Rule of Law

Regime uncertainty

I would like to expand on one of the features of the real estate market in the Ivory Coast: Weak Rule of Law.

In general weak rule of law means that there is regime uncertainty, ie one cannot be certain what rules, permits, regulations or laws apply.  As a business owner one risks being greatly affected by the whims of the people in charge and what mood they are in on any particular day. And it’s difficult to do business when one cannot predict whether the government will issue a permit, confiscate capital investments, ask for bribes, tax according to the law or not, or arbitrarily stall operations.

When the rule of law is respected, it provides business with some measure of predictability so they can plan and operate smoothly. When it is not respected, there are just too many variables, too much risk of loss or waste

So that’s why there is more business and consequently more wealth creation in places with stronger rule of law.  However, the risk premium for doing business in a weak rule of law environment is high, as there is less competition and more opportunities. Niches in weak-rule-of-law environments which are somewhat shielded or countries which are trending towards stronger rule of law seem to be good places to be.

2005 map of Worldwide Governance Indicators, which attempts to measure the extent to which agents have confidence in and abide by the rules of society. Colors range from dark green (90th-100th percentile) to light green (75th-90th percentile), yellow (50th-75th percentile), orange (25th-50th percentile), pink (10th-25th percentile) and red (0th-10th percentile)
2008 World Map of the Control of Corruption Index, which measures the degree to which corruption is perceived to exist among businesses, public officials and politicians. Source: World Bank,

I’m not sure if the Ivory Coast is trending towards stronger rule of law – neighboring Ghana seem to have been doing so over the last years – but residential real estate could be a somewhat shielded niche.

Positives for residential real estate:

  • There is so much of it. The state bureaucracy doesn’t seem to have the resources or organisation to check every single owner occupied or rented dwelling. And if the tax on real estate was to be implemented according to the law or arbitrarily, all over the country, people would protest which would likely make such implementation difficult if not impossible.
  • It’s a business that blends in with ordinary people living in their homes. The government has a hard time targeting those making a business out of real estate without targeting single home owners or tenants.  Commercial real estate, per day renting or hotels on the other hand, are much more visible and more at risk to arbitrary and unpredictable government actions.
  • There is no need to transfer goods in our out of the country, (with the possible exception of importing building material but that isn’t at the core of the business.)  Customs at land borders, ports and airports are among the government entities where the regime uncertainty problem is at its greatest.
  • Property rights for real estate are certainly not as strong as in the developed world, but they are not disastrously weak, at least when there is some sort of building and not just empty land.   And then it’s debatable whether respect for property and other individual rights can be included in the concept of Rule of Law, but either way they are very important.


  • The buying of land, building, selling and enforcing rental contracts processes with their associated paperwork are vulnerable to regime uncertainty.
  • The business can’t be moved elsewhere.
  • There is a largely unapplied tax on all residential real estate, opening up for arbitrary enforcement. On paper the tax is 4% of the gross annual market rent for owner occupied properties, and 15% of the gross annual rent for lettings. What if you get three different tax collectors a year, each not acknowledging the other two, putting most of the tax in their own pockets and trying to negotiate the tax amount using a starting bid at a much too high level?

Political connections

Another survival strategy for businesses to dealing with an unpredictable government is “if you can’t fight them join them”. Ie, that businesses become so involved in government and regulatory bodies that they effectively gain control over the very entities that are supposed to keep them in line.

My guess is that practically all large companies active in the Ivory Coast have employed this strategy to some extent. With weak rule of law, politicians and government administrators get so much power that it is difficult to conduct large scale business operations without having them on your side.

In this environment a discussion on right or wrong in for instance the interpretation of a contract (not necessarily involving any large company), can – and I have seen this happen multiple times in West Africa – turn into a discussion of who knows the highest placed politician.

The fact that businesses can control law-making and regulations, achieve so call regulatory capture, is problematic. A business that achieves regulatory capture is also able to write and implement laws and regulations that it can deal with, but its competitors cannot. The eventual outcome is that companies use regulation to drive everyone else out of business until a monopoly is achieved, putting consumers at its mercy.

