Echoes of Local Content: Capturing the Unclaimed Benefits

The inability of oil producing countries in Africa to fully implement local content policies and their lack of commitment to the principles of the law had thrown up a number of challenges for the continent. Today, a number of oil-producing countries are struggling with reduced revenue and high indebtedness.

This article analyses the numerous benefits the continent had lost due to the lack of commitment and partial implementation of local content. These benefits ranges from reduction in capital flight, reduction in unemployment, technology transfer among others, while it also listed ways as proffered by professionals in which these benefits can be harnessed.

By Godspower Ike

The low price of crude oil in the international market has plunged a number of African countries, especially oil-producing countries, into a biting economic slowdown. This may not have arisen had the affected countries shown strong commitment to the utilization of indigenous resources and implementation of local content.

As a result of the low prices, a number of oil-producing countries in Africa are experiencing difficulties in the management of their economy, as they are faced with dwindling revenues, rising expenditures and huge indebtedness.

Economic analysts had over the last couple of weeks, blamed this economic slowdown on the failure of the affected countries to entrench and enforce the principles of local content in their various petroleum industries.

The Nigerian Oil and Gas Industry Content Development (NOGICD) Act, was developed within the context of growth of Nigerian entrepreneurship and the domestication of assets to fully realise Nigeria’s strategic developmental goals.

The scheme, which has the potential to create over 30,000 jobs in five years, was geared towards increasing the domestic share of the $18 billion annual spending on oil and gas from 45 per cent to 70 per cent, in addition to enhancing the multiplier effects on the economy, through refining and petrochemicals.

Today, not only did the country fail to achieve all these targets, the continent has been deprived of a number of other benefits that would have been accrued from the implementation of local content.

Some of the benefits that Nigeria and its counterparts in Africa have been unable to claim due to the lack of commitment to the implementation of local content include reduction of capital flight, increase in foreign exchange earnings, provision of employment, manpower training and development and increase in foreign direct investment.

Others are industrialization, increase in technical and infrastructure provision, transfer of technology, ownership of pilot investment in oil and gas and creation of ancillary services that generates employment and other positive externalities.

One of the effect of these was seen a few days ago, when the National Bureau of Statistics, NBS, in its recently released Job Creation Report for the third quarter of 2015, revealed that no new job was created in the Nigerian petroleum sector in the third quarter of 2015.

This has made it the second consecutive quarter whereby the petroleum industry did not create a single job, compared to the first quarter of 2015, whereby the sector created just one job.

Mr. Henry Okolo, former Chief Executive Officer of Dorman Long, explained that increasing local content would have positioned the country to reap from accelerated economic growth, employment creation, technological acquisition and development and enhanced national security.

In addition, stakeholders in the Nigerian oil and gas sector had a few years ago, warned that the country risked losing $67 billion in oil and gas industry expenditure if it does not accelerate efforts to increase local content in its petroleum sector.

They are of the view that the $67 billion represents total petroleum industry expenditure for five years, between 2008 and 2012. Of this figure, oil expenditure for both onshore and offshore will take $34.4 billion, while spending on natural gas would reach $32.7 billion.

They claimed that most of the funds went to foreign firms and individuals due to the absence of a vigorous pursuit of a robust local content policy.

The stakeholders bemoaned the fact that the national target to achieve 45 per cent local, Nigerian content by 2006 was missed, while the 2010 target of 70 per cent look was also missed, compared to Malaysia and Brazil that have reached at least 70 per cent local content.

Also, it was claimed that Nigeria was losing about $8 billion annually to non-implementation of local content by oil companies operating in the country.

Oil experts disclosed that with an estimated annual spending of about $10 billion going into the Nigerian oil and gas industry annually, only about 20 per cent or $2 billion of that amount is domiciled in Nigeria.

This means that about $8 billion of this amount goes out of the economy in things that could ordinarily be done locally.

This situation, the stakeholders said, was also responsible for the oil industry appearing to be an enclave, aloof from the rest of the economy, apart from the considerable sums it brings to the national coffers from exports of oil and gas.

Thus, despite the oil and gas industry being both a creator and heavy user of technology, Nigeria is missing out on capturing this technology and transforming it into a creator and supplier of technology.

In spite of all these, the Nigerian Content Development and Monitoring Board (NCDMB) had in 2014, announced that the Local Content Act had enhanced job creation and indigenous expertise, and had grown local content generally from three to five per cent to a significant 12-18 per cent.

The NCDMB further claimed that $5 billion of new investments have been made by Nigerian service companies in the last four years and that tens of thousands of jobs have been created.

In his article titled: ‘Nigerian Local Content: Challenges and Prospects,’ Jean Balougha, a Research Assistant in the Economics Department of the University of Lagos, stated that oil exploration, which started onshore has tremendously improved Nigeria’s daily production capacity to about 2.3 million barrels per day, and raised her proven reserves to about 37 billion barrels.

