IN 2017, THE INTERNATIONAL GROWTH CENTRE (IGC) published a study1 showing that Mozambique has gained quite a lot from Anadarko Petroleum’s discovery of large natural gas deposits in the Rovuma Basin. For example, the discovery has led to the creation of 10,000 new jobs between 2010 and 2013. It has also captured the interest of international oil companies (IOCs), which has, in turn, attracted companies working in other sectors. As a result, the total amount of foreign direct investment (FDI) moving into the country rose by billions of dollars each year, with $9 billion worth of FDI reported in 2014 alone.
And the benefits don’t stop there: The additional inflows created even more new jobs, with census data indicating that the number of FDI-related positions had risen to nearly 131,500 as of 2014. What’s more, each FDI-related position generates, on average, another 6.2 openings in the same sector and the same area.
The study’s conclusion? The Rovuma Basin gas discoveries may have given rise to nearly 1 million jobs in Mozambique. This is wonderful news, given that the total number of jobs in the country is only around 9.5 million!
But there’s a catch.
Mozambique didn’t exactly generate those 1 million new positions by itself. IOCs brought in expatriate staff. In turn, the expatriates needed local goods and services. They established connections with Mozambican firms so that they could get them, and their actions caused the multiplier effect to kick in.
So, what’s the lesson here? Do these numbers demonstrate that FDI is Africa’s primary target and that every country on the continent ought to aspire to attract outside investors?
I hope not. Instead, I think that Mozambique’s example should inspire Africans to create their own multiplier effect. I believe it can help us understand that IOCs such as Anadarko and Royal Dutch Shell are not the only entities that can help spread the gains made by the oil and gas industry into other sectors of the economy.
This is not to say that African countries should spurn the idea of working with major foreign companies. Not at all! We can’t succeed with zero input from outside. Corporate giants can help us acquire the skills, technology, and corporate cultural norms we need to maximize our success. But they aren’t the only source of value.
It ought to start with us.
More specifically, it ought to start with small and medium-sized enterprises (SMEs).
Currently, the majority of everyday Africans work for SMEs. They work for tiny mom-and-pop shops, for mid-sized companies, and every type of operation in between. These enterprises may be small compared to, say, Shell, but they do have certain advantages over multinational titans. They interact more directly with customers, and they have a better grasp of what will work—and what will not work—in local markets.
In many cases, SMEs have an even better understanding than government agencies and state-owned companies of what their clients truly want and need. They are also more nimble than government-run institutions because they do not have to navigate quite as many bureaucratic obstacles when they decide they would rather work with a local partner or a contractor than complete a job on their own.
This is true across the board, in multiple sectors of the economy. In upstream oil and gas operations, for example, a mid-sized Angolan firm that is extracting 1,000 bbl/d of petroleum from a marginal field may be able to hire an emergency cleanup crew relatively easily, without having to navigate the multi-layered bureaucratic barriers that govern access to Sonangol’s human resources department. In the oilfield services industry, the deputy director of a small Nigerian marine engineering company may be more likely to know where she can rent extra boats on an irregular basis than her counterpart at a European conglomerate.
In the realm of transport, the district manager of a mid-sized Chadian trucking company may have access to the same maps and GPS equipment as his counterpart at an international operator serving half the continent—and far more knowledge about where to find a mechanic for emergency repair jobs on back roads near the border with Sudan. In retail food sales, the owners of a mom-and-pop general store serving work camps near Uganda’s Lake Albert oilfields may be able to use family networks in the Democratic Republic of Congo to secure extra supplies of a coveted item quickly, rather than waiting for the next corporate convoy to arrive. In the area of technology services, web designers working for a scrappy start-up firm in Accra may know more about the cheapest way to secure wireless internet service than anyone in a major foreign tech company’s Ghanaian office.
So, what can African governments do to support the capabilities of such companies? How can they make the most of these African entrepreneurs’ detailed knowledge about local markets and the ability to respond quickly to changing conditions? Should they pass laws designed to beef up local content requirements in a bid to ensure that African SMEs receive a share of FDI inflows?
The short answer: No, they should not. Rather, the goal should be to make local content rules unnecessary.
One of the main reasons local content laws exist in Africa is that African governments want the local oil and gas sector to create more jobs. That is, they want to reap some benefit from their decision to let their subsurface resources be extracted and sent to market.
This is logical. But frankly, African SMEs are better at job creation than larger entities. They don’t depend on foreign workers, as the IOCs do all too often. Instead, they typically hire locals. Therefore, African governments ought to take steps that allow as many SMEs as possible to succeed.
Local content regulations can help create a level playing field for local SMEs in the beginning phases of oil and gas development, but they ought to be phased out in the long term. Once African companies gain the skills, technology, and personnel they need to outperform foreign investors and to create new jobs consistently, they should not need local content rules anymore. Instead, they will benefit more from the confidence that they are operating in an environment where the government supports entrepreneurship, enforces laws consistently, upholds contracts, protects property rights, collects taxes and fees in a transparent manner, discourages corruption, supports education and training programs, and so on.
Another thing governments can do to help SMEs is to make sufficient investments in infrastructure. After all, small and medium-sized companies need pipelines, roads, and utility connections, too. But infrastructure programs are complicated and expensive—and difficult to finance. China’s government has offered assistance on this front, and many African leaders have gladly accepted. Some of them may have done so out of sheer exuberance at the thought of gaining access to billions of dollars’ worth of credits from a lender that does not demand political reform as a prerequisite for handing over cash.2
It is worth noting, though, that this type of investment in infrastructure is counterproductive in some ways. More specifically, it limits African countries’ ability to create new jobs. It makes the disbursement of loan funds contingent on commitments to award construction and modernization contracts to state-owned Chinese companies, even though these firms typically bring in their own workers and avoid hiring locals. Additionally, these investments sometimes carry unfavorable terms, such as the use of commodities as collateral (or even payment).
