. I see this to and fro running for many years to come, with each doing as they think best in the circumstance .

Conclusion

Having said all, the real competition at the end of the day is between the heartbeat of a free enterprise economy and the lawyers’ attempt to protect their dignified territory. Who will win?

We are in 2011 and the talk of the day in Nigeria is the April elections. Underpinning all the chatter is the sorry state of our country – poor infrastructure, insecurity, et al. The question everyone asks: will the April 2011 elections bring us a deliverer?

Even the most patriotic and stoic amongst us (and believe me I am lover of Nigeria) clearly realize that Nigeria is at its all-time decline in many respects

Security

Today we discuss the unabated kidnappings with ease as though we have lived with it for decades and it is no longer a heinous crime. Many of us can count a dozen kidnap victims who are related to us directly or indirectly. Yet our psyche has accepted this as appropriate dinner table conversations and comedians weave tales around kidnap scenes – it is now a way of life!

A few questions are rife – how many kidnappers have been apprehended, tried, and sentenced? How much legislation has been passed at the Federal and State levels in response to this new mode of human (or inhuman?) trafficking? What new training and equipping have we provided to the police to ramp up their ability to deal with this malaise? The other aspect of our insecurity only deserves a passing glance on the pages of the newspapers – it is a near daily occurrence to read or hear about politicians who are murdered or nearly so. Ask any Nigerian to make a list of politically motivated killings under the long military era (coups and civil war excepted) and compare with under the shorter period of civilian rule and the findings are ironical – more people have lost their lives under the civilian era. Today, the proliferation of arms in Nigeria (excluding the armed forces) is enough to prosecute a war. No wonder a container load of arms was discovered at the Apapa ports. But how many slipped into the country before that one was exposed?

Political risk

Despite the fact that we have been in a democracy over a decade, our political risk rating has not improved significantly. If anything, the last 5 years has seen more policy shifts and reversals than in the 10 years preceding. Banking is making a U turn in many aspects – for example universal banking has been scrapped and is being replaced with the status quo which was specialized banking. Import policy reversals have left many who established factories in response to a ban on some imported items in a state of despair with sudden policy reversals – ask indigenous furniture manufacturers association for their horrid stories in this regard. How about the fact that the late President Yar’Adua put on hold the Cross Rivers State Tinapa project for several years – Investigating the project – until the foreign investors took their money elsewhere. Another interesting one was how a court nullified the election of the Delta State Governors less than 6 months before the end of his tenure. Uncertainty in public policy and in our political space is at its all time high!

Expatriate Quota

Many companies are complaining bitterly that application for renewal of expatriate quotas are being refused at an alarming rate, and several companies may face a management crisis in the next few months if this is not readdressed. Nigeria must make up its mind if it plans to run a liberal economy or not. If foreign investors will come, they will arrive at our doorsteps with their own managers. Are the top managers of Nigerian banks in other countries for example not Nigerians?

Visa Procedure

I once listened to the vivid description of the Nigerian High Commission in London and its dingy nature. I wish I could shed a tear or two. I am told that visa forms are sometimes given to people to go outside the premises to make photocopies. I have an American friend and client who dreads having to visit the Nigerian High Commission in New York – the stories are unprintable. We cannot even put up a deceptive first impression at our foreign embassies? But someone keeps saying that we are trying to attract foreign investors?

Transport Infrastructure

In the true spirit of consistency, after a foreigner has been dealt with thoroughly at the Nigerian High Commission in London (or wherever) we will subject them to some lavish welcome torture party at the Murtala Muhammed International Airport in Lagos: the heat from the epileptic air-conditioning; the smelly toilets; the long wait at the conveyor belts, the derelict escalator as you descend into immigration hall in near darkness. It is a travesty of some sort that the good name of the late General Murtala Muhammed is being associated with such a badly managed edifice. Perhaps we should in the interim call it “Dimka Airport” until we fix it right – Dimka was the coup plotter who killed General Murtala Muhammed, and it is apt because that airport is a major coup against our national pride and psyche as Nigerians. If I were the Minister of Aviation I will be too ashamed to place my photograph on the wall of that airport – a monument to dereliction.

Let me close this bit by telling of a particular night when I flew into Lagos with a foreign client on her first visit to Lagos. As we drove on, until close to the middle of the third mainland bridge, she popped her question – Do the street lights ever come on? What do you say to such questions? Maybe? Sometimes? Perhaps? Depends? What?

Sundry Signs of Decay

In the last few days you would have encountered other symptoms of gross societal decay. I will tell a few: I heard a man on radio frustrated about the INEC registration process for the forthcoming elections narrate how the registration machine (by whatever name called) could only recognize 7 of his 10 fingers and one of the officials suggested to him that he should consider being registered as a cripple with 7 fingers so he can be deemed to have concluded his registration. He vehemently refused and left in frustration! On another score, many citizens are miffed at how any responsible Government will ask the school children not to go to school for 3 weeks so that the school can be used by INEC for registration. I cannot believe it! There are more things going on today that are mind boggling. We can go on mentioning more!

Conclusion

As as Nigerian are you currently reluctant about long term investments in Nigeria in this season? If you were not a Nigerian would you invest in Nigeria?

The real estate market in Nigeria has grown in great leaps and growing even further – as a large pool of investors becomes suspicious of the stock market. Real estate seems to be a visible alternative that keeps the investors relatively in control if they buy property and manage it personally or through a property manager. But how many people can buy upmarket real estate that provides required return on investment? The market recognizing this appetite and vacuum has open and avenue for people to invest in real estate bite sizes – pooling money together in a structure that enable each participant to invest in a large portfolio or singular project with an express return to each investor commensurate to their respective cash outlays. This is the essence of the emergence of Real Estate Investment Trusts (“REITS”) or Real Estate Investment Companies (“REICOS”) in Nigeria. This concept of mutual real estate investment funds started in the US many ago and has grown to constitute a fair portion of the real estate investment in the US peaking at about 1 Trillion USD value in 2010 REITS have also become very popular in many countries the world over.

Is there a Legal framework for REITS in Nigeria?

Nigeria investment and securities Act recognizes REITS as a type of Collective Investment Scheme (CIS) and the Securities and Exchange Commission (SEC) has set out specific rules concerning how REITS should function. REITS are there highly regulated by SEC with very rebost rules and a plethora of Dos and Don’ts. Given that a REITS is an incorporated entity – set up as either a trust or company under the company and Allied Matters Act.

The key things a discerning investor should know about the current rules and regulations governing the REITS market in Nigeria today are:

Taxation

In several other countries a REITS or REICO is not subject to a tax because it is deemed as a low through transaction. The ecessnce is simply that rules other countries state that REITS should distribute a certain percentage of their income (usually up to 90%), in which case the trust or company is deemed to paying out to investors and not retaining profits in anyway. Such countries have legislated that the taxman should skip the income tax from the company or trust and collect taxes only from income of the anti-holder in the REITS.

In Nigeria however, there is not yet a definite statement on tax exemption for REITS or REICOS – despite ongoing efforts by SEC and other stakeholders. They real estate investment companies are subject to Company Incomes Tax, and so are the Trusts Income Tax Act deems a Trust to be a company ffor the purpose of taxation.

Investment Rules

By SEC regulations, depending on whether the entity is a company or trust, and whether it is listed or unlisted, certain rules apply as to how pooled funds should be invested. A minimum of 70-75% of company assets must be core real estate whist 20-25% may be real estate related assets. At any rate the maximum for liquid assets (cash in a fixed deposit account for example) should be 10%.

Assets Rules

The assets acquired by a REIT must be insured and manage by a qualified Asset Manager, Also s development must be held for a minimum of 2 years before disposal. And in the case of REITS (as opposed to a REICO) the level of new development should not exceed 20% of the Fund’s Gross Assets Value. Every two years a REIT a rating and valuation report whist the RECIO files a valuation report only.

