A Survey of the Literature on Local Content Policies in the Oil and Gas Industry in East Africa

Although oil and gas exploration has been going on in East Africa for decades, until recently exploration activities grew more slowly compared to other regions in Africa. Today, there has been a series of oil and gas discoveries in several East African countries, including Kenya, Madagascar, Mozambique, Tanzania and Uganda. Debate is however mounting over what effect the new oil and gas discoveries would have on East Africa, given the trajectory of older oil-producing countries in Africa, particularly Angola, Nigeria and Sudan. The challenge for East Africa is, therefore, how to maximize the potential benefits from the resources to avoid the under-developmental path that these other countries followed. There is general consensus that lack of specialized skills is a major obstacle to Africa’s realization of its resource potentials. One instrument currently being adopted by most oil and gas resource-rich countries (both in and outside Africa) to deal with the skills problem and to enhance linkages between the oil and gas sector and other sectors of the economy is the formulation of local content policies (LCPs). Typically, LCPs require companies to give preferential treatment to nationals of the country in which they operate in matters of employment and in the procurement of goods and services. It is believed that this would result in technology transfer and facilitate the ability of the country to take charge of its own development. But LCPs come with certain tradeoffs: Their potential incompatibility with international trade agreements threatens their sustenance; they can create unrealistic expectations capable of discouraging investment; and they are easily prone to corruption. However, there is a strong case for emerging oil and gas-producing East African countries to consider adopting the LCP. The nascent nature of the oil and gas industry in the region means that these countries would not have the technical and even managerial expertise to meet the demands of the industry. And training and education are essential for economic development. The LCP appears to be a potent tool to train local professionals. The question however is how to design the policy to reflect the particular needs and circumstances of each country. East African countries may consider adopting a localist approach to LCP by giving special consideration to the localities where the oil and gas and exploitation takes place. This approach may help them to address wider socio-economic problems associated with oil and gas development. They may also consider adopting a regional approach, which would enable all the countries to pull their resources together to jointly address the skills problem facing the region and thereby help one another. Given the enormous oil and gas skills gap in the region, it may help East Africa to avoid the imposition of stringent local content targets on oil and gas companies operating in the region and, instead, adopt an incremental and compartmentalized approach that takes stock of what skills are available, in what compartments at any given time and set their local content targets accordingly. Promotion of linkage development is essential to enhance the contribution of the oil and gas industry to the macro economy. Linkage development can facilitate technology transfer and economic diversification. But even these measures will have only minimal positive impact if the potential for elite capture and corruption is not addressed through the injection of transparency and accountability measures into the LCP design and implementation