By Peter Reat Gatkuoth
October 27. 2020 (SSNA) — Too many resource-rich countries remain challenged by undiversified economic structures with weak industrial bases, high unemployment, and economic vulnerability to commodity cycles. Many of them are reviewing or revising mining and investment codes and contracts; looking to local content policies to help exploit mining’s powerful potential for inclusive economic development. This paper looks at how well the local content policy has been implemented by different industrials sectors in South Sudan. In so doing, the paper points out the challenges encountered in the design and the implementation of the policy in South Sudan.
Local content policies are usually designed by policymakers to pursue targets such as industrial development, job creation, value addition, linkage creation, securing direct and indirect opportunities for employment, and better value chain incorporation. Governments have been using local content requirements for quite some time, and despite the highly controversial debate in the literature about their success or failure, their popularity has increased since the economic crisis of 2008. South Sudan attained independence in 2011 with a hope to realize so many dreams with its oil sector including the dream of making the South Sudanese the engine that drives the development and production of petroleum resources for common good (LeRiche, 2013).
Before independence, northern Sudanese, Chinese, Malaysians, Indians and their firms dominated the Sudanese oil industry.’ There would be no true freedom or independence without correcting the dominance of foreigners and their firms in the oil sector, which is vital lifeblood of our economy. The development of local content of the petroleum industry is not only the engine of South Sudan’s economy but also a dividend to its citizens for achieving independence (Titmamer, 2015). To realize this dream, the South Sudan National Legislative Assembly enacted the petroleum bill, which was signed into law by the President in 2012 (Muhongo, 2020). The Act paved way for the formulation of the National Content Policy in 2018. The Policy includes clauses that require (1) procurement of goods and services produced in South Sudan, (2) employment and training of South Sudanese, and (3) transfer of skills, knowledge, and competence.
To fulfill these requirements, the companies are required to prepare and implement plans and programmes for procuring national goods and services, employment and training of South Sudanese including in post-graduate training and scholarships and transfer of skills, knowledge, competence, and technical know-how (Tordo, 2013). The policy also requires that unskilled labor must be given to South Sudanese. The petroleum companies are also required to prepare and implement local content plans and submit annual reports to the Ministry of Petroleum and Mining. The extent to which the above-mentioned local content clauses have been implemented has not been established. Therefore, this research intends to find out the progress of implementation of local content provisions by comparing the current local content levels to the levels stipulated in the provisions of the National Content Policy of 2018 and the Petroleum Act 2012 (Wassara, 2015).
The broader objective is to appraise how the Policy has fostered local participation in the Oil and gas industry, particularly in Melut County and probably in Unity State. The paper also looks at the challenges faced in complying with and identifies and explains the gaps in the Policy. As a country relatively new to the petroleum industry after having attained independence nine years ago, assessing the progress of local content policy in fostering the participation of communities in the oil and gas industry is very crucial, as the results could be used to improve policy and solicit more compliance from the oil companies. In a sense, South Sudan does not only need the utilization of the local content policy in the petroleum industry, it also needs it in other sectors of the economy dominated by expatriates for the instance mining industry and in the area of infrastructure (Dietsche, 2020).
A scan of the economic development trajectory of resource-rich countries suggests that many have not managed to derive sufficient economic and political benefits from their natural resources. Numerous studies indicated that extractive resources can potentially become a ‘curse if not managed well’ although evidence is non-conclusive regarding the correlation between resource endowments and economic outcomes. Moreover, many countries that became excessively dependent on mineral exports often did so at the expense of their other economic sectors and in particular their industrial sectors, leaving very concentrated economic structures highly vulnerable to the volatility of commodity prices or currency appreciation (Wheeler,1984). Pathways to economic diversification have not been monolithic. Experiences across resource-rich countries globally suggest that countries have even embraced different routes at different moments of their development trajectories. These were defined by these countries’ internal systemic and political realities as well as exogenous contextual situations such as the cyclical behaviors of commodity prices, demand and supply, and technological changes (Corden, 1984).
