Oil & Gas Local Content Policy:
Challenging The Limelight Of Nigeria’s Technology!
Local firms are ultimately and probably the most important driver of economic incomes and growth in developing countries. The study found that local technology is spreading faster in emerging economies than in rich nations, even though the technology gap remains wide. It also found that technological progress has helped raise incomes in the developing world and reduced the share of people living in poverty from 29 percent in 1990 to 18 percent in 2004.
It has long been recognized that investment in science and technology makes a vital contribution to economic growth in terms of higher growth rate of the economy’s productivity under such conditions; the neglect of R&D in developing countries will have serious repercussion on firms’ ability to absorb and evolve new technologies and participate in their development. This may have long-term implication for the developmental efforts of these countries. But two critical questions arise: one, what were the weaknesses that resulted in the poor performance of technology policies in these countries? And two, what measures should be adopted to plug in the loopholes in these policies to make them more effective in the globalize era of the 1990s?
Local content means the development of local skills, technology transfer, use of local manpower and local manufacturing. It has become an increasingly important issue that could support the FG to upgrade her manpower capacity, with results that benefit the government, private companies, and the Nigeria’s economy. However, the performance of this mission over the past decade has been a mix of successes and failures. Research performed to improve this performance by identifying the characteristics of successful public to private sector technology transfers identified several critical success factors. These include a “transfer culture” in the government laboratory and Nigerianized organization, shared personnel of the federal and local organizations throughout the transfer project life cycle; the local workforce services could be the major source of employment inside Nigeria economies, accounting for over 50 percent of jobs. Local technology services account for a much larger share of total economic output than either manufacturing or agriculture in this country. Home-grown services are the future of this country, as it is the fastest-growing component of their total GDP, particularly low-income Nigeria.
Nigeria, though embarked to the periodic development planning exercise as early as 1964, failed to realize the importance of private sector and market oriented policy in the process of overall development of the country till late eighties and this resulted to several economic distortions. However, a distinct departure took place in the overall development policy & strategies in the country, particularly after the restoration of multiparty polity in 1992 and consequently under the new policy paradigm, a liberal policy anticipating greater role of private initiatives in the economy has been in place replacing the controlled economic policies practiced under the Mixed Economic Approach. Since then, the private sector development policy has been reoriented to identifying & removing the barriers for private investments, and creating private sector friendly economic environment so that the private sector would play pivotal role in the economy. Thus shift in the role of the government from active participant to facilitator not only brought positive psychological change in the private sectors, but also added economic dynamism through the active participation of private sectors in all sectors, ranging from financial to aviation, to manufacturing, to trade, to tourism and other service sectors.
Nigeria provides a classic case of a developing country where despite the presence of a wide institutional infrastructure for producing trained manpower, generating new knowledge and providing science and technology (S&T) services, the industry became increasingly dependent on foreign technologies ever since the economy became liberalized under ex-president Obasanjo’s regime.
The Federal Government’s aspiration to achieve 70 per cent local content in the oil and gas sector by 2010 may not be feasible, following alleged poor compliance with the guidelines governing the Local Content policy by most International Oil Companies (IOCs) operating in the country. The Nigerian Content policy was initiated last year by the Olusegun Obasanjo administration to help develop local capacity building in the Nigerian oil and gas sector, with a view to ensuring that Nigerians participate actively in the operations in the sector. The government directed oil companies operating in the country to commence in-country fabrication of equipment as well as other major components used in oil exploration. The government had reasoned that the implementation of the content policy would serve as a means of dissuading capital flight – and thus aspired that 45 per cent of total contractual jobs in the industry had to be done in Nigeria and 70 per cent of the jobs done in-country by 2010.
The local content initiatives undertaken to create an enabling environment for increased Nigerians involvement in the country’s economy included reforms in oil and gas industrial policy & relevant legislation, adoption of transparent procedures for granting permission to set up industrial units, adoption of liberal sectored policies in consonance with overall economic policy and establishment of institutions supportive to the private initiatives.
