Designing Local Content Frameworks in the Oil, Gas and Mining sectors in Africa: Principles and Guidelines

It is widely agreed that many resource-rich countries, particularly in Africa, have not benefited from their abundant natural resources. This phenomenon has become known as the resource curse.[1] The term resource curse describes the paradox whereby countries that seemingly have an abundance of natural resources tend to suffer severe social-economic and political challenges. These challenges are as a result of inter alia; mismanagement of the natural resources and the proceeds thereof, conflicts over both the sharing of resource revenues amongst communities and for control of these resources, political and economic instability, and rampant corruption. 

It is amid this backdrop that many African countries have placed developing and reforming pre-existing local content policies and regulations among the top priorities for policy development. This is as a strategy to increase the benefits from the oil, gas and mining sectors, to promote economic transformation. For example, Kenya has in recent years accelerated efforts to create a local content policy for the petroleum industry to enhance local stakeholder participation in the growing oil and gas sector, amid the discovery of oil deposits in 2012. There is now a Local Content Bill of 2018,[2] and the government is looking to develop both Local Content Oil and Gas Regulations, and the Kenya Local Content Policy. Currently, oil, gas and mining companies are required to take local content aspects into account before embarking on operations. 

There is no single universally accepted definition of the term local content.[3] Instead, the definition especially of the word “local” and the companies that are deemed local, is country specific and is defined in accordance with the country’s policy objectives. However, it is argued that the definition of such terms is of no consequence, but what is imperative is to assess the economic development needs of a country and how the oil, gas and mining sectors could contribute to addressing these needs.[4] The aim of this article is not to venture into the debate on what local content means, but to explain some of the principles and guidelines that are required in designing an appropriate model for local content to enhance economic growth and development. 

It is trite that the term local content comprises two components, namely: local procurement and capacity building. In both the mineral and petroleum industries, there is a strong focus particularly on local procurement policies, a pillar of local content policies. Local content can be described as the added socio-economic value that accrues to host nations from the exploitation of oil, gas and other natural resources. The added value is manifested through the creation of jobs for domestic communities and promoting enterprise/business development, procuring machinery and other material from local companies, encouraging technology transfers and stimulating innovation in local economies et cetera. 

On one hand, properly designed local content policies ensure that value remains within a country to enhance long term economic development of the country of operation. On the other hand, poorly designed local content frameworks could have adverse effects on a country. For example, they do not only reduce government tax revenues, but also prejudice local infant companies by procuring machinery in other countries, and enhance unemployment if personnel are sourced from other countries, among other detrimental impacts. 

There are a number of principles and guidelines that could assist in the design of effective local content policies, as shown below (this is not a closed list).   

Key guidelines for local content policies: How to create value through local content policies

• Local content policies must be clear and specific about what they aim to achieve for the country and the responsibilities must be properly allocated.[5] The policies should not be designed as blanket provisions that are applicable to all other sectors but must be designed in a manner that they are specific to the targeted industry. Many local content policies in Africa have failed to achieve their intended objectives because of the lack of clarity.

The different stakeholders involved in oil, gas and mining projects must be able to understand the priorities of the government of the host country, and their responsibilities. This understanding ensures that the burden of delivering on the agreed goals not only falls on the oil, gas and mining industries, but also on all stakeholders involved, as a measure of accountability. 

• The local content objectives must be both realistic and attainable within a specific period.[6] This also ensures that the respective stakeholders can be held accountable for not delivering on their undertakings within the defined time frames. The local content policies must also have a long-term vision to transcend political cycles.
• These polices must be flexible to changing circumstances and priorities and allow the relevant stakeholders to adapt to such changes. For example, historically in Africa, whenever a new political regime accedes to power, there tends to be a myriad of changes in the new government’s policies and priorities. Also, advances in technology in mining production technologies could pose challenges for the industry, hence, local content policies must be designed in a manner as to anticipate such changes. 

The fundamental idea is that local content policies must be consistent with national development plans. Many countries have national strategic documents or documents that set out the country’s vision for development, like South Africa’s National Development Plan (NDP), Kenya’s Vision2030 etc. In 2009, the African Union (AU) adopted the Africa Mining Vision, which among other objectives, seeks to foster “transparent, equitable and optimal exploitation of mineral resources to underpin broad-based sustainable growth and socio-economic development.”[7] This policy document sets the framework for the future of mining in the continent. Local content policies ought to align with these and other development plans. 

• Along with local content policies being flexible to changing circumstances, they must be predictable.[8]Frequent changes in regulations could be detrimental to companies by increasing operation costs and contributing to delays as companies try to comply with the policies in place. 
• In terms of procurement of goods and services from local companies, the procurement rules and regulations must be transparent, whether they are contained in statute or secondary documents.
• Local content policies should incentivise investors to invest in the oil, gas and mining industries of the economic growth and development of the country.[9] For example, containing provisions that stipulate fiscal incentives such as: expenditure in training nationals of the host country be recoverable as expenditure for continuing operations in the host country. 

Although there is a need to incentivise investors, policymakers need to guard against encouraging rent-seeking behaviour, whereby companies would seek to benefit through subsidies and other unwarranted government incentives, without creating value for the host country.   

• The policies must be designed to contain mandatory requirements to promote local content such as: (https://www.afdb.org/en/topics-and-sectors/initiatives-partnerships/african-naturalresources-centre/delivering-on-the-promise-leveraging-natural-resources-to-accelerate-humandevelopment-in-africa/)local sourcing requirements to ensure that mining companies source their inputs from local suppliers, and domestic employment requirements to force mining companies to employ a certain percentage of labour at different levels of the respective projects and reserve some categories of jobs to local employees whilst limiting the number of foreign labour. For example, in the mining sector in South Africa, the government, through the Mining Charter imposed compulsory requirements for the employment of at least 40% local labour at all levels, including at senior management levels.[10]

Additionally, ownership provisions should be incorporated whereby mining companies are required to enter into joint ventures or partnerships either with local companies or the state etc.

• Lastly, local content policies must incorporate mandatory monitoring and enforcement mechanisms.,[11] This can be done for example, through the establishment of independent government institutions to monitor compliance with such polices, and to sanction those that are found to have contravened those policies.

This article has outlined some of the overarching principles, but in no way suggests that these are the only guidelines to be resorted to in designing local content policies for African nations. These guidelines encapsulate the local content rules of engagement at work in the oil, gas and mining industries.  Addressing local content concerns in the extractives industries generally, requires a careful balancing act between the interests of investors and those of local communities.[12]

Mining companies need to perceive local content as an opportunity to contribute to sustainable economic growth and development in Africa, and not as a hurdle to their exploitation of resources. Compliance with local content provisions in law should be more than just a box- ticking exercise. Participation in local content activities could benefit companies and comprise the company’s global image and reputation. These arguments advocate for a shift in mindset on the part of companies to encourage their participation in local content projects. 

If properly formulated and implemented, local content policies could be leveraged to become a key enabler for economic growth and development in developing countries, especially in Africa.

Written by Kennedy Chege.