Guess this is a problem affecting the developed world as well, strong corporate lobby groups in the US spring to mind.

A little bit swashbuckling

I found this speech made by Amazon founder Jeff Bezos to the Princeton Class of 2010. It hits quite close to home.

Here’s the end of it:

(The full thing can be found at )

I was working at a financial firm in New York City with a bunch of very smart people, and I had a brilliant boss that I much admired. I went to my boss and told him I wanted to start a company selling books on the Internet. He took me on a long walk in Central Park, listened carefully to me, and finally said, “That sounds like a really good idea, but it would be an even better idea for someone who didn’t already have a good job.” That logic made some sense to me, and he convinced me to think about it for 48 hours before making a final decision. Seen in that light, it really was a difficult choice, but ultimately, I decided I had to give it a shot. I didn’t think I’d regret trying and failing. And I suspected I would always be haunted by a decision to not try at all. After much consideration, I took the less safe path to follow my passion, and I’m proud of that choice.

Tomorrow, in a very real sense, your life — the life you author from scratch on your own — begins.

How will you use your gifts? What choices will you make?

Will inertia be your guide, or will you follow your passions?

Will you follow dogma, or will you be original?

Will you choose a life of ease, or a life of service and adventure?

Will you wilt under criticism, or will you follow your convictions?

Will you bluff it out when you’re wrong, or will you apologize?

Will you guard your heart against rejection, or will you act when you fall in love?

Will you play it safe, or will you be a little bit swashbuckling?

When it’s tough, will you give up, or will you be relentless?

Will you be a cynic, or will you be a builder?

Will you be clever at the expense of others, or will you be kind?

I will hazard a prediction. When you are 80 years old, and in a quiet moment of reflection narrating for only yourself the most personal version of your life story, the telling that will be most compact and meaningful will be the series of choices you have made. In the end, we are our choices. Build yourself a great story. Thank you and good luck!

Jeff Bezos

Now there is a bit of survivorship bias here. Those that left good paying jobs to start their own ventures and failed, instead of creating multi-billion dollar companies, are unlikely to be invited to make speeches at Princeton.  Still, I think Bezos makes a lot of good points.  Life does get more enjoyable and interesting if one doesn’t play it safe all the time, and dare to make original choices.

And I have a feeling that those who leave nice jobs to start companies and fail, manage benefit from the experience somehow like succeeding in the next try or taking the career in a new path.  I don’t think there are many regretting trying.

Translating this into my own situation, I am already determined to push the real estate venture in Africa until it either becomes much bigger than it is today or fails.  (And blog readers will see how it goes!) Even if the venture never provides as much money as my day job, at age 80 I’d rather tell the grandchildren about setting up a real estate company in West Africa than being a mid-level employee at a large corporation.


Consumer credit

In the Features of the Real Estate Market post I wrote that mortgages are rare in the Ivory Coast. But why are they rare?

I think the underlying issue is a lack of trust and a weak legal system making it hard to enforce contracts. What’s the point for a bank of having a house as collateral for a mortgage, if it’s very difficult to legally take possession of it?

This applies not only mortgages, but to consumer and personal credit in general which is rare all over the Ivorian, and indeed West African economy. There are practically no cell phone subscriptions, and calling is done using pre-paid cards. Credit cards are rare, but debit cards are getting more and more common.  I recall visiting Senegal in the late 90s, and noticing that most people who used the few existing ATMs were foreigners. However, today in both Senegal and the Ivory Coast the vast majority of ATM users are local residents and there are often long queues for ATMs.

Water and electricity are actually paid in arrears even in poor areas creating a de facto consumer credit, but here, if bills aren’t paid, the electricity and water companies can just turn off the service without having to take any legal action. Continue reading “Credit”

A comment on the latest affair rocking the Ivory Coast

A blogger I mentioned a while back, Theophile Kouamouo, who is also a managing editor for the Ivorian newspaper Le Nouveau Courrier was arrested last week along with two other journalists from the same newspaper.

On the 13th July Le Nouveau Courrier published a story on corruption in the cocoa business  which included leaked conclusions from an ongoing legal inquest on the cocoa industry. The journalists are accused of “theft of administrative document” and asked to reveal their source, something they have so far refused to do according to AFP and other media.

It’s clearly discouraging that journalists are put in prison and pressured to reveal their sources. On the other hand it’s good to see that the affair has created quite a big stir among the civil society and local media as well as gathering some international attention. There has even been talk about all Ivorian newspapers publishing the leaked information together, and as Koumouo and Le Nouveau Courrier are pretty pro FPI and Gbgabo, the issue appear to cross party lines, even though so far I have mostly seen media close to the opposition focusing on it.

The way I see it is that it’s a whole lot better that when journalists are put in prison, the civil society reacts and makes a big outcry, hopefully leading to the journalists’ release without charges a few days or weeks later,  than a situation where media does not publish controversial stories or where journalists instead of being arrested are picked up by guys with kalashnikovs in the middle of the night and never seen again.

Journalist Guy-Andre Kieffer has not been seen since 2004

So the stronger civil society is in this type of situations, the better it is for the Ivory Coast, and for anyone wanting to do business there in an honest way. I’m cautiously optimistic that civil society is on a path of strengthening and there seems to be a positive trend.

In 2003 Transparency International (TI) wrote the following:

While civil society is generally weak in West Africa, there were a few cases during the year, notably in Senegal, where civil society responses to corruption had a political impact. The proliferation of private media has helped expose cases of corruption and sustain pressure for government accountability. The region’s record on freedom of expression and freedom of information is not strong, however.

And on in their latest overview text on Sub-Saharan Africa I read:

Unfortunately, in most of the region, governments are either unwilling or unable to address corruption effectively, and progress is slow even in those countries where the political will to reform exists. In addition, the level of development and organization of civil society also varies considerably. Notwithstanding, civil society throughout the region is increasingly becoming active and outspoken concerning governance issues and corruption. Media in many African countries are independent and critical, and corruption is now publicly debated.

With increased room for civil society to manoeuvre and greater freedom for the media, TI chapters in the region have become an integral pillar of national integrity in their respective countries by demanding greater accountability from government and advocating reforms in the areas of governance and the management of public resources.

But if civil society is in one corner of the ring – who is in the other?
In the case with Le Nouveau Courrier, the national prosecutor Raymond Tchimou has since 2007 led an inquest into the cocoa industry that has already caused many of the top dogs in the industry to be put behind bars on provisionary detention (including individuals with close ties to Gbagbo according to RFI). It’s Tchimou, that has ordered the arrest of the Nouveau Courrier journalists and asks them to reveal the source of the leak.

So it seems to be pretty complex, and for an external observer it’s hard to figure out exactly what’s going on, and maybe the boxing analogy makes it too much a black or white issue whereas there are likely to be shades of grey, (but putting journalists in jail for not revealing their sources, that’s a black or white issue, dammit!).

My guess is that somewhere close to the “other corner of their ring” are members of the super elite  with political connections who have gotten rich by more or less corrupt practices in the cocoa industry, and who now are doing what they can to preserve their positions.

To conclude, I found this quote on avenue225 from the police at the prison where the journalists are held:

«Ici nous gardons les criminels et autres braqueurs. Nous ne comprenons pas trop ceux que ces journalistes font ici», lance un policier en essayant de nous rassurer avec le sourire «Ne vous en faites pas. Ça ne va pas durer comme ça ».

Freely translated to:

“Here we keep the criminals and robbers. We do not quite understand what that those journalists are doing here, ” said a policeman trying to reassure us with a smile “Do not worry. It will not go on like this.”

Lessons from letting to poor people in rich countries

Get Rich Slowly

I just read a three part story on the lovely named blog “Get Rich Slowly” about an investment in a low income area in an American city (I think it’s Indianapolis). It’s about a 23 year old guy starting out in real estate by buying a cheap 8 unit apartment building with no money down, which on paper looked like a great investment. And well, then the problems start. Here’s the story:

Part 1 – How I Bought an 8-Unit Apartment Building with No Money Down and Walked Away with $1000 Cash at Closing

Part 2 – Lessons Learned from Rushing Into Real-Estate Investing

Part 3 -How My Real Estate Investing Adventure Came to an End

An excerpt:

One of the main reasons for the low price was the neighborhood: It wasn’t just a low income area — it was one of the lowest income areas in the entire city. The units rented for an average of $450/month, which included all utilities.

