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To what extent are local content policies effective in

the oil industry in Nigeria?

Student:

Mies Bos

Student Number:

S2057239

Supervisor:

Dr. Leila Demarest

Second reader:

Dr. Maria Spirova

Seminar:

Democratisation Process in Contemporary Africa

Word count:

7937

Abstract

This paper researches the effectiveness of the local content policies (LCPs) in the Nigerian oil This country is a victim of the ‘resource-curse theory’. A theory which claims that states full of natural resources, are often not able to use their wealth to become economically successful. The study aims to find out to what extent the implementation of LCP is an effective political tool to combat the resource curse theory. The thesis has a societal role in the debate how to deal with natural resources in developing countries. The conclusion is found by reading multiple qualitative reports and academic articles about LCPs and effects in specifically the Niger Delta region. This research finds that LCPs are a potential tool of escaping the resource curse, due to it’s governmental influence and clear targets. However, in order to reach this point, the Nigerian government still has to adapt multiple elements of the local content policies. Therefore, the author recommends to find a framework to mitigate corruption, a way to deal with the lack of government capacity and the development of a framework to measure data of local content. When this is possible, its key that institutions reflect upon the implementation of LCPs. At the moment LCPs are not all rounded enough to let Nigeria escape from the resource curse. But when certain issues are solved and elements are changes it will an effective policy framework to escape from the resource curse theory and let the Nigerian economy prosper for all citizens within the country.

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Across Africa, oil, gas, and minerals are being discovered more often than ever before. Nowhere is the global commodities boom being felt more acutely… But sadly, history teaches us that a more destructive path is likely – conflict, spiralling inequality corruption and

environmental disasters are far more common consequences of resource bonanzas (Annan, 2012)

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3 1. Table of Content

2. Introduction 4

3. Literature Review 7

3.1 Definition of LCPs 7

3.2 Methods used to implement LCPs 7

3.3 Different positions on LCPs 8

3.3.1 Arguments in favour of implementation of LCPs 8 3.3.2 Arguments against the implementation of LCPs 9

4. Methodology 11

5. Elaboration on the Research Question 12

5.1 The resource curse theory in the Niger Delta Region 12 5.2 History and current situation of LCP’s in Nigeria 14

5.3 Implementation of ‘The Act’ 15

5.4 Difficulties of measuring successfulness 16

5.5 Mixed results from acknowledged research 16

5.6 Negative position within LCP debate 17

5.6.1 Decreasing investment 18

5.6.2 Increasing corruption 18

5.7 Positive position within LCP debate 19

6. Conclusion 22

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4 2. Introduction

A country with large amounts of oil or diamonds would be likely to be a wealthy and developed state. However, in the past these elements have often resulted in poverty, war and corruption. In many instances, states full of natural resources have not used this wealth to become economically successful (Mittelman, 2017). The abundance of wealth from raw materials has often been mismanaged by the government, or taken away by foreign companies. The economic benefit of one resource might reduce investments into other aspects of the economy, while currency appreciation may make daily life more expensive. Less diverse economies become dependent on one resource. The costs for all these elements together are left for the local population. They do not see money invested into education, infrastructure and health, but see the environment around them getting worse and worse. Economists refer to this situation as ‘the resource curse’ or ‘paradox of plenty’ (Murshed, 2018).

The term was first applied by Auty (1993). Later Sachs and Wamer (1995) were the ones who focused on the strong negative correlation between the abundance of resources and economic growth. From 1960 to 1990 the per capita income of resource rich countries grew three times slower than the per capita income of resource poor countries (Polterovich, Popov, & Tonis, 2010). This gap in growth is getting larger (Sachs & Wamer, 1995). Sachs and Wamer were scholars who have established the most research on the topic. Their main research outcome was the assumption that the resource curse will result in poor economic growth in countries with an abundance of natural resources. They said: ‘the resource curse is the observation that countries rich in natural resources tend to perform badly’ (Sachs & Warner, 2001, p.1) In later years, academics have developed more widespread views on the resource curse. Currently, the resource curse includes more elements of the economy oriented system, such as the social and political components (Biresselioglu, Demir, Gonca, Kolcu, & Yetim, 2019). Worldwide this renewed view has received a growth of acceptance. The Natural Resource Government Institute (NRGI, 2015) shows that resource-rich countries are more likely to develop authoritarianism and sensitive economic climate, compared to their neighbours with less resources.

In order to limit the negative consequences of abundant resources, different policymakers have intervened with the implementation of Local Content Policy (LCP). A World Bank Study used the following definition for the LCPs: ‘LCPs are government interventions that look to increase, in the long term, the share of employment or of sales to a sector that a locally supplied

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at each stage of the value chain’ (Tordo, Warner, Manzano & Anouti, 2013). LCP is an instrument to encourage a growth in local firms within the supply chain. This should lead to more benefits of the resource wealth within the economy (Adedeji, Muhammad & Shaufique, 2017). LCPs want companies to use manufactured goods or domestically-supplied services when they function in the economy. Through more local employment, industrialization and development within the country can be achieved (OECD, 2019).

