Homeground advantage: Entrenching local interests in the extractive industry

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Background

Kenya has recently discovered several blocks of natural gas and oil spanning several counties. However, most of these counties are poor, including Turkana which is known to have the most promising oil fields that could be exploited as early as June, 2017. Lamu and Wajir also have natural gas.

It has been observed that countries which are rich in natural resources, specifically non-renewable resources like minerals and fuels, somewhat paradoxically tend to have slow economic growth, little or no democracy leading to authoritarian rule, sluggish development and are more prone to conflict as compared to countries with fewer natural resources. This situation has been coined the “resource curse” or the “paradox of plenty”.

Resource Curse

The term resource curse was first used by a British economist, Richard Auty, in 1993 to describe how countries rich in mineral resources were unable to use that wealth to boost their economies and how contradistinctively, these countries had lower economic growth, than countries without an abundance of natural resources.

Avoiding the resource curse was one of the key issues raised by the public in 2012 after the Kenyan government announced that commercially viable oil had been discovered in Turkana. Several members of the public were apprehensive as they did not want Kenya to suffer the same resource curse suffered by several African countries such as Equatorial Guinea, Liberia, Libya, Nigeria, Republic of Congo, Sierra Leone and Sudan.

The Local Content Bill, 2016

Cognisant of the above, the Senate Committee on Energy, Roads and Transportation introduced the Local Content Bill in July 2016 (the Bill). The Bill is intended to avert the conflicts that have rocked communities in oil and gas rich areas by ensuring that the majority of poor Kenyans in those areas are assured of enjoying the benefits of natural resources.

The Bill is premised on Article 69(1) of the Constitution which imposes an obligation on the State to among other things, ensure the sustainable exploitation, utilisation, management and conservation of the environment and natural resources and ensure the equitable sharing of the accruing benefits and to ultimately utilise the environment and natural resources for the benefit of the people of Kenya.

Objectives of the Bill

The Bill seeks to provide a framework to facilitate local ownership, control and financing of activities connected with the exploitation of gas, oil and other mineral resources. It also seeks to make provision for an increase in local participation along the value chain in the exploration of gas, oil and other mineral resources.

The Bill also seeks to ensure that local content is entrenched in every aspect of the extractive industry through the involvement of local communities which should lead to the enhancement of the income received by local communities following their involvement in the extractive processes, for example, by ensuring that landowners and owners of resources receive the revenue due to them following use of their land and resources.

Further, the Bill looks to facilitate the development of local economies through the creation of employment opportunities and by ensuring the procurement of goods and services that are produced locally. Additionally, the Bill aims to stimulate local industrial development, capacity building and to increase the local capability to meet international standards in the supply of goods and services.

Local Content Committee

The Bill establishes a Local Content Development Committee (the Committee) whose functions include overseeing, coordinating and managing the development of local content in Kenya; making recommendations and advising the Cabinet Secretary in the Ministry of Mining (the Cabinet Secretary) on formulations of policy and strategies for the development and implementation of local content; making recommendations to the Cabinet Secretary on the minimum standard requirements for local content and the development of the local content plans; appraising, evaluating and approving local content plans and reports submitted to the Committee; overseeing, in consultation with the county governments, the implementation of local content policies and strategies by operators and collaborating with county governments in the implementation of strategies to improve the capacity of local persons, businesses and the capital markets to fully leverage the objectives of the intended Act.

Local Content Plan

Under the Bill, oil and gas companies will now be required to state how local communities will benefit from the proceeds of the extractive processes before they are licensed. The companies are required to submit a Local Content Plan (the Plan) to the Committee in which they should set out information regarding the procurement and utilisation of locally produced goods and services, the qualification requirements and employment of local persons to be engaged in the extractive industry, workforce development strategies in relation to locals and strategies for the support of local participation in the activities of the operator.

The operator is also required to set out in the Plan the strategies through which it intends to give priority to goods produced and services delivered locally and to also give priority to qualified local persons with respect to employment opportunities.

Skills and Technology Transfer

The Bill requires oil and gas exploration companies to commit to a skills and technology transfer agreement with local firms and individuals. This will ensure more Kenyans are employable and have the skills required for job opportunities in the extractive industry.

An operator is also required to submit to the Committee, a succession plan for any position not held by a local person within a period of six (6) months from the commencement of its operations. This provision seeks to ensure that where a certain position is held by an incumbent expatriate, the role will be taken up by a local person within a specified time.

The Bill also requires the Cabinet Secretary for Environment and Natural Resources to issue guidelines and contracting standards on thresholds to be attained by each operator with respect to the percentage of local equity ownership of companies engaged in the extractive industry.

Local Content Training and Development Fund

The Bill established the Local Content Training and Development Fund (the Fund) and requires the extractive industry players to remitsuch percentage of their net revenues to the Fund as will be determined by the Cabinet Secretary in consultation with the Committee for the purpose of training locals. This provision is aimed at ensuring that in the future, local content requirements are fully implemented as required under the Bill.

A Nigerian Perspective

It is arguable that the discovery and exploitation of oil in Nigeria has been more of a curse than a blessing. The oil has benefited only a few people and this has resulted in frequent conflicts amongst communities, particularly in the oil-rich Delta region.

The Nigerian Oil and Gas Industry Content Development Act, 2010 (the Nigerian Act) on local content was thus enacted with similar intentions as the Kenyan Bill. The Nigerian Act seeks to increase indigenous participation in the oil and gas industry by prescribing minimum thresholds for the use of local services and materials and to promote transfer of technology and skills to the Nigerian labour force in the industry.

Like the Kenyan Bill, the Nigerian Act provides for preferential treatment of local ventures and workforce. It also provides a host of requirements designed to ensure workforce development of and technology transfer to Nigerians as a first option. It requires that, whenever possible, operators should hire Nigerians. When the operators are unable to find skilled workers, the Nigerian Act then requires that they put in place programs and procedures for training workers and to make periodic progress reports to the Nigerian Content Monitoring Board.

In addition, the Nigerian Act mandates that operators provide a succession plan for all positions filled by expatriates, except for five percent (5%) of management positions, which may be permanently held by foreigners, with Nigerians taking over after a maximum of four (4) years of apprenticeship under incumbent expatriates.

Conclusion

While the Memorandum of Objects and Reasons of the Kenyan Bill states that one of its objectives is to provide a framework to ensure that landowners and owners of resources receive the revenue due to them, it would appear that the Bill does not have express provisions on exactly how the proceeds of the extractive industry are to be shared with the local community.

The Bill seems to place more focus on the involvement of the local community in the mechanical processes of the extractive industry through the provision of goods and services required for the industry and less on actual distribution of the income generated from the extractive industry.

It may therefore be concluded that while the Bill provides a good starting point on addressing the concerns of the public regarding the direction Kenya is taking to safeguard local interests in the extractive industry, the question as to how effective the Bill will be in achieving its stated intention will be answered once the Bill is passed into law and with the passage of time.