Overview of the Local Content Measures in Nigeria Vis-à-Vis the Obligations Under the Nigerian Content Development Management Board Act

Contributor: Boma Banigo Esq.

Prior to Nigeria’s independence in 1960, the Nigerian government began efforts to establish policies and legal measures to promote the development of local content in the oil and gas industry in the late 1950’s, by enacting a number of policies and legal measures to encourage the use of local content in the industry. To a large extent, such measures were not considered comprehensive, and they also failed to achieve the desired goals of indigenizing the industry and facilitating Nigeria’s economic diversification. [1]

To that end, the Nigerian government in 1999, introduced initiatives to establish a comprehensive policy regime to promote the development of local content in the oil and gas industry. As a result, several committees were set up to create ways beneficial to the increase of local content levels in the industry, while increasing the industry’s contribution to Nigeria’s gross domestic product (GDP).[2]

It was further identified that Nigerian content development initiatives required “an exhaustive systemic approach that would assess local content levels, identify constraints, develop clear policies and processes to stimulate growth and clearly define the roles and responsibilities of stakeholders,”[3] as a result of which The Nigerian Oil and Gas Local Content Policy was created leading to the enactment of the Nigerian Oil and Gas Industry Content Development Act, 2010.

This article examines the evolution of local content regimes in the Nigerian oil and gas industry prior to 2010, and the obligations created by the act regarding local content measures in Nigeria.

LOCAL CONTENT MEASURES

‘Local content measures,’ as the term suggests, are domestic trade policies enacted by government, with the goal of ensuring that businesses operating within their borders use products or services with a local origin. Under the Local Content Act, the concept is classified as “Nigerian content” and is defined as the:

Quantum of composite value added to or created in the Nigerian economy by a systematic development of capacity and capabilities through the deliberate utilization of Nigerian human and material resources and services in the Nigerian petroleum industry.”[4]

States typically impose local content requirements on businesses to aid in the achievement of national economic goals such as economic diversification, reduction of import dependency, promotion of indigenous participation in strategic economic sectors, promotion of exports, facilitation of technology transfers, skills acquisition and job creation, and advancement of social and environmental objectives.[5]

The success of local content policies is largely dependent on the extent of implementation. For instance, where local content measures are used to improve the competitiveness of local industries, rather than as a mechanism to protect those industries from market competition, there is a good chance that they will produce positive and long-term economic results. Local content measures, on the other hand, may fail to produce desirable and long-term economic outcomes if they are not accompanied by efforts to improve local firms’ competitiveness.

As a result, the application of local content measures without a corresponding increase in the competitiveness of local firms, that benefit from such measures is likely to provide only temporary and artificial protection to local businesses, as they will likely become uncompetitive in the long run. Accordingly, a report of the UNCTAD has observed that:

“Where [local content requirements are] used carefully with offsetting measures to ensure that suppliers face competitive pressures and have access to the technology and skills they need to improve their capabilities, they can foster efficient suppliers. Where used in a protective setting with few pressures to invest in building competitive capabilities, they can result in inefficient suppliers that saddle the economy with high costs, outdated technologies or redundant skills.”[6]

Hence, it’s critical that a state’s imposition of local content measures is done in a way that boosts local firms’ long-term competitiveness.

Another attempt to promote local content development in the country was the Federal Government’s Decree Establishing the Petroleum Technology Development Fund (PTDF) in 1973, which aimed to provide training for Nigerians to qualify as professionals and technicians in all fields of the industry[7]. Subsequently, the government in 1991, implemented the Indigenous Concession Policy, which aimed to broaden indigenous participation in the industry while also diversifying sources of investment and funds inflow. As a result, Nigerian entrepreneurs were awarded onshore and offshore oil blocks, paving the way for the emergence of indigenous oil companies in oil exploration and production.[8]

Another outstanding measure include the enactment of the Coastal and Inland Shipping (Cabotage) Act passed by the Nigerian government in 2003, to increase local content in maritime activities affecting the industry, such as the carriage of petroleum products in coastal and inland waters, as well as other ancillary services like barging, bunkering, and towing. The Act, however, fell short of its goals of increasing indigenous participation in the maritime and oil and gas industries. This was attributed to a number of factors, including a lack of indigenous fleet, indigenous manpower, financial support and inefficient administration.[9]

OBLIGATIONS UNDER THE NIGERIAN LOCAL CONTECT ACT

The Local Content Act establishes explicit obligations on all regulatory actors and operators in the oil and gas industry, to consider “Nigerian content” (local content) in the execution of any operations or projects in the industry.[10] The Act requires that domestic products and services should be given priority in commercial activities and project execution within the industry[11].