A sector where a variety of LCPs are playing a role in Africa is the oil and gas sector. Nigeria is the largest oil and gas producer in the continent. The oil and gas sector accounts for around 10% of Gross Domestic Product and the petroleum export revenue is about 86% of total exports revenue (Organization of the Petroleum Exporting Countries, OPEC, 2019). From these numbers one would expect that the Nigerian citizens benefit largely of the presence of this resource. The contrary is true. The impact on the country, specifically in the Niger Delta Region is disastrous; from environmental damage to the demolishment of multiple unique ecosystems. It also affects the health of Nigerians due to contamination of the water they drink, the air they breathe, and the food they grow. Local communities have been brought into poverty with their towns destroyed (The Bayelsa State Oil and Environmental Commission , 2019). The presence of oil within Nigeria is marked by the resource curse thesis. Due to the risen attention to the problems the oil sector creates, a multiple number of local content codes have been established.

In 2010, the President of Nigeria signed the Nigerian Oil and Gas Industry Content Development Bill into law. The Nigerian Oil and Gas Industry Content Development Act aims to increase the amount of Nigerian citizens and companies present in the country’s oil and gas industry, rather than large foreign companies dominating this industry. Through this Act, the government shows its objective to localise and include Nigerians in all aspects of the industry; economic, human and material (KPMG, 2010). The Act was the first step in Nigerian political history that focused on local policies, labour creation within the country and the increase of the domestic economy (Garrick, 2018).

Doing research on LCP in the oil industry in Nigeria is not new. Multiple researchers have done studies on a variety of aspects within localising the oil industry. This is done in both qualitative as quantitative ways. The research often covers either the positive side of the story, or the negative side of the story. This research project wants to show both sides of the story in order to get a complete picture of the situation. This is done as far as this bachelor project

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reaches. A crucial element of the paper will be to assess the positive elements against the negative ones. The thesis exists of multiple parts. Firstly, the literature review which explains the definition of LCPs and researches the positive and negative aspects of these policies. Secondly, the methodology will be elaborated upon. The third part will exist of an evaluation on the successfulness of the implementation of Nigerian LCPs. In the end this leads to an answer of the Research Question which is: To what extent are local content policies effective in the oil industry in Nigeria?

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7 3. Literature Review:

3.1 Definition of LCPs

LCPs are part of the Productive Development Policies (PDPs). The goal of this framework is to strengthen the productive structure of a certain national economy. This is done through multiple sectors in the economy; from agriculture to textiles and software (Crespi, Fernandez-Arias, & Stein, 2014). The aim is to ‘raise growth and improve the competitiveness of the overall economy while maintaining a rising trend in living standards’ (Melo & Rodriguez-Clare, 2006). It contains all government interventions and programmes which objective is a growth in level of employment, services, manufacturing plans and the overall financial value to the local industry value chain (Acheampong, Ashong, & Svanikier, 2016).

An element to make these PDPs succeed are the LCPs. Local content is defined as ‘local content is generally taken to be the total value added to a national economy through the localized production of select services and key materials, equipment and goods related to target sectors of the economy’ (Accenture, 2008). The main focus of LCP is on the value of localized goods and services. The objective of these LCPs is to strengthen the participation and growth of national labour, goods, services, technology and capital (Acheampong et al, 2016).

3.2 Methods used to implement LCPs

There are 3 main categories that are applied to LCPs in the extractive sector

(Ramdoo, Do international trade rules prevent local content policies? , 2016). First of all, the promotion of upstream linkages are mechanisms made to motivate for sourcing of local inputs. Examples of these are compulsory or optional requirements to have a local workforce in the gas and oil industry. Local ownership is important within the process of LCP implementation. Governments can decide that the level of local employment needs to be reported by the companies. Secondly, the downstream linkages have to be encouraged, this can be done by advancing export-oriented strategies (e.g. add value to unprocessed minerals). Next import-substitution strategies (e.g domestic sales). Thirdly, the horizontal measures are applied, these focus on encouraging local industries. Procedures that are used for these horizontal measures are tariffs, financial incentives for local producers, subsidies or the establishment of industrial regions.

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8 3.3 Different positions on LCPs

International Organizations have different positions in the debate of supporting or not supporting the implementation of LCPs in the oil and gas sector. The UNDP, African Union, and African Development Bank have studied resource-based development in the past years and concluded that resource-based development can have a large developmental potential (Ovadia, Local content and natural resource governance: The cases of Angola and Nigeria, 2014). However, the OECD has not mentioned the LCPs in their Framework of Public-Private Collaboration for Shared Resource-Based Value Creation (OECD, 2016). Also the Africa Economic Outlook has shared its negative position within the LCP debate (AEO, 2014). Organizations raise multiple arguments in favour or against the implementations of LCPs. The World Bank keeps a neutral position within the debate (Tordo S. , Warner, Manzano, & Anouti, 2013). The work of Tordo et al. from the World Bank will be used as basis in order to elaborate on the arguments in favour and against the implementation of LCPs.

