How revenues from oil and gas in Africa can be made to work for ordinary people

Oil-Exploration

Critics point out that ordinary people have not benefited from oil and gas exploitation in many African states. Billions of dollars in revenue have had little positive impact on the lives of most people in countries like Angola and Nigeria. Local content policies have been expanding across Africa and are currently being drafted in Uganda, Tanzania, Kenya and Mozambique. In a new book, The Petro-Developmental State in Africa, Jesse Salah Ovadia argues that this needn’t be the case and that a different approach focused on local content is possible. This involves regulations that encourage employment and nurture local companies to increase domestic participation in the industry. I asked him whether his proposed approach could be a game changer for economic development in Africa’s oil producing states.

What is the petro-developmental state and why does it matter now?

The petro-developmental state is a vision of what sub-Saharan countries can achieve through their oil and gas resources. It is tapping non-renewable resources for structural transformation and improving people’s lives in the long term for an eventual transition to post-carbon economies.

In a petro-developmental state, local content policies support infant industries. The approach is anchored in oil and gas due to the state’s leverage with this commodity to regulate local participation. These industries can grow and develop comparative advantage over time in areas of economic activity that have non-oil applications and eventually employ large numbers of people and contribute to building a more robust economy.

In fact, it’s a vision of state-led industrialisation and job creation anchored in oil that actually diversifies economies away from oil. The value of local content is just as great as the revenues from oil, while the benefits are much more important for long-term development.

Is local content the way forward following the oil price shock?

The oil price shock has actually deepened my belief that local content is the key to how petroleum resources can be developmental. Oil prices will always be volatile and have provoked economic crises in Angola and Nigeria. That’s one of many reasons a development strategy cannot be based on use of petroleum revenues alone.

Even when prices drop, oil production continues. So the opportunities for development through local content remain because the companies producing the oil still require all of the same goods and services from local suppliers. The benefits are much more consistent and they also reduce the reliance on oil over the long term as local companies expand and diversify from the oil sector into the non-oil economy.

What are the possible benefits of local content for communities in areas of oil and gas production?

There are a number of different things meant when people talk about local content. In Ghana, Kenya and other new oil states in Africa, local content is often understood to direct benefits to communities. I don’t really see it that way, for me it’s about national development through expanded manufacturing and services sectors.

Oil-barrel
There may be some ways communities can participate in the industry in lower-skilled jobs and supplying basic services and this should be encouraged. But other policies are needed by governments to redistribute the revenues and benefits from petroleum and for companies to obtain their social licence to operate by giving back to the communities they work in.

How might Africa’s new oil producers approach local content?

There are a variety of factors to consider as Africa’s new oil producers set up their approaches to local content. The days of high oil prices are gone and we have to remember that local content involves a cost to both government and the private sector.

Governments should start by evaluating the existing levels of education and skills as well as industrial development. These factors, combined with the amount of oil the country has, how hard it is to extract and how long it will last, are important to consider when determining how to promote local content.

Setting unrealistic targets for local content will reduce the benefit. Rather than creating hard targets across all oil service activities, it would be better to try to build comparative advantage in selected areas. It is worth sacrificing some oil revenues in order to maximise local content if additional regulation would increase in-country value creation.

I worry though that over time as new producers develop their local content policies, they are bowing to pressure to take a less regulatory and more voluntary approach – something I call “soft local content policies”. This doesn’t work because local content is about national development, not creating shared value or win-win outcomes.

What is meant by the dual nature of local content? How can it be reconciled with development objectives?

Dual nature is the idea that local content can both benefit local elites and have positive developmental effects. But I think it will be a struggle in Angola and Nigeria as well as newer oil producing countries like Uganda, Tanzania, Kenya and Mozambique to have the positive effects outweigh the negative ones.

Angola’s recent appointment of Isabel dos Santos, the president’s daughter, as the head of the state’s oil company has a dual nature. Clearly she’s there to ensure her father’s continued access to a key source of rent and patronage. But paradoxically she’s also there to reform and professionalise the company as it struggles to deal with the low oil price environment. I think she was put there for both of these reasons. This demonstrates the dual nature of Angola’s attempt to build a developmental state.

Angola’s top-down approach requires significant political reform to be successful because the balance between elite benefit and national development is so one-sided. The lesson for the citizens of Africa’s new oil states is to pay attention, engage on the issues and make their voices heard on questions of petroleum management and oil-backed development.

How much of a game changer could local content be for the emergence of a petro-developmental state?

I’m often accused of being overly optimistic on this matter, as there is a lack of evidence about the impact of various local content policies. But I believe I’m making a more nuanced argument about a shift in the limits of the possible and a new opportunity for petro-development. Obviously an actually-existing petro-developmental state would be game changing.

It’s a vision though that I theorise alongside a less optimistic vision of new forms of elite accumulation and rent-seeking. There is an open question about how successful old and new African oil producers will be in using local content to bring about developmental outcomes in Sub-Saharan Africa.

Article by Jeremy LindThe Conversation