However, he stated that despite Nigeria’s ever-growing profile and wealth, the country remains one of the poorest, and technologically backward, nations in the world, adding that this is basically because the much-taunted wealth has not translated into improved welfare.

According to him, one reason for this is that over 90 per cent of the yearly industry expenditures escape the domestic economy as capital flight.

He said, “Despite the ever growing number of local oil service companies the latter’s annual gross earnings still account for less than five per cent of the sector’s aggregate annual contracting budget. Even the local media has been denied the much desired opportunity to advertise the activities of upstream companies in Nigeria.

“Some of these companies, including Nigeria LNG prefer to spend huge media budgets running into millions of dollars on foreign media like CNN, upstream journals and magazines. They hardly spend 20 per cent of such annual budget on Nigeria media.”

Balougha further stated that following enormous investment in human capital by the Nigerian National Petroleum Corporation (NNPC) and some of its joint venture 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,” he explained.

He, however, stated that the inability of indigenous companies to get a share of the action at the upstream sector may not necessarily be due to incompetence, but rather due to a dearth of funds.

Confirming this, some stakeholders in the petroleum sector are of the view that one of the factors hindering the growth of local content in Nigeria is the non-accessibility of the Nigerian Content Development Fund (NCDF) by indigenous companies.

The NCDF was established by the NOGICD Act to assist Nigerian companies operating in the oil and gas industry with finance and liquidity issues. In 2014, the NCDMB issued an overview of the operating model for the NCDF. Broadly, the NCDF comprises one per cent of the value of every contract awarded in relation to any project, operation, activity or transaction in the upstream sector.

As such, the system works as a withholding to be made by the awarder of the contract and subsequently remitted to custodian banks for the programme. The funds in the NCDF are used for guaranteeing lending to Nigerian service companies and for infrastructure and training investment led by the NCDMB.

The NCDMB claimed that the NCDF reached $350 million at the end of 2014, and was projected to grow to $700 million over the next five years. The NCDMB also claimed that about $100 million, being proceeds from the NCDF, had been invested in some proposed oil and gas parks.

Apart from the claim that the fund was been used to finance oil and gas parks development, stakeholders are of the view that a number of indigenous oil and gas companies had been unable to access the funds.

However, the NCDMB insists that the NCDF is accessible. It claimed that the fund which is meant to serve as a guarantee is intended to facilitate funding agencies to give money to indigenous operators.

Executive Secretary of the NCDMB, Denzel Kentebe, while speaking with Orient Energy Review, gave the assurance that the NCDF is being assessed by indigenous, citing the Lagos Deep Offshore Logistics, LADOL, as one beneficiary of the fund.  The board is carrying out sensitization workshops on how companies can easily assess the intervention fund. In his words: ‘we are carrying out some sensitization on how to assess this fund, we are doing this with the banks to ensure due diligence and that things are properly done’, he said.

The NCDMB stated that the fund which is managed by the Bank of Industry (BoI) is designed to serve as collateral and is sitting in a number of banks.

The NCDMB said, “The usage of the money has been structured into two legs. The 30 per cent leg is for direct interventions, where if we find a project to do, we promote it and pay for it. If we find a scheme that trains our people, we pay for the training. If we find things that people are reluctant to fund because they are not sure it is beneficial, we pay for it as a pilot.

“But if you have a business venture and you need a loan to execute that business venture, especially if it is a capacity development-related venture, the fund gives your bank comfort to give you a loan because the fund is a guarantee from us. When you start paying back your loan, 50 per cent of your interest is taken by the fund. That is what investors want.

“But there are people, who have the view that because that fund is there, they can just come to the NCDMB to give them money. How many people will get such money? The demand for fund by the industry is beyond $1 billion at any given time for these kinds of things. So, the fact that there is $350 million in that fund or has been collected does not mean that NCDMB will start giving people the money. That is not the way the fund was structured.”

However, analysts are of the view that if the country’s desire for the funds to represent a new era of financial responsibility is to be realized, then whether oil prices stay low or rebound, there should be commercial assistance for indigenous companies and financial benefits for the people of Nigeria for years to come.

Chairman, Schlumberger Africa, Mr. Sola Oyinlola, identified the lack of in-country financial capacity to undertake big ticket transactions and inadequate infrastructure, including the deplorable state of supporting industries, for prototyping or manufacture or assembly of any locally engineered solutions as major challenges facing the local content policy.

He listed other challenges to include the lack of technical capacity; dearth of research and development institutions and culture; and the limited access to technology limiting the possibility of innovation and domestic technological creativity.

Another issue that had been of major concern to stakeholders in the oil sector is the high cost of fund. Most indigenous companies had to grapple with double-digit interest rate and unfavourable financing conditions from financial institutions.