3.3.1 Arguments in favour of implementation of the LCPs

There are 3 main arguments that scholars point towards when they are arguing in favour of LCPs: (1) to increase it’s value-added, (2) to support employment and social objectives and (3) to correct market failure (Tordo et al, 2013).

Firstly, governments in developing countries argue that LCPs are economically beneficial to increase the value-added. Through LCPs diversification is encouraged (Mahroum & Al-Saleh, 2016). The debate on the resource-curse plays a role within this diversification argument (Kenny, 2010). Governments of resource-rich countries are often inadequate in responding to public welfare needs. These countries often have lower rates of economic stability and growth, have higher rates of authoritarianism and conflict than their neighbours with a lower abundance of resources (Natural Resource Governance Institute, 2015). With the implementation of LCPs scholars argue that through the resource sector, more employment and products are discovered in the non-resource sector (Tordo et al, 2013). This implies that the resource acts as catalyst for the economic growth within a country.

Secondly, LCPs can enhance the social structures and possibilities of a country’s population (Tordo et al, 2013). In order for the oil and gas sector to succeed, a large basis of capital is needed. This leads to foreign powers entering and a low amount of nationals taking the lead in developing the economy. However, through LCPs social pressure is created to increase the

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amount of participation and employment from local citizens (Lee, 2016). Therefore, the level of local employment will increase. Furthermore, communities living close to projects where oil and gas is extracted need to get compensation for their destruction of living environment (Cosbey & Ramdoo, 2018). Through the LCPs it’s possible to set international standards on social impact and create a framework where local communities receive compensation and earn incomes.

Thirdly, LCPs can function as a correction of market failure (Tordo et al, 2013). When oil and gas is found within a country, the knowledge and specialized labour is often lacking. Therefore, oil companies decide to welcome foreigners with knowledge and skills to come to less developed countries. Due to the fact that local citizens do not have the knowledge and expertise, they do not get the jobs of this wealthy industry. Through LPC governments are able to intervene and encourage the local labour force to develop skills that are needed within the gas and oil industry (Kieyah, 2015). The state is a key player in educating and supporting its citizens to become part of the gas and oil industry.

3.3.2 Arguments against the implementation of LCPs

Scholars who speak up against the implementation of LCPs raise 3 main arguments. (1) Misalignment between instruments and policy objectives, (2) lobby groups and institutional frameworks and (3) international regulations.

The main arguments that scholars use against the implementation of LCPs is the misalignment between goals and the instruments (Tordo et al, 2013). If policymakers claim the existence of an externality, it is important to be sure this externality exists. And the instrument chosen to solve the externality is the right one. For example, the superiority of power of MNCs within the market. The implementation of reaching the local content targets might not make a difference. The issue might lie somewhere else, such as a lack of competition regulation or market supervision. Through regulations that encourage domestic supplier to access a fair market might be a better solution.

Secondly, LCPs are prone to lobby groups. The large companies who are already acting within the developing countries do not get benefits out of LCPs in the short term, and are most likely not very willing to change their way of doing business (Tordo et al, 2013). There have been cases of countries who were able to implement and succeed with LCPs, rather than being

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lobbied by the large and powerful companies (Rodrik, 2007). The literature claims that in order for LCPs to be successful and increase welfare, an institutional system needs to contain some crucial elements:

- The government provides public goods such as infrastructure required by the sector - Transparent and clear rules are established

- Clear performance indicators are used to measure competitiveness of the sector.

To end with, in order to make economies grow in the globalized world of today, multiple international regulations have been established. The World Trade Organization (WTO) is the leading global international organization responsible for rules of trade between nations (World Trade Organization, 1995). An issue of the implementation of LCPs is that these policies do not comply with a range of international trade regulations designed by organizations such as the WTO (The World Bank, 2016). There exist multiple international agreements which do not go hand in hand with the implementation of LCPs. Examples of these are; agreements such as the General Agreement on Tariffs and Trade (GATT), the agreement on Trade-Related Investment Measures (TRIMs), the General Agreement on Trade in Services (GATS), and the agreement ton Government Procurement (GPA) (Tordo et al, 2013). Warner (2011) claims that LCPs are strictly prohibited, due to the fact that they mandate the use or purchase of a firm from a local source. This goes against the rules agreed upon in art III and article XI of the GATT (The WTO Agreement Series, 1994). It is important to note that the oil and gas industry is seen as a separate service sector within the WTO (Tordo et al, 2013). This means there is a possibility for governments to intervene in the regulations within the oil and gas sector.

