Firms urged to embrace ‘local content’ in Africa for investment growth

Out-Law News | 30 Apr 2014 | 9:36 am | 3 min. read

Firms that fail to deal with Africa’s increasing demands for local content from global investors will fall behind their peers, a 10-point guide to local content has warned. 

The guide, based on advice from a panel of experts (6-page / 1MB PDF) representing industry and the African mining, banking, consulting, investment and energy sectors, examined what investors need to do to meet domestic development objectives.

The panel was brought together by Pinsent Masons, the law firm behind, and the strategy and communications consultancy Africa Practicefor the first of ‘The Africa Sessions, 2014’.

The panel covered the range of investment, industrial, social and political perspectives that are shaping developments across Africa in the context of local content demands.

On oil and gas, the panel noted that local content is “well established as a principle”, but is being extended into the finance sector and investors should expect requirements to be extended into “most if not all sectors in due course”.

There is “no single approach” to local content development and international business should not seek a consolidation and replication of regulation across multiple markets, said the panel. “Successful local content policies will identify sectors where due to specifics of geography, climate, human capital, natural resources or market access, the local content development makes sense.”

According to the panel, “just because a business is locally-owned does not mean that it will succeed and create local manufacturing capacity or local jobs”. The panel said the “most forward thinking governments are now recognising that local ownership can be the least important element”.

Defining what makes ‘local’ content can be contentious, the panel said. Although normally understood to mean ‘national’ content, “in some jurisdictions there is an increasing focus on the ‘local’ element... to reflect state-level political and ethnic realities”.

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 build competitive advantage”, the panel added.

Firms ready to invest in local content will be able to secure industry-specific incentives and exemptions if they are “prepared to be the first movers”, the panel said. Brazil was cited as an example of how “interventionist local content polices can drive industrial growth”.

The panel said increased levels of regional cooperation “should make local sourcing, manufacturing and recruitment more viable, if – and it’s a big if – national governments are willing to accept regional solutions to local content”. However, “if barriers to regional trade continue to be lifted, the business case for local manufacturing will improve”.

Developing “robust, competitive local supply chains” will also have commercial benefits beyond local content compliance, the panel said. Investors are urged to identify “creative solutions” for building “increasingly important” sustainable local supply chains.

However, local ownership “no longer needs to mean a local, politically-connected, 51% shareholder”, the panel said. The panel experts added that local ownership can become more inclusive by using developing local capital markets to “allow for genuine local equity participation”.

An effective local content strategy can help to maintain a ‘social licence’ to operate – by more closely aligning local and project interests, the panel concluded. “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.”

The panel’s findings are in line with a World Bank report published in 2012 – ‘Increasing Local Procurement By the Mining Industry in West Africa’. That report said: “There is a compelling economic argument to support local procurement in West Africa. Local procurement by mining companies can bring about significant benefits to a wide range of stakeholders. Mining companies can minimise their logistics and stock holding costs, reduce their lead times, increase security of supply as well as enhance their reputations and obtain a ‘social licence’ to operate.”

The report added: “There are few greater opportunities for sustainable economic development in West Africa than increasing local procurement by the mining sector. If a coordinated approach by all of the preceding stakeholders is adopted, combined with a strong commitment to implementation, the economics of many West African countries could be substantially transformed.”

The chairperson of the African Union Commission, Nkosazana Dlamini Zuma, told the fifth EU-Africa Private Business Forum in Brussels last month: “The insistence of African countries for better terms of trade and economic partnerships, for joint ventures with local businesses, for manufacturing plants for the products we consume to be located in our countries, for local content and ownership in critical sectors are part of ensuring that we create shared prosperity for Africans, lasting peace and security and that Africa becomes part of the global value chains.”

The Africa Sessions is a series of high-level conversations on African business hosted by Pinsent Masons and africapractice. The next London event is on Wednesday 14 May and focuses on  investment protection and geopolitics. To attend this session or future events in London, Dubai or Aberdeen, please contact Lucy Wilson.