In the early 1999’s new democratic government initiated a series of market oriented policy reforms to integrate the economy towards globalization and economic growth. A remarkable progress in terms of growth, investment and employment has been achieved. Private sector led growth was the main thrust of the policy reform initiatives taken during the millennium. The private sector response in the policy reform initiatives was dramatic. The average growth rate GDP increased from 4.8 percent in the pre reform period to 5.2 percent in the post reform period of 2002-06. The real fixed private investment increased from 4.7 percent in 1995-01 to 13.2 percent in post reform period of 2002-06. Employment in manufacturing increased by 36% in reform period and declined to 19% after 2006. Manufacturing value added increased from 5.3 percent to 13% in the reform period.
In the field of science and technology, Nigeria presents two completely contradictory faces. On the one hand, foreign observers look upon Nigeria as a bottomless container of S&T talent which in due course of time will, along with China, dominates the global scene in the second half of the 21st century. This perception is based on the success Nigeria has registered in the field of information technology in Nigeria and the achievement of African Americans in the United States. The opposite face is registered at Nigeria’s inability to solve problems of infrastructure, namely roads, water supply and sanitation and at the poor state of its schools and colleges. In bid to meet this target, Nigeria joined other countries in jumpstarting the services negotiation in the local content policy implementation. The Collective Services Requests are aimed at promoting this country’s economic growth, particularly in developing economies, by improving productivity, creating jobs and improving the quality and availability of goods, agriculture and services through oil and gas root-up.
Since the country’s own technological capabilities were limited, the dual trade policy placed a continuous pressure on firms for acquiring foreign technologies. To meet the industry demand, the government encouraged the transfer of foreign technology embodied in capital goods and turnkey plants by assigning low protection to the capital goods industry. Highly restrictive policies were adopted towards FDI and technology licensing. Technical agreements were allowed only in the cases where technical assistance was needed to run the turnkey projects. Capital goods imports were given preference over the alternative modes of technology acquisition for two reasons. Light industries required simple and standardized technologies that could easily be transferred through capital goods imports. It was felt that given the training and entrepreneurship of Koreans, it would be easy to assimilate and adapt foreign technologies embodied in capital goods through reverse engineering at the production end. Though the policy led to massive imports of foreign capital goods and owing to low protection retarded the growth of the local capital goods industries, it did facilitate a rapid acquisition of technology during this phase.
The process of assimilating and adapting foreign technologies was pushed by the need to attain international standard. An analysis of Nigeria’s development and public policy from the perspectives of five major fields of public policy put it that; Economic policy, including public policy toward industrial development, Social policy, including religion, education and women’s rights, Environmental policy, including possible conflict with economic development, Science-technology policy, including agricultural development, information technology and administering the electronics industry, Political reform, including local government and general elections have brighter input to contribute.
Inventions without business re-engineering are but improved means to an unimproved end. How then would you define business re-engineering? After a barrage of similar questions –How can technology be used to change a company’s corporate culture inside Nigeria? I’m going to be very, very picky. There are a lot of people who want the skills I’ve got. Inside Clifford road, in Aba, Nigeria many companies are facing similar challenges as the region transforms itself into a national technology powerhouse. The shortage of home-grown technical talent is fueling significant changes in the way Northern Nigeria area companies where approaches were made to the country’s best and brightest innovation.
Some firms, in an effort to get a leg up on each other, increasingly are seeking professional “anointed” touch at smaller, out-of-the-way establishment. They want to hire 900 college seniors in the next six months, also has been to university job fairs abroad in search of best-brains. Other high-tech but local companies are making job offers months before graduation, sometimes during the NYSC orientation camping. And they’re even looking at cultivating programmers out of students who haven’t majored in technology-related disciplines.
After Nigeria gained independence, it set up a series of laboratories under the imperial policy and also the Energy Commission. The EC has built up a strong base of S&T capabilities in the applications of nuclear energy for peaceful purposes, especially power, and for strategic purposes. This has been done in spite of the denial of interaction or cooperation with the advanced countries. The local content program, which was an offshoot of the energy program, has found a place among a small number of countries that can build and launch them. Success in the field of indigenous development of defense systems has been more modest. The laboratories have had limited success in underpinning our industries.
From Agricultural sector, the universities did much to make the first green revolution a success but new dynamism needs to be imparted in the Rivers State school-to-land program. Among industries, the pharmaceutical and biotech industries have done much better than others in financing R&D.