Nigerian banks, mainly because of the high risk associated with lending to the oil and gas sector had introduced stringent lending conditions, which indigenous oil companies had difficulty adhering to.

Some oil companies claim they get loans from banks for as high as 20 per cent, a development that had made most of their projects uneconomical.

However, Balougha disclosed that Nigerian banks lack the financial base to make any meaningful impact on local content development, declaring that the biggest Nigerian banks are tiny banks when it comes to energy financing.

According to him, most Nigerian banks operate in dilemma-laden territory as most indigenous contractors have no proper business structure, while others are not really in the business because more often than not the person who gets the contract is not the one looking for finance.

He identified other obstacles to include a thin industrial base, lack of adequate power, water and other infrastructure to support an expanded manufacturing base, lack of small and medium-sized enterprises and an underdeveloped capital market.

Balougha shared the opinion of some industry stakeholders who stated that over 70 per cent of the contracts awarded to Nigerian companies are executed overseas, thereby defeating the primary objective of Nigerian content development which is to develop in-country capacity by executing contracts in Nigeria using Nigerian local resources.

He added that other problems of local companies revolve around executive capacity and critical mass with technical and financial wherewithal.

He said, “Generally, most local companies are small, fragmented and incapable of packaging or attracting loans. Few of them can deliver turnkey projects without resorting to some form of partnership agreement for equipment, expertise or technical support.

“There exists the so-called ‘Knowing-Doing gap’ in Nigeria, that is the disconnect that exists between policy formulation and policy 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, with many government programmes and projects ending in downright failure.

“Inadequate think through, weak institutional capacity, lack of political will to carry through change, inconsistency in government policies, lack of support from relevant stakeholders and corruption are some of the causes of this gap.

“The implication of this is that the future of the Nigerian people is currently being controlled by foreigners whose main objective could be to post better returns on investment.”

Despite all the setbacks and challenges, Nigeria had stated that it is now poised to make a local content push into other energy-related sectors. The Local Content in Building and Construction Industry Bill continues to be a work in progress and there are also specific plans for local content in lubricants and power, and the creation of sectoral committees to develop ideas for other areas of the Nigerian economy, including fabrication, finance, insurance, shipping and petroleum technology.

Regardless of these encouraging signs, reports states that the success of local content will depend on how it is enforced. As Nigeria strengthens its efforts to boost the local economy and to ensure that value from a whole range of projects is captured in-country, indigenous companies will look to the NCDMB for support and action.

If the NCDMB shows signs of stepping-up enforcement, the years ahead would be critical for expatriate companies operating in the country.

Therefore, stakeholders are of the view that the high cost of funds is a factor that jeopardizes indigenous oil service companies’ ability to compete effectively with their counterparts from Europe and the United States, who are well endowed with capital.

This untoward development, according to the stakeholders, has reduced Nigerian banks, not yet cut out for long-term projects and with a penchant for quick business and immediate returns, to mere ‘cash centres’.

They further stated that 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, noting that this would increase their level of participation and give them the necessary experience that would engender technology transfer.

The stakeholders maintained that technology transfer should be well programmed and aggressively pursued if economic, military and political advantages are to be guaranteed.

They however, lamented that despite the increased number of Nigerians in managerial and professional positions in firms involved in upstream and downstream operations has been observed, the evidence of technology transfer is yet to be seen.

They said, “Nigeria, therefore, needs her own unique strategy of technological progress pursued with all seriousness if Nigerians are to make any meaningful impact soon. Another factor that made nonsense of past efforts at improving local content (and is still a challenge to current efforts) is the nation’s inability to develop her infrastructure.

“Coupled with this is a lack of a sound iron and steel industrial base, lack of foundries and effective machine tool manufacturing. These are all part of the fundamental challenge, which the government must address through its privatization programme.”

To this end, Balougha is of the view that the Federal Government of Nigeria, as well the governments of other African countries must remove the inconsistencies in the local content act, sincerely respect the local content blueprint and follow its carefully, especially in the awarding of contracts for deepwater and other projects in the oil industry.

Finally, he said, the sincerity of government about the local content issue must be reflected in attractive fiscal policy or measures such as reduction in import duties for steel and chemicals and other consumables as well as tax holidays for indigenous oil and gas and related firms, all of which may gender a competitive spirit in our local fabrication yards.

Therefore, analysts are of the view that the present state of Nigeria and Africa’s needs is a clear indication that a responsible and dynamic approach to sustainable local content development must be adopted by government, policy makers and upstream operators to guarantee a better future for the nation’s oil and gas industry.

It has been said that technological development does not occur just by chance; rather it is a product of a nation’s sound economic management, policy reengineering, good governance and a social value system that rewards hard work and creativity.

Having a few companies committed to local content and pursuing local content programmes is not enough. Support for local content policies must be nationwide. It must be accepted by all and should become embedded in every operator’s business philosophy.