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Intense competition for access to African natural resources in recent years has allowed African governments to increasingly dictate the terms of engagement. Chief among their requirements is often a demand for foreign investors to develop 'local content': to create jobs, open equity to local partners and invest in local supply chains.
Local content is well-established as a principle in the oil and gas and mining sectors, and the requirements are increasingly being extended into the natural resources and other sectors. Investors seeking to expand their operations into Africa through strategic mergers and acquisitions (M&A) should take note.
What is local content?
Local content requirements can be imposed on foreign investors under the trade laws of many countries as a condition of their investment in that country. These conditions can be quite vaguely worded and are rarely the same in every jurisdiction, meaning that companies operating in lots of different territories usually cannot implement a single approach in every case.
Defining local content can be contentious. Although the requirements are normally understood to apply nationally, in some jurisdictions there is an increasing focus on creating benefits in local communities. In the Nigerian oil and gas sector operators in the Niger Delta are increasingly under local pressure to ensure that local content policies reflect state-level political and ethnic realties – for example, operators in Rivers State must employ staff and procure goods and services from Rivers State rather than elsewhere in Nigeria.
Early local content requirements focused heavily on local ownership. The most forward-thinking governments are now recognising that local ownership can be the least important element. Just because a business is locally-owned doesn't mean that it will succeed and create local manufacturing capacity or local jobs.
With local content here to stay and local content requirements only likely to tighten, those companies that put local content front and centre of their investment strategies will fare better. Companies that can link their businesses more closely to the local environment through local equity ownership, local supply and local job creation will find it easier to monitor, mitigate and manage risk, and to build competitive advantages.
Advantages and challenges
For national governments the advantages of local content requirements are clear: the transfer of knowledge and value to the local economy and to indigenous companies. However, there are also clear advantages for investors:
- supply chain optimisation: developing robust, competitive local supply chains will have commercial benefits beyond local content compliance including faster production time, supply chain security and profitability;
- local capital markets: local ownership no longer needs to mean a local, politically-connected, 51% shareholder. The development of local capital markets is creating opportunities to raise capital locally and to allow for genuine local equity participation, making local ownership more inclusive;
- license to operate: democratisation and increased access to information continue to increase the number of stakeholders interested in or with an influence on any investment in Africa. In this context, maintaining social licence to operate is a complicated exercise of identifying, engaging and satisfying an increasingly diverse number of different actors across all levels of society. An effective local content strategy can help to maintain a licence to operate by more closely aligning local interests with those of your project.
Unfortunately, too often government policy and regulation have been inadequate or inappropriate, causing businesses to respond with caution. Investors have often sought to circumvent or avoid local content requirements rather than comply.
By seeking to artificially increase levels of local participation in an industry, requirements set out in local content legislation sometimes go beyond local capacity. In a number of African markets, achieving the balance between local content requirements and an enabling investment environment has been difficult. This is why although most African investment codes, mining codes and model Production Sharing Agreements include a reference to local content, this is rarely properly defined or regulated.
Where local content requirements are clear, for example on the subject of employment quotas, capacity shortfalls can also make compliance extremely difficult. If governments want companies to comply with exacting quotas in technical sectors they must work hard to bridge the gap by improving standards of secondary and tertiary education, aligning curriculums with the technical requirements of important sectors and creating opportunities for public private partnerships in education.
There is no single approach to local content development and international businesses should not seek to consolidate and replicate compliance arrangements across multiple markets. Local content policies need to reflect the political and commercial realities of the local environment, and efforts by national governments to develop local content in sectors where the country has no competitive advantages are likely to fail.
Successful local content policies will identify sectors where intervention makes sense: for example, due to specifics of geography, climate, human capital, natural resources or market access.
Akshai Fofaria is an expert in African energy and natural resources projects at Pinsent Masons, the law firm behind Out-Law.com.
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