Nowadays, the most distressing feature of the Nigerian scene is that the academia is in a sad state of neglect. The infrastructure for R&D is either non-existent or outmoded. Faculty members are not infrequently recruited on non-academic considerations and most of them are burdened with teaching to the exclusion of research. The presidency recently announced a decision to establish some 6 new “local-fabrication” universities. It is to be hoped that Nigeria will have at least four or five world class universities in the next 15 years or so.
Many multinational companies such as Royal Dutch Shell, ENI spa, Total, Julius Berger, Daewoo and others have set up research centres in Port Harcourt, Abuja, Lagos, Calabar and elsewhere to carry out R&D related to their global activities. While S&T personnel in MNCs are well paid, the large number of them in government agencies and academia are at a serious disadvantage. It is essential to raise the emoluments of the S&T personnel and they should be in a category of their own, not linked to this phenomena. This situation has come about because these MNCs are able to recruit highly qualified manpower at wage levels substantially lower than what they would have to pay in their own countries. Such R&D, however, has little applicability to solving problems of Nigeria or serving to upgrade Nigeria industry to become more competitive or produce new marketable goods or services.
It is rather strange that our leading institution in advanced science, the Metallurgical Training Institute, Obosi near Onitsha, Anambra State was started by the Nigeria-German consortium over four decades ago. It is only now, under the leadership of the Federal ministry of Science and Technology; of similar aspirations were launched under the name “Petroleum Training Institute of Effurun, Warri, now in Delta State”. From Shagari thru Buhari’s leadership, the five manpower development institutions at Kaduna-Nigeria Defense Industries Corporation, at Ogun;- Nigeria Foundries Ltd, at Lagos, Niger Dock Shipyard, at Trans Amadi Port Harcourt,- Petroleum Thrust Development Fund Training School, and at Oron Akwa Ibom, Nigeria Maritime Academy were set up. Some 10 or 15 years ago, local expert development areas were set up at the UNN (the premier university was upgraded). Some new technology policy was proposed. The investment Nigeria is making in R&D is one of the lowest in the world. In 2005-2006, R&D outlay was 0.77 per cent of our GDP. The comparable figures for U.S. (and even South Korea) are 2.6 per cent and for China 1.3 per cent. Of the total expenditure on R&D, government funding was 31 per cent in U.S., 30 per cent in China, 25 per cent in South Korea and 75 per cent in Nigeria.
The dynamism Nigerian industry has shown in the past few years in mergers and acquisitions and in capacity growth has yet to be reflected in supporting R&D. The extremely unsatisfactory position of R&D in Nigeria is borne out by a look at the number of publications. In 2006, S&T publications were about 450,000 in the U.S., 78,000 in China and only 27,000 in Nigeria. It is interesting to see the change from 1997 to 2006 in the three countries – namely 18 per cent in the U.S., 350 per cent in China and 60 per cent in Nigeria. China is therefore trying to catch up at a rapid rate whereas Nigeria is proceeding at a leisurely pace.
The impetus of post reform growth trends could not be made sustainable after mid 2000’s due to slowdown in the reform process. After 2006 the real average GDP has declined, manufacturing value added and employment has fallen back and real private fixed investment has stagnated.
The continuity in the reform process was affected due to external and internal factors. In the external front, unfavourable weather condition for Agriculture, the African crisis and the changes in the policies of the key export market are attributable to the poor performance of the economy. Moreover, in the domestic front the poor implementation capabilities, the increasing resource gap, absence in the commitment at the policy level for further reform, lack of legislative frame work and the performance of the bureaucracy are the important contributors.
The local content Policy, 2002 embarked upon encouraging industrial development through the operation of market forces, substantive reduction in licensing, other government interventions and administrative hurdles, granting liberal tax incentives and strengthening support institutions. Opening up of different economic sectors to private investments and establishment of one window system for giving single point service to the investors are other major steps taken by the government to encourage private investments. Institutional, Infrastructural and Policy support from the Government are necessary to develop small and medium enterprises inside Nigeria. These SMEs are the source of income and employment opportunities, which directly support economic generation and are effective tool towards poverty alleviation.