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11 4. Methodology

The research question is relevant for our model of society where multinational companies play a large role. The strength of these companies is the fact that they work across borders. This gives them the opportunities to explore their markets across the globe. At the same time, the variety of markets worldwide face different social and economic environments. MNCs with their origins in industrialized economies and their operating systems in developing countries face obstacles due to differences between the governance and economic situation between developed and emerging countries (Molz, Ratiu, & Taleb, 2013). The thesis has a societal role in the debate how to deal with natural resources in developing countries. The paper aims to get more insights into the relationship between local content policies and escaping the resource curse theory. This will be done through a focus on policymaking. The power of this paper lays in the evaluation of policy that is made in an African country, Nigeria.

In order to find out on what scale the LCPs are successful. I will perform a qualitative research analysis. This will be done through assessing multiple academic articles and newspaper articles. Attention will be given to the background of the resources; aiming for the usage of both western and African authors. The purpose of the research is to create a full-fledged picture of the current situation of LCPs.

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5. Elaboration on the research question

5.1 The resource curse theory in the Niger Delta Region

According to Ogbunwezeh (2009), the Niger Delta region is ‘the ultimate desecration and monumental testament to the failure and criminality of the [Nigerian] ruling class’. The Niger Delta produces the oil wealth of the country. However, there is one doctor per 82,000 people, which is twice as much as the national average of 40,000 people per doctor (Ibeanu, 2006, p. 1). Only 27% of the region has safe drinking water available and 30% have access to electricity (Ibid.). Therefore, the Niger Delta region is one of the clearest examples of the resource curse theory (Agbiboa, 2013). Academia often study the conflict in the Niger Delta by focussing at militia groups, elites and the state taking advantage of the oil wealth. According to Collier (2007, p. 30) and Ikelegbe (2006) these are the main actors leading towards an ‘oil curse’. However, multiple scholars have shown that the problems in the Niger Delta Region has more complicated roots than only the resource curse theory (Ikelegbe, 2010; Ukaga et al. 2012). These authors refer to historical events of demonstrations and the grievances of ethnic minorities. These grievances were already present before oil entered into Nigeria’s economic system (Obi, 2007). When oil was founded, this lead to an explosion of the grievances that already existed in the oil-rich Niger Delta region (Obi C. , Oil and conflict in Nigeria's Niger Delta region: Between the barrel and the trigger, 2014). The Niger Delta communities started protesting against the exploitation and environmental degradation of their oil-abundant region. The oil companies and Nigerian government did not respond to these early peaceful demonstrations. Already in the 1990s the voices of the Niger Delta communities were not heard. This lead to “the combination of growing inequalities, deepening grievances and resistance to the militarization of the region contributed to the descent into violent conflict” (Ibid. p. 150)

Watts (2008) was aware of the fact that the resource curse theory does not fully cover the reasons of the violence and poverty in the Niger Delta region. Conflicts in the country did not only emerge due to the oil-abundance. The way governance was practiced also played a role. The wealth received due to the oil, has been a driver for corruption and political power (Ebiede, 2011). The elites in the federal government, that exist of the larger ethnic groups, use the Niger Delta resources to develop their own region. This way they benefit themselves. This is a result of the federal government structure, which is detrimental for smaller ethnic groups (Suberi,

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2001). The centre government decides how the financial streams run. This makes states highly dependent on their federal government. Collier and Sambanis (2005) mention that the control of the federal government over states has increased the rivalry between states. In the Niger Delta, a region with a large amount of ethnic groups it has established a large dependency on the central government.

Large amount of youth unemployment, environmental damage due to oil, poverty, perceived discriminatory employment practices disadvantaging local population, neglects by government administration and socioeconomic and political marginalisation are the main grievances of the Niger Delta population towards the government and oil companies (Obi C. , Nigeria's Niger Delta: Understanding the Complex Drivers of VIolent Oil-related Conflict, 2009). These grievances have existed for a long time. They are an element of the rivalry between two parts of Nigeria. First of all, the ethnic minority groups in the Niger Delta region. They feel that they are not getting the advantages of the oil revenues in their region, due to their political marginalization. And secondly, the national government, which is dominated by bigger and non-oil producing ethnic groups. These groups are cooperation with large oil multinationals. The second group causes environmental and oil pollution in the Niger Delta region. While the inhabitants of that region do not take the advantages of the large amount of economic prosperity. Neither do they get financial contribution for the devastation of their land (Okonta, 2008).

Furthermore, armed conflict has been an ongoing issue within the region. There is a high number of small arms available in the regions. According to Agbiboa (2013) the wide circulation of arms is due to the high demand. This is because of the lack of success of the social contract between the citizens and the state. He believes people accept state authority when they offer economic services and security. When this does not happen, armed groups start to develop (Agbiboa D. E., 2013). Currently, there is a high level of security threat in the Niger Delta Region (Obi C. , Nigeria's Niger Delta: Understanding the Complex Drivers of VIolent Oil-related Conflict, 2009). Nigeria knows several militia groups that are attacking oil installations and kidnapping international foreign workers. At the moment Movement for the Emancipation of the Niger Delta (MEND) is the largest umbrella organisation for several militarized groups (The Economist, 2008). Their belief is that the national state finds the foreign oil interest more important than the environmental degradation and decrease of living standards of the the Niger Delta population. In 2009, President Yar’Adua established the