Amongst others, one of the key policy instruments commonly aimed at stimulating resource-based economic transformation is local content. Although there is no agreed definition of what constitutes ‘local’ or ‘content’, this concept is generally understood to mean a set of policy instruments designed by national governments to ensure that a certain share of factors of production (such as labor, supplies of goods and services, technology and knowledge) required at various stages of the value chain is sourced from the domestic economy. For example, with regards to employment, LCPs seek to secure an immediate increase in the share of local employees (Gelb, 1988). Policies can go as far as imposing a legal requirement onto extractive companies to actively recruit the local workforces in such a way as to create jobs or facilitate the transfer of valuable skills and knowledge from foreign labour to the local or national workforce.
Countries have valid motivations to design and implement LCPs and these are usually linked to economic and socio-political considerations; the balance of which is a delicate act. On the economic front, local content is perceived as a ‘low-hanging’ fruit because it can potentially create jobs and stimulate local industrial development. It seeks to capitalize on the companies’ necessity to source certain critical goods and services as well as on various types of jobs that are needed during the life cycle, at different skill levels (Ramdoo, 2015). It is estimated that between 40 and 80 percent of the revenue created in oil and gas, and mining is spent on the procurement of goods and services (McKinsey, 2013). The share ratio spent in-country varies significantly off course, depending on the type of mineral at stake and on the capacity of countries to supply the requisite goods and services to extractive firms. It is also estimated that procurement spending significantly exceeds the contribution to government revenues, which only ranges between 3% and 20% of GDP. For this reason, more than 90 percent of resource-rich countries seek to use LCPs to get as many benefits possible from that potential (McKinsey, 2013).
Furthermore, LCPs are ways of inciting the development of competencies, necessary to make the industry function. While sometimes the requisite talent or pool of expertise might not be immediately available due to skills mismatch or skills shortage and in other circumstances, extractive companies prefer to use expatriate labor. LCPs are therefore meant to encourage national workforce development and transfer of skills and knowledge, to gradually incite companies to use more local labor and less foreign workers, in particular in strategic positions (Stevens et al, 2015). Similarly, LCPs are a way to create economic linkages and business opportunities for local entrepreneurs. However, specialized goods and services needed at various stages of the life cycle of the mining industries may not be available. Companies must therefore purchase such goods and services from international providers. However, over time, mining firms may build well-established relationships with their regular international providers, making it difficult for small local firms to participate competitively in the value chain. Supportive policies within the national mechanism taskforces are therefore deemed necessary to stimulate efforts to source locally (Stevens et al, 2015).
LCPs also serve socio-political interests. In many resource-rich countries, increasingly, societies are denouncing policy failures and are holding governments to account because the extractive sector has largely failed to deliver on inclusive and sustainable development objectives and welfare creation. The Africa Progress Panel 2013 for instance, portrayed the wide disconnection between wealth and well-being, depicted by the mixed record between high growth rates in some resource-rich countries and poverty and low human development (Easo, 2016). At the same time, the complex political economy surrounding the resource sector calls for the governments to navigate among the various interests to secure deals that work for companies while maintaining social peace and maximizing benefits at the national level. In that sense, LCPs can provide useful tools to create visible opportunities at the domestic level.
People have developed high expectations and are deeply frustrated that these have still not been met. Now that South Sudan is independent, the communities expect a lot from the oil companies, mining industries, and government. The communities wanted their share of the oil revenues to be used for the development of the county through various local industries. They expect jobs, a higher living standard, schools, clinics or hospitals, and good roads. It worth highlighting that in Koch, specifically Rier village, the people clearly stated that community development was more important than individual benefits such as jobs. This seems true for most rural people; however, for example, young people in bigger settlements like Melut and Paloch are keener on getting employment.
Furthermore, access to employment in the oil companies is very limited. Being a highly capital-intensive industry, oil companies do not need many laborers. Skilled staffs are expatriates or come from outside of the counties. Some people have been employed for petty jobs or are contracted for short-term work as casual laborers. After construction works were completed, the number of jobs fell. Today there are only a few community members working as office cleaners, guards, or drilling machine operator assistants. Recently, however, a small number of South Sudanese have been recruited into key oil management positions such as field managers. Moreover, a few people from the counties have been appointed into oil-related positions in the government. Nevertheless, most skilled staffs are expatriates or come from outside of the country.
