Between the National Treatment Principle in Nigerian’s Bilateral Investment Treaties and the Local Content Act – Is there a cause for concern? (Part 2)

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The Local Content Act vis-a-vis the National Treatment Principle

The relevant provisions of the Local Content Act on its relationship with the national treatment principle under BITs, are those dealing with the requirement for first consideration for Nigerian companies and the requirement of exclusive consideration for indigenous companies in certain circumstances. These are contained in section 3 of the Act and reproduced as follows:

3.-(1) Nigerian independent operators shall be given first consideration in the award of oil blocks, oil field licences, and oil lifting licences and in all projects for which contract is to be awarded in the Nigerian oil and gas industry subject to the fulfilment of such conditions as may be specified by the Minister.  

(2) There shall be exclusive consideration to Nigerian indigenous service companies which demonstrate ownership of equipment, Nigerian personnel and capacity to execute such work to bid on land and swamp operating areas of the Nigerian oil and gas industry for contracts and services contained in the Schedule to this Act.  

(3) Compliance with the provisions of this Act and promotion of Nigerian content development shall be a major criterion for the award of licences, permits and any other interest in bidding for oil exploration, production, transportation and development or any other operations in Nigerian Oil and Gas industry.

“Nigerian independent operators” and “Nigerian indigenous service companies” are not defined under the Local Content Act. However, reading the provisions of Local Content Act holistically and contextually and as it has been generally interpreted in the Industry over time, it is generally accepted that the references to these terms are to companies that are incorporated in Nigeria with majority Nigerian equity shareholding of not less than 51% Interestingly, and although not used in the body of the legislation, Section 106 of the Local Content Act defines “Nigerian Company” to mean “a company formed and registered in Nigeria in accordance with the provision of [the] Companies and Allied Matters Act with not less than 51% equity shares by Nigerians“.

Therefore, one may reasonably conclude with respect to the provision on first consideration that in seeking to award oil and gas assets and contracts generally, the relevant governmental authority must initially look to companies that qualify as a Nigerian Company. It is only if such companies are unable to meet the standards required for the award that foreign operators may be considered. That is, in the event of equal qualifications of a Nigerian Company and a foreign company (i.e. a company incorporated in Nigeria with less than 51% equity shares held by Nigerians), the Nigerian Company immediately gets preferential treatment in the award.

It is stricter concerning bidding on land and swamp operating areas of the Nigerian oil and gas industry for contracts and services contained in the Schedule to the Act. Section 3(2) of the Act appears to automatically disqualify foreign-owned services companies from such bids by reserving exclusive consideration to companies that qualify as a Nigerian Company.

Given the nature of the above provisions of the Local Content Act, there is an indication of discrimination against foreign companies and preferential treatment in favour of Nigerian nationals and companies that qualify as a Nigerian Company. Such a conclusion, when considered alongside the national treatment provisions in BITs will perhaps only highlight the conflict between both sets of provisions.

Indeed, some of the BITs entered into by Nigeria contain exceptions that Nigeria may argue to justify the Local Content Act provisions. For example, the BITs with Germany and the United Kingdom contain exceptions in relation to where the favourable treatment of nationals over the foreign company is for the purpose of stimulating the creation of local industries. The BIT with Italy appears to limit the national treatment principle to only capital, profit and income while the BIT with the Netherlands uses the term ‘unreasonable discriminatory measures’ for actions of a contracting state that must not be carried out against the investment of nationals of the other contracting state in limiting the application of the national treatment principle. However, the majority of the Nigerian BITs that are currently in force do not seem to contain any exceptions that would see the highlighted Local Content Act provisions pass the national treatment principle test in those BITs. So, what next?

 

Way Forward

It is often argued that the requirement for a contracting state to treat foreign investors and their investments at least as favourably as domestic investors strip the power of governments to pursue national development strategies which many local content laws and regulations seek to achieve. To strike a balance, some governments have negotiated certain exceptions in their investment treaties to allow for situations where there is a need for the development of local investors. This is not the case in most of Nigeria’s BITs. On the contrary, it has been suggested that most of these BITs were ratified as a matter of routine practice, without due deliberation on their merits. There was no real strategy of negotiations, ratifications were not well organised, and officials hardly considered the treaty content.

In order to obviate possible liabilities from potential proceedings that may be instituted by an investor under any of the Nigerian BITs in force and to ensure that national treatment obligations do not continue to have the potential effect of depriving Nigeria’s developing economy of necessary tools for economic development, there is a need for Nigeria to look at renegotiating these BITs as soon as possible. The renegotiation should take into consideration the effectiveness of the BITs and the extent to which they have contributed to the promotion of investments in Nigeria. BITs should not be signed purely for personal and political reasons. The renegotiation should also be focused on including exceptions that may be necessary to ensure that what appears to be the current conflict between the provisions of the Local Content Act and the BITs is adequately addressed.

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