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Amnesty Program to reduce the violence in the Niger Delta Region. The policy entailed that militant could drop their arms in a timeframe of 60 days, if they did so, they would not be prosecuted. Through disarmament, demobilization and reintegration the armed groups would be able to get back into society. The amnesty program has resulted in a decrease of violent attacks in the Niger Delta, but the region is still poor and underdeveloped. The Niger Delta keeps being a region with a large amount of injustices that sustain the grievances established in history. This insecurity also threatens the ‘fragile peace’ that has been build through the Amnesty program. (Agbiboa D. E., 2013)

5.2 History and current situation of LCPs in Nigeria

Nigeria is 13th oil producer worldwide, and Africa’s largest (OPEC, 2019). The country has the biggest gas reserves on the continent. The petroleum industry contributes to around 75% of the revenue of the government and 96% of the total export revenue (International Monetary Fund, 2014). Currently the gas and oil industry exists of a combination of Nigerian and international players. One sees that International Oil Companies (IOC) are often part of joint venture arrangements with the Nigerian National Corporation (NNPC). The largest actor within the petroleum sector in Nigeria is Royal Dutch Shell (Rosenau, Chalk, McPherson, Parker , & Long, 2009). They produce almost 50 percent of Nigeria’s oil. They do this through the joint venture of Shell Petroleum Development Corporation (SPDC) with NNPC. Other companies that are active in the country since oil was found are Total, ExxonMobil, Chevron and Agip (Ibid.)

Nigeria knows a long history of LCPs focusing on deepening the number of backward linkages within the oil and gas sector (McCulloch, Balchin, Mendez-Parra, & Onyeka, 2017). In 1969 the first Petroleum Act was signed. This lead to directives advocating for utilizing local services and regulations for Joint Operating, Agreements and Production Sharing Contracts between the Nigerian government and international oil companies. In order to stimulate Local Oil Companies (LOCs) into the country, the marginal field programme (MFP) was established (Acheampong et al, 2016). This started with the 1996 Petroleum Amendment Decree. This act was given more mandates by the Guidelines for Farm-out and Operation of Marginal Fields. The MFP is a program that encourages the indigenous population to participate at the top of the oil industry. Only LOCs are allowed to apply for regulations given by the MFP. Through this system, larger IOCs are not given these benefits, which gives local companies the opportunity to grow and create a more equal market. Through partnerships with the MFP

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program the LOCs have been able to build up a market where locals play crucial roles and their expertise grows. Within IOCs this happens in a more competitive and challenging atmosphere where locals do not always reach their highest potential. The MFP has been evaluated, and its seen that their operations are gaining traction. There are obstacles within the program, during licensing rounds there is a requirement for a $10 million capability for applicant, this is a challenge for local participants and might have resulted in several capable companies not being able to participate.

The action within oil nationalism deepened in the 2000s. This happened through policies that aimed to lift the level of local participation within the petroleum industry and a desire to raise the share of revenue from the sector locally (Nwete, 2012). In order to reach these goals, two bodies were created: (1) a local content division within the Nigerian National Petroleum Corporation (NNPC) in March 2005 and (2) the Nigerian Content Consultative Forum (Adewuyi & Oyejide, 2012). Within the growth of local content there was a focus on fabrication, logistics services, well and drilling, banking and insurance, manufacturing, shipping and marine services and engineering (Bakare, 2011).

5.3 Implementation of ‘The Act’

A milestone within policy development was reached with the Introduction of the Nigerian Oil and Gas Industry Content Development Act in 2010 (Acheampong et al, 2016).

- The Act defines the Nigerian content (since local content policies differ per country) and allows for preferential treatment to companies that qualify as ‘Nigerian’. A company is qualified as a Nigerian company when 51% of the shares are held by people with the Nigerian nationality.

- The Act has objectives for increasing the amount of local content. In 2007, there was a 45% increase. They aim to a 70% increase in 2010 and 80% increase by 2020. (Ihua, Olabowale, Eloji, & Ajayi, 2011).

- The Act underlines the growth of backward linkages through utilizing of locally produced inputs (Adeji, Sidique, Rahman, & Law, 2016). It does this trough introducing minimum goals for Nigerian participation in 280 sections of oil services.

- The Act requires companies to grant 1% of the value of energy contracts to a Content Development Fund. This is created to encourage local trainings (Ramdoo, Resource-based industrialisation in Africa: Optimising linkages and value chains in the extractive sector, 2015).

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Next to this the Nigerian Content Development and Monitoring Board (NCDMB) was established. This body is responsible for the implementation and compliance of the Act about LCPs in Nigeria (Nigerian Content Development and Monitoring Boards, 2020). They enforce the implementation of the Act trough setting extra policies, and guidelines, starting programmes and review LCP plans (Ovadia, Local content and natural resource governance: The cases of Angola and Nigeria, 2014). They mainly focus on the manufacturing and services sector. These sectors have to be strong to extract resources in the country.

