Monday, 5 November 2018

Lessons Learned from Capacity Building Projects in Africa: A Regulatory Perspective

William (Bill) Ferreira. Partner Hogan Lovells, Washington D.C
“Capacity development is the process through which individuals, groups and organisations, and societies deploy, adapt, strengthen, and maintain the capabilities to define, plan and achieve their own development objectives on an inclusive, participatory, and sustainable basis.”

United Nations Economic Commission for Africa

As a Partner in the Africa practice of a global law firm with projects across the African continent, I see first-hand how clients embrace these capacity building principles.  For the past 25 years, our firm has advised colleges, universities, hospitals, foundations, NGOs, civil society organizations, and development companies on capacity building in Africa.  While for all of us the greatest and most important challenge is achieving a project’s sustainable development goals, we must also solve another very practical problem -- how to implement a legally sound operation in the host country.

The following lessons are drawn from observation and experience with capacity building projects across sub-Saharan Africa.  These projects cross sectors and disciplines, ranging from public health and medical research to chronic hunger and education.  The lessons identified here are broad, in that assorted business and legal considerations may influence the approach to any one regulatory area in Africa.  As such these reflections are illustrative; they hardly exhaust the twists and turns that arise in each country.  But perhaps this discussion will serve to inform and remind the reader of principles that underlie professional judgment on regulatory issues that arise in capacity building projects. 

Respect Africa’s country-by-country uniqueness. Each country’s distinct political, social, and historical framework informs the modern regulatory climate.  To overlook these distinctions and to paint with a broad brush (such as, “This approach worked in South Africa so it probably works in Nigeria”) is hazardous.  For example, several years ago an organization established a legal entity in South Africa to undertake an innovative education and training initiative, which ultimately was successful.   The organization aimed to replicate that successful model for Nigeria, re-purposing the same corporate templates to start the project in Nigeria.  What ensued was a sticky multi-year quarrel with Nigerian university regulators about the mission of the entity, which could have been avoided if Nigerian legal advice had been taken at the outset.

The takeaway: a legal strategy in one country is not necessarily transferable to another country, and legal solutions that make sense from a western law perspective may be completely unworkable in African jurisdictions.  Assertions offered by local contacts, such as “This is the way it’s usually done” is no substitute for proper advice from reputable local counsel.  Respect for Africa demands no less. 

Obey the “doing business threshold.” To institutions long experienced in Africa projects, discussion of this topic is like a broken record.  But incredibly, some humanitarian organizations still plunge into boots-on-the-ground projects in Africa without consideration of local “legal status”—i.e., local business registrations, licenses, or other permissions to conduct programs in the host country. The consequences are plain.  Increasingly evident is the ability of inflexible and bureaucratic regulators to discover (through sophisticated means) an institution’s blind eye to registration and related in-country tax and employment law obligations.  Penalties often follow.  Nonprofits and humanitarian institutions generally do not enjoy automatic exemptions or “grace periods” for compliance with local business law.  Activities that trigger host country registration obligations or other legal status issues may include:

Lagos, Nigeria
  • Employing local nationals, or posting employees to positions there.
  • Executing a lease for office space.
  • Opening a bank account.
  • Operating in a highly regulated sector (e.g., medicine, higher education).
  • Procuring equipment, vehicles, or insurance for in-country assets.

None of the steps in the process of setting up a registered operation presents a conceptually difficult problem; however, the combination of formality and inefficiency that may characterize government functions in Africa makes the process lengthy and sometimes frustrating.   To apply for host country registration and licenses in a capacity building project may involve, for example, submission of forms, proposals, resolutions, bylaws, powers of attorney, financial records, and other materials sufficient to put regulators on notice of the institution’s intentions and activities there.  Various countries permit local operation via a collaboration agreement or affiliation agreement with a local entity, or a memorandum of understanding with the appropriate government ministry.  Some countries permit foreign institutions to “piggyback” on a governmental organization’s legal presence, such as operation pursuant to USAID’s bilateral agreements with the host country.  In still other countries, the institution could be subject to civil or criminal penalties for operation of any program prior to registration of a specific in-country business entity and licensure of that entity.

Because program sponsors often are very eager to begin operations, and because in many African countries it is unlawful to begin operations until certain formalities have been completed, it is important for institutions to find the fastest and surest way possible through the legal thickets of qualifying to operate in the host country.  A remarkable array of “interim” solutions may be available, depending on the county.  In all these circumstances, capacity building organizations must respect the rule of law wherever they intend to pursue an operation.

It takes only one employee. Recently authorities in an East African country executed a search warrant on the offices of a US organization engaged in public health technical assistance programs in that country.  The allegation: omission to obtain proper immigration status for dozens of US nationals posted to that country, and omission to remit personal income taxes for local employees.