Under Section 3(2) of the Act, indigenous Nigerian companies are meant to be given exclusive consideration for the execution of oil and gas contracts and services, where such companies demonstrate evidence of basic qualifications such as the ownership of equipment, the availability of Nigerian personnel, and the possession of capacity to execute projects on land and swampy areas.[12]

In addition, any operator bidding for a license, permit, or interest in the Nigerian oil and gas industry must submit to the NCDMB a “Nigerian content plan” (local content plan), demonstrating compliance with the Local Content Act’s requirements. Section 10 (1) of the Act further provides that every local content plan is required to contain provisions which would ensure that “first consideration shall be given to services provided from within Nigeria and to goods manufactured in Nigeria…” (emphasis)[13].

Before beginning any project in the oil and gas industry, an operator must submit such a plan to the NCDMB. Every local content plan submitted by an operator is required by Section 12 of the Act to include a detailed plan, outlining how the operator and their contractors will give Nigerian goods and services first consideration to the satisfaction of the NCDMB. Generally, the minimum level of local content in any commercial activity or project to be executed in the oil and gas industry, is required to be consistent with the levels that are established in the Schedule to the Local Content Act.[14] Where the NCDMB is satisfied that a local content plan is in compliance with the Act, it will issue a “certificate of authorization”, authorizing the operator to execute a specific project or transaction in the oil and gas industry.[15] The Local Content Act also prohibits the importation of welded products into Nigeria, if they are intended for use in oil and gas projects. The Act, on the other hand, mandates that all industry operators and contractors carry out all fabrication and welding activities in the country.[16]

Non-compliance with local content requirements is punishable under Section 68 of the Act. In this regard, an operator or contractor who fails to comply with local content obligations in relation to a specific project in the oil and gas industry, will face a fine of 5 per cent of the project’s value or the project’s cancellation if convicted.[17]

Furthermore, the Act aims to establish a fiscal regime and tax incentives to encourage both foreign and domestic companies, to develop local capacity through measures, such as the establishment of facilities for the local production of imported goods and services.

In this respect, Section 48 of the Act provides that the Minister of Petroleum Resources “shall consult with the relevant arms of Government on appropriate fiscal framework and tax incentives for foreign and indigenous companies which establish facilities, factories, production units or other operations in Nigeria, for purposes of carrying out production, manufacturing or for providing services and goods, otherwise imported into Nigeria.

CONCLUSION

It is quite a glaring fact that government policymakers must adopt a more dynamic approach to ensuring the sustainability of local content development, to further ensuring the security of a better future for the country’s oil and gas industry. It is however expected that with sound economic management, policy re-engineering, good governance, and a social value system that rewards hard work and creativity, there will be a significant number of companies committed to Nigerian content and pursuing local content programs.

REFERENCE

  1. U. J. Orji, “Towards Sustainable Local Content Development in the Nigerian Oil and Gas Industry: An Appraisal of the Legal Framework and Challenges – Pt I” [2014] 32(1) International Energy Law Review.
  2. K. A. Mohammed, “Nigerian Content Development: The Petroleum Technology Development Fund Initiatives” [2009] 2 (2) Petroleum Technology Development Journal.
  3. Enhancement of Local Content in the Upstream Oil & Gas Industry in Nigeria, SNF Report (2003).
  4. Section 106 NCDMBA
  5. Ibid
  6. United Nations Conference on Trade and Development (UNCTAD), Elimination of TRIMS: The Experience of Selected Developing Countries (United Nations: New York and Geneva, 2007) https://unctad.org/system/files/official-document/iteiia20076_en.pdf accessed March 14 2022
  7. A. Akinrele, Nigeria Oil and Gas Law (Oil, Gas & Energy Law Intelligence: London, 2005)
  8. A. Oni, Expropriation and Takings of Mineral Rights in Nigeria from an International Perspective: A Doctrinal and Legal Comparative with North America, http://ssrn.com/abstract=1339396 accessed March 12, 2022
  9. U. J. Orji, “Promoting Technology Transfers in Nigeria’s Extractive Industries: A Review of the Legal Regime, the Challenges and Proposals for Responses”, Journal of World Trade and Investment (2018) Vol. 19 No. 2,
  10. Section 2
  11. Section 3(1)
  12. Section 3(2)
  13. Section 10 (1), emphasis added. Regarding the application of local content obligations to services in the oil and gas industry, and the compliance of the Local Content Act with Nigeria’s GATS commitments
  14. Section 11(1)
  15. Section 7
  16. Section 53
  17. Section 68

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