5.4 Difficulties of measuring successfulness

A large amount of studies that have been performed shows evidence that there is a growth of local content within the gas and oil sector. These studies show a line with the number of local content going up, but they all mark different time periods or translate it into different ways of measuring. Adewuyi and Oyejide (2012) show the amount of local content numbers before the Act had been signed and they do so step by step. In the 1970s local content grew from 3-5% to 20%, in 2004 it grew to 20% and in 2009 with 39%. Bakare (2011) focuses on the time period after this, namely the period after the introduction of the Nigerian Content Policy in 2010. He claims that the local content within the petroleum sector has risen by 400% in the six years after the introduction of this Act. The World Bank (2015) translate their measurements into the number of jobs that local content policies have created. According to their studies the LCPs have attracted 5 billion dollars into the local Nigerian economy and has created 38,000 jobs. Adeji et al. (2016) found mixed results on the implementation of local content policies. They claim that on the one hand, LCPs do lead to positive results on local value creation in Nigeria’s Petroleum sector. This is due to the fact that there is a larger participation within local firms and a growth of backward linkages. On the other hand, they claim that the impact over the total Nigerian economy has been lower than targeted.

5.5 Mixed results from acknowledged research

Adeji et al. (2016) have done an in-depth study on the role of local content policy in local value creation in Nigeria’s oil industry. They did this through a structural equalling modelling (SEM) approach. Their study reflects the impact of the policies focusing on participation of indigenous oil firms’, backward linkages and job creation. The authors have done a survey with 209 local oil and gas firms in the Niger Delta. This data is analysed through the SEM technique. It has been acknowledged by multiple authors as an extensive and reliable research project. The results show empirical evidence that there are benefits of LCPs within the factors of indigenous

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oils firm’s participation, backward linkages and job creation. There is a positive and significant impact found using the SEM technique. There is also a relationship between the local firms’ participation and backward linkages. They have a positive effect on the number of jobs created. However, the local value addition that has been established as a result of LCPs is less than average. The impact that has been found in the oil sector in Nigeria, is not as substantial as Norway and Venezuela. Two countries that also applied LCPs within their oil industries. Therefore, the in-depth SEM research gives mixed results. On the one hand the authors claim the targets of the Nigerian oil industry through local content policies are not met. But on the other hand they say there is still large potential for the successfulness of LCPs in the future. The growth in level of indigenous entrepreneurs participating in the oil sector could lead for a fast transformation and integration of entrepreneurial activities. This would be both beneficial for the people living in the Niger Delta as the whole nation. In order to make the LCPs successful, monitoring of the implementation is crucial. Only than economic development will take place in the country.

5.6 Negative position within LCP debate

The impact of LCPs within Nigeria has had multiple speculations. Some say it is a success story while others completely disagree to that statement. Heum et al. (2003) say that foreign petroleum companies keep on dominating the oil and gas sector in Nigeria. Nwete (2012) agrees to these findings and explains that the foreign participation takes place both in the top of the sector and at the supply of goods and services. Although the Nigerian government is implementing a large amount of policies on local content and domestic growth, the results have been little. The petroleum industry is still leading to more foreign wealth than benefitting the Nigerian economy (Ramdoo, Resource-based industrialisation in Africa: Optimising linkages and value chains in the extractive sector, 2015).

Researchers are experiencing difficulties with finding the failures and successes of the implementation in LCPs. This is due to the large amount of corruption and vandalism within the petroleum industry and a lack of data from international organization on the topic. The Nigerian government has been publishing statistics from the oil production in the country, however these were not always as successful and trustworthy. The Act has find itself in the midst of two bottlenecks; the complex methods for foreign companies to reach the targets and the codification of business practices (Hufbauer, Schott, Cimino, Vieiro, & Wada, 2013). There are two negative aspects that are found in Nigeria that will be highlighted within this section.

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18 Decreasing investment

The Act has resulted in a decrease of the number of foreign investments into the petroleum sector. The USTR says: ‘the international oil companies have approved no major investments in the oil and gas sector since the first quarter of 2009.’ (Hufbauerer al, 2013) This was before the act was implemented. But this has been the result of the PIB, which terms and conditions are similar to those of The Act. Overall, Nigeria is seen as a country that is not very open towards foreign investment. This leads to IOCs investing into their onshore oil fields that are already in place. These need less knowledge and investment to keep working. Nigerians are able to work with these systems. At the same time, IOCs are doing research on offshore systems, finding the best methods to work in these difficult to reach locations. Around 65% of Nigeria’s reserves are located here. The government had a target of generating 4 million barrels of oils a day is impossible to reach without the cooperation of international companies. In order to solve the issue of decreasing investments into the oil industry, it is recommendable to divide the law into two branches. The first branch is on onshore investments, and the second on offshore investments. Through this the Nigerian set targets would be able be reached in a more gradual method.

