Nigerian Local Content Policy: Gains, Improvement Opportunities, and Imperatives for the Future

0

By Dr. Wisdom Enang

 

History of the Nigerian Local Content Policy:
Before the enactment of the Nigerian Oil and Gas Industry Content Development (NOGICD) Act, also known as the Nigerian Content Act, most operations in the nation’s oil and gas space were executed by International Oil Companies (IOCs). The glaring lack of technical know-how in-country led to the importation of skills. Experts estimate the resulting capital flight to have cost the Nigerian Economy over $8b yearly. At the time, the level of local content in the oil and gas sector then was a mere five per cent, and at least 2 million jobs were reportedly lost due to the absence of legislative backing for local participation in the sector. The major implications of this manifest in less revenue accruing to the government; job losses; lack of skills / technological know-how transfer; high cost of products; long project cycle and over-dependency on foreign countries among others.
However, in 2001, former President Olusegun Obasanjo inaugurated the Presidential committee on Local Content in the Oil and Gas Industry, and in the process mandated the Nigerian National Petroleum Corporation (NNPC) to drive the policy and set certain targets. It was at the backdrop of this mandate that the Ministry of Petroleum Resources and the NNPC pushed for development of the Nigerian Oil and Gas Industry Content Development (NOGICD) Bill. President Goodluck Jonathan signed the bill into law on April 22, 2010. NOGICD, which complemented the Petroleum Act was designed to foster Nigerian content development, especially in the oil and gas sector.

How NOGICD Changed the Game:
Since the signing into law of the Nigerian Oil and Gas Industry Content Development Act in 2010, and with a visionary and dynamic agency, the Nigerian Content Development and Monitoring Board (NCDMB) driving its implementation, there has been a systematic but gradual improvement in local content in the industry. With Nigerians developing competence in jobs that were the exclusive preserve of expatriates, most of the jobs that were executed outside Nigeria are now being performed by Nigerians and in Nigeria. This has led to the retention of a large chunk of the industry expenditure in-country, with the attendant positive impact on employment generation and growth of Gross Domestic Product (GDP).
The growth of local content development from 5% in 2010, to 28% in 2017, and 31 per cent currently is seen by many as a remarkable feat. It also means more money for the nation’s economy, improvement in local capacity, retention of foreign exchange hitherto spent on the hiring of expatriates, and completing jobs abroad.
Other notable gains of the NOGICD act of 2010 include:
* The rise of crude oil production and exploration companies like Eroton, Seplat, Aiteo, Oando, First E&P, as well as the Nigerian Petroleum Development Company (NPDC). These local companies have been able to compete with majors, and account for 20% of Nigeria’s oil production and 60% of domestic gas production.

* The rising number of fabrication yards across the country, which was instrumental to the construction of the topsides of the EGINA FPSO modules by Samsung Heavy Industries Limited (SHI-MCI) at LADOL Yard, in Lagos. Nigeria is estimated to be currently able to handle the fabrication of more than 60,000 tonnes per year with its array of world-class fabrication yards.
* The development of two world-class pipe mills – the SCC Pipe Mill with an installed capacity of 270, 000 MT per annum, and the Yulong Pipe Mill, with the capacity to manufacture 400, 000MT per annum.
* The growth in the number of service companies in the Nigerian oil and gas sector to about 8,000, with more than 60 operating companies, four active dry-docking facilities, and 5 pipe coating yards.
* A rise in the number of rigs and marine vessels owned by Nigerians from 3% to 40% currently.
* The creation of a $50m Nigerian Content Research and Development Fund aimed at driving the development of indigenous technology and innovation.
The NCDMB investment policy has facilitated the efficient utilization of the Nigerian Content Development Fund, leading to partnerships in setting up modular refineries, LPG value chain and other manufacturing hydrocarbon processing activities. The benefits of the Nigerian local content policy go well beyond “economics”, as it also affects National Security. For example, the beneficiaries of the Amnesty programme of the Federal Government have taken advantage of the local content policy in the oil and gas sector to get employed in the various oil servicing firms and multi-national companies in the industry. It is without a doubt, that the Nigerian local content policy has been a tremendous success.

