For international firms the Middle East has proved a tough jurisdiction to crack. Neil Hodge asks local firms and lawyers what they can teach the global players

While parts of the Middle East may practically float on oil, the region is still classed as an emerging market. With that comes investment risk as the local economies 'see saw' in response to wider global financial shocks and political turmoil.

The past couple of years have seen a raft of firms move into the region, with Addleshaw Goddard, CMS Cameron McKenna, Morgan Lewis & Bockius and White & Case all taking the plunge by sending in teams into the UAE, while Baker & McKenzie has merged with UAE-based firm Habib Al Mulla. In January Clifford Chance (CC) became the first international law firm to launch a joint Saudi and foreign-owned office in Saudi Arabia.

But lawyers based in the region admit that the market for legal services can be volatile. A few firms have pulled out, testament to the fact that international firepower does not necessarily translate in an area where close, long-term relationships are often the key to success: Olswang has shelved its Dubai plans, while Holland & Knight has shut up shop in Abu Dhabi – its only office in the Middle East.

Michael Kerr, Middle East managing partner at Dentons, says demand can fall more quickly in the region than in other markets, but being committed to the long-term success of the region is the key to winning clients. "The Gulf economies are strengthening again, and projects that have been in the pipeline for several years are now at the implementation stage," Kerr explains. "There is more confidence in the market and international law firms that have had a long-term presence here can see more business opportunities."

CC's managing partner for the Middle East, Robin Abraham, says the region is constantly maturing, but firms have to be flexible in how they deal with changes in the marketplace. "A few years ago restructurings were a big part of our practice, as were contentious issues," he says. "However, construction is the big fee earner now, and corporate and project finance work is becoming stronger. The areas of practice that are the most in demand – or most profitable – often switch.

"International firms that set up here need to be able to follow changes in the market quickly and make sure that they can support what clients want. Any firm that comes in thinking that it can focus on just a couple of sectors is going to find that demand for such work can be uneven after the initial rush."

A better year
Local law firms feel that 2014 has been a good year, and that 2015 will prove even better. Governments are opening their coffers and embarking on huge infrastructure spending sprees, while rules to improve corporate governance and transparency, and to free up financial services – such as Saudi Arabia's plans to permit overseas financial institutions to buy and sell shares in companies listed on the Tadawul, the largest stock market in the Middle East – are whetting foreign investor appetite.

Husam Hourani, managing partner at Al Tamimi & Company – the region's largest unaffiliated local law firm – says the past 12 months have been very successful. The firm has launched a new healthcare sector group, a regulatory practice and a sports law practice, and has opened three new offices in Erbil, Iraq; Muscat, Oman; and Manama, Bahrain – the latter completing its reach across the entire six-nation Gulf Cooperation Council. The firm is also looking at further new office locations for 2015.
Hourani is confident that Al Tamimi will capture a lot of work connected to a relatively new growth area of business in the region: initial public offerings (IPOs). "I expect the growth in company listings to continue," he says. "We've had three key listings this year and we see several more on the horizon. Having worked on all of the IPOs listed with the Dubai Financial Market so far this year, I believe we are perfectly positioned to support this trend."

Because of the increase in work, some firms are going on a recruitment drive as the market for legal services and government advisory work has become more buoyant. "We are looking to recruit more local lawyers with industry sector experience but it is a challenge," explains Rosanna Chopra, partner and business development manager at Galadari in the UAE. "The economy tends to work in cycles here, so you need to find the people who can best serve your needs for the long-term.

"Relationships are also very important in this region so you need to have people in your firm who can retain clients and find new ones when there is a downturn, as well as being able to deal with an influx of work when it comes. Essentially, you need a good mix of lawyers who can be minders, finders and grinders."

Booming markets
Sam Habbas, senior partner at ASAR, which has offices in Bahrain and Kuwait, believes the legal services market in the Middle East is generally on an upward trend. And while he points out that the market appears to be expanding faster in Dubai than anywhere else in the region, he adds: "In Kuwait we are seeing increased activity with regards to infrastructure projects, such as transport and utilities projects – including electricity generation and water desalination – and we are also experiencing increasing interest in capital markets, taxation and mergers and acquisitions."

Habbas is optimistic that Kuwait should continue to develop as an economic force and a foreign investment magnet thanks to the passage of several pieces of key legislation, including the amended Companies Law and a new Public Private Partnership Law approved in June. Large-scale infrastructure projects will also prove a valuable source of work for law firms, especially since a KWD35bn (£76bn) development plan approved by the Kuwait government in 2010 is expected to be extended next year. There is also likely to be a rise in capital markets work, compliance in particular, now that the Kuwait Capital Markets Authority,
the recently established financial regulator, is fully operational.

Public-private partnerships are also becoming more common in Bahrain, where financial services regulation is gathering pace. For example, there are plans to pass legislation to formalise corporate structuring and handover procedures for major government projects. Bahrain has also recently issued enhanced corporate governance provisions for publicly traded and regulated entities to further enhance investor and consumer confidence. 