Increasing corruption

The legislators who have written the Act are not active on reporting on the process of the localisation of the oil production. The Act says that they board has to publish a report once a year on the developments of the legislation. However, this has not been done. The website of the NCDMB does not provide much data or statistics on the progress of the oil industry on LCP implementation. Hufbauer et al. say: ‘The very nature of the board raised red flags, given Nigeria’s history of corruption’. Nigerian governors have started to ask for waivers from international companies, the NCDMB board has not yes made public the financial costs of these waivers. The US Foreign Corrupt Practices do not allow payments made by MNCs that are not open and known. A lack of transparency in waivers goes against this American Law. Therefore, US multinationals are concerned for corruption and bribery. Additionally, the Act says that board members may receive ‘gifts’ from the industry, specifically allowing the board to raise funds ‘by way of donations, gifts, grants and endowments’ (provision 90(2)(b)).

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19 5.7 Positive position within LCP debate

Mkandawire (2010) explains why the implementation of LCPs is pivotal from the ‘investment-trade nexus’ This notion claims that ‘investment-trade is not the main element of economic growth, but the build-up of of human and physical capital. When the Nigerian LCP regulations will be linked towards a larger economic cycle than only the petroleum industry. It will be able to work as catalyst for the whole systems; from infrastructure, to manufacturing and education.

It’s interesting to observe the view of consultant companies that closely follow trends within the oil and gas sector. According to the McKinsey Global Institute (2013), 9 out of 10 resource-rich countries have implemented laws on local content. Countries such as Indonesia, Kazakhstan and Brazil have improved the amount of local content rules. Also countries within Africa have started to implement LCPs within their legal framework. Examples of these are: Ghana, Tanzania, Uganda and Mozambique. According to consultancy companies the ‘rules of the game have changed’ (Aoun & Mathieu, 2015). For oil and gas companies to succeed, local content is needed. This is especially true within developing countries.

Multiple players within the oil and gas sector in Nigeria have shared positive stories about implementation of the Act. International firms have also shared a growth in local content within their annual reports. ENI writes that 67% of the amount of employees were Nigerian in 2011 and this increased to 94% in 2013 (ENI, 2013) Also Shell came with data on the Nigerian number of employees which were 95% in 2013 (Shell, 2013).

An issue within LCPs is the difficulties governments have with measuring the value addition of the implementation of the policies. The reason why Nigeria is often seen as a success story is due to the establishment of the NCDMB (Olawuyi, 2017) . Their mandate to monitor the and assess the development of the implementation of LCPs. Part of the NCDMB statute is the possibility to give penalties of a minimum of five percent of the total project if the company does not comply with the LCPs. The fines that are paid go into the Local Content Development Fund. This funds money goes into the education of local enterprises. This is a win-win situation. IOCs have a reason to follow the laws and respect the LCP enforcement. At the same time, it creates a method in which LCPs are monitored so they can lead to actual long term benefits. Furthermore, research from Adewuyi and Oyejide (2012) demonstrates that Nigeria has started to localise and see a growth in the level of backward linkages. The authors have identified multiple backward linkages within the sectors of manufacturing and

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intensive services. Ovadia (2013a) shows evidence that the amount and size of Nigerian companies involved in services within the petroleum sector is increasing. This happens in multiple elements of the oil and gas industry; from engineering to fabrication services and equipment. He shows that there is a variety of places where local content has grown largely after 2005. Balouga (2012) says that Nigerian companies cooperate closely with international companies within the marine transport services. He also claims that fabrication is the most active sector within localising the gas and oil industry. However, Ovadia numbers claim this share is not that large yet, around 40%. This shows that the data different scholars are using do often show different elements.

5.8 Policy recommendations

The LCP framework is one that stands on itself and is starting to develop step by step. At the moment the LCPs have not reached its fullest potential in Nigeria. In order for this to happen the author will elaborate on certain policy recommendations. It is important to be aware of the fact that there is a large amount of factors that can make the LCPs more effective. It is even possible that other policies might better achieve certain local content goals. Policies depend on each other to work out. These policy recommendations are based on what the author feels as being the largest gaps within the current policies. Gaps that are more relevant to a country like Nigeria than for instance Norway, which has a complete different political climate.

1. Identification and mitigation of corruption is needed:

As elaborated in paragraph 5.1 corruption is an always present element in the history of Nigeria. There are several places within the value chain of the oil industry that gives pace for corruption. The OECD says: ‘local content regulation can be misused to provide support and preferences to firms connected to political elites’ (Geipel & Hetherington, 2018). Financial resources can be funnelled to political leaders. Since corruption is a tense topic, it is crucial to establish a structure of knowledge and data sharing that gives more transparency on local content.