A review of the problems facing Local Content Development in the Nigerian Oil and Gas Industry:
Notwithstanding the foregoing gains made by the Nigerian Local Content Development Policy, it is important that we understand what worked well, and what needs improvements. This assessment is an imperative if we must have a national local content policy that is robust and effective in the long term, and meets future requirements.
A notable factor militating against local content development in Nigerian is insufficient funds for indigenous companies from Nigerian banks (due to the large financing requirements of energy projects) which impede these companies from participating effectively and efficiently. Also, although the local content policy has led to increased opportunities for small and medium sized enterprises (SMEs) in the industry, and thus resulted in more contract awards in both cases, this cannot yet be considered as a higher SMEs participation because there are still several bottle-necks to the award of such contracts such as tedious prequalification and tender processes. Some industry players argue that local content raises project inflation costs sharply. These companies blame such inflation on quota policies without adequate pre-existing networks of suppliers, which often results in the middleman syndrome in which local importers purchase goods and services from foreign suppliers and resell them locally at higher prices. In such a situation, the local content policy becomes a hidden generator of inflation for the benefit of only a few. Beyond the difficulty in aligning with quotas, companies also struggle to obtain and report local content data from their own suppliers. Other obstacles are a thin industrial base, lack of adequate power, water, and other infrastructure to support an expanded manufacturing base, and an underdeveloped capital market.
The issue of non-compliance to the Nigerian Local Content Policy remains a highly debateable topic, with some school of thought arguing that some multinationals continue to violate provisions of the Nigerian Content Policy through the use of expatriates from foreign technical centres, who perform job functions that Nigerians have the capacity to execute. One of the key factors fuelling non-compliance is the uncertainty that trail the meaning and practical application of most key concepts and provisions in the Nigerian Oil and Gas Industry Content Development Act. For example, the term “first consideration” was not defined in the Act, nor did the Act spell out the guidelines for the Board to determine the veracity of the criteria employed by the operator in determining first considerations within the provisions of the Act. Also, the Act failed to define the terms “management position” and “intermediate cadre”. In the absence of clear statutory guidance on the import of such key terms in the Act, its implementation is being undermined as various companies adopt their own interpretations. Consequently, this has seen the influx of all kinds of expatriates into Nigeria to do jobs Nigerians can do.

Imperatives of the Nigerian Local Content Policy:
The Nigerian Local Content Development Act, is been seen increasingly as an important tool that could support the federal government to upgrade her manpower capacity, with results that benefit the government, the private sector and the economy. To achieve full implementation of the local content policy, the government also needs to embark on a series of market-oriented policy reforms to integrate the economy towards achieving competitive growth and globalization, through the use of private sector led socio-economic initiatives. The government must also encourage industrial development by granting liberal tax incentives and strengthening support for local institutions. The role of small and medium scale enterprises in realizing the effective implementation of the Nigerian local content policy cannot be ignored. They need to be encouraged and strengthened in terms of finance and operational regulations, because of the critical role they play in the development of the economy.

The Nigerian local content policies need to look beyond simple generation of economic rents, and focus on the development of linkages that will endear more growth and economic development of the oil producing regions and the nation. Enforcing local content depends on the availability of an industrial-supply base that can act as growth levers. The mechanism for enforcement often determines the temper of the law, and the behaviour of those regulated. The sanctions prescribed under section 68 of the Nigerian Oil and Gas Industry Content Development Act 2010 are criminal in nature. The section describes breach of the Act as an offense punishable upon conviction by fine or project cancellation. The implication of this provision is that the penalties stipulated can only kick in after conviction by a court of competent jurisdiction, based on strict rules of evidence and proof beyond reasonable doubt. Considering criminal law remedies are hard to obtain, this provision may constitute a bottle neck to the implementation of the act in some cases. The adoption of administrative penalties as against criminal penalties is however recommended, as the former demands lots of evidence to nail violators of the act. Additionally, a sensible combination of the administrative and criminal penalty will engender better compliance, cooperation and timely rectification by the regulated community.
A strategic approach to local content also requires realistic targets that contribute to lasting benefits in the long term, as well as clearly defined yard sticks to measure agreed local-content benchmarks by government. Targets that are beyond the existing capacity of local industry or the absorptive capacity of particular assets may create inefficiencies which results in higher costs, lower government revenues and less competition.
Monitoring and transparent reporting remains a key imperative in actualizing the goals of the Nigerian Local Content Policy. This requires the development of appropriate structures and frameworks on ground to monitor and transparently report the implementation of policies related to local content. Consistency of implementation is another noteworthy imperative.
The Nigerian Content Development Fund established by the Act and managed by the Board should extend its hand to bailing out indigenous companies by operating a kind of revolving loan to indigenous companies to enable them actively participate in the oil and gas sector of the Nigerian economy. For example, the Local Content Fund should be widely accessible to more local contractors who win bids, but do not have the upfront mobilisation to execute the projects, with some ending up in debt, or losing the contract entirely. Such funds could be made available under contractor finance schemes, and favourable term loans for equipment acquisition. It is also important for the NCDMB to partner with the Central Bank of Nigeria to ensure that Nigerian banks begin to engage in long term financing of projects in oil and gas industry. Furthermore, there is a need for private-public partnership to reinforce the implementation of human capital development through constant acquisition of skills and technical know-hows. The Nigerian Content Research and Development Fund is a good starting point that can advance skills acquisition, however, the expertise of a broad range of research-intensive private and public universities should be actively leveraged to its maximum potential.

