Rising China and Africa's development: oil
Rising China and Africa's development: oil

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Rising China and Africa's development: oil

3 Linkage development: Ghana case study

In this section, you’ll look into how Ghana’s local content policy has fared, and, generally, the extent to which localisation has been achieved.

Ghana started commercial production of oil and gas resources in 2010, following the first discovery of oil in commercial quantities in 2007, with later discoveries of two additional oil fields. It took the involvement of foreign capital and expertise for Ghana to realise its dream of becoming an oil producing country. Thus, at the onset of oil production in Ghana the IOCs had to play the lead role in oil production, meaning that there was very limited opportunity for local ownership of the lead firm in Ghana’s oil extraction. Moreover, Ghana’s industrial development capacity was limited when oil exploitation started and remains so. This has also meant that there has been limited potential for localisation and linkage development to take place. Meanwhile, as Ghana’s oil find has been entirely offshore, this places greater demands on technology, capital and skills, compared to the extraction of onshore resources.

Another obstacle has been the small size of Ghana’s banking industry and financial market, which has meant that cheap and long-term capital is hard to find locally. Interestingly, estimates indicate that Ghana’s three main oil fields – Jubilee, TEN and SGN fields – on average cost USD 6 billion per project to develop, a figure approximately equivalent to half the entire assets of Ghana’s banking sector (The Economist, 2015). Thus, the potential for local equity participation in the supply chain of oil extraction in Ghana is limited.

It was on the back of these constraints that Ghana’s Local Content law was enacted in 2013. Among many other requirements, the law says that:

  • an indigenous Ghanaian company should have first preference in the granting of petroleum agreement
  • at least 5 per cent equity participation of an indigenous Ghanaian company is required for any entity to qualify for a petroleum agreement
  • a joint venture with at least 10 per cent equity participation for an indigenous Ghanaian company is required for a non-indigenous company that intends to be engaged as a supplier
  • foreign companies must also have capacity development plans that need to be approved by the sector regulator.

Regarding direct employment and purchasing of goods and services, the following targets have been set:

Petroleum (local content and local participation) regulations, 2013

First schedule: minimum local content in goods and services (regulations 1(c), 10 and 18).

Part 1: local content levels to be attained from date of effectiveness of licence or petroleum agreement.

(Local content and local participation regulations L.I.2204)

Generally, the Local Content law appears to have been helpful. The lead IOCs’ orientation towards local linkage development has been positive. In contrast to IOCs’ historical scepticism about local suppliers, the lead IOCs in Ghana provide some support to local companies to take advantage of opportunities in their supply chains. Evidence gathered as part of our research into Chinese oil companies in Africa indicated that the IOCs go ‘the extra mile’ in ensuring that local companies they contract themselves use local sub-contractors in the discharge of their contractual obligations for some projects. Moreover, they also ensure that when a local company wins the bid for a contract which was previously placed with an international company, the particular service or contract remains reserved for the local company. In terms of employment, a lead operator in Ghana (Tullow) says it has achieved 73 per cent localisation, though localisation in management and technical roles may be significantly lower than non-technical and low-skill roles.

The IOCs have also carried out capacity development initiatives, providing training and support to local companies and individuals. Typical examples include establishment of the Enterprise Development Centre (EDC), a joint venture by Tullow Oil PLC and the Government of Ghana to provide training and support to local companies, and the Jubilee Technical Training Centre (JTTC), which offers technical training in oil and gas to individuals.

Figure 2 Capacity building training session held at the Jubilee Partner-funded Enterprise Development Centre in Takoradi

Some local companies have subsequently benefited from the supply chains of the lead IOCs in Ghana but several challenges still remain. For example, the depth of local content in the supplies of the local companies remain questionable. Given the country’s low industrial base, a large proportion of the supplies of local companies to the lead firms may be imported. Moreover, indigenous equity participation in the petroleum agreements is virtually non-existent, because specialised and long-term capital is locally unavailable, leading to the situation where locals ‘front’ for foreigners. This also raises questions about whether there was some arbitrariness in the Local Content law’s policy’s targets or whether some of them were just unrealistic.

Activity 2 Ghana’s experience of linkage development

While the previous section highlighted some of the successes of local content legislation, translation into tangible benefits has not been without its challenges. What follows is a short video and an excerpt from a report on local content implementation. As you watch and read, list what you see as the main barriers to the development of linkages.

Ben Boakye and Pauline Anaman from the project partner organisation Africa Centre for Energy Policy (ACEP), Richmond Atta-Ankomah from the University of Ghana and Kojo Asante from the Ghana Centre for Democratic Development (CDD-Ghana) summarise some of the issues Ghana has faced trying to develop better local linkages.

Download this video clip.Video player: Video 2 The challenges to local linkage in Ghana
Skip transcript: Video 2 The challenges to local linkage in Ghana

Transcript: Video 2 The challenges to local linkage in Ghana

When you look at Ghana's Local Content legislation, the LI 2204, it provides specific objectives for local content for localisation but the overarching goal is to ensure that there is value creation and value retention. But then when you look at further into the shadows of the law, it fails to consider employment and it tends to consider a supply of goods and services. But it does not consider that the other sectors of the economy that could feed into the localization agenda. So within Ghana, yes, we have achieved some level of employment, we have achieved local participation in supply, but it has not been great. Now, I cannot give specific data on the achievements because the reporting has been in bulk. When oil and gas companies report that they have spent X amount in this sector, they do not even show to what extent, or how much of that share goes to local suppliers and to which specific local suppliers. Because it could even be that we have local suppliers taken advantage, but it is a monopoly or duopoly. And that does not ensure that the benefit is shared and trickles down.
Ghana has been effective, I think, to some extent. If you look at some of the numbers of oil companies, like Tullow, for example, show in terms of employment that they employ more Ghanaians at senior management levels, and so on. In terms of the contract volumes that are going to local private sector, it's large. But it is not really clear what exactly we are setting out to achieve and whether or not we are making progress. How much progress have we made since we set out these agenda? So, it's sort of difficult, it's mixed. You can't really tell if we are on track or we are not on track. So I think that is the challenge. So in terms of effectiveness, I think the jury's still out.
I think some effort have been made on paper to meet targets. And those targets are really talking about the numbers of employments, the number of contracts. But there are always deeper detail behind those numbers. For example, if Tullow says they have been able to deliver 90% local content, how much does that constitute in terms of value against the 10% that is not local? So if you have 10% foreign taking salaries that are higher than the 90% local, I mean, the local content doesn't mean much. So we have to really look at value creation, ensuring that we really have the people who can deliver the kind of skills that are highly paid, and that takes time. If you really want the numbers, you can get the numbers delivered by you. For service contracts, we're told that, for example, the Sankofa oilfields outsource over $1.7 billion to local companies. The question really is, if $1.7 billion came into the Ghanaian economy, I'm sure you- everybody will feel it, but nothing much has changed. It tells you that they also outsourced it or they also sourced a lot of the input from abroad. So we have to think thoroughly at what services are being sourced, what inputs are being sourced. Are they locally produced? And if they are not, what are the strategies to really target those? Rather than throwing numbers out there without actually digging deeper behind to see what the substance really are. I think the established [INAUDIBLE] have come through generations of producing interfacing with various communities. And they've gotten to a point where they don't really care much about where their capacity is coming from. Once there is capacity and it's appreciated, then that capacity can deliver that job. They look more or less at what- who, really, is doing their job. But China has, probably, more strategy to send people out as backed by their loans. So when they sign a contract, they want to ensure that they check all the boxes that says we need to bring in Chinese companies to deliver the job. So when you have a local content policy that says that you should have to recruit local Ghanaians, for example, that comes in conflict with what the Chinese also want. And in most cases, African governments are not able to enforce their local content regulation because they want the money, they want infrastructure to show for the next election. And therefore, they are not able to resist those temptations. So that is the difficult bit where we can't find any document, but everybody you speak to tells you that China has a strategy to ship people out as part of their loan package to Africa.
The Chinese first entered into Africa in the mid-1990s. And their first point of call was Sudan. And they came as national oil companies that didn't have much global footprint, in terms of the oil industry. And so, they came thinking that, OK, we could do things here in the way that we do it in China. And so they tried to bring- if they have an oil block, they would try bring oil here, the labour and the capital that they would need for their structure to take place. But over the years, we've see a shift away from that, regarding the Chinese. Because they also trying to learn from the international oil companies how to do business abroad. And so, and I think, maybe, that is where the Sudanese have been fortunate and have been able to take advantage of. So while the Chinese are leaning to move away from it, they are also pushing them to also move away from that, sort of, approach. And so, I'm not surprised that in Sudan, you have a Chinese company but they seem to have been able to achieve some level of localization linkage development. And compared to a place like Ghana where we have an international oil company, yet we seem to be struggling a little bit with our linkage development and localization. Mind you, timing is also a factor in here. So maybe Ghana could get better as time goes by.
I mean, I'm a local person. If I front for somebody and I'm willing to keep it a secret, regulation cannot uncover it. You know, no policy can uncover it. Somebody swear on oath to say that I own a business and he has a transaction with a foreign company to keep that secret- it is really difficult to have a regulator that will be able to dig deeper to be able to know who really is behind it. The solution, really, is to build a real capacity. The solution is to encourage people to team up, to show face that they have the numbers, they have the money to be able to take up the opportunity, else you can't stop fronting when the local capacity doesn't exist.
Fronting is a very difficult challenge in Ghana. The law requires that before a foreign company acquires a petroleum agreement, that foreign company must partner with a local- must have a local partner who must have at least 5% equity. Now, we understand it is [INAUDIBLE] knowledge that the oil and gas industry is capital intensive. Now, we have local companies that cannot assess cheap financial resources in-country. At the same time these local companies have to partner with these international oil and gas companies. And the international oil and gas companies need these local companies. So there is now a market to create partnerships and nothing else. And that has led to the fronting that we see. Fronting has been a difficult challenge that Petroleum Commission has been battling with. And so far, it is quite difficult to see the way forward, to be honest. So I like it when the Deputy Minister mentioned that, well, the government, knowing all these challenges, is now looking at their warehousing option, where we can now see how state institutions who have good cash can participate in the sector.
End transcript: Video 2 The challenges to local linkage in Ghana
Video 2 The challenges to local linkage in Ghana
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Now read the following which is a section taken from a report written by the IMANI Centre for Policy and Education (2018) that looks at the successes and barriers to institutionalising local content in eight countries and across five sectors. It is an analysis of the oil and gas sector in Ghana.

Local content in Ghana’s oil and gas sector [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)]

While statistics, such as those showing the rise in the number of indigenous companies operating in the sector since the introduction of local content legislation, are indicators of progress toward greater linkages in Ghana, it is clear many challenges remain. Some of the key issues with localisation identified in the video and passage include:

  • Limited numbers of local suppliers preventing benefits from trickling down to the rest of society more broadly.
  • The capital-intensive nature of the sector means few indigenous companies have the financial assets necessary to meet the 5% investment requirement.
  • A lack of investment in value creation and skills specialisation mean that high levels of revenue have to be spent on outsourcing to foreign companies. Building on from this problem is an external constraint. Foreign companies need to prove they are meeting international sector standards and few local companies have the expertise or staff with the qualifications to meet these requirements.
  • Growth in local employment and goods and services in the oil and gas sector are encouraging but there remain poor levels of linkages being made to other sectors of the economy.
  • Local content policy may be at odds with foreign investor approaches - wanting to bring in their own suppliers and contractors. The desire to attract this investment can override the political will to enforce local content legislation effectively.
  • Practices such as ‘fronting’ for foreign companies hinders effective regulation, which is linked to the wider issue of opacity around oil sector operations. In addition, it was explained that a lack of capacity within government agencies prevents effective monitoring and evaluation to assess the impact of local content provisions.

Within the IMANI report, one interesting point was an apparent awareness within the Ghanaian government that the local content LI 2204 regulations may have, from the outset, been too ambitious in terms of timeframes and policy targets. Related to this observation, in the video, Dr Richmond Atta-Ankomah stressed that time was a key factor in explaining why Ghana was struggling to create linkage development. Compared to Nigeria and Sudan, localisation and linkage development may appear relatively low, but the oil sectors of these countries are decades old, so we would expect their linkages to be better. So, while Ghana may have significant progress to make in terms of localising development outcomes, time and lesson learning from other contexts may mean it enjoys greater benefits over the longer-term.


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