Contrasting it to the Ivory Coast

The tenants in my 6 unit apartment building in Yopougon, in Ivory Coast’s commercial capital Abidjan, pay 15,000 CFA Francs, or 29.33 USD per month.  So, disregarding the water and electricity bills  which are not included in Yopougon, that’s a developed – developing world difference of a factor 15x  (450/29.3).

In the Merits of Meritocracy post I speculated that there would be more problems with tenants in poor neighborhoods in rich countries than in poor countries. The story from Indianapolis does give some anecdotal support to the first half of this theory:

Economically depressed neighborhoods bring plenty of unexpected issues for first-time real estate investors. I had factored in a higher vacancy rate and knew the average tenant would be more transient than normal. However, I hadn’t accounted for the emotional impact of dealing with issues like drug addictions or existing racial tensions.

One of the three paying tenants when we took over was named…Amber (at least that’s what we’ll call her here).

Amber had at least two, completely opposite personalities. The first was of a stereotypical southern belle. She’d greet me with a warm smile, invite me inside, and offer me something to drink or eat. She’d say things like, “I hope you have a Jesus day,” whenever I’d leave. The first three times we met, I assumed she was the best tenant of the whole building.

Unfortunately, Amber’s second personality was less friendly. It involved ranting, screaming, and at least three explicit words per sentence. She’d call and leave 17 voicemails within a hour, each one more incoherent than the last. At times it was so bizarre I felt like pinching myself to be sure I was conscious.

The final straw came one day when we were having a company install new furnaces in the building. Amber intentionally waited until the crew was almost done with the job and dialed the fire department. She claimed that the HVAC company was trying to kill her by piping gas straight into her apartment through the air ducts. As you would expect (and appreciate), the fire department takes any calls of gas leaks very seriously.

Within ten minutes, there were three fire trucks parked outside of the building.  While examining Amber’s unit, she also took the liberty of informing the firemen that the HVAC crew had molested her cat. The biggest problem with her story was…she didn’t even have a cat.

So I hope there are no Ambers among my tenants in Yopougon, but we’ll see!   My guess is that there won’t be people with this type of issues among the tenants, not only due to the screening, but also due to the fact that they tend to be taken care of within extended families in Africa. And if they are not taken care of by a family they are unlikely to have a regular income and being able to pay a deposit.   That’s what happens when there is no all-covering national social welfare.

Ethical aspects

Doing business in poor areas

It struck me that when doing buy-to-let investments in poor areas there is no way getting around that one has to be prepared to throw out poor people from their homes. Not in person, but that doesn’t make it feel any better. (or, ahem, maybe it does a bit, but it’s not different from an ethical point of view)

The somewhat cold and rational way to look at it is that doing business in poor areas is beneficial for the area creating better services (housing in this case) and jobs. Not doing business there at all because one cannot take tough decisions leaves everybody worse off.

A half charity, half business approach to allow some tenants to stay without paying rent out of pity is I believe a recipe for disaster.  By doing this there is no longer a business relationship between landlord and tenant where both can hold their heads high. Instead the tenant becomes dependent on continuous charity from the landlord.

Additionally, the incentives that are created are awful if the tenants with most problems don’t have to pay rent, whereas honest hard working tenants have to pay. The honest ones might become a bit less honest and come up with a few problems of their own in a situation like this.

Doing business and doing good?

One better model to mix business with philantropy is what Warren Buffett and Bill Gates are doing. Ie, focus completely on the business at first and then at old age do philantropy in a sophisticated, well thought out and business like manner, or just give the money away to someone that does philantropy very well (like Buffett did). Doing successful philantropy or aid is actually very difficult in my opinion, if by success it is meant that it actually helps the poor in a non-temporary way, and not just makes the donor feel good about himself/herself which is a goal much easier to achieve and arguably more commonly achieved.

