Local content – the phrase has rippled through Africa’s energy and mining sectors, gathering strength over the past decade. From workshops to conferences, from ministerial briefings to presidential speeches, African governments are devising frameworks that will hitch their domestic industries to the growth that foreign investment brings.
Nigeria, Ghana, Angola, Morocco, South Africa, Uganda, Gabon and Guinea have passed local content bills in recent years, often in the extractive industries.
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 5% equity stake for Ghanaian firms – not including the government-owned Ghana National Petroleum Corporation – in every oil licence.
The rationale is clear. 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.
African Union Commission chairperson Nkosazana Dlamini-Zuma reminded African finance ministers in March that African countries have to “design a comprehensive industrial development framework […] to speed up and deepen value-addition of local production, linkages between the commodity sector and other eco- nomic sectors”.
Guinea’s mines minister Kerfalla Yansané says: “We have been learn- ing from our mistakes. Our mining companies were not integrated into the mainstream of our economy. Now we want them to be part of growth corridors. There should be a link between mining activities and the whole en- vironment, meaning agriculture, services, transport, education and so on.”
For Jean-Louis Ekra, president of Afreximbank, this economic nationalist moment “is not just happening in Africa, because of the difficulty in job creation you see around the world. In Europe, whenever a company says it will move a factory abroad you have instant uproar from the government.”
A panel of experts convened by Britain-based law firm Pinsent Masons earlier this year was unanimous: “Local content legislation [in Africa] is here to stay, and those companies that fail to recognise this evolving investment reality will quickly fall behind.”
In places where governments have been working on this for some time, like Nigeria, there are real changes afoot. “One of the best testimonies to this is local participation in the annual CWC Nigeria Oil & Gas Conference,” says Fisoye Delano, senior vice-president of CAMAC International and previously man- aging director of the Nigerian Petroleum Development Company.
“The number of Nigerian oilfield services providers has changed significantly, just as significantly as the number of indigenous exploration and production companies. Eighty-five percent of exhibitors in NOG 2014 were local service providers.”
Multinational companies tend to fight against the local con- tent policies. When companies have large international service providers, they can keep costs low and maintain high standards. A senior manager at an oil company operating in Nigeria says: “What they are asking for in local content is just unworkable.”Local service providers often ask for higher fees than their international competitors and do not have the same levels of experience.
The complaints of multinational companies are not the only obstacles to the implementation of local content policies. Two additional challenges are rooted in the historical lack of capacity in local industries.
The first is 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.
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% in the joint venture.”
Few Ugandan companies have the capital to set up joint ventures with multinationals. Because of the lack of definition of what constitutes a Ugandan company, civil society groups say that local elites can create front companies that help multinationals to com- ply without transferring skills and wealth.
Some of the early black economic empowerment deals in South Africa faced this problem, hence a redoubled effort by the department for trade and industry to crack down with an approach that uses scorecards and an agency to investigate the investors.
When there is room for discretion in interpreting the eligibility criteria in local content deals, predatory elites can benefit.
The second obstacle to local content policies is the lack of sup- port given to boosting capacity. “Of course we have to build the capacities of our SMEs [small and medium-sized enterprises] and our manpower so that we can actually turn local content into reality,” explains Guinea’s Yansané.
In 2012, the Moroccan government established a regulation that entitles SMEs to manage 20% of all government contracts. 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.
Here, at least, there seems to be more progress. 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 provides Angolan companies with training that allows them to participate in the supply chains of large oil companies. CAE consultants also help in the development of business plans, a crucial mentoring service that many African SMEs could use.
Since its founding, more than 1,500 companies have particip ated in the scheme, winning more than 300 contracts worth $214m and creating 2,700 jobs. In 2010, the CAE expanded its mandate to include the provision of finance.
Some of the companies that the CAE has helped have grown into much larger companies. Examples of success include the NASA Commercial Import and Export Lda, which started off as a small company with a handful of employees and now supplies safety shoes and other clothing to Chevron. Another is the plumbing and electrical repair company Luafanda Reparações. It won a $680,000 building maintenance contract with BP in 2010.
But this remains small beer com pared to Nigerian success. The listing of Caverton Helicopters on the Nigeria Stock exchange in late May is just the latest step for the indigenous air services company, which won a contract from Shell worth $760m over five years.
“Today, that company is becoming a regional player, selling ser vices in Ghana,” says Simbi Wabote, global local content manager for Shell. He believes it is because of a step up in quality, and especially critical mass. “Doing business with the oil and gas industry is not about small enterprise, these are not Mickey Mouse contracts”.
Niger dock’s manufacturing for Total is another example, likewise the many vessels servicing platforms offshore that are owned by Nigerians. Most encouraging is that companies that have benefited from local content deals tend to get local banks involved in their operations. Again, Nigeria leads the way.
“Banks in the West Africa region are now depending on Nigerian banks for expertise in major oil, gas and power transactions,” says CAMAC’s Delano.
In the long term, strengthening local banks could be far more important to boosting Africa’s economies. ●
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