Sydney firms are pondering what the arrival of a second Magic Circle firms means for their fortunes in this congested market.
Readers from outside Sydney will need to excuse any parochialism, but Sydney firms continue to maintain that their city is the gateway to Australia, if not the region. “We believe international clients see Sydney as the gateway, which is clearly why Clifford Chance and Allen & Overy have opened in Sydney. Sydney now is the dominant player in the Australian legal market – it has become the financial services hub of Australia and is angling itself to become the financial hub of Asia. I don’t know whether that’s going to happen, but certainly Asians see Sydney as the prime gateway for investment into Australia,” says Henry Davis York managing partner Sharon Cook. Last year, Henry Davis York earned 20% of its revenues from off-shore clients.
While Perth lawyers have basked in the clear endorsement of their market implicit in two new Magic Circle entrants and while Brisbane firms gear up for increased competition from new interstate arrivals such as Gadens and Henry Davis York, not a great deal has been written on the lure of Sydney. Perhaps the attractions are obvious and require no explanation per se – but according to local lawyers, Sydney’s pre-eminence has strengthened post GFC.
“The pre-eminence and dominance of Sydney has increased over the years to a point where there is a clear gap between Sydney and the other cities around Australia,” says Cook. “I think the best example is the ASX-Singapore Stock Exchange merger talks going on at the moment. That’s a classic example of the dominance of Sydney in the Australian market and the attraction of Sydney to the Asian market. If that merger proceeds, it will only enhance Sydney’s position in the national and Asian market.”
While much of the industry commentary has centred on the Magic Circle attraction to Perth, Sydney firms see the arrival of A&O and Clifford Chance equally as an endorsement of the work they have been doing in their home town – and particularly an endorsement of the quality of the Sydney boutique firm. “It is interesting that Clifford Chance chose two specialist firms for its merger,” says Truman Hoyle managing partner Shane Barber. “There are a number of good specialist firms out there, especially in Sydney but also around the country that are quietly getting on with providing services – insurance firms, construction firms and so on.”
The point, says Barber, is that Sydney specialist firms are likely to come under greater international scrutiny. “What we’re seeing increasingly is that global buyers will seek out specialist firms. They’re not particularly concerned about having a one stop shop. And that’s something the Sydney market is particularly well placed to do,” he says. All of this translates into a strong case for lawyers at the top tier firms to consider a switch to a specialist firm. “Good practitioners with good standalone practices in discrete areas shouldn’t rule out the fact that there is this option available to them,” says Barber. “They will find in many cases that partner incomes in these premium specialist firms are not that different to the incomes they’re already earning.”
Privatisation
While Clayton Utz and Blake Dawson continue to capture a solid share of privatisation work in NSW, some other firms are also appearing on the big deals – notably Baker & McKenzie and Gilbert + Tobin. Late last year, Gilbert+Tobin and Clayton Utz advised the NSW Treasury on the A$235m sale of the waste management entity WSN Environmental Solutions to the French/ Singapore JV SITA Environmental Solutions. Baker & McKenzie advised SITA on that deal.
Gilbert + Tobin also advised NSW Treasury on the sale of the NSW Lotteries Corporation to Tatts Group, a unique transaction which saw Tatts Group opt for the services of its in-house team, led by GC Penny Grau and senior solicitor Anne Tucker, rather than external legal counsel – a decision which was prompted by the highly specialised nature of a lotteries business.
Perhaps the most controversial deal was stage one of the NSW government’s plan to privatise the electricity industry, a deal which has been subject to a parliamentary enquiry which may become a judicial enquiry if the Coalition takes government. The advisors on this deal were Baker & McKenzie (NSW government), Clayton Utz (Origin Energy) and Mallesons (TRUenergy). The exact proceeds of the sale are still unclear, although they are widely reported to be well short of the initial $3.3bn claimed by the government.
The Lotteries sale and particularly the electricity privatisation have been subject to some highly vitriolic criticism, which raises questions about the extent to which government advisors Baker & McKenzie and Gilbert + Tobin are likely to be dragged into the ensuing political quagmire. Gilbert + Tobin managing partner Danny Gilbert says that once the blame game begins in earnest, the line between a legal advisor and the client who receives the advice can get blurred. “Once third party critics start looking for deficiencies, I think you as an advisor are exposed to risk as people try to undo a transaction or work out what went wrong and deliver responsibility for that,” he says. “And that involves both a financial and reputational risk.”
Still, Gilbert is confident that the politics of the transaction will not harm the advisors: “Sure, if you’ve stuffed up, it’s going to taint the firm,” he says. “But if you’ve delivered a high quality service, I think that can stand aside from any criticisms that might be directed at the client. You can inevitably get caught up in it, but I don’t think to a great degree.” Gilbert says that he would have no hesitating in tendering for the next privatisation job that comes along: “Absolutely we’d be keen. It’s our job as tier one experts to be able to manage those risks,” he says.
