Local Content Regulations: Lessons Learned
Local content regulations are likely to remain firmly in place across the continent, as governments struggle to find an answer to their demographic challenges.
Year-by-year, Africa’s oil producing club is becoming less exclusive, as discoveries in the Gulf of Guinea, the Horn of Africa and the Indian Ocean excite investors. However, in development circles these finds have been met with a degree of trepidation. For all of the continent’s progress in economic growth and diversification, talk of natural resource booms echoes with the troubling memories of hollowed-out productive sectors and ‘Dutch Disease’.
According to McKinsey’s Africa at Work report, the natural resource sector only employs around 1 per cent of Africa’s workforce—a disproportionately small fraction, given the scale of its contribution to gross domestic product growth. The same research forecast that the African workforce would grow by 122 million between 2012 and 2020.
Finding stable, productive jobs for that large cohort of workers is going to be one of the defining political challenges of the current political generation, and governments are increasingly looking for ways to leverage their natural resource endowments to build more diversified economies. Alongside the sovereign wealth funds that have been established across the continent to invest directly in infrastructure, governments have put in place local content regulations that require the international companies in the extractive industries to bring domestic businesses into their supply chain, and to invest in human capital development.
Perhaps the largest and oldest of the local content regimes in sub-Saharan Africa is in Nigeria, where a recent update to the legislation, the 2010 Oil and Gas Industry Content Development Act, gives clear rules on the extent to which local companies must be brought into international oil company supply chains. That indigenisation process could well be extended, if a much-delayed piece of legislation, the Petroleum Industry Bill, is finally passed.
“The oil and gas sector accounts for about 80 per cent of Nigeria’s budget revenue, so it has an important role to play in driving real growth and development in the country,” says Igo Weli, General Manager Nigerian Content at Shell Petroleum Development Company of Nigeria. “Through targeted capacity development initiatives, Nigerian companies have progressively become more significant in our supply chain. Recent activities focused on engaging Nigerian oil and gas professionals in the Diaspora have also helped to develop a flow of skilled and capable Nigerian human capital back into Nigeria.”
Typically, local content regulations have met some resistance from international oil and gas firms, who worry about the capacity of local enterprises to fully integrate into highly complex and technologically-advanced supply chains. In countries where there is a relatively small pool of skilled labour, the cost of hiring staff and procuring services can become severely inflated.
“Building in-country capacity requires developments on many fronts, in lock step with each other – it is not an easy task,” Weli says. “The key challenges in Nigeria include the dearth of research and development institutions, limited access to technology, the state of supporting infrastructure and industries and import duty regimes. Collaboration of key stakeholders from both the public and private sectors is crucial. Local content development will also thrive in a healthy industry - with growth in exploration and production operations as well as a steady flow of new projects.”
Shell believes that its work in local content has had considerable benefits for the companies in its supply chain, and for the wider country.
“We have deepened the participation of Nigerian companies in our operations, with attendant positive impact on the community, local and national economic and social indicators,” Weli says. “Our initiatives have contributed to the steady growth of in-country capacity in some critical areas that were previously a challenge for Nigerian companies to participate in.”
Farouk Gumel, who heads the professional services firm PwC’s operations in West Africa, says that genuinely building capacity within the supply chains, beyond simply complying with the regulations, has commercial benefits.
“Most of the local players are new. Most of their customers are [international oil companies], so maintaining quality in the supply chain is a critical success factor,” he says. “Any weaknesses will have serious financial, social and environmental consequences. The big guys are working with the small guys to ensure quality. It is a matter of survival.”
Gumel says that Nigeria is a good example of balancing the needs of building local capacity with the needs of the companies. “The country's local content rules encourage local participation but only to the extent that their is local capacity. The Country acknowledges you cannot build local capacity overnight,” he says. “Furthermore, most of the oil and gas assets are still owned by the [international oil companies] who demand the best workers, suppliers and safety.”
Other countries around sub-Saharan Africa where oil has been discovered are building their own indigenisation and local content regulations, alongside financial structures, such as sovereign wealth funds, to make sure that their economies benefit in the long term from their short-term oil windfalls. Gumel is uncertain as to whether Nigeria’s lessons have been learned.
“The jury is out. This is an evolving issue. Everybody is learning along the way,” he says. “I know the governments are talking to each other on such matters. Regulators are visiting each other on study tours. Only time will tell whose model is superior.”