Tanzania Publishes First Draft of a Long-Awaited Local Content Policy

by King & Spalding
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In January we reported that Tanzania is in the process of developing new legislation and regulations for its emerging gas sector. In February this was followed by our report specifically on Tanzania's Natural Gas Policy (NGP) in which we noted how the NGP seeks to bring wide-ranging benefits to Tanzania across the entire value chain.

Tanzania's relatively rapid transition from an under-developed country to a potentially large LNG exporting nation has naturally brought with it a requirement to update and enhance existing legislation and regulations. Investors in Tanzania's gas sector have identified the lack of clear oil and gas policies as a substantial challenge, and the Government of Tanzania is now responding to that challenge. A key objective of the government in developing new laws and regulations is to increase local content to ensure that Tanzanian businesses and individuals participate strategically at every level across the natural gas value chain.

In April the Ministry of Energy and Minerals took a first step towards introducing a new policy on local content with the (belated) publication of a first draft of the "Local Content Policy of Tanzania for Oil and Gas Industry – 2014" (LCP). The LCP, once finalised, is to serve as a precursor to a Local Content Bill that will, in time, become local content legislation.

In this article we look at the key provisions of the draft LCP, and consider industry's initial reaction.

Local Content Objectives in the Natural Gas Policy

The first Natural Gas Policy (NCP), published by the government in October 2013, carried a clear message that "Natural gas resource found in Tanzania belongs to the people of the United Republic of Tanzania, and must be managed in a way that benefits the entire Tanzanian society."

The NCP sets the scene for a new policy to be implemented to bring about (i) employment and training of Tanzanians; and (ii) investment to maximize the supply of Tanzanian goods and services. It recognizes that achieving the objective of maximizing local content requires the implementation of "sound policies, strategies, actions plans, continuous consultation amongst key stakeholders and strengthening capacity of various institutions such as Local Government Authorities (LGAs) and Community Based Organizations (CBOs) ." The NCP calls on international oil & gas companies (IOCs), in particular, to create opportunities for maximizing local content.

Key Provisions of the Draft Local Content Policy

In the draft LCP a "Local Business" is one that is incorporated in Tanzania and is wholly owned by Tanzanians or at least 51 percent of the shares are owned by Tanzanian nationals. An interest held by a Tanzanian entity can only be transferred to another Tanzanian entity. Ownership structures of businesses are to be carefully scrutinized to determine the authenticity of Tanzanian-owned shares, taking lessons from other countries that have faced the challenge of "shadow shareholders."

The draft LCP identifies five focus areas:

  1. Capacity building and technology transfer: (i) IOCs and other players in the supply and value chain are encouraged and required to work with a Tanzanian partner; (ii) specific thresholds for local participation will be developed, with different thresholds for specific parts of the supply chain; (iii) strategies will be developed for fostering the transfer of technology and knowledge; (iv) operators are expected to prepare and implement plans for the transfer of technological know-how and skills; and (v) the government will set up a centre for Excellence for Oil & Gas to expedite skills and knowledge transfer.
  2. Participation of Tanzanians and Tanzanian owned entities: (i) Operators are expected to prepare training programmes for all aspects of oil and gas industry activities and at all levels, to be revised annually; (ii) preference must be given to the employment of Tanzanians who have requisite qualifications, competence and experience; (iii) where a foreign national is being employed there must be a plan for a Tanzanian to succeed to that position; (iv) foreign experts will be subject to limited and non-renewable work permits; (v) the relevant Tanzanian authority will approve mandatory schemes for training Tanzanians; (vi) as far as practicable, goods and services produced by or provided in Tanzania by Tanzanian-owned businesses are to be used in preference to foreign goods and services provided in Tanzania by foreign businesses; (vii) Tanzanian-owned businesses shall receive a margin on price preference prescribed by future legislation; and (viii) where a foreign entity provides goods and services it shall operate from Tanzania and partner with a Tanzanian-owned and -registered company.
  3. Procurements and usage of locally produced goods and services: The government will: (i) ensure there is a compulsory local content requirement in every invitation to bid for the provisions of goods and services; (ii) ensure that contractors and lead sub-contractors manage risks of local businesses to allow their participation; and (iii) ensure transparency, value for money and competitiveness in every procurement process undertaken by contractors and sub-contractors.
  4. Fabrication and manufacturing in-country: In order to increase and maximize manufacturing in Tanzania the government shall: (i) ensure the availability of equity financing to local businesses engaged in fabrication and manufacturing; (ii) ensure that Tanzanians with required skills are available to participate in fabrication and manufacturing; (iii) encourage multinationals to bring their global oilfield services and equipment to Tanzania; and (iv) ensure the development of a consolidated domestic fabrication industry.
  5. Socio-economic responsibilities: In order to promote equal opportunities, increase awareness of HIV and AIDS, ensure safe working conditions, and maximize benefits to local communities, the government will: (i) ensure that all projects in the oil and gas value chain, including training opportunities, are based on gender equality and equity; (ii) work with IOCs to facilitate the provision of preventive and curative education on HIV and AIDS and other infectious diseases to stakeholders in the oil and gas industry; (iii) ensure that operators in the oil and gas industry adhere to statutory and international best practices on environment management and protection; (iv) ensure that the industry establishes and adopts sound environmental management systems; (v) ensure that all investors and contractors are obliged to undertake locally prioritised community development programmes; and (vi) ensure that oil and gas companies submit credible Corporate Social Responsibilities action plans to an appropriate authority for approval.

Implementation

Implementing the local content requirements and objectives contained in the draft LCP will require the enactment of new legislation and the amendment of existing legislation. The government aims to enact at least three new pieces of legislation; (i) the Local Content Bill; (ii) a Natural Gas Bill; and (iii) a Natural Gas Revenue Management Bill. Amendments will be made to the relevant provisions of the Income Tax Act and the Energy & Water Utilities Regulatory Authority Act.

The draft LCP envisages a Petroleum Regulatory Authority and an independent National Local Content Committee. which will oversee the full implementation of the local content policy.

Initial Reactions to the Draft LCP

The Ministry of Energy and Minerals asked for interested parties (IOCs and nationals of Tanzania) to provide comments on the draft LCP by 20 May. Initial feedback on the draft LCP appears to indicate that oil and gas companies consider the local content requirements to be too stringent, and that waivers will be required (or at least the requirements will need to be diluted). It has also been noted that the draft LCP gives absolute priority to "Tanzanian citizens." Currently the East African Community (EAC) members of Burundi, Kenya, Rwanda, Tanzania, and Uganda are advancing towards free movement of goods, services and labour, and it is quite likely that the other EAC members may object to the priority given to "Tanzanian citizens." The industry's reaction to the draft LCP may not be fully known until the next draft of the LCP is published, although there is expected to be further dialogue between the government and interested parties in the meantime.

Nina Howell
London
+44 20 7551 7543

nhowell@kslaw.com
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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