Africa’s oil and gas-producing states don’t need funds that are offered under such conditions. Instead, they need opportunities to team up with commercial lenders with an appetite for risk—and no small amount of patience. They need to form relationships with lending institutions that are willing to give borrowers time to develop their assets and reach the point of being able to support themselves and generate enough revenue to repay their creditors without excessive discomfort.
If African governments can meet all these targets, African SMEs will be free to keep growing and evolving. They will have an incentive to stretch the boundaries of the multiplier effect—to move into all the sectors that can provide support to oil and gas development, including (in no particular order) engineering, banking and financial services, commodities trading, logistics and transportation, legal services, construction, manufacturing, wholesale and retail trade, information technology services, and power generation.
In many cases, the experience and assets that SMEs gain through the multiplier effect will prepare them for the moment when the oil and gas wells start to run dry—or the times when revenue streams dwindle because of market fluctuations. That is, these companies stand to gain transferable and scalable skills. Firms that trade oil, gas, or petroleum products such as gasoline can become familiar with world market trends and expand into the wider commodities trading sector. Law firms will be able to offer a wider range of services, helping clients outside the oil and gas sector to achieve regulatory compliance, to navigate licensing and permit procedures, or to consider their options under new legislation. Construction companies can leverage their familiarity with local conditions and their ties to other operators, using them as a basis for bidding on contracts in nearby or neighboring states. Software engineers can team up with local schools to offer training in code writing, web design, and other high-demand skills, and their students will be able to work in any industry that uses computers.
Of course, it will be easier to start local content implementation in the parts of Africa that have oil and gas. Producer states will not only attract FDI but will also generate demand for many additional services, thereby creating openings for local entrepreneurs willing to seize new opportunities.
But there is also room for other African countries to get in on the action. We can see an example of this by looking to the island-state of Singapore.
Even though it produces very little on its own, Singapore plays a key role in global oil and gas trade. It is home to Asia’s main energy futures market, the Intercontinental Exchange (ICE; www.theice.com), and is the third-largest physical oil trading hub in the world—as a result, many commodities traders have set up shop there. Singapore is also a major refiner and supplier of petroleum products, and it sports many large oil, LNG, and fuel storage depots.3
Additionally, the country has become one of the mainstays of the oilfield service sector. It hosts the local and regional offices of multinational giants such as TechnipFMC, Schlumberger, and Baker Hughes. It has also fostered the development of home-grown players such as SembCorp Marine and Keppel FELS, which are the largest two builders of offshore rigs in the world.
And since it is home to more than 3,000 service providers of all sizes in the area of marine and offshore engineering, Singapore is also a source for countless varieties of equipment, vessels, and services for use at underwater oil and gas fields. This is a profitable business. It currently supports about 10,000 local jobs and pumps billions of dollars into Singapore’s economy each year.4 Presumably, it has also generated more jobs and more revenue through the multiplier effect—but not so much that the national economy is entirely at the mercy of world oil and gas markets.
It is tempting to think that Singapore came to this happy state by virtue of its geography. The former British colony lies at a crucial point along international shipping lanes, putting it in a good position to service vessels moving from the Indian Ocean to the Pacific Ocean and vice versa. (Indeed, it has long occupied the top spot on the list of the world’s largest bunkering ports.)
But the island-state’s fortunes are not merely a product of good luck and a favorable location. Singapore has worked hard to expand its capabilities, beginning in the 1980s, when local firms first provided services and supplies for vessels involved in oil and gas projects in Malaysia and Indonesia. Over the next two decades, their successes inspired other Singaporean entrepreneurs to branch out into other areas of the marine and offshore engineering sector.
Many of these efforts have flourished. Singaporean investors have combined their own determination with the government’s business-friendly policies (as well as the continued growth of the hydrocarbon sector between 2002 and 2014) to establish places for themselves. Many companies have also been hurt by the oil price crash that began in mid-2014, but their troubles have not dislodged the country from its position as the linchpin of Asian petroleum markets.5
There is a lesson for Africa here. Singapore, a former colonial subject, found a way to turn itself into an industrial and engineering heavyweight. Despite its own lack of oil and gas reserves, it became a major player in the energy sector. And it did this by maximizing its own advantages—not just its geography and its history of involvement in shipbuilding—but also its people, with their skills, ambition, and knowledge of local conditions. Its government acted deliberately to encourage investment wherever possible, making room for foreign partners while also supporting local investors.
African countries ought to try something similar. Whether or not they produce oil and gas, they too have strong assets—especially human capital. They can draw on a large pool of workers who are eager to find work, gain skills, and exercise their entrepreneurial drive. These ambitious men and women have what it takes to build and launch companies capable of providing oil and gas producers with solutions for their engineering, marine, transportation, industrial, legal, and other dilemmas. They may have to start small, but if they can find their own niches in the market (and count on support from business-friendly governments), they will eventually be able to grow and pursue major projects. They could, for example, work up to building an offshore service and ship repair base off the coast of Nigeria, in a spot that is more convenient for African and foreign companies than, say, Stavanger in Norway. Or they could use South Africa’s well-developed financial sector as a springboard for expanding African banks’ role in the financing of oil and gas development and service contracts. If they take this path, they will be able to create thousands—perhaps even millions—of new jobs, both directly and through the multiplier effect.
And these jobs will benefit Africa in ways that even I can’t imagine yet!