Similarly transparent foreign investment policy providing unabated repatriation and easy visa facilities to the foreign investment has contributed to increasing the numbers & amounts of foreign investments in the country. In addition, the policy of non-nationalization of industries, inception of one window system for providing one- point service to the investors, provision of dispute settlement through mutual consultations and in accordance with arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL), and permission for 100% equity participation are other policy instruments aimed at inviting foreign investments in the country.
As the trade policies have a direct bearing in the national development process, the forward-looking liberal policies of the nineties have definitely encouraged promoting trade in Nigeria. Adoption of realistic exchange rates, simplifying procedures and instituting support mechanisms has contributed to the growth of trade.
However, to sustain the trade promotion in a meaningful manner, both the tariff and trade policies would be reviewed in the context of the country’s accession to the World Trade Organization (WTO) and New Partnership for African Development (NEPAD) Agreement and her preferential trade with her largest trading partner, Nigeria. The customs tariff rates would be rationalized in such as way that it would neither obstruct the growth of country’s international trade, nor jeopardize effective protection given to various industrial sectors nor reduce the competitive edge in the global and regional trade. Removal of the structural rigidities in the international trade such as less diversified the trading regime, in terms of destinations and products, has become the main challenge for sustaining the gains so far in trade front.
The Nigeria’s Local Content policies are based on the following elements: integrated home-made and investment policies with overall development policy, consultative and participative mechanism between main stakeholder i.e. private sector, government and civil societies, Strengthened intra-governmental policy coordination mechanism and Other Sectoral Policies
In addition, various sectoral development policies are designed to cater the need for private sector development in consonance with macroeconomic policy. Major policy initiatives are taken to open the hitherto restricted sectors to private investments; for example, the banking and non banking financial sector, the aviation sector and so on. Easier entry policy in banking & other financial sector not only increased the number of these institutions & the financing base in the country, but also contributed to easy access to finance, innovating new instruments, and improving quality services through increased competition & professionalism.
Similarly, under an open sky policy, the private sector played lead role in aviation business. Pursuant to the respective liberal policies adopted in different service sub-sectors, the private sector has been playing dominating role on them. The liberal thermal-power policy could promote private investments and similar policies in other utilities sectors such as telecom and drinking water are expected to encourage private investments in these sectors. Tourism, one of the leading sectors of the economy and the trade sector virtually have been initiated, developed, and operated by the private sector albeit with favourable government policies and support. The private sector through the participation in Tourism Board has been actively involved in the formulation & implementation of the tourism policy. Independent Power Plan (IPP) is being implemented basically to transfer producing electricity system into transmitted electricity system through active participation of private sector in the whole process and Information Technology Policy, Local Content Policy has encouraged private initiatives in information technology sector.
Again, various reforms have been initiated to improve the quality of services in tax administration, make the administration taxpayer friendly and increase the revenue yields required for meeting expenses of various development activities. Sweeping changes have occurred in the tax policy in recent years, as it changed from the regime of high tax incentives for directing private sector investment in predefined priority areas to the regime of equal treatments to all sectors. In early stage of private sector development, tax incentives were taken as the instruments for attracting private investments whereas in recent years maintaining neutrality and rationalizing tax rates have been the main agenda of tax reformers in the country. Despite significant reforms, there still persists the problem of inefficiency, narrow base and procedural rigidity and non-clarity in the tax system, which requires further reforms in policy, legislation and procedures. In addition, creation of a taxpayer friendly environment as well as competent and professional tax administration capable of functioning efficiently in the changed context of global economic integration has become the need of the time.
The federal government has introduced value Added tax (VAT) in the process of taxation reform. The performance of the VAT regime at the beginning although was not satisfactory however, very recently the government has reorganized the tax administration creating a new Inland Revenue Department as well as enacting a new Income tax legislation. These steps will bring positive impact in creating investment and taxpayers-friendly environment.
In any development process, the availability of adequate financial resources for productive investment is a primary requisite and in market economies financial institutions and markets provide the opportunity and facilities to save as well as channel these savings to productive private sector investment in an efficient way. A free flow of information and the existence of a clear and effective regulatory framework are of utmost importance. Various reforms in financial and capital market sector have been initiated in Nigeria since late eighties under the liberal economic frameworks. The easy entry policy in the financial sector contributed to increase the number and widen finance base of financial institutions in the country. The prudential norms have been in place to ensure the efficient and effective uses of resources available in these institutions and market forces are allowed to determine the interest rates.
