Why we need local content policy now

Unassailably, Kenya rests on a new global focus that is attributable to the confirmation of the commercial viability of the recent discoveries of oil, gas and other minerals.

Such global interest has triggered a furious behind-the-scenes competition to scramble for opportunities associated with the extractives industry.

Moreover, this allure, among other factors, has rekindled international investors’ optimism of development as evidenced by a notable surge in foreign direct investment.

Paradoxically, such optimism is greeted with indifference by local investors, especially in the oil and gas sector. This indifference raises policy concerns of the private sector’s failure to drive the demand for local content policy.

Local content policies enjoy overwhelming support as evidenced by the proposed Petroleum Exploration, Development and Production (Local Content) Regulation of 2014.

However, the private sector has gathered adequate mobilisation to demand formulation of local content policies. Lack of private sector’s clout is conjecturally attributable to information asymmetry of oil and gas sector, which is highly technical and complex.

Local content policy is a commitment to generate capability in a oil producing country to support the long-term development of an emerging sector.

Kenya defines local content as the quantum or percentage of locally produced materials, personnel, financing, goods and services rendered in the petroleum industry value chain in monetary term.

This definition presupposes a market failure that the government has a duty to correct.

Efficient correction of such market anticipates that the government has sufficient and credible data to determine the scope of the market failure.

Otherwise, incorrect estimation of the scope of market failure can distort the market. Such distortions may erroneously burden oil companies to the extent of disincentivising the investors.

On the one hand, there is also a possibility of government failure in form of regulatory capture that could be propagated by self interest of multinational corporations or local cartels.

Under the Petroleum (Exploration, Development and Production) Bill of 2015, any upstream petroleum contractor/sub-contractor is obligated to comply with local content requirement. Such compliance calls for prioritisation of Kenya’s local goods and services, labour and equity participation.

In addition, there are other statutory rules like preparation and submission of local content plans to the Upstream Petroleum Authority.

On the face of it, these rules establish a quota system, which will overburden investors. If not well executed, it will create inefficiency that will compromise the expectation of establishing a vibrant oil and gas sector free from tragic experiences of other oil and gas-rich countries.

It is important to enforce these rules within some policy content. Therefore there is a policy imperative to formulate a local content policy to guide these rules. However, having policy in place is not sufficient.

Private sector must take the baton of driving the process of formulation and implementation.

In view of this, the private sector should take advantage and participate in or follow this week’s Oil and Energy Services Local Content Convention at the Safari Park Hotel.

The convention should focus on “what” rather than the “why” question. Specifically, private and public sector should deliberate on the urgency of formulating a local content policy now.

Prof Kieyah is the acting programmes co-ordinator at Kenya Institute of Public Policy Research and Analysis (KIPPRA).

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