Design legal frameworks that increase local participation in the oil sector

The laws should support local value addition; where an oil company localises a portion of its supply chain. It strengthens the country’s industrial base while providing employment. Locally produced goods and services start conforming to international standards and certifications. This leads to an improvement in the quality of industrial goods and services, logistics, accommodation, food crops, livestock and dairy products.

Legal frameworks include the laws, regulations and policies that underpin the legal and fiscal regimes in exploration and production agreements. A country’s legal framework can incentivise the development of local suppliers in the oil sector. In Africa the oil production industry tends to be standalone, with limited forward and backward linkages within the local economy (AfDB 2009).

In extreme cases all food, drink, labour, operations services and goods are supplied by foreign firms. This happens because oil production requires very high standards of health, safety and environmental management.

The international oil companies come from highly developed nations, while most oil producing countries are economically backward, with low skilled human resources. Creating very high and sometimes untenable expectations on how to share the wealth generated from oil. This has sometimes degenerated into open conflict, with some countries expropriating the assets of oil companies. However these countries later realise they cannot produce oil without external support, and should have negotiated a win-win solution for the benefit of all concerned.

For example, when the late Iraqi Leader; Saddam Hussein, was toppled, the new government changed the oil laws and auctioned oil fields to international oil companies, who had been locked out of Iraq for close to forty years. Iraqi civil society dubbed these auctions, the sharing of the ‘spoils of war’, raising the prospect of future conflict.

In a related case reported in the East African newspaper, the Tanzanian government passed a new law requiring foreign owned mining companies to cede 50 per cent stake to the public in Tanzania. One of the mining companies rejected a demand by the government to relinquish half of its shares to the State Mining Company. There are fears that the new law may scare investors away from Tanzania.

The sine qua non for good oil law making is the ability to incentivise international oil companies by ensuring that they get a reasonable return on their capital, while extracting as much value as possible for the host country in terms of: signature bonuses, royalties, taxes, social investments, employment and supplier development. Finding the right balance has always been a constant and evolving struggle.

If local suppliers are left at the mercy of global procurement and contract economics they will be squeezed out the oil value chain, because foreign firms are more capitalised and technically advanced. Hence local suppliers need to be effectively supported particularly by the national legal frameworks.

Some oil producing countries now have clear local content laws that incentivise the development of local suppliers. The legal framework should clearly support the transfer of technology, capacity, capability building and the localisation of supply chains. Nigeria, Angola and Ghana now set minimum percentage benchmarks for local content in all supply contracts. This is an idea Uganda can borrow for our benefit.

The laws should support the creation of joint ventures, partnerships and mergers that allow small local players to quickly build up world class capability.

The laws should also encourage oil companies to contract their legal, insurance, engineering and banking services to local firms. Nigeria requires oil companies to place 10 per cent of their annual revenues in resident Banks. While Angola requires oil companies to pay all suppliers of goods and services consumed in Angola through resident banks.

The laws should support local value addition; where an oil company localises a portion of its supply chain. It strengthens the country’s industrial base while providing employment. Locally produced goods and services start conforming to international standards and certifications. This leads to an improvement in the quality of industrial goods and services, logistics, accommodation, food crops, livestock and dairy products.

The good news is, most international oil companies now deploy a myriad of supplier development initiatives. Therefore an effective legal framework would supplement the in-house initiatives at these firms. Supplier development is also impacted by the quality of a country’s business environment and its infrastructure.

Mr Karama coordinates the oil and gas strategy at Stanbic Bank Uganda . karamaj@stanbic.com