Nigeria's Local Content Policy and Its Impact on Sustainable Economic Value Creation
The term ‘Local content’ means different things to different people, the common denominator being value addition to the country, Brisibe, the local oil and gas investor opines. Obuaya, a leading voice in the clamour for higher participation of local companies in the oil and gas industry, provided his definitions in line with this idea of ‘value addition' (Obuaya, 2005).
According to the Nigerian Oil and Gas Industry Content Development Act (2010), local content is the quantum of composite value added to or created in Nigeria through the utilization of Nigerian resources and services in the petroleum industry, resulting in the development of indigenous capability without compromising quality, health, safety and environmental standards.
In the same vein, (Bello, 2010) states that the Local Content Act – an Act envisaged to tackle the problem of insufficient value addition to the Nigerian economy arising from the near lack of local capacity/capability in the industrial sector especially in the petroleum industry. The Local Content Policy is based off of a singular industrial and economic goal of value addition – as evident in its history of implementation which cuts across a range of time frames with different value addition policies per time.
The Local Content Policy action went into operation in 1971 through the establishment of the Nigerian National Oil Corporation – NNOC (Decree No. 18, 1971). NNOC was established to push the frontiers of the Nigerian interests in the petroleum sector through the control of its joint ventures with oil multinational corporations (Akpanika, 2012). Following a merge with the petroleum ministry, NNOC became the Nigerian National Petroleum Corporation – NNPC in 1977. NNPC began implementation of the actual local content initiative through acquisition of interests in the operation of Indigenous Oil Companies – IOCs. These interests grew to about 70% with responsibility of controlling all acreages and other activities (Balouga, 2012). The current version of the Local Content Policy – the Nigerian Oil and Gas Industry Content Development Act – was enacted by the National Assembly of the Federal Republic on the 22nd Day of April, 2010.
As stated in Section 5 of the Nigerian Oil and Gas Industry Content Development Act – NOGICDA. The central idea of the local content policy is to create local value, build local manpower, compound technology transfer from IOCs, and primarily grow the local industries that feed the main upstream and downstream sectors of the Oil and Gas industry. It does this through the Nigerian Content Development and Monitoring Board also referred to as “the Board” (Nigerian Oil and Gas Industry Content Development Act, 2010). The Board shall implement the provisions of this Act with a view to ensuring a measurable and continuous growth of Nigerian content in all oil and gas arrangements, projects, operations, activities or transactions in the Nigerian oil and gas industry.
The theoretical foundation for local content development is the backbone for the structure its policies would take as demonstrated in Nigeria’s policies on the subject. According to Warner (2007), there are two distinct strategies for achieving higher local content targets. The first strategy is where the state requires oil companies to give greater preference to those nationals and national suppliers who can compete internationally on costs, quality and timeliness. The second policy is where the government proposes a ‘step change’ i.e. gradual change of local content capacity achieved by consciously building the capability of national and local skills to access opportunities, considered as ‘local capability development’. It is argued that while the former strategy can be considered more of a ‘push model’, the latter is more of a ‘pull model’ (Ihua, Ajayi&Eloji, 2011). With this information, Warner argues that the latter strategy is a more progressive model that would involve considerable undertakings from the International Oil Companies (IOCs). The author stresses that we should not be so naive as to expect changes in local content and community investment practices to occur in the absence of the right incentives.
Ihua U.B. et al. (2011) argued that although the latter model sounds laudable, it is important to consider that multinationals are not charity organizations, but strictly profit-oriented organizations, hence a complementary incentive and regulatory approach should be taken.
The NOGICDA, runs on the central method of value creation via incentives and regulation as posited by Ihuaet al. (2011). The Act provides for as much incentives as it does regulatory function as witnessed in various Sections.
Section 3 of the NOGICDA, provides for Nigerian independent operators – NNPC, its subsidiaries, its joint venture partners and foreign oil and gas companies – to be given first consideration in the award of oil blocks, lifting licenses and similar contract awards.
Section 14 of the Act states that “all operators and project promoters shall consider Nigerian content when evaluating any bid where the bids are between 1% of each other at commercial stage and the bid containing the highest level of Nigerian content shall be selected provided the Nigerian content in the selected bid is at least 5% higher than its closest competitor. This places indigenous contractors at a major competitive advantage increasing and sustaining the Local Content by a stable value curve.
Another example of broad value application to the Nigerian economy is the use of local financial institutions, such as banks, and insurance providers by the IOCs, which should inject liquidity into the local economy and by extension affect the availability of long term funding for the nation’s technical capacities and industrial base (National Oil and Gas Industry Content Development Act, 2010).
The aggregate effect of these policies cut across multiple sub-sectors of the economy, like the fabrication, financing industries and the upstream and downstream sectors of the oil industry. It serves the synergistic purpose of economic development via numerous accruing improvements stimulated by active incentivisation coupled with regulation. One reference is the steady reduction of capital flight in the oil industry. In the 10 Year Strategic Roadmap and progress report released by the NCDMB, it is illustrated that before the enactment of the Act in 2010, only a meager amount of less than 5% of spends was indigenously retained in the Nigerian economy. As of 2017, circa 26% of spends was retained in the economy (NCDMB 10 Year Strategic Roadmap, 2016). The target in-country value addition prospected by the NCDMB is 70% in 2027 (NCDMB 10 Year Strategic Roadmap, 2016).
In view of value creation and economic revamping however, the myriad benefits of the Local Context Act do not make it impervious to challenges. Balouga (2012) published that following enormous investment in human capital by the Nigerian National Petroleum Corporation and some of its joint partners over the years, a new crop of highly competent and experienced Nigerian engineers, geologists and geophysicists has emerged. Today, some of them have established private oil prospecting and oil services firms, which are classified as indigenous contracting firms. However their inability to get a share of the action at the upstream may not necessarily be due to incompetence, but rather due to a dearth of funds. The author further opined that Nigerian banks lack the financial base to make any meaningful effort on local content development. The author posits that the biggest Nigerian banks are tiny banks when it comes to energy financing. Concurrent data from the National Bureau of Statistics on Net Domestic Credit Breakdown for the last quarter of 2018 shows the net domestic credit for December 2018 as just over 27 million Nigerian Naira- an amount that dwarfs in comparison to foreign fiscal sources (Nigerian Bureau of Statistics, 2019).
High cost of funds is a major factor that trounces the efforts of indigenous contracting firms. Policy makers in Nigeria’s Oil and Gas industry must seriously consider the idea of establishing a strong energy bank that would empower local contractors/investors. This would increase their level of participation and give them the necessary experience that would engender technology transfer (Balouga ,2012)
Another major problem of the local content act is the existence of a ‘knowing-doing’ gap- the divide that exists between policy formation and implementation. This term describes the absence of a critical link between strategy and action. Public policy initiatives and actions in Nigeria have persistently been incapacitated by this gap (Balouga, 2012). The author further states that a suitable solution would be for “government to sincerely respect the local content blueprint, and follow it in the awarding of contracts for deep water and other projects in the oil industry.”
The current state of the economic landscape in Nigeria is a clear indication that a dynamic method for sustainable value creation must be reached and the Local Content Policy is one of many steps forward. If sustainable and measurable progress is to be made, then the blueprint of the policy must be followed on a nation-wide scale- having a few companies committed to Nigerian Content is not only enough, the policy of Local Content Development must be at the heart of every operator’s business philosophy.
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Nigerian Oil And Gas Industry Content Development Act..
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Oloibiri Lecture Series and Energy Forum (2014). The Role and Impact of Nigerian Service Companies in the Development of the Oil and Gas Industry.
Warner, M. (2007). Community Content: The Interface of Community Investment Programmes with Local Content Practices in the Oil and Gas Development Sector. [online] Available at: http://www.od.org.uk/business [Accessed 20 Sep. 2019].
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.