However, Buffett and Gates didn’t start their businesses in Africa and weren’t faced with the ethical issues associated with doing business in a place with prevalent poverty. One that did is Ingrid Munro, a middle aged Swedish woman who manages to mix business with doing good and is almost becoming my new hero!

Jamii Bora

Ten years ago Munro lived in Kenya and had just retired. She had gotten to know 50 beggar women living in the slums of Nairobi who wanted to borrow money from her. Instead of lending them money straight away, Munro encouraged the women to save the equivalent of half a euro a week, promising them they could borrow twice as much as they saved.

It worked out great and was the foundation of the microfinance organisation Jamii Bora (meaning “Good Families” in Kiswahili). Munro’s idea was to aim Jamii Bora’s services at the poorest of the society, actually unlike much other microfinance often targeting people a level above the poorest of the poor.

From the start, and I like this part, Munro made it clear that Jamii Bora was not doing charity, and that business considerations would strictly be the top priority.

On Jamii Bora’s Swedish website (there is an English one too) Munro is quoted saying:

“One cannot lift a person out of poverty. There is no country in the world that has raised itself out of poverty through charity. What we offer to Jamii Bora members is access to a ladder that they can climb up to take themselves out of poverty. But the climbing they must do themselves.”

Today Jamii Bora has 300,000 members, is building a whole new town outside Nairobi and has obtained a banking license making it Kenya’s fifth largest bank by account holders and is offering all types of financial services.

Now, I’d say Ingrid Munro is a social entrepreneur as Jamii Bora’s main goal seem to help people and not to make money. It’s interesting to see though, that strict business priciples and aiming to make a profit (Jamii Bora aims to make a small profit) not only contributes to the goal of helping people, but seems to be critical to Jamii Bora’s success.

Unlike Jamii Bora, my own little venture aims primarlily at making money, but helping people is a non-negligable side effect. And looking at Jamii Bora, contrary to popular belief, it looks like the goals of making money and heping people are more symbiotic than contradictory.

For more info on Ingrid Munro, check out this interview with her in a (great) New Yorker article about microfinance

Tenants’ incentives

New Tenants

The tenants for the remaining two apartments (out of six) in Yopougon have now been selected. One is a factory worker in the Zone Industrielle de Yopougon, working with cosmetics I think, and the other is a security guard.  Very regular blue collar day jobs in other words, and even formal sector ones.

Zone Industrielle Yopougon

According to my local partner one cannot ask them for their salary, but an estimation would be that it is below 100,000 CFA Francs (152 EUR) per month, maybe in the 50,000 – 80,000 range. To get the total household income, the income of the spouses need to be added, but at the moment I don’t even know if the two new tenants have spouses.

While these households are poor in an absolute sense on a global scale, they are actually above average in the Ivory Coast and among the relatively lucky few that earn a regular income. If this was the norm the Ivory Coast would be called a tiger (or lion) economy and a success story.


Anyhow, I am starting to suspect that I have been worrying too much about tenants not paying rents. Looking at their incentives, they have paid a five month’s deposit and there is also a credible risk of being forced to moved out if rents are unpaid. I hope it won’t need to go this far but after two months’ unpaid rent, one can start the process of getting an expulsion order at a court and having a “hussier” to execute it. It might be a bit complicated and cost more than 5 month’s rent, not including bribes, but it is doable.

The tenants are likely to have unexpected expenses, such as a relative needing medical care, that can delay rent payment, but my guess is that unrecoverable delays will only happen if their regular income is lost. I am guessing that a tenant is not going so far as to risk losing his home to help a relative or sort out other problems that can arise.

If I’m right, it means that the rents will be paid relatively alright, and absent other troubles (such as for instance floods, damage to the property etc) the investment should work out. The idea with this investment was partly to test investing in a not so well off neighborhood on a small scale  and learn from it, and if it looked promising, do it several times over.

Scaling up

Now,while it does look promising, doing it several times over poses a few problems. There aren’t that many similar plots of land for sale in Yopougon, and those for sale are often so called “terrain villageois” where property rights can be unclear and it can be a long bureaucratic process to sort them out. The whole process of buying land has many pitfalls, making patience very important.