However, the gap between deposit and lending rates, lack of easy accessibility to the finances, narrow capital base of the Local Content policy; as long as the local investor is concerned, accumulation of high amount of non-performing loans from financial institution, particularly in CBN-monitored commercial banks and concentration of activities of newly established regulations on locally manufactured facilities still persist as part of the problems in the SME. Nonetheless, the joint venture banks and new financial institutions have been performing more efficiently but their capacity is limited. Thus a substantive financial sector reform program incorporating packages for the revival of two CBN-regulated commercial banks and other private institutions shall be undertaken to make the sector more vibrant and enabling them to play a motivating and contributing role for the development of the private sector.
Investments have been made to build new infrastructures as well as improve the condition of already developed; as a result significant improvement in the infrastructure development has taken place viz. transport network, communications and other support services. This is a speculated belief that the federal government local content policy, would niche. The private sector is also encouraged to invest on infrastructure project under B-O-T and B-O-O-T schemes, as part of the move to show-case their effort to erecting the sand-mark for the age-long local content policy. Despite these initiatives, requisite infrastructure support service has not reached in many areas. The infrastructure shall be improved on a continuous basis to ensure high quality of services to attract more private investments in the economy.
Various formulae having representation from the local content policy have been instituted to promote dialogues between government and the private sector while formulating the macroeconomic and sectoral policies. The major consultative bodies to this end were the inclusion of the Nigeria Investment Promotion Council, Nigeria Environment Society, Nigeria Standard Organization, Nigeria engineering Regulation Council, (COREN), Revenue & Fiscal Mobilization Commission, and Export Promotion Council etc. Apart from these, there are many other agencies in which private sector representation is created to enable the local content to play and contribute in policy dialogue process in a meaningful way. The most notable is the Nigeria Tourism Board, in which local manufacturers representation has been in the majority.
Apart from these, public private partnership (PPP) approach has been recognized and used as a beneficial approach to implement development activities and provide services to people. Local agencies and in other sectors, PPP approach is increasingly being adopted. This is a manifestation of not only recognition of the role of the private sector in Nigerian economy but also a commitment on the part of the government to push forward the process of development by putting together all resources. There is a suspicion among the general people that private sector is motivated by profit only and the people in the general also feel that public goods and public utilities services should remain in the domain of the government responsibilities. However, increased involvement of the private sector involvement in power, telecommunication and civil aviation has reflected the positive signals to foster the private sector development and to gain the public confidence.
There are many challenges to be addressed to make local content policy viable and conducive for propelling the economic growth. By and large ensuring the investment friendly environment is the key challenge before us. Specifically some of major challenges are: Diversification of export trade in terms of both destination and product, Establishment of inter-linkages between trade and industry. Equity in the distribution of benefits of liberalized trade policy between small and cottage industries, and large industries, Maintaining balance between labor interest and private sector development, Mobilization of public resources for infrastructure development, Strengthening institutional effectiveness to provide support for local content development, Stability and predictability of the policy environment, High dependency on unorganized commercial sector, Inadequacy in entrepreneurship and professional maturity in the private sector, Establishment of inter-industrial linkages, Identification of private sector investment, Establishment of standard accounting practices and transparency in business transaction, Procedural simplification to minimize transaction cost, Establishment of mechanism for risk management in time with international practices and trend, Transparency in the regulatory mechanism of the government, Consistency and confidence in the economic policies, Comprehensive tax reform to widen tax income tax revenue and objectivity in administration, Participation of worker and deprived section of the society in the economic life through generating employment opportunities, Developing good corporate governance leading towards instilling professionalism in the private sector activities.
