On 15 October, ARI hosted a debate on how Africa’s extractive industries can be leveraged to spur economic diversification. The governments of established hydrocarbon producers such as Nigeria, and newcomers like Kenya, are taking proactive steps to realise the potential of natural resources through local content policies. International oil and gas companies also increasingly recognise the need to invest in local value-addition; provide opportunities for training, employment and entrepreneurship; and create shorter supply chains.
Dr. Jesse Salah Ovadia, Lecturer in International Political Economy, University of Newcastle; author of The Petro-Developmental State in Africa: Making Oil Work in Angola, Nigeria and the Gulf of Guinea:
- Oil and gas possess unique potential to leverage foreign investment in domestic industry. However, the benefits of extractives development need to be directed towards national development, rather than a small elite.
- Petro-developmental states must harness state capacity and invest revenues from oil and gas productively, but should also utilise local content policies to diversify the economy. Local content can anchor non-oil growth and economic transformation. The rebasing of Nigeria’s GDP last year highlighted the importance of domestic manufacturing and the service industry to the economy as a whole.
- Nigeria’s local content law is both one of the oldest and one of the strongest in terms of what it requires. Every country that has enacted legislation since has weaker regulations.
- The current downturn in the global oil price offers advantages for the development of local content. In Nigeria the depreciation of the naira has made local services cheaper for international investors. As long as oil extraction continues, so too do the benefits of local content.
Dr. Ernest Nwapa FNSE, Pioneer Executive Secretary, Nigerian Content Development & Monitoring Board (NCDMB):
- The discovery of oil distorted Nigeria’s economy, leading citizens to abandon productive sectors in search of easy profits from extractives. No value was added in country; crude was exported and gas was flared. Taxation and royalties were assumed to be sufficient benefits. There was little attempt by domestic businesses to provide materials or services to the hydrocarbon industry. International oil companies (IOCs) everywhere assumed they had no role to play in national economic development until producers established national oil companies (NOCs) to increase indigenous participation in the sector.
- President Obasanjo directed the Nigerian National Petroleum Corporation (NNPC) to work with IOCs to enhance value addition. The NNPC reviewed programmes from Brazil and worked with a Norwegian agency to avoid disruption to operations while creating a transparent way of broadening participation in the industry. A decision was taken to legislate, but to avoid being too prescriptive. Between the genesis of local content policies in 2003 and the final legislation in 2010, the NNPC opened dialogue with IOCs, service companies and regulatory agencies.
- The NNPC began by collaborating with those possessing technology, funding and expertise; it was important to start by building trust, before moving to detailed discussions. Avoiding disruption and remaining globally competitive were two key priorities, but so were the need to ensure sustainability and demonstrate government commitment. Nigeria pushed for immediate benefits to communities affected by oil exploration. Oil exploration brings noise, pollution, and social challenges to parts of Nigeria; and when companies move on they often take electricity and employment opportunities with them.
- In five years, the NCDPM multiplied the number of Nigerians employed in the oil industry ten-fold. This was more than the country had been able to achieve in the previous 50 years. IOCs moved from operating out of hotel rooms to establishing offices and workshops in Nigeria.
- Enshrining a local content policy in legislation is important; but there is a risk of including too much in the laws, which prevents innovation. Equally, targets needed to be revisited. Strong political will and demonstrations of financial commitment are required from government to build confidence. Collaboration with IOCs should result in win-win situations. Nigeria was fortunate that any risk of losing investment was mitigated by a global movement toward adopting local content policies. The supply chain in Nigeria is now robust, with most large companies using local suppliers.
Patrick Obath, Executive Director, ASI Kenya Extractives Industry Development Programme:
- Kenya has much smaller oil and gas reserves than Nigeria, but nevertheless the discovery has resulted in high expectations. Kenya is currently establishing how best to harness income from sector, use oil to catalyse economic transformation, and ensure sustainability. The country is also in the process of devolving power from the national level to 47 county governments. Tensions between different tiers of government, and between counties, may make it difficult to leverage benefits at the local level.
- Communities where resources are located have experienced interventions by NGOs and others warning of a “resource curse”. The challenge is to manage popular expectations. Investors, government and communities are meeting to debate how the proceeds of investment should be shared. At this stage, the aim is to transform knowledge and skills in affected communities so that over the long-term local people can be properly involved in the exploitation of natural resources.
- The sharing of revenue is a political hot potato. There is a false expectation that the day drilling starts, there will be funds available to communities. County governments need to brace themselves for a delay of eight to ten years before they see any returns on the development of oil and gas reserves. Both the national government and the counties need to better understand the investment cycle and plan accordingly.
Isabelle Ramdoo, Deputy Head of Programme, Trade and Economic Transformation at the European Centre for Development Policy Management (ECDPM):
- Local content policies take different forms. There can be quantitative requirements, for example quotas based on numbers, or on value; or qualitative requirements, such as reporting and justification obligations, information sharing, and advertising of opportunities. The scale and provisions can vary widely, both in terms of how ‘local’ the policies seek to be and whether they deal with labour, procurement, joint venture and technology transfer.
- Local content is not an end in itself, but part of a comprehensive development package. Governments also need to consider incentives for both foreign and domestic investors. A major challenge remains linking the extractive sector to others in the economy.
- Even if legislation is well drafted, more than just regulation is required. NOCs must possess a sound understanding of the sector, and the procurement needs at different stages. The government should work to identify opportunities and gaps, finance shortages, and adjust policies to enable local and international companies to cooperate.
- Research and development and innovation are also important. Local content can provide an opportunity to address the technology gap. However, it remains difficult to catch up with international suppliers given the degree of competition in that sector. Collaboration and partnership are the core of successful local content policy.
The Q&A can be listened to here:
Pictures:
Full Podcast: