Buoyed by competition for access to natural resources and consumer markets from a diverse group of potential investment partners, African governments are increasingly able to dictate the terms of these engagements. Front and centre of these terms is often a requirement for foreign investors to develop ‘local content’: to create jobs, open equity to local partners and invest in local supply chains. The national objective is clear: the transfer of knowledge and value to the local economy and to indigenous companies. The incentive for business should also be clear – businesses that can develop talent procure inputs and market goods and services locally should be able to develop better operating margins and to protect long-term license to operate. Unfortunately, too often government policy and regulation have been inadequate or inappropriate. Business has responded with caution and often sought to circumvent or avoid rather than to comply. The result is a complex, varied local content landscape across the continent, which is difficult to navigate. Key questions that must be interrogated include whether local content policies are effective in achieving national development objectives and how investors should approach national participation.
Evolving reality
Local content legislation is here to stay and companies that fail to recognise this evolving investment reality will quickly fall behind. A combination of complex political, market and socio-economic forces mean that every country in Africa is pursuing local content development in some shape or size. Democratic reforms have been remodelling politics across the continent, slowly rendering governments more accountable to their electorates. In this environment, governments increasingly recognise that jobless economic growth and strong government revenue is not enough to sustain political power.
At the same time economic shocks such as the global financial crisis and periodic commodity price collapses are driving home the need for sustainable economic development in resource and non-resource economies alike. African leaders are increasingly cognisant of the need to harness the potential industrial multiplier effects of oil or mining revenue sooner rather than later.
Finally other subtler forces on the ground are rendering local content development viable. The return of better educated and trained diaspora with strong professional experience is building the local human capital able to fill the jobs and create the businesses needed to meet local content requirements. At the same time domestic banking sectors are improving, increasing access to local finance while international banks and financers, frustrated by poor growth rates and returns at home and more confident of investment prospects in Africa, are making more foreign capital available.
The drivers for local content development are there: the question is how to accelerate local economic development; how to develop the local financing structures, workforce and supply chains needed to create diversified local economies; how to bridge the gap?
Bridging the gap
It is not an African phenomenon: every economically developed or developing country has faced the challenge of how to develop local capacity and as a result, vacillated between periods of protectionism and liberalism. However, because it has happened before does not make it easier to manage. Local content legislation seeks to artificially increase levels of local participation in an industry beyond levels that local capacity is currently able to meet. It is by definition aspirational. As a result, at the point of promulgation it is generally impossible to comply with.
This has been acutely clear in a number of African markets where achieving the balance between local content requirements and an enabling investment environment has proven difficult, creating an inherent conflict between local content requirements and local operating realities. For example, most investment codes, mining codes and model Production Sharing Agreements now include a reference to local content but rarely is local content properly defined or regulated. In November Tanzania published a new model Production Sharing Agreement, which tightened local content provisions obliging companies to ‘maximise their utilisation of goods, services and materials from Tanzania’ and giving priority to nationals. This vague wording is typical. It is left to industry to create mechanisms and strategies to drive local content development, or in some cases, to circumvent local content requirements.
Where local content requirements are clear, for example on the subject of employment quotas, capacity shortfalls mean that compliance can be extremely difficult. If governments want companies to comply with exacting quotas in technical sectors they must work hard to bridge the gap by improving standards of secondary and tertiary education, aligning curriculums with the technical requirements of important sectors and creating opportunities for public private partnerships in education.
Understanding local content: conclusions
If the rationale behind investing in the development of local content is sound and well understood, how to achieve the effective development of local content is clearly more challenging. Government knows what it wants to achieve: a diversified economy powered by indigenous companies servicing all parts of the economy to generate jobs and economic stability. How to intervene with incentives, regulations and penalties to artificially alter the local economy and how business should respond is much more difficult to define.
This is an edited version of a research note on The Africa Sessions, a series of high-level conversations on African business hosted by africapractice and Pinsent Masons.
“Tom Wilson is the Director of Intelligence and Analysis at africapractice.”
