Does application of local content in West Africa hurt investments?

The concern that local content application may mitigate value creation and competitiveness in the economy is why it is a specific performance requirement prohibited by the World Trade Organisation (WTO) of which the countries implementing it are members.

However local content application remains in the statute book of many countries and even in the pretend free markets of the West, it forms the underlying philosophy behind policy decisions. Thus, does the application of local content in Africa especially in West Africa, lead to value addition or retard investments opportunities?

A session at the recently concluded 2016 Offshore West Africa conference included a panel discussion on Local content opportunities and participation areas. The panel had Kwaku Boateng, representing Ghana’s Petroleum Commission, Chinedu Oba, GM, Nigerian Content Development, Shell Nigeria. Also on the panel were Paul Zuhubem, representing Nigerian Content Development and Monitoring Board, Tosin Yusuf, Country Director, African Energy Association, Jide Jadesimi Executive Director, LADOL, and Ibilola Amoa, Managing Director, Lonadek as moderator.

Chinedu Oba came with the view of the industry where local content is conceived as value creation in the local economy not about Nigerianisation. Boateng was at the same forum selling Ghana’s local content policy that seeks to achieve indigenous participation of Ghanaian citizens in 51 per cent shares ownership in oil and gas companies, occupying at least 80 per cent of executive positions and filling 100 per cent of other positions.

The incongruity of policy and best practices that exists in countries like Nigeria and Ghana with stern provisions for local content application may be counterproductive to their objectives.

Ghana is projected to have oil reserves that could yield $20 billion in revenue in the next five years but has very limited local expertise and capability yet has a local content policy demanding 90 per cent local participation in the country’s oil industry by 2020.

While Nigeria has a more liberal policy on local content, its application is hampered by the fact that local companies have poor quality control systems. Equatorial Guinea mandates that all petroleum agreements must have local content clauses and provisions for local capacity building and insists preference is to be given to local companies in the award of service contracts even with limited capacity.

And this limited capacity is perhaps more pronounced in terms of human capacity. Madeline Young in an article for Nigerian Development and Finance Forum, highlighted the Organisation for Economic Cooperation and Development (OECD) 2008 report on pro-poor growth that the global mining industry provides approximately 25 million jobs world-wide, which is just 1 percent of the planet’s job market.  This percentage can vary from up to 3 percent to 0.7 percent in mining countries. Employment in the oil and gas industries measures up to 1.5 percent to 4 percent in oil-rich countries like Saudi Arabia and Equatorial Guinea respectively.

United Nations Conference on Trade and Development (UNCTAD) stated in the 2007 World Investment Report that, of that 1 – 3 percent of extractive industry employment created in a host country, the majority of those positions will be highly skilled, requiring specialised technical degrees such as engineering, advanced accounting, mechanical equipment operation certification, or specific administrative skills experience. Many positions with foreign companies also require multiple language fluency (English, French, Chinese, Spanish, Portuguese, Arabic, etc).

Panacea

West African governments look to local content as a way out due to pressure to provide employment but this is an industry where yawning local capacity gaps exists. Also the extractive industry is very capital intensive requiring huge capital outlay in operational costs, purchasing and importing equipment, technical studies (and knowledge) and attracting investments through creative marketing, opportunities that have not been created by governments that seems to have patents for sleaze, incompetence and the politics of bile.

A review of local content laws in the African countries requires in the very least, a rethinking of the philosophical undertones from which they draw breath. Policy should be framed with free market with a view to Africa creating and competing in free markets otherwise they will continue to fall short of modern realities.

Boateng admitted that Ghana’s targets are unrealistic, an open secret to any rational mind.

“We know it is very ambitious but it is to encourage Ghanaians and build local capacity. Clearly we may not meet the targets in 2020,” he said.

A compromise then has to be found that will include building local participation and encouraging critical foreign investments. Free trade zones with flexible conditions for foreign participation encourage investments that will help regulators meet key objectives.

Nigeria has about 34 free trades zones with laws that gives complete holiday from all federal, state and local government taxes, rates, and levies. Duty free importation of capital goods, machinery, components, spares parts, raw materials and consumable items in the zones.

Lagos Deep Offshore Logistics Base (LADOL) has successfully built $3 billion Egina floating, production, storage and offloading vessel (FSPO), an offshore production facility housing both processing equipment and storage for produced hydrocarbons.

Jide Jadesimi said, “Through local content, we have been able to start building a critical infrastructure in our facility that will become a legacy to our future generations.” LADOL is on course to provide 5,000 direct and 50,000 indirect jobs.

Ibilola Amao, noted a critical element in meeting local content expectations. “Local players have to first fill the gaps in terms of technology by partnerships with international companies.  We have too many small companies with too little capacity. We need to see local collaboration to build capacity.”

West African countries need to refine their definition of local content to be competitive in a fast-paced economy. Rather than protectionist policies, free participation in their local economies will eventually lead to technical competence, foreign direct investments and collaborations that will create more sustainable long-term value.

Local content should be seen as value created in the economy through domiciliation, domestication, technology transfer, training and capacity building. Success in local content should move beyond just in-country value creation to export of local products across domestic boundaries to become internationally competitive.

ISAAC ANYAOGU