In 2018 for instance, the government of South Sudan supplemented the local content clauses in the Petroleum Act of 2012 with the local content policy. This policy was meant to formulate measures and frameworks to enable the participation of South Sudanese in the Oil and gas industry. Despite this move, however, the oil and gas industry and mining are still dominated by expatriates and companies predominantly owned by non-South Sudanese. This intends to explore the gap in knowledge as to the poor performance of the local content policy in fostering the increased participation of South Sudanese and their Local companies in the oil and gas industry.
The Government’s development objectives are focused on supporting the private sector in South Sudan which is considered to be the engine of growth for the overall economic development of the Country (Easo, 2016). Through wide-ranging legal and policy reforms, it’s good that the Government seeks to create an environment that promotes the development of the private sector. Efforts are also being made to address the challenges that are faced by entrepreneurs including lack of access to finance and entrepreneurial skills development particularly amongst the small and medium enterprises (Tordo et al, 2013). In the same measure, the Government has emphasized positioning South Sudan as an attractive investment destination through targeted policy and legal reforms that will facilitate the operations of large to small enterprises.
With the creation of the Southern Sudan Investments Authority (SSIA), the Government has made strides in attracting large foreign investors in key sectors of petroleum, agriculture, mining, and tourism. By granting investment incentives to investors and improving access to facilities through the establishment of export processing zones, the Government has created an enabling environment for investors. As a result of all these efforts, there is increased private sector participation and growth from national, regional, and international actors. Foreign Direct Investment (FDI) to South Sudan has particularly seen an increase as investors take opportunities available in agriculture, agro-processing, mining, tourism, and other sectors. Such an investment is not only expected to improve South Sudan’s economic performance through the competitiveness of its products but to lead to the transfer of technology, employment, and transfer of skills to the local population (Shankleman, 2011).
Despite the increase in investment flows, the domestic private sector has not been integrated with the new investments. There has not been sufficient integration with the domestic market through the utilization of locally sourced products, employment of South Sudanese at the most senior managerial level, nor the transfer of knowledge and skill to domestic firms and individuals. Without the necessary regulatory and policy framework, the investment to South Sudan will not yield significant benefits to the economy of South Sudan. The National Policy on Local Content for South Sudan should therefore ensure that there are linkages between foreign companies or enterprises and the local national economy. This Policy, while building on the efforts of the Government to promote foreign investment will require investors to meet a set of performance targets in their operations (Shankleman, 2011).
Most of the countries that had successes in economic development, borrowed ideas, and design policies from a different country. Therefore, it worth revisiting different countries on how they operate and implement their policy framework when it comes to a Local Content policy. An example of such a Nation in Nigeria. Nigeria’s oil and gas industry was established in the 1930s when Royal/Dutch Shell launched its explorations in Nigeria’s onshore areas. In 1971, Nigeria created its national oil company called Nigerian National Oil Corporation (NNOC) which became the Nigerian National Petroleum Corporation (NNPC) in 1977 and joined OPEC. One year later, Nigeria’s onshore and shallow waters oil production reached two million barrels per day (Mushemeza, 2016).
With the oil price shock of 1973, OPEC gained more influence and Nigeria introduced its programmes of nationalization and indigenization, leading to government ownership of Shell Nigeria and 60 percentage of the other international oil companies operating in Nigeria. The government also acquired equities in subsidiaries of multinational oil service companies (Trends, 2018). To gain a larger share of the benefits, Nigeria’s government introduced the Nigerian Oil and Gas Industry Content Development Act (CDA) in 2010. The CDA provides a comprehensive legal framework for local content and covers “all regulatory authorities, operators, contractors, subcontractors, alliance partners and other entities involved in any project, operation, activity or transaction in the Nigerian oil and gas industry (Hufbauer, 2018).