There is no shortage of work for local firms, it seems. "Litigation, arbitration and alternative dispute resolution matters continue to keep the firm busy," says Qays H Zu'bi, senior partner at Bahrain-based firm Zu'bi & Partners. "Other legal services have also picked up in certain sectors such as telecommunications, hospitality and retail.

"We have noticed an increase in real estate and construction projects, especially after the law concerning property development has come into effect, which is expected to encourage local and foreign investment in local real estate projects. We have also been busy with numerous employment matters since the labour laws recently changed."

Law firms in Qatar are also set to enjoy the further spoils of planned large-scale infrastructure and transport projects. "There is a strong commitment from the authorities to develop the country's infrastructure and housing and this
is bringing in a lot of construction work and foreign contractors," explains Abdul Rasheed, legal consultant at Qatar-based firm Gebran Majdalany. "But that is only part of the story.

Qatar is intent on developing its financial services sector – as well as regulation of it – so that the country has a strong capital market to attract further foreign investment."

Local v international
While the uptick in economic fortunes is certainly blessing independent outfits, lawyers at these firms are uncertain how the improvements in investor confidence and government spending will materially impact on international law firms – or their share of the market in the region – in the long term.

The degree to which international outfits can operate across the Middle East varies from country to country. Generally, local firms are guaranteed the lion's share of direct government contracts, with foreign firms acting for contractors rather than the government. Local firms also benefit from being solely able to litigate cases in court. However, companies tend to prefer arbitration and dispute resolution outside of court in most parts of the Middle East, which throws international players a juicy bone.

While western law firms are making deeper footprints in the region, Habbas is confident that their presence will not adversely affect local outfits. "As an established local firm, we do not see the entry of international firms in the jurisdictions in which we operate as a threat," he says. "In many cases, foreign firms do not practise local law and would actually work with local firms rather than compete against them." 
Hourani adds: "We've seen a number of firms enter the market and we welcome this competition. We work with many of the international firms as their local counsel. Our model, however, is to remain independent."

Some believe that only those international firms that have had a sustained long-term presence in the region will ultimately reap rewards, and that new entrants are likely to face a real struggle. "The international firms are driven by the actions of their clients, so, if there is more foreign corporate activity here, the likes of the magic circle will follow," Chopra points out. "But when corporate activity drops back, so too does the presence of international firms.

"Locally based firms, however, are driven by the economy of the region, so they are more able to adapt to client needs as the business climate changes. They are here to stay, but international firms – which tend to have large overheads because they are 'senior partner heavy' – will only stay if they can afford to."

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Casablanca: the beginning of a beautiful relationship
International law firms are excited by new developments in Morocco – particularly in its largest city, Casablanca – which could mean that they will be able to use the location as a hub for pan-African operations, as well as a strategic link for the Middle East, North Africa and Europe.

Following the Arab Spring in 2011, Moroccan political and business leaders have been supporting a drive for reform and to open up the market to inbound investment by making the country a financial centre for North and West Africa.

So far, the signs are positive. Morocco has an international outlook, has close bilateral relations with the US and enjoys 'advanced status' in the EU's European Neighbourhood Policy – a programme that tries to foster better economic and political ties with non-EU countries that border EU member states.

Furthermore, the country has enjoyed recent economic growth of between 4% and 5% year on year since 2011, and has been relatively quiet and stable politically compared to other North African countries such as Algeria, Tunisia, Libya and Egypt.
The ingredients for Morocco to create a finance centre are all there: the largest financial institutions and insurers in the region are in Morocco and it is the second-largest financial market in the continent after South Africa. Experts say the decision to create Casablanca Finance City as a regional financial hub will help make it a stepping stone for the rest of the continent, and will also reinforce Morocco's role as a destination of choice for foreign investment.

"Morocco is a great location in which to do business and to launch a pan-Africa growth strategy," says Mustapha Mourahib, managing partner of Clifford Chance's Casablanca office, which opened in 2012. "It is politically stable and has a sophisticated legal system, and it is enjoying year-on-year economic growth.

"There is also serious political will here to embrace foreign business and open up the country's markets to foreign investors and companies, as well as a commitment to investing in large-scale infrastructure projects and reforming the country's financial services sector. For example, Morocco is the only African country to have rules on the issue of sukuk, or Islamic bonds."

Bernd Bohr, capital markets partner at Mayer Brown, says the launch of Casablanca Finance City is a positive move to attract foreign businesses – and law firms – to the country. "Morocco already has a stable banking sector, but the focus on financial reform and opening the market to more foreign players will improve transparency and confidence," he explains.

"Many international law firms already have an Africa strategy, but the recent political and economic instability caused by the financial crisis and the Arab Spring have put some of the more ambitious plans on hold. Developments like Casablanca Finance City are exciting as they provide opportunities for firms to get more involved in capital markets and financial services work, as well as drive M&A activity."