2. Policy regulation has to be coordination through government abilities:

LCPs consist out of multiple elements and some of these demand more capable and steady government institutions and administrations, in order to be effective. While Nigeria is a more more fragile states. For LCPs to succeed several elements of a government are important: the presence of up-to-date data is necessary, strong institutions that can recognize what targets are reasonable and what gaps have to be addressed (Geipel & Hetherington, 2018) . When this is

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not in place a countries government should adapt its policy regulations to its abilities. Through this a goal can be reached step by step, and a country can grow. This makes it a longer-term project, but also more effective while executing policies. Bourgain and Nem Singh (2013) recommend that international political economy of natural resources have to be attached to ‘the developmental roles of states, democratization and, most importantly, a political approach to resource management as embedded in global governance discourses.’ Trough LCPs this is done, however in order for the LCPs to succeed there has to be a strong political economy and institutional system. This should be build up in steps that goes at a pace of the government abilities.

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6. Conclusion

This thesis focused on the question: ‘To what extent are local content policies effective in the oil industry in Nigeria?’ The paper aimed to get more insights into the relationship between local content policies and escaping the resource curse theory. In order to answer the research question, the author concludes by stating that LCPs can be a successful method, but at the moment it does not work to the fullest. Throughout the research it became clear that LCPs within the oil and gas sector in Nigeria have a double nature. On the one hand it is a framework that encourages large-scale economic developments. Economic developments that focus on local developments where Nigeria benefits from. On the other hand, it’s a framework that gives the elite the possibility to make use of the high amount of oil rents. This is due to the fact that governments and state institutions play a leading role and can therefore favour certain local capitalist by giving by giving incentives and demanding IOCs to use certain local goods and services (Besada, 2016). The NCDMB has estimated that local capture of the oil industry has increased from 5% to 40% in the past decade (Ovadia, Local content policies, natural resource governance, and development in the Global South, 2016). However, there is still a danger of reinforcing the power of the Nigerian upper class. In order to see Nigeria developing as a country that is not prone to the effects of the resource curse theory LCPs are useful. Through creating local wealth, a country is likely to develop. However, until this stadium is reached it is pivotal to work on the challenges that the LCP face during the implementation phase. Challenges such as the lack of government capacity and the development of a framework to measure data of local content. When this is done its crucial to keep reflecting upon how the process is going. When these policy recommendations are followed, the LCP framework will pay off and make the Nigerian economy prosper for all it’s citizens.

The weakness of this research project is the fact that the knowledge comes from reports and research that has been done in the past 30 years. This comes from a broad range of sources with different views, data analysis, statistics and moments of evaluation. Data schemes in Nigeria might not always be up-to-date and fully reliable. Through these academic discussions the author has been able to form an opinion on the data. However, she has not been able to view the situation and talk to different actors living and working in the country. Especially since this paper functions as a societal role its important to understand the situation within the community to the fullest. The thesis is written using second hand data, which could be a weakness, since every situation might be interpreted differently by different authors.

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A strength of the project is that this paper focuses on multiple different elements within the discussion on LCPs. Within LCP literature there is a gap in an overview on the evaluation and extent of effectiveness. Several reports and researchers are writing from a certain perspective, they only focus on either the positive or the negative side. This paper focuses on both, which gives a balanced story about the effectiveness of LCPs in the oil industry in Nigeria concluding with policy recommendation. Which also offers the reader a look ahead.

Local content lead to an increase of labour from the local workforce to oil companies. However, the oil industry is also limited to amount of employees it can employ. Especially the linkages towards other industries connected to the petroleum industry are crucial within succeeding for LCPs (Ovadia, Local content policies, natural resource governance, and development in the Global South, 2016). Industries such as manufacturing and services are closely connected. Therefore the author would like to recommend for further research with a broader scope. ‘Nigeria should intensify its ongoing efforts to diversify its economy to shrink its huge dependence on crude oil which still accounts for the vast bulk of foreign exchange earnings. This is the only option which in the long run can reduce the country’s overreliance on crude oil and its associated tensions’ (Agbiboa D. E., 2013). There should not be a single focus on the oil and gas industry. But the LCPs should have an umbrella function over multiple sectors within the society. The aim of LCP is to benefit the whole population of the African country. There has to be a focus on multiple elements to reach this target. Elements such as development of education and infrastructure. But also the growth of domestic materials has to be stimulated. When LCPs are applied in a broader context than only the petroleum industry, all generations will profit from the policies and in the long term it will become more successful. Further research on the possibility of broadening the LCP framework is encouraged.

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30

Consent Form Publication Political Science Bachelor’s Thesis

in the Leiden University Student Repository

Name student: Mies Bos

Student ID S2057239

Name of supervisor Dr. Leila Demarest Name of second reader Dr. Maria Spirova Full title Bachelor’s

thesis To what extent are local content policies effective in the oil industry in Nigeria?

All Bachelor’s theses are stored in Leiden University’s digital Student Repository. This can be done (1) fully open to the public, (2) under full embargo. In the second case the thesis is only accessible by staff for quality assessment purposes.

The Bachelor’s thesis mentioned above is the same as the version that has been assessed and will be:

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Signed as correct: Mies Bos

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