An in-house government lawyer who did not wish to be named agreed that firms would not suffer any detriment from their involvement in controversial deals. “Everyone knows that the client makes the decision, not the advisor,” she says. “A lot of these decisions are not popular and everyone gets bagged in the end. But from the client’s point of view, I would say it is a positive thing that firms like Baker & McKenzie have got this experience in dealing with these kinds of matters – that would be an advantage when considering them for similar work in future.”
Henry Davis York partner Steven Blanch says that the story of electricity privatisation was far more a question of politics, not legal advice. “There were a lot of political problems, in-party fighting - so the model that was proposed did not go through. And so at end, it seems like they got away with what they could. That wasn’t where it started – the original proposition was to do what happened in Victoria, where most people were happy with the outcome,” he says.
PPPs
NSW has its fair share of PPP activity, although invariably the projects receiving the most attention have been the failures: the Lane Cove Tunnel which went into receivership last year – a process which generated work for Allens, Gilbert + Tobin and Minters - and the Cross-City Tunnel which went into receivership in 2006. Still, the state has also had its successful PPPs, such as the A$700m Royal North Shore redevelopment – a fact which seems to support the theory that social PPPs, or projects for which the private sector receives a fixed fee for providing a service, are the more successful class of PPP.
Still, one needs to be careful about the use of the word “failure” to describe the PPPs which have collapsed. “Fail is a tricky word, because as far as the government is concerned, the [Lane Cove tunnel and the Cross-City tunnel] delivered precisely what they hoped to deliver,” says Steven Blanch. “Both projects they came in before time and under budget – so on neither occasion would you call them a project failure either. It’s just that on both occasions, less people used them than was budgeted for.”
Chang, Pistlli & Simmons partner Richard Graham agrees that the critical issue was the traffic modelling which underpinned the projects. “It comes down to the assumptions made in the modelling – the numbers were just wildly wrong,” he comments.
While it is the private sector that have paid the cost, Henry Davis York partner Helen Vickers makes the point that governments do not want to be associated with a failed project, even in situations such as the two distressed tunnels where the taxpayer was not exposed. She says the difference between failure and success in these kinds of projects may come down to modelling and the type of tollroad under consideration. “Look at the M7 for example – it was a PPP similar to the Cross City and Lane Cove tunnels, with a very similar risk profile – why didn’t that one become a failure? It’s because it’s a different project. The Cross City and Lane Cove tunnels were expensive – short distances and a lot of expense for a short bit of road – compare that with the M7 which had no tunnelling - still expensive to build - but nothing like the tunnel cost – but it put corridors where they previously didn’t exist,” she says.
Some lawyers note that private sector clients have baulked at the costs of participating in PPP bids – although they readily acknowledge that there may be valid reasons for these costs. “The big complaints have been about bid costs – for example, in the [Railcorp] rolling stock PPP, one unsuccessful bidder had invested in excess of 110m ,” says Richard Graham. “That said, a rolling stock PPP is so technical that it would be hard to escape the rigour of having a lot of design work up front.”
Point of difference
If the Sydney boutique firm is the heir apparent in the post-Magic Circle world, there arises an interesting question as to how these often unheralded players can promote themselves in an overcrowded market. Truman Hoyle’s Shane Barber says that the key is to have a point of difference. “In a busy market like Sydney, you must have a point of difference that clients and lawyers alike can understand,” he says.
We’re a specialist firm focussing on technology, communications and media and new economies generally - we’ve got a story to tell which is quite different to most other firms in Sydney. So people understand what the firm’s about – that’s key to capturing the imagination and being disciplined about how you convey that to the market. We talk at a lot at seminars and do policy work for industry associations, government, chambers of commerce - invariably there’s a demand when you do that work to comment publicly so you develop a busy profile in terms of media - people begin to see the name.”
It has been many years since Gilbert + Tobin matched the description of a boutique specialist, but Danny Gilbert still recalls the basic lessons for establishing a practice: “Focus on the market and clients you want and build first tier capacity – it’s pretty simple,” he says. “Work out what you want to be, establish your brand around that and make sure you can outperform your competitors.”
Magic Circle firms will be looking to build their first tier capacity in exactly that manner, but Gilbert cautiously points out that having a strategy is not the same thing as having the capacity to execute it. “These foreign law firms, all they have done is move players on the board – the lawyers are doing the same work, but in a different house,” he says. However, he says that international firms will ultimately make an impact. “It will be a while before they start to take market share. Will they take it? I think they will,” he says. “The challenge of being the best is getting tougher, but we can meet it. It doesn’t bother me too much – I think we’re up for it.”
New South Wales legal market – quick facts
New South Wales accounts for 41.7% of Australian legal services enterprises*
37.4% of Australian solicitor practices are in NSW
45.5% of solicitor practice revenue is earned in NSW
SOURCE: IBISWorld Industry Report, September 2010
*defined as enterprises with separate management and accounts
