Local content legislation: help or hindrance?

Some believe that the transfer of knowledge, skills and value to Africa’s local economies should be left to market forces, while others think lack of  legislation creates a vacuum for abuse. William Pollen assesses the situation.

As the natural wealth of the continent has become more apparent, African governments are increasingly trying to dictate the terms of the extraction of their country’s resources. Local content legislation – designed to ensure domestic economic participation and development – is usually the mechanisms of choice to achieve this. While traditionally associated with the extractive industries, today its scope is far broader. But what is the right approach to drafting this legislation, how should it be implemented and is it needed at all?

These were some of the issues discussed with representatives from big business, policy makers and NGOs, during Invest in Africa’s “Big Local Content Debate” in London on 20th June, which questioned whether such policies have delivered on their promises.

What is local content and why does it matter?

The term “local content” has been popularised in recent years and yet it remains an ambiguous term; too all encompassing and vague to some, yet too specific and limiting to others. So a clearly defined starting point matters. For our purposes we worked with the widely accepted definition of local content as: “participation and development of nationals in the workforce and local suppliers, goods and services.” Today, in the African context, the aim of local content is simple: to transfer knowledge, skills and value (including jobs and procurement) to the local economy, companies and people.

Why does local content matter? Obviously, businesses must comply with a country’s local content laws to be able to operate, but there are other reasons companies should embrace local content. Investing in skills, sourcing locally and building capacity means businesses can operate more efficiently, more profitably, reduce risk, strengthen their entire brand and so protect their long-term licence to operate. You’d be hard pushed to find a business that does not agree with this sentiment but the tension centres on the legislation itself.

From the perspective of governments, local content policies can stimulate broad-based economic growth. Government intervention in the private sector in Africa, especially extractives, is hardly a new phenomenon, but today’s policies no longer just refer to restrictions on imports or imposing tariffs. The legislation is now aimed at creating “backward links” (supplying input, i.e. knowledge, skills and value to the local economy through job creation, the opening of equity to local partners and supply chain investment), as well as “forward links” (increased productivity and infrastructure from businesses operations, i.e. new refineries and plants).

Help or hindrance?

A number of African markets have proven that striking the right balance between local content requirements and creating a healthy investment environment is difficult. Whilst some argue for no legislation, instead advocating that market dynamics create the level playing field legislation strives for, others worry that no legislation leaves a vacuum for abuse by all sides. However, our debate found consensus across three key areas.

Firstly, legislation created in a vacuum (usually for short-term political gain), without consistent dialogue with the private sector, NGOs and local businesses, is destined to fail. What’s more, success is more likely when this consultation is led by an independent third party and includes consideration of the nation’s educational capabilities.

Secondly, time to embed and adapt any legislation is key. Today some point to Nigeria as an example of a comparative success, but it must be remembered that the country has more than 30 years of experience formulating such policies. For markets which are developing or have recently implemented their policy – like Tanzania, Mozambique, Ghana and Kenya – all sides must be realistic in what can be achieved in the short term; especially given that the industries most affected require specialised, high-end technological inputs that are often sourced through globally integrated supply chains. This means countries with younger economies find it difficult to develop and maintain a local supply at the quality, size and pace of these industries. Overtly ambitious local content policies tend to create supply bottlenecks and negatively impact all concerned.

Finally, we must be very careful in setting specific targets. Although the Nigerian Oil and Gas Industry Content Development Act 2010 is widely cited as increasing local participation in the oil and gas industry, by prescribing minimum entry requirements to promote transfer of technology and skills to Nigerian staff in the industry, overly optimistic or restrictive targets – like those defining the percentage of local ownership in any joint ventures – create rent-seeking behaviour and market abuse that actually denies locals the very opportunities this legislation is seeking to create.

What’s more, rigidly enforced targets don’t adapt to fundamental changes in market conditions, like the recent collapse in the oil price. This means that whilst businesses have drastically rethought their operating models and what’s affordable, they are working with rules that have not, so the legislation starts to (wrongly) be seen as a cost of doing business.

Where next?

The overwhelming consensus from our debate was that local content legislation was needed, even if only because it helps governments articulate their intentions and future direction. This alone is invaluable to investors. For example, Tanzania recently created a new version of its Production Sharing Agreement that asks companies to “maximise their utilisation of goods, services and materials from Tanzania.” This type of wording leaves room for interpretation and allows the industry to demonstrate their commitment to moving in the same direction as the government.

What is critical is that all stakeholders are continuously consulted in the drafting of legislation and continue to be involved during implementation and beyond.

Despite the shortcomings of much of the local content legislation in Africa, a framework to operate within is better than no framework at all. There is no one-size-fits-all solution to this challenge but we believe partnerships and collaboration, across sectors, are the way forwards. After all, as a business you are highly unlikely to be unique in facing local content challenges, so why not learn from others, work together and engage governments as a business community, not just as one company or industry.

This sort of cross-sector, united engagement saves everyone time and money and builds the trust and understanding of one another’s needs and expectations that policymakers and businesses must have to create local content legislation that truly delivers on it promises.

William Pollen is the director of Invest in Africa.