The reform of the local content regulation in 2014 marked the first time that service providers from African countries were allowed to benefit from access privileges when contracting services in Equatorial Guinea. This regulation granted the same privileges to companies whose majority shareholders were African citizens in the following order of preference- Equatorial Guinea, CEMAC states and Africa as a whole.
The local content regulations are an imposition of legal positive discrimination that grants priority access privileges in the contracting of oil services in Equatorial Guinea. Consequently, all International Oil Companies (IOCs) are obliged by law to contract services from local suppliers. In the event that they cannot find other companies, they must contract companies of CEMAC citizens (Gabon, Cameroon, Chad or Democratic Republic of the Congo). Where they cannot find a supplier that meets the standards, they must make reasonable efforts to contract any company of any other African country.
1. Why did most African companies fail to benefit from this local content regulation?
Small and medium-sized enterprises such as small Oil and Gas Service Providers are key to growth in Africa. They account for around 80 percent of the region’s businesses. These businesses usually struggle to penetrate more advanced overseas markets. However, they are well positioned to tap into regional export destinations and can use regional markets as stepping stones for expanding into overseas markets at a later stage. The main problem is and continues to be in the barriers to trade. Although Equatorial Guinea had opened its oil market to all African companies, it could not change the CEMAC legislation that maintains common external tariffs. In practice, companies created within the CEMAC zone need a certification that allows them to export within the CEMAC free of tariffs. However, the products of all other companies from African countries that are not members of CEMAC are subject to various types of tariffs, namely:
- Basic needs (5%)
- Raw materials and capital goods (10%)
- Intermediate and diverse goods (20%)
- Current consumer goods (30%)
Looking at the operational capacity in the supply of goods and services combined with the standards required in the industry, it is evident that most African companies do not really benefit from this privilege.
2. What changes does the AfCFTA bring about?
With the coming into effect of the AfCFTA a number of these tariffs will be substantially reduced. In practice, this would expand the scope of Equatorial Guinea’s local content regulation to almost the entire continent without any trade barriers. Therefore, these companies will have access to the market of other CEMAC countries. To achieve this, the bilateral negotiations recommended by Article 18 of the AfCFTA should be done not only with Equatorial Guinea but also with CEMAC. Regional blocs and communities must work together towards a common goal rather than individual States acting in their own interests.
3. Will there be regulatory problems at CEMAC level?
The answer is a resounding yes, although the benefits outweigh the problems. Looking at Gabon’s new local content regulation, it is noticeable that even though the legislation is slightly different and establishes different requirements for IOCs, the objectives that Gabon pursues are similar to other countries. For example the local content objectives of Equatorial Guinea, Cameroon and Congo. These objectives are all designed to increase the technical capacity of the locals and their economic participation in the oil sector. If the AfCFTA brings more competition as expected, these goals will be achieved as foreign tariffs will be relaxed allowing companies across the continent to have better access to these markets.
4. Is the AfCFTA a threat to the goal of all local content regulation to benefit locals?
No, the AfCFTA will in fact accelerate local content goals by creating better local capabilities. Article 5 of the protocol, specifically the principle of national treatment, eliminates discriminatory treatment for products from other member states, save for the exceptions contained in Articles 26 and 27. Thus, the CEMAC and other regional organizations will gradually eliminate tariffs that may affect the objectives of the AfCFTA. The main benefit of this is that it will boost the competitiveness of local workers and improve the operational capacity of companies in the CEMAC area.
In summary, Equatorial Guinea had already opened its oil and gas market for African companies in 2014 but reserving certain privileges for local companies, individuals and members of CEMAC was not beneficial. These measures are limited by common tariffs imposed by CEMAC. This not only prevents free market access of companies to Equatorial Guinea and the CEMAC area but also makes it difficult for local workers and companies to compete. With the AfCFTA entering into force, trade barriers will be gradually eliminated in the oil and gas market. Therefore, the profits will directly benefit small African suppliers of goods and services.
As Pan-African leaders, Centurion Law Group is carefully monitoring the developments of AfCFTA, specifically in the CEMAC region. We provide tailored advice to all businesses operating on the Continent.
Visit: centurionlgplus.com to learn more about our team, practice areas, and contribution in Africa.
Credit: Leon van der Merwe, Director of Centurion Plus, and Pablo Obama Mitogo Akele, Associate Attorney