PIA and the future of Local content in the Nigerian Oil and Gas Industry:
For the government to achieve the local content target, it must adopt initiatives to create enabling environment for increased involvement of Nigerians in the oil and gas industry. Such reforms as the Petroleum Industry Act 2021, and other relevant legislations, will go a long way in increasing the opportunities and environment that will integrate local players in the oil and gas sector. The PIA generally seeks to adopt a commercial approach to the governance framework of the petroleum sector through a clear separation of the regulatory bodies and the commercial body, in order to promote effectiveness in the sector. It also lay out the institutional framework for the Nigeria Oil and Gas Industry. Some of the key PIA provisions that promotes Nigeria content position include:

* Domestic Gas Obligations:
Under the PIA, gas producers are mandated to meet set domestic obligations to strategic sectors of the Nigerian economy e.g., Power, Fertilizer Plants and Methanol. The PIA also imposes a penalty for default in meeting those obligations.

* Midstream Gas Infrastructure Fund:
The PIA also introduces a 0.5% levy on the wholesale price of petroleum products and natural gas sold in Nigeria. This fund is earmarked for equity investments of Government interest in infrastructure development on midstream gas operations.

* Host Community Development Fund
The PIA equally introduces a 3% levy on an operator’s actual operating expenditures of the preceding financial year in upstream petroleum operations. Subject to a need assessment conducted by the trust managing the fund, 75% of the fund is earmarked for capital project, while 25% reserves and not more than 5% is for administrative costs.
Achieving the goals of the Nigerian Local Content Policy would further help in the domestication of petroleum refining, domiciliation of manufacturing of industry requirements, extraction of value from gas, and positioning Nigerian operators and service providers at the fore-front of play in the upstream, midstream, and downstream sectors of the industry.
The reassuring successes recorded by the NOGICDA (the Nigerian Oil and Gas Industry Content

Development Act), makes a strong case for extension of the Nigerian Local Content Policy beyond the Oil and Gas sector to other critical sectors of the Nigerian economy. This urgency is also reflected in the current drive by the National Assembly for the passage of a Bill to repeal the NOGICDA, and enact the Nigerian Content Development and Enforcement Act. The new bill will see the extension of the local content policy beyond oil and gas to other sectors: Information and Communications Technology, Power, Solid Minerals, and Construction. With the foregoing developments, the scope of influence of the NCDMB within and beyond the Oil and Gas sector is only expected to increase significantly. For example, through the use of the Nigerian Content Development Fund, the NCDMB is partnering with a gas production and manufacturing company for the establishment of 400,000 per annum Type 3 LPG composite cylinder manufacturing plant in Polaku, Bayelsa State. This is in line with its resolve to develop facilities that will improve Nigeria’s ability to meet domestic gas demand. The NCDMB will also be partnering with the OPTS (Oil Producers Trade Section) to develop marine standards for the vessels that operate in the Nigerian oil and gas industry. The standards, which will be applied in marine tenders, will state uniform technical specifications that the marine vessels must meet to be eligible to operate in the industry.
The prospects of expanding the scope of the Nigerian Local Content Policy within and beyond the oil and gas sector is promising. Nonetheless, it is noteworthy to state authoritatively that: actualizing the goals of the Nigerian local content policy cannot be at the expense of quality. As such, indigenous companies must continue to invest in improving the quality of their products and services, and deliver same to the Nigerian market at competitive prices.

About the Author
Dr. Wisdom Enang is a Fellow of the Nigerian Society of Engineers, a Chartered Engineer with the Institution of Mechanical Engineers UK, and an internationally published expert in the Oil and Gas engineering field. His research interests and expertise include carbon capture; energy economics; operations integrity management; oil and gas policy formulation and implementation; enhanced oil recovery; and operations digitization. In addition to providing technical advice on the Nigerian “Oil and gas industry reform programme”, Dr. Wisdom is also a public commentator within the Petroleum and Natural Resources Sectors, covering the following topics: Governance; Domestic gas sector development; Local content policy formulation and implementation; Statute and regulations; and Policy design and implementation.

 

Leave A Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More