Trustees’ Role

SEC regulations have imposed s Trustee on every REIT or RECIO. Why, The Trustee is expected to protect the interest of the Unit Holder in the Scheme. The Trustee has therefore has far reaching power: underlying assets of REITS are vested in trustee; investment by the fund manager requires the consent of the trustee; Trustee is empowered by the Trust Deed to perform several functions. The flipside is that the Trustee has onerous obligations to the Unit-Holder and has to indemnify them against losses occasions by Trustee’s negligence.

How Many Unit-Holders Required?

There is always the question of whether the laws specify a minimum or maximum number of participants in the scheme. In the US for example it must be at least 100 shareholders, whist in Australia there is a prescription. The only mention of numbers in Nigeria so far is in section 153 of the investment and securities Act that refers to “two or more investors” in defining a Collective Investment Scheme.

Capitalisation Required

According to the rules, where the REIT intends to be quoted on the Stock Exchange (as opposed to being a private REIT) the minimum offer for the IPO should be N1 Billion and subsequent offers not less than N500 million.

Corporate Governance

The issue of corporate Governance is important with mutual funds in the hands of a “total stranger”. Rule 247 goes to town in this regard and does a very good job at insisting, amongst others things, that: Trusteeship and Management are separate; REITS must have investment Committees; Trustee control on behalf of unit holders; there are no deals with a company where offices of the management company own ½ of 1% of share individually or cumulatively own more than 5%; Promoters shall invest minimum 10% and that there are different levels of notifications to SEC required for certain actions by fund managers.

Unit-Holder’s Right of Redemption

Section 166 of the investment and securities Act requires that when a unit holder requests, the manager under the scheme shall within the time prescribed by SEC buy from the holder the number of units specified by the holder at the prevailing price. This section would only apply to Open Ended Funds (privately held funds different from Closed Ended Funds which are quoted on the stock market and subject to different exist modes dictated by the prevailing market regulations and conditions). This section raises the company law question of whether a company can legally repurchase its own shares, but section 154 (3) of the Investment and Securities Act creates an exception to that restriction contained Section 160-161 of companies Act. Open ended real estate investment companies  can therefore repurchase their own shares.

Can a REIT Invest in properties Abroad?

The rules are clear that a Nigerian Real Estate Investment Scheme cannot invest outside Nigeria. However Section 195, of the Investment and Securities Act permits a foreign REIT with the approval of SEC to solicit for investors in Nigeria. It is of course important to reiterate that foreigners can invest in Nigerian Real Estate Investment Schemes based on our existing investment laws.

Conclusion

Several areas still need tightening: Firstly, although it seems to be the borrowed norm from other countries that 90% of income is distributed to unit-holders, the rules should be definite in this regard. Secondly, the issue of tax exemptions for REITS should be addressed as a matter of urgency. Thirdly the Land Use Act is begging for review in this regard-the steps and hurdles to title exchange are inimical to real estate development. Lastly, how would we grow the market for Mortgage REITS without a framework for property mortgages in Nigeria?

Presentation on Emerging Legal and Regulatory Framework for PPPs in Nigeria was delivered in July 2015 as part of the Nigerian Bar Association’s Section on Business Law Conference. Please wait for the Power Point Presentation to load: [embeddoc url=”http://ayulijemide.com/wp-content/uploads/2015/12/Presentation-from.ppt” viewer=”microsoft”]

Interview Conducted 17 May 2015 in Lagos, Nigeria. Transcript of Interview: Presenter: Nigeria has been rated as one of the worst countries to do business in. In-fact a 2014 Africa survey report says Nigeria is not among the world 60 countries to do business in. The World Bank even rank us 175th mostly because of the inconsistent…

Real Estate Unite 2015 Conference- Anchored by Mr. Ayuli Jemide

Plenary Session Discussion Topic: Housing Deficit, Infrastructure Shortage and Framework.

From the just concluded Real Estate Unite 2015 conference, the opportunities in the Real estate sector such as the Housing deficit of 17,000,000 and infrastructure deficit in Nigeria is discussed by seasoned experts Adenike Osilaja (President, MV Mortgage Inc), Ayuli Jemide (Lead Partner, Detail Solicitors)…