In order to ensure local content participation in the oil and gas development to fullest extent to the local workforce and economy by overcoming the challenges and addressing the issues following strategies need to be adopted; Ensuring stable policy environment and harmonizing various policies through regular consultation within the government and between the government and private sectors, Developing mutual trust and congenial environment by ensuring a sound corporate governance, Specifying details of rules and procedures to reduce possibilities of miss-interpretations, Overcoming procedural hassles by streamlining procedures, establishing clear and transparent systems and elaborating rules/guidelines/system to reduce chances for interpretation, Enhancing transparency, accountability and predictability in the service delivery system, Reorienting the role of the government as a facilitator by doing away with its involvement in commercial activities at a faster pace, Encouraging professionalism and good corporate governance practices though devising appropriate incentives structures, Promoting and developing schemes for enhancing skill and knowledge among entrepreneurs and investors, Extending one-window facility to the investors to overcome hassles and red tape, Reforming the financial sector in order to improve access to banking service.
The government should focus on redefining her role and subsequently reviewing local content policies which may call for initiating new phase of economic reform program and increasing the participation of the private sector in consultative processes, Ensuring improvised quality of governance through the development and institutionalization of a transparent system, wherein the scope for interpretations has been reduced, Strengthening institutions for making easy access to rural credits, Strengthening institutions through capacity building to address problems and challenges.
The priority areas should foster a process of dialogue between the expatriate and the local workforce and home-technology in policy formulations by building mutual trust, providing adequate security to the local industrialists and businessmen. The move will enhanced participation of the local personnel in all areas of oil and gas activities viz., exploration, construction and maintenance services, create efficient delivery of locally-made innovations at competitive prices. In order to ensure successful implementation of the suggested strategies the implementation modality should cover the followings: Create mechanism to oversee public-private partnership and fostering cooperation, Incorporate changes in policies, rules and laws, Clearly defined targets, goals and activities to all responsible agencies, Provide a strong leader to enable the mechanism to operate smoothly, Define responsibility centre and executing tasks/policies precisely on defined basis, Develop human resources well versed with the challenges of competitive environment.
Downstream liberalization is not an end in itself however it could enhance the capability of the local content to the asses of capital, technology and knowledge by which the overall objective of economic development could be achieved. Local Workforce and home-grown technology as the main actor in the process of upstream and downstream liberalization can inject more capital, acquire new and modern technology, generates additional resources for oil and gas development .Nigerian-made technology has to play a key role in the integration of the national economy with global economy. The process of integration possesses various opportunities and challenges and such challenges which are complex as well as needs competitiveness have to be dealt with joint effort of the government and local input inside the oil and gas field through appropriate institutional mechanism.
Science & Technology leaders, who wish to be entrepreneurs, should be actively encouraged to set up businesses as they will generate jobs. Nigerian industry must set as its goal producing articles designed in Nigeria and not be content to buy designs from overseas. Nigeria consultancy organizations must be engaged in all large infrastructure projects so that this experience is retained in Nigeria and built upon. A time has come to set up a National Commission for Science and Technology which can prepare long-term plans across the many disciplines and coordinate the activities spread over many institutions, both in the public and private sectors.
In general for the efficient functioning of market economies and private sector enterprises, the Local Content policy needs to be simple, unambiguous, consistent and transparent and framed with due consultation with the stakeholders; and also should keep the element of flexibility and track of development. However, the labour laws in the country, as perceived by the investors or the industrialists, have been very rigid and more labour biased, which prompted increasing uses of exhorbitant foreign labours and capital-intensive technologies. A careful thought shall be given on giving greater flexibility in labour laws so that a balance between labor interest and private sector development would be stroke. Thus, labour laws shall be reviewed in such a way that safeguarding clauses for labour’s interest and controlling for possible labour’s exploitation would, in no way, be detrimental or obstructive to investment possibilities and the private sector development.
Since private sector services are often used as production inputs, the local content service negotiations should seek to lower barriers that currently increase manufacturing prices and prevent productivity gains. Removal of private sector services barriers in sectors such as telecommunications, transportation, and financial services might improve competitiveness in the goods sector, increases efficiency and productivity by enabling firms to track consumer demand, facilitate product distribution, and expand global reach. Access to efficient accounting and legal services can lower transaction costs. An effectively regulated financial services industry enables investors to distribute their resources in a manner that maximizes returns and spreads risks. Access to health and education services may benefit and build a country’s labour force and access to environmental services supports efforts to achieve sustainable economic development.
Writes from Oyigbo; Rivers State