Furthermore, the CDA includes targets for Nigeria’s participation in 280 different categories of oil services to foster local linkages and local job creation. The local content development targets were set progressively starting at 45 percent of local content in 2007, reaching 70 percentages in 2010 and exceeding 80 percentages by 2020. Despite the hurdles and challenges Nigeria has overcome, the country has a positive outlook and a noted success in the oil industry. NCDMB contends that the local content amounted to 90 percentages in engineering design, 60 percentages in the manufacture of valves and fabrication of subsea systems, and 45 percentages in the manufacture of high voltage cables – although progress in Nigeria is difficult to measure due to the difficulties of measuring local content (Ovadia, 2016).
In the same token, Botswana successfully moved from being low to a middle-income country following independence, due to its prosper in the diamond industry. For nearly 35 years, diamonds were the main contributor to Botswana’s GDP and government revenues. Diamonds contributed 81 percentages to mining value-added between 2004 and 2014, followed by copper-nicol with 16 percentages, soda-ash with two percentage and gold with only 1 percentage. Before the diamonds boom in the 1970s, Botswana’s income depended considerably on international aid sources and beef exports. From the 1970s onwards, the diamond industry developed successfully and received major policy support from the government in terms of property rights, rule of law, joint ventures, and several local content measures, and among others. Furthermore, the government began accumulating savings from mineral revenues. Today, around 30 percent of government revenue is derived from central bank profits and other income from accumulated assets (Kazzazi et al, 2012).
In 1999, the government implemented the Mines and Minerals Act, granting permits for industrial mineral exploitation to citizens of Botswana only. Furthermore, the Act includes soft local content policies, for instance, requirements to the holders of mineral concessions for maximum possible employment and training of Botswanans as well as the requirement to give preferential treatment to all locally produced materials and goods. The Competition Act was issued in 2009, providing competition incentives for enterprises to train and employ Botswanans and use local goods (Kazzari et al, 2012).
Sustainable economic development from the oil and gas sector or any other sectors in the country is a long-term proposition and planning. To achieve it, policymakers should focus on the design of policies that promote inclusive employment, maximize synergies among economic sectors, and adapt to the global and evolving nature of the oil and gas industry. Starting on the “right foot” is therefore particularly important. A major challenge with this local content lies in the understanding of what is ‘local’ and ‘content’ are. Today, few countries, South Sudan excluded, have explicit and clear definitions of what ‘local’ and ‘content’ are in their legal frameworks. This leaves a lot of room for creative interpretations both within the government and among companies.
As long as this is not clear, measuring the impact will be difficult. Lack of targets or thresholds in the Act and disregards for recording data and sharing it with researchers are some of the factors responsible for non-compliance as well as data inadequacy. For example, the Act has not provided for minimum thresholds on employment, local goods and services, and knowledge transfer. It has not also defined what a South Sudanese Company meant so that the right companies can be awarded services and procurement contracts. Furthermore, it does not provide for incentives and penalties to reward or punish those who meet or fail to meet the targets.
If the Act had explicitly stated thresholds, punishment, and incentives, the companies would have likely made records to prove that they have complied. In addition, some companies did not share some details of the contractors citing confidentiality. The claim that contractual information is confidential is a misunderstanding of confidentiality in our view because the kind of data we requested is not classified per the law as confidential. These significant challenges must be addressed to ensure effective implementation. To avoid anti-competitive practices and hence negatively affect companies’ productivity, local content requirements are only compulsory if extractive companies can find better alternatives in terms of price, delivery, or quality. In countries where the capacity to deliver is lacking or weak, extractive companies do not source locally. This weakens the enforcement capacity of the governments. Therefore, reviewing the local content legal framework and looking at how well the local content policy has been implemented by different industrial sectors in South Sudan is very important and very critical in order to pave the participation of local industry and improvement of national economic advancement.
The author of this article is going to write an article entitled “Revenue Maximization through the National Oil Company: A case study of the Republic of South Sudan.” The author will examine the economy and the Role of the National Oil Company, the fiscal instruments applied by the National Oil Company to capture Revenue shares from the sector, Challenges, and Recommendations thereof. The writer notes that while the National Oil Company was incorporated to participate in the upstream activities of the oil and gas sector on behalf of the Republic of South Sudan, the Corporate faces a number of constraints and challenges. If you wanted to discuss or share with him any ideas thereof, please do not hesitate to reach him at [email protected].
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