Re-enforcing Local Content Laws to Attain Africa’s Economic Development
African countries had over the years, crafted impressive local content laws that are designed to increase the participation of indigenous companies in key sectors of their economy, especially in the extractive sector.
While a few countries have recorded significant milestones in local participation as a result of the laws, others are yet to achieve any success.
However, it is postulated that the reason the continent is yet to achieve its dreams in the area of local content is due to the lack of enforcement of the laws and the brazen disregard for the laws by international oil companies and their local partners in most cases and the lack of sufficient capacity to handle some key projects.
This write-up, therefore, highlights the efforts African countries have made in formulating local content policies, the successes they have achieved, the challenges hindering the policy and ways the laws can be strengthened, while highlighting the need to raise the bar in building capacities.
By Godspower Ike
The risks posed by global economic volatility, especially with the economic slowdown in Asia and Europe, have served a warning signal to African countries and have highlighted the need for countries in the continent to strive towards a self-reliant and sustainable economy.
To achieve this sustainable and self-reliant economy, economic and energy analysts have advocated a strengthening of local content laws across the continent and concerted efforts to dissuade international companies operating in the continent from violating these laws.
According to these analysts, African governments have today, come to the realization that jobless economic growth and strong government revenue is not enough to sustain political power.
Specifically, it is stated with the African population growing exponentially — Nigeria, for example, is expected to have a population of over 200 million by 2020 and with the emergence of a younger, better educated, job-hungry generation, government must create jobs and economic opportunities for all if it is to maintain a popular mandate.
Analysts, in a forum titled, ‘The Africa Sessions’, organized by Africapractice and Pinsent Masons, are however, of the view that drivers for local content development are already in place in Africa, stating that the question remains how to accelerate local economic development; how to develop the local financing structures, workforce and supply chains needed to create diversified local economies among others.
According to them, the return of better educated and trained Diasporas with strong professional experience is building the local human capital, able to fill the jobs and create the businesses needed to meet local content requirements.
They said, “These Diasporas are also returning with robust financial resources and a sophisticated understanding of international finance. At the same time domestic banking sectors are improving, increasing access to local finance while international banks and financiers, frustrated by poor growth rates and returns at home and more confident of investment prospects in Africa, are making more foreign capital available.
“Where local content requirements are clear, for example, on the subject of employment quotas; capacity shortfalls mean that compliance can be extremely difficult. If governments want companies to comply with exacting quotas in technical sectors, they must work hard to bridge the gap by improving standards of secondary and tertiary education, aligning curriculums with the technical requirements of important sectors and creating opportunities for public private partnerships in education.”
Local content breaches
It is agreed that the problem with local content in Africa, is not in area of the laws, but in ensuring compliance among players in the sector. Local content laws in Africa have been crafted to international standards, with emphasis on increased indigenous participation and economic growth.
Across the African continent, a number of breaches have been recorded in the area of local content implementation. Specifically in Nigeria, international oil companies (IOCs) have been accused of refusing to employ certain categories of Nigerian professionals, while others have blatantly refused to comply with the laws.
In an interview with Orient Energy Review, Peter Esele, former President of the Trade Union Congress, TUC, in Nigeria, disclosed that local content laws in Nigeria and a number of other African countries are not so effective because those who are saddled with the responsibilities of making it work are not living up to their responsibilities.
According to him, until the enforcers of the law ensure compliance and sanction offenders, African countries would not enjoy the benefits of the law. He said, “For instance, we have always had the National Agency for Food and Drug Administration and Control – NAFDAC. But when Dora Akunyili came on board as Director General of the agency that was when we now knew that NAFDAC actually existed.
“Until the people who are saddled with the responsibility of enforcing and making sure that everything is in line with local content do their job, we will not attain the necessary result. Whatever it is the country is benefitting at the moment is still intangible, compared to the huge potentials in the law.
“Taking example from other parts of the world, like in Angola that is trying a bit in that respect. I have some of my friends and colleagues that go there with rigs. No matter how good you are, Angolan authorities will only give you 30 days to pass on the knowledge, and you know that you are going to leave.
“Until we are able to emphasize the fact that certain areas of our economy, especially the oil and gas sector, must be strong on local content, then we will begin to benefit. You can imagine what this will do to our foreign exchange. Instead of having capital flight, we will now have local companies also repatriating these funds, thereby growing our economy.”
However, Raj Kulasingam, a lawyer at the international law firm, Dentons, identified Nigeria as the only country with a little bit of success in local content. According to him, the general consensus is that the local content rules in Nigeria has been successful in achieving its objectives of getting greater local participation in the oil and gas sector and has contributed to the creation of indigenous oil and gas companies such as Seplat, Shoreline, Afren among others.
He lamented the fact that despite the benefits Nigeria has enjoyed from its implementation, the impact on Ghana, Nigeria’s West Africa neighbour, remains to be seen.