Hiring just one local national, or posting just one employee to the host country may trigger financial and legal obligations there.  As a general rule, host country employment law applies to local nationals and third country nationals assigned to positions in that country.  It may seem convenient to engage staff as “independent contractors” or “consultants” as opposed to employees, to avoid entanglement with labor law, payroll, and tax withholding obligations in each country.  But this is a trap.  Most countries disregard the “contractor” designation if the substantive arrangement between the parties suggests that an employment relationship exists.  Mischaracterizing the relationship generates fines and unpleasant proceedings.  Similarly, HR-related documentation such as “Staff Manuals” and “Terms of Service” are ripe for dispute when drafted without inquiry into local labor law. 

Johannesburg, South Africa
Respecting immigration status also is critical. For example, in Mozambique a citizen of foreign nationality cannot reside there for work without obtaining a residence card and a work permit, which entails Ministry of Labor approval and a trove of documents (e.g., a certificate of completion of university studies, translated into Portuguese and certified by the Mozambican consulate and foreign ministry of the country of origin), regulatory clearance from police, and attention to quotas on the number of foreigners permitted to work in the country.  Many organizations find these immigration-related requirements especially difficult to accept when, over the course of many years, they have operated with no immigration-related difficulties.  Recently, however, organizations that operate “as they always have” were fined and nearly barred from reentry because local staff did not hold appropriate immigration status.

Engage local stakeholders. Hall of Fame Major League Baseball pitcher Satchel Paige once said “Don't pray when it rains if you don't pray when the sun shines.”  Something similar can be said for relationships into Africa.  Cultivating healthy relationships with local stakeholders is vital, not just during a project but before a project proceeds and following a project.  Local stakeholders – such as cultural leaders, associations, professional networks, nongovernmental organizations, and municipal authorities – have sharp perspectives on the substance of a project and the regulatory path forward.  Gaps and ambiguities persist in written policies or guidelines that pertain to capacity building projects, especially for scientific and public health initiatives, and engagement with local leaders (including local counsel) is a responsible approach to understanding the values that should guide a project.  Often a question from local stakeholders -- Does this project seek to deliver a “quick win” or to establish a long term commitment? -- affects the project’s legal and regulatory strategy.

Take one example:  After receiving a large USAID award for a 5-year training and education project in North Africa, a major US hospital held meetings with local health department officials and professional networks across a dozen provinces within the African country, to introduce the project and establish personal connections.  These relationships made a crucial difference when challenge after challenge arose in the large-scale project. But timely implementation of the project ultimately yielded an additional 5 years of funding from the sponsor.

Avert conflicts, bribery, and corruption. Consider this scenario: Recently a development organization flagged “procurement irregularities” in purchases in a West African country.  A little investigation showed an unusual volume of supply contracts with a company based in a particular province.  The organization’s leadership visited the company’s physical location in that province.  The address turned out to be an abandoned bakery.  What followed was a protracted internal review and voluntary disclosure to funders that distracted substantially from the humanitarian aims of the program. 

Headaches have been traced to unwarranted assumptions about the suitability of local business partners.  It’s best to know in advance that your proposed collaborator is financially distressed, accused of fraud, or staffed by family of government officials.  Due diligence on African entities is possible through public searches, discreet reference checks, local counsel, and even investigative firms, none of which are necessarily expensive or time-consuming.  Often these checks yield precious information on the counterpart’s reputation, motivation, business experience, and finances.

Although many development organizations work hard to change the culture of bribery and corruption, rigorous offensive and defensive measures remain crucial.  Senior management at today’s development organizations implement a thoughtful, multi-faceted approach to anti-bribery compliance.  In addition to anti-corruption policies and standard procedures to diligence vendors and third parties, there are routine risk assessments, periodic compliance training, user-friendly guidelines, helplines, and ongoing monitoring of transactions.  One organization prepared and negotiated a bilateral agreement with the Ministry of Health, titled “Principals of Ethical Practice”, to distribute to all employees, partners, vendors, and consultants across their field operations.

Final thoughts 

Trial and error can be costly in capacity building initiatives.  The regulatory environment in many African countries is opaque, even as reforms are underway.  Myriad more topics, from banking regulation to import and export, are worthy of mention.  The practical challenge in addressing these issues is not the particular difficulty of any one of them, but the difficulty of learning what the rules are for all of them and threading the necessary paths through the local regulatory processes.   Several pieces of the puzzle must fit together before large capacity building projects can properly begin, and orchestrating the necessary actions efficiently, so that they come together in a reasonable and timely manner, is much more difficult than one might reasonably expect.  But making a permanent difference in Africa’s future is worth the effort. 

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