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Local Content Regulations to Spur Economic Prosperity in Oil and Gas Industry

 

By Joe Watson Gakuo

In every country with natural resources like oil or gas, the government will often implement local content policies with a noble intent, in an effort to create jobs, spur local industries and tame ‘Dutch Disease’. These kinds of policies aim at promoting a system where international companies work with locals or ‘buying local’ products or services.

Local content policies have their origins in the writings which outlined the ‘Infant Industry Argument’, an argument that was first articulated in the 1790s. Local content is a topical issue, and has become a hot issue in the natural resource industry in general, and oil and gas in particular.

In developing countries like Tanzania, local enterprises are the drivers of economic activity and development. Since the discovery of commercially viable quantities of gas in Tanzania, efforts have been made to promote inclusivity and local participation in this emerging sector, and local content as a whole.

The Local Content Regulations aim towards maximization of the national value creation by means of the oil and gas value chain through employment, value addition, technology transfer and the acquisition of knowledge. The pre-requisites for enhancing local content are the rule of law, skilled workforce, and investment-friendly atmosphere. However, on their own, these policies are not a silver bullet. Two issues come to mind;

First, skills gap are typically the most prevalent barrier to meeting local content requirements. These gaps creates a void which is bridged through various technical assistance and training initiatives. Oil and gas exploration companies have noted that local suppliers who bid for procurement opportunities often fall short of meeting industry requirements in areas such as information technology, systems management, environment, health and safety standards. This is not surprising given that Kenya is a new entrant in the upstream sector. I would argue that for the technical initiatives to be sustainable in the long term, the government must take the lead.

One such program is led by a consortium of oil and gas companies which includes which have invested over $1.9B to facilitate the skills development in Mtwara, and in Lindi, a program being implemented by Vocational Edecution and Training Auhtority (VETA), Voluntary Services Overseas (VSO) and International GIZ. The aim of this program is to strengthen the capacity of the country to manage oil and gas resources and create wealth for sustainable development.

Secondly, the implementation of the local content regulation will promote the growth of the small and medium-sized enterprises across the value chain.  The procurement of local goods and services is very important as it establishes a multiplier for local economic development through contribution to employment, skills strengthening, supplier and local enterprise development.

Oil and gas exploration companies expend up to 80 per cent of their investments on products and costs that are supplied from without. Thus, indirect employment in the sector accounts for a large proportion of total employment and value addition.

The opportunities available however have not been sufficiently usurped by SMEs due to the information gap on how to create business partnerships, requirements of the industry and actors in the industry. This is serious challenge given reports  indicating that SMEs constitute 95 percent of all business in Tanzania, constitute 35 percent of the country’s GDP  and creates over 80 percent of jobs

In conclusion, if these regulations are implemented effectively, they can have great impact on the Tanzanian economy. For example, since Brazil, a giant in the offshore oil industry, passed its local content rules, an estimated 875,000 jobs have been created, and the value of domestic purchases has reached USD 14 Billion (Kshs.1.4 Trillion).

Local content regulations are considered to be among the most important tools for extracting additional benefits for local communities or businesses from foreign investments in the oil and gas industry.  It is worth noting that a large majority of stakeholders to the petroleum sector in Tanzania are very supportive of improving and increasing collaborations in the industry.

Joe Watson Gakuo is the Founder, Upstream Awards

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Updated: August 9, 2018 — 9:36 AM
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