Also commenting, Mr. Humphrey Okposo, Managing Director, Atlantic Marine and Oilfield Services, disclosed that while the purpose of the Local Content Act is to promote the indigenisation of Nigeria’s oil and gas industry, the implementation has provided a medium through which companies are taking advantage of the policies and flooding the market despite not possessing the qualifications or capabilities needed to perform the jobs they claim to offer. According to him, the emphasis on local content has led to growth in local participation, but not necessarily participation with substance.
Okposo noted that it has become common practice for contracts to be awarded to local companies that do not have capacity to perform the job. He said, “These companies then turn around and subcontract that contract to a company that does have the capacity, thus adding an extra intermediary and driving up the aggregate costs of the supply chain. “Most of the time, because these jobs are given to the lowest bidders international oil companies receive a good deal. The local companies who end up doing the job accept a lower profit margin, as the initial contracted company maintains a set profit margin for themselves.
“This creates challenges for the companies doing the job. With a lower margin, companies have to find a way to balance the books, invest in maintaining equipment, ensure that the compressors continue to run, keep an ample supply of workers on the payroll, and determine whether to take a loss on the figures and get the job done. In the long run, we take the hit financially for the imperfections in the system.”
He, however, advocated that local content policy directives be reoriented towards incentivising genuine capacity building, which can lay the foundation for future unassisted and organic growth of the local sector.
Also speaking on the issue, Mr. Igwe Achese, National President, Nigerian Union of Petroleum and Natural Gas Workers (NUPENG) stated that the monitoring body for local content in Nigeria, the Nigerian Content Development and Monitoring Board, NCDMB, as well as its counterparts in other parts of Africa, have failed to live up to expectation as a monitoring body for local content.
According to him, most of the international companies currently involved in local content are actually owned by foreigners who use indigenes as fronts.
He said, “Even where we have firms owned by indigenes in the spirit of the local content arrangement, especially in the drilling sub-sector, contracts are awarded to foreign firms or to companies which have no rigs.
“Where local companies are awarded some contracts, their workers are outsourced to service providers and casualised and paid pittance as wages. In most cases, the local companies are averse to unionism.”
He called on the authorities to wake up to their responsibilities to enforce, impose sanctions and do adequate monitoring.
For instance, he said, “The NCDMB must monitor effectively that the key provisions in the Act are adhered to, like Nigerians being given first consideration for employment and training; succession plans for positions not held by Nigerians; maximum of five percent of management positions for expatriates and that Nigerians must constitute a minimum of 60 per cent of the Board.”
Achese further noted that the whole essence of local content is to generate local capacity and utilization of technology and use the products that are domiciled in-country, instead of relying on products and services from abroad, which constitutes a drain on the continent’s foreign exchange.
According to him, this will go a long way to stimulate economic activities in the country, create employment and promote technology transfer; adding that the end result is the use of the continent’s human and material resources which is a chain in the service delivery system.
Sanctions for breaches
Stakeholders are of the view that one of the ways of discouraging breaches is placing heavy sanctions on defaulters. For example, BG Group Plc, the United Kingdom’s third-largest natural-gas producer, paid $71 million in fines in Brazil for breaching local content rules at an offshore project where it did not find commercial volumes of oil.
In Africa, sanctions are hardly meted out to defaulting companies and this has further compounded the problems of the continent in the area of local content implementation, this is in spite of various provisions for sanctions for non-compliance.
Specifically, in Ghana, acting as a ‘front’ to achieve local content status can result in a fine or imprisonment, while the breach of various other local content requirements can result in a fine equal to five per cent of the value of the proceeds from the relevant petroleum activity up to a maximum of $5 million. Whether these sanctions are implemented on defaulting companies or individuals remain to be seen.
The NCDMB had severally threatened to sanction international oil companies that flout the Nigerian Local Content law, stating that it has the right to sanction erring operators after the issue has been investigated.
However, we are yet to see any sanction in this regard.
In addition to Nigeria, Ghana, Angola, Morocco, South Africa, Uganda, Gabon and Guinea have passed local content laws in recent years, often in the extractive industries, with commendable provisions. However, these laws ended up not enforced properly.
The Africa Report, in a piece titled, Local content: Cultivating homegrown talent,’ pointed out that the Nigerian Oil and Gas Industry Content Development Act has tough requirements on giving local companies priority in oil block licensing rounds and compels oil companies and service providers to hire Nigerians.
Ghana’s local content law likewise gives local companies first preference in bidding rounds for oil blocks and requires a minimum five per cent equity stake for Ghanaian firms – not including the government-owned Ghana National Petroleum Corporation – in every oil licence.
Also, the report stated that in Uganda, a clause in the local content law says that “where the goods and services required by the contractor or licensee are not available in Uganda, they shall be provided by a company which has entered into a joint venture with a Ugandan company provided that the Ugandan company has a share capital of at least 48 per cent in the joint venture.
