Local Content and Competition

Local Content and Local Capacity: The Missing Dots

“The old model of flying in expats to do the technical job combined with a few locals doing the rest of the work on the ground has to change and has started to change,” said Simon Meadows Smith, the managing director of Ghana-based firm SEMS Exploration Services. Except for Simon, everyone at SEMS has West African origins.

Across West Africa, local content laws have been introduced or are due to be introduced as a way of encouraging, and legally prescribing, local participation of both goods and people in mining value chains. Ghana has finetuned its localization requirements in a fresh 2020 decree, and Burkina Faso has announced in 2021 a novel decree to help promote Burkinabe business owners. The intentions are clear – to give local companies and local people more arbitrage in the competition with foreigners and seek to remediate not only a local-foreign competition but also a SME-multinational one. The impacts of such policies do not always, however, follow the script and may have different consequences for both sides.

When it comes to local procurement of goods, local content requirements are not compatible with other laws. Incentives to buy locally may be cancelled by import incentives: Ghana has created the Mining List, a catalogue of mining-related equipment eligible for VAT reimbursements, which ultimately promotes cheaper non-Ghanaian consumables. Furthermore, many products made in Ghana are more expensive than those bought from international markets and some are either not available in the country, or their local supply is very limited. Nexans Kabelmetal, for instance, imports all raw materials but aluminium for its local production: “The low stock of products and raw materials mitigates against buying locally. If local content laws are to be effective, we need more cohesive policies that grant both the availability and benefits of locally purchased products,” said CEO Eric Waldner.

“African politicians, if I may generalize, have a difficult job balancing free market policies with promoting local businesses and driving localization initiatives. I do not feel that Ghana is running an aggressive nationalization program and the competition between local and international companies remains unbiased and free.”

Fabian Limberger, Chief Commercial Officer, Rocksure International

In terms of people, local employment quotas have tasked international companies to hire locally, but before that, they must develop the local talent they can hire from. These laws have been broadly successful. In Ghana, 90-95% of staff working for international companies are already Ghanaian nationals, but the remaining 5-10% represent higher-paid roles. The updated local content regulations in Ghana stipulate that local staff should occupy higher positions like general manager or mine manager, and that they should also provide gender-inclusive recruitment. These two aspects have been the latest focuses of international operators. Canadian tire manufacturer Kal Tire has a 98% Ghanaian team, and the few expats making up for the difference are mandated with training locals to become managers. Meanwhile, Epiroc is working to encourage more women to enter the mining industry. