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INTRODUCTION

The Oil and Gas sector of the Nigerian
economy has hitherto, remained the mainstay of the country’s capital value chain
and the most remarkable component of our National Gross Domestic Product. Given
this incontrovertible fact, it has therefore become highly imperative that the
Act be revamped and its provisions brought into compliance with international
industry best practices while still preserving its core objective, which is
provision for the development of Nigerian Content in the Nigerian Oil and Gas
Industry by encouraging participation of Nigerians.

Before the National Assembly, is a
Bill to amend the Nigerian Oil and Gas Industry Content Development Act, 2010,
properly short cited as the Local Content Act (the “Act”). The Act which is
composed of 106 Sections is sought to be amended by the Nigerian Oil and Gas
Industry Content Development (Amendment) Bill, 2020 (HB.838) (the “Bill”). The
move to amend the decade-old Act sprang out of the pressing need to address
certain salient issues which have been either neglected or improperly captured
in the legislation.  In a bid to prevent
the enactment of provisions considered inconsistent with the mandate and true
spirit of the Act, the Bill seeking to usher in these amendments has thus, been
subjected to rigorous legal scrutiny to capture enlightened viewpoints that
will allow the fulfilment of its objects before it ascends into law. This paper
is focused on some provisions of the Bill we believe needs to be addressed.

THE
NEED TO DEFINE NIGERIAN INDIGENOUS COMPANIES: FUNDAMENTAL ROLE IN THE
DEVELOPMENT OF NIGERIAN CONTENT

The mandate of the Nigerian Oil and Gas Industry Content
Development Act
is primarily to provide for the development of Nigerian
Content in the Nigerian Oil and Gas Industry by encouraging participation of
Nigerians. Indeed, the true measure of the success of content development in
Nigeria is in the amount and complexity of works and role played by Companies
wholly owned and managed by Nigerians, whose focus is on developing
Infrastructure and Technology in Nigeria, thereby encouraging profits to be
retained and reinvested into our economy. Consequently, these Companies are
building and developing capabilities towards ultimately exporting Nigerian
products and services, rather than relying on importation, which is an absolute
characteristic of a Nigerian Indigenous Companies.

The focus of the Act
primarily is on Nigerian indigenous companies. Therefore, any amendment to the
Act must be to protect and encourage an environment for exponential increase in
their numbers and rapid growth in size, so as to pull along the Nigerian
economy. Just as the most developed Oil and Gas countries have done, they have
prioritized the interests of indigenous companies by enacting laws that will
foster and encourage their participation on the sector that is driving their
economy. The glass ceiling which is preventing our economic growth will go away
when we prioritize indigenous companies in the dealings of the sector that
corners us the most revenue annually.

The Act has fallen short of providing
a comprehensive definition as to what constitute the entities regarded as “Nigerian Indigenous Companies”, rather it
resorted to using terms such as “Nigerian
Independent Operators”
and “Indigenous
Service Companies”
in making reference to exclusive and first consideration
to Nigerians as stipulated in the Act. Furthermore, Section 106 (interpretation Section), defines “Nigerian Companies” thus:

 

A company formed and registered in Nigeria in accordance with the
provision of Companies and Allied Matters Act with not less than 51 % equity
shares by Nigerians”.

 

A cursory study of judicial
pronouncements on the definition of what constitutes a Nigerian Company, will
reveal that the meaning provided by the Courts over time, appears to be at a
sharp variance with what the Act envisages, which apparently allows room for
foreign ownership of equity shares in a company considered Nigerian. A
classical case in point, is SIKIRU AGBOOLA LASISI v. REGISTRAR OF
COMPANIES [I176] LPELR-SC.301/1975,
where the Supreme Court laid down
the correct test for determining whether a company is a Nigerian association or
not, in these words:

 

It is clear from the definition under
Section 16(1)(c) of the Nigerian Enterprises Promotion Decree, 1972 that the
correct test for determining whether a company is a Nigerian association or not
is to discover the owners of its capital and other financial interests. If its
capital and other financial interests are wholly and exclusively owned by
Nigerian citizens, then it is a Nigerian Association. If, however, a portion of
its capital or other financial interest is owned by an alien then, except as
otherwise prescribed by or under the Decree, it is an alien association”.
(Underlined
is ours for emphasis).

 

The Act having defined the term
Nigerian Company makes no further mention of a “Nigerian Company” at
all, rather it resorted to various vague variations; “Nigerian Indigenous Operator”; “Nigerian Indigenous Service Companies”;
“Nigerian Indigenous Contractors”; “Nigerian Contractors and Service or
Supplier Companies”
, and “Indigenous
Companies”
to reference sector participants contemplated under each
relevant provision. Although, the Act has implicitly substituted the term “Nigerian Company” with the
above-mentioned phrases, it nevertheless still intends for the word “indigenous” to remain in the Act so as
to portray its very meaning and objective.

The ambiguity created by the above mentioned words has opened the
provision to different constructions, with stakeholders having to rely on the comprehension
of industry best practice or formally recurring to the interpretation of the Nigerian
Content Development and Monitoring Board (the “Board”) in line with S. 70(1) of
the Act, which permits the Board to “provide
guidelines, definitions and measurement of Nigerian Content and Nigerian
Content Indicator to be utilized throughout the Industry”.

The Bill attempts to cure this ambiguity by proposing to replace
the terms “Nigerian Independent
Operators”
with “Nigerian Companies”,
and “Nigerian Indigenous Service
Companies”
with “Nigerian Service
Companies”
. Regrettably, this has failed to fix the uncertainty occasioned
by the Act, instead, it moved further away from the purpose the Act is designed
to attain, which is the exclusive consideration and participation of Nigerians.
Hence, the proposition by the Bill to erase outright, the term “Indigenous”, nullifies the true meaning
and intention of the Act.

Undoubtedly, what gauges the achievement of content development in
Nigeria and especially in the oil and gas industry, rests on the intricacy and
aggregate of works done and the contributions made by Nigerian domestic
companies concerned with the development of infrastructure, technology and
building galvanized human capacity in Nigeria, thereby assuring the reflow,
retention and reinvestment of profits in our economy. Accordingly, these
Companies are forming and expanding the required competence geared towards the
ultimate exportation and trans
atlantic
trading of Nigerian goods and services, in place of protracted dependence on
importation, which typifies the precise features of Nigerian Indigenous
Companies.

A brief study of some oil producing countries shows how their
Local Content Laws focus on participation of its citizens in the Oil and Gas Sector
and have reflected same in their laws. We can take a cue from our sister
nation, Ghana, having passed a
similar Law three years after the enactment of the NOGICD Act. The Petroleum (Local Content and Local
Participation) Regulation, 2013 (Ghana),
passed in 2013, was enacted with
the purpose of enhancing the capacity of indigenous Ghanaian companies and to
promote their participation in the Oil and Gas Industry.

Regulation 49 of the country’s Petroleum (Local Content and
Local Participation) Regulations, 2013,
defines an “indigenous Ghanaian Company” as

 

A company incorporated under the Companies Act, 1963 (Act 179)
that: a) has at least 51% of its equity owned by a citizen of Ghana; and b) has
Ghanaian citizens holding at least 80% of executive and senior management
positions and 100% of non-managerial and other positions”.

 

Similarly, resource rich countries;
Kuwait, Qatar, Saudi-Arabia and the United Arab Emirates (UAE) etc. also focus
on local content requirements to maximize the gains of foreign participation in
their Oil and Gas Sectors. The aim is to provide opportunities for local
industries to participate in Oil and Gas activities. Although, several of these
countries do not exactly define the term “local” in their Local Content
Regulation (LCR), generally it means; nationals, and companies owned, or
majorly controlled by nationals.

It is owing to this prevailing reason, that Nigerian Indigenous
Companies must assume a central place within the covers of our Local Content
Act. Therefore, any amendment to it must be anchored on providing and
encouraging an atmosphere for a flooding increase in their numbers and rapid
growth in sizes, in order to redefine the Nigerian economy.

This work recommends that the term “indigenous” be retained and
consequently, the interpretation Clause of the Bill should interpret “Nigerian
Indigenous Companies”
to mean;

 

A company with
100% equity and assets owned by Nigerian Citizens with its head office/parent
company located in Nigeria”.

 

It is only a clearly worded and purpose-driven definition of this
kind that can adequately foster the existence of a truly Nigerian Indigenous
Company and guarantees an all-round local content development in our dear Oil
and Gas Sector.

 

INCREASE OF
PERCENTAGE TO BE CONTRIBUTED TO THE NIGERIAN CONTENT DEVELOPMENT FUND

The
Act makes provision for the establishment of a Nigerian Content Development
Fund (the “Fund”) under Section 104(1),
for the purposes of funding the implementation of Nigerian content development
in the Nigerian Oil and Gas Industry. In other words, it is provided to ensure
the absolute achievement of the goal for which the Act was enacted in the first
place.

Having
so established the Fund, Section 104(2)
of the Act further categorically
spells
out the major source from which the fund will be generated and placed at 1%
deductible at source, of every awarded contract to any of the listed entities
who are concerned with all the goings-on in the Upstream Sector of the Nigerian
Oil and Gas Industry, to be paid into the fund. This arrangement has worked
perfectly well for the fund itself and provided a considerable measure of ease
to all concerned parties in the undertaking of their business operations within
the spheres of the industry.

Conversely,
the Bill by virtue of a new Clause 105
(2)
proposes a coinage of this provision, such that the major source of the
fund will now be derived from the deduction of 2% at source of every contract
awarded to any operator, contractor, subcontractor, alliance partner or any
other entity involved in any project, operation, activity or transaction in the
Upstream Sector and designated Midstream and Downstream projects operation of
the Nigeria Oil and Gas Industry, which is to be paid into the fund.

Flowing
from the foregoing is the overt fact that, while the initiative to extend the
spectrum of application of this provision by the Bill to include “designated Midstream
and Downstream projects operation” is by far a commendable one, as it will
automatically open the floodgate of more income pooling into the fund and in
turn, speed up the implementation of content development in the industry.
However, an increase in the contributory funds from 1% to 2% of every contract
awarded, is outrageous and can be regarded as double taxation on so many
levels. It can be argued that the sector is indeed already significantly
overburdened by a plethora of levies and fees; Education tax, Nigeria Police
Trust Fund (NPTF) levy, Nigerian Capital Development Fund (NCDF) Levy, Niger
Delta Development Commission (NDDC) Levy, Nigerian Export Supervision Scheme,
and Offshore Safety Permit, others include Cargo & Stevedoring Dues, Waste
Reception Facilities Levy, Value Added Tax among others, and the proposed
minimum of 0.5 per cent of participants respective gross revenues for Research
& Development (R&D) activities in Nigeria. Industry Stakeholders have
expressed concern that any additional financial imposition as proposed by the
Bill on the industry, will very negatively impact Nigeria’s competitiveness and
affect the viability of projects and investments.

It is a bit alarming that while the Government
seem
s to want to
achieve lower costs, it
is imposing
multiple taxes and levies. This is without consideration for high security
costs, assets fixing and environmental remediation costs, that
follows asset damages. The Government is expected to support the
industry to remain a viable partner for the economic development of Nigeria and
not impose unnecessary burden. 

In
addition, an increase to 2% smacks of unaccountability, given that there are no
detailed developmental returns on previous contributions to the Fund, published
by either the Board or any other responsible regulatory body. It then becomes
valid to recommend that contributions be retained at 1% as provided in the Act.

 

APPLICATION
OF THE NIGERIAN CONTENT DEVELOPMENT FUND

Unequivocally, the landmark success in the Nigerian economy over the breadth of
the last decade is attributable to the enactment of the Nigerian Oil and Gas
Industry Content Development Act. T
he
proposed amendment, which is channeled along the lane of enhancing better
participation of Nigerian citizens, rests on how the industry, local businesses
and state institutions create the needed synergy to overcome the obstacles
militating against the actualization of local content opportunities. `

 

Clause 105(3) of the Bill provides that;

“The Fund shall be managed by the
Nigerian Content Development and Monitoring Board and employed for projects,
programmes, and activities directed at increasing Nigerian Content in the Oil
and Gas Industry.”

 

While it can be argued that the
reasoning behind the above clause is progressive, however, it has merely
replicated the provision of the same clause it seeks to substitute, which fails
to address the evident flaw in the application of the fund.

The resources released for funding by
the Board is commendable in most cases but usually are totally insignificant
for some projects. Bringing into account the yearly generated revenue of the
Board, which is earmarked at $360 million from commercial ventures for the year
2020 alone[1],
it will be most ideal to allocate a percentage of the yearly generated revenue
to the advancement of indigenous companies; large projects, laudable
programmes, capacity building solutions, activities and services of robust
advantage to indigenous companies from whose operations the source of the
generated fund is derived.

Therefore, in order to realize and meet the full objectives of the Fund, for the purpose of
unceasing advancement in the Sector, at least one major project considered
instrumental to the exponential expansion of indigenous companies should be initiated
and executed in the industry, every fiscal year. Thus, not only would it be
highly profitable to set aside a minimum percentage of the total generated
contribution to be spent on projects each year, but it will also prepare the
fertile ground for the acceleration of these companies into the league of their
counterparts with multi-national repute, the economy will be better enriched,
and the multiple returns can then be directed towards stretching the boundaries
of research and development in the industry and even ultimately financing the
process of diversifying into and promoting other sectors in the not too long
run.

Similarly, the Board
should through the Fund
, provide
low-Interest Loans to Nigerian Indigenous Companies operating in the Upstream
Sector, to enable them deliver services at competitive pace
, intentionally proceed on ceaseless capacity building programs for local
companies in order to both build and boost the right structures to enable them
compete favorably in the Industry
, ensure effective enforcement of the
Act to enhance in-country value creation, retention, reinvestment, and
generation of  employment for Nigerians
across the Industry value chain, especially at such a time when the revenue
accruable to the Federal Government from other key sectors of the economy is
degenerating at an alarming rate.

Suffice it then to assert that, the provision of Clause 105(3) is
the key to attaining all of these promising potentials which the whole
amendment process portends for the Oil and Gas industry in particular and the
economy as a whole, only if it is redrafted to encapsulate the pertinent
enabling words in the manner described hereafter:

 

“The Fund shall be managed by the Nigerian Content Monitoring
& Development Board, and 50% of the total generated fund thereof shall be
employed for projects, programmes and activities beneficial to Nigerian
Indigenous Companies and directed at increasing Nigerian content in the Oil and
Gas Industry”

 

The Local Content Development Fund can only serve its true purpose
if applied to the right course, and the Act must state this in no uncertain
terms.

 

CONCLUSION

The Bill cannot afford to reenact the
shortcomings it is meant to eliminate. It is therefore required at this crucial
moment for our Legislators to ensure that the Bill underway, is cleared of all
the ambiguities, irregularities, and shortfalls replete in the subsisting
principal Act. A carefully thought amendment of the Act is vital to crystalize
the core intentions of the initial drafters of its letters. While this is being
done, we must balance the interests of the stakeholders in the sector. An
increase in the contributory funds will be burdensome on the already over taxed
stakeholders.

 

 

Damilola
Vordah Imong
is with Messrs O. M. Atoyebi, SAN
& Partners (OMAPLEX LAW FIRM) where she works in the Corporate and
Commercial Department of the Firm. She has an in-depth understanding of the Oil
& Gas and Energy Sector and has worked with various key industry
stakeholders and facilitated several transactions.