The report also noted that in 2012, the Moroccan government established a regulation that entitles SMEs to manage 20 per cent of all government contracts, adding that ensuring that these companies actually exist is a challenge, but skills and finance are the main constraints that limit the creation of a fleet of local companies that can seize local content opportunities.
Continuing, the report stated that in Angola’s oil sector, the international non- governmental organisation CDC Development Solutions created an enterprise development agency called the Centro de Apoio Empresarial (CAE) in 2005 in collaboration with the Angolan government, international oil companies and the national oil company Sonangol.
The CAE, according to the report, provides Angolan companies with training that allows them to participate in the supply chains of large oil companies, adding that CAE consultants also help in the development of business plans, a crucial mentoring service that many African SMEs could use.
It added that since its founding, more than 1,500 companies have participated in the scheme, winning more than 300 contracts worth $214 million and creating 2,700 jobs. In 2010, the CAE expanded its mandate to include the provision of finance.
The rationale is clear, according to the report, stating that after decades of natural resource flows out of African countries, economies remain locked into the lowest rung of economic development, with local companies unable to add value to raw commodities.
“The continent’s industrial fabric remains threadbare, and the growing number of young graduates will cause chaos if there are not enough jobs to fill,” it stated.
In spite of these laudable laws, the report, however, highlighted obstacles to local content policies to include the fact that the slippery definitions of local content can often lead to fronting, whereby multinationals structure arrangements so that there is only a semblance of domestic participation.
Another obstacle, according to the report, is the lack of support given to boosting capacity of indigenous players.
In addition, African Development Bank (AfDB) and the Bill and Melinda Gates Foundation (BMGF), in a report titled, ‘Creating local content for human development in Africa’s new natural resource-rich countries,’ written by AFDB’s Steve Kayizzi-Mugerwa and John Anyanwu, identified the constraints facing local suppliers from competing effectively to include lack of capacity, funding, information, skills, regulatory and institutional, and infrastructure.
The report further stated that in spite of efforts to promote local content, local firms may lack the capabilities to produce goods and services at the required quality and may lack access to credit.
It added that local firms and extractives firms may lack the mutual information to begin relationships, while the regulatory and institutional environment may be inadequate.
“Workers may lack the appropriate skills, in addition to the fact that infrastructure, such as power, water, or transport facilities, may be substandard,” it stated.
To strengthen enabling environment for skills generation and boost local content in Africa, the report stated that policy-makers should answer a number of questions, key among which are if the government would offer tax deductions on skills training by companies, or impose compulsory levies?
Other questions are who should take the responsibility for defining a national skills development plan linked to the extractives industry? And if there should be role for regional organizations?
However, the report said, “Our review of policies and of country experiences points to some general conclusions and lessons from experience. Nevertheless, policy-makers should avoid being tempted by easy answers and ‘best practice’ from elsewhere.
“Institutions vary from one country to another, including with respect to the relationship between governments and foreign investors, as does the level of domestic industrial capabilities and skills and the stage of the extractives sector life cycle. The appropriate policy response will therefore depend on the specific country and industry context.”
Strengthening local content in Africa
The AFDB and BMGF report further stated that for local content policies to be successful, government of African countries should promote an enabling environment for local businesses, by removing barriers to entry such as poor infrastructure, promoting the development of skilled labour, strengthening institutional coordination, facilitating coordination of local suppliers, removing regulatory requirements, and supporting increased access to finance.
The report further advised that the government should strengthen and clarify the legal and regulatory framework, ensuring a well-resourced and accountable administrative system with clearly defined functional responsibilities.
It further stated that encouraging collaboration among stakeholders is key to increasing local content and would help enhance productivity and efficiency through knowledge spillovers, synergies, better coordination, and efficient access to public goods.
The report also called for governments at all levels to build capacity of local businesses and invest in human capital; plan ahead to ensure sustainability well before any actual projects have started; engage in information sharing and transparency target the sectors with the smallest ‘gaps’, by working with industry to identify the parts of the value chain where local firms have capabilities for timely delivery of the required quality at a competitive price or where the potential to build capacity exists.
In line of the above, it is a general consensus that for local content to thrive in Africa, the laws and requirements should be made public, procurement processes should be transparent, standardized, while accountability should be enforced.
Stakeholders are also of the view that local content targets may be more effective if they are implemented in a phased approach while the rules are flexible. They also called for the establishment of a unified method of local content measurement with the policy having the force of law.
In general, it is agreed that effective local content policies need to be implemented by dedicated and independent government authorities staffed with qualified personnel who are knowledgeable regarding industry practices.
Such authorities, it is stated, can be responsible for monitoring local content and ensuring that local suppliers are guaranteed the opportunity to apply and compete for contracts. They should be tasked with establishing a registry of competent and qualified local vendors.
The authorities should also track opportunities in the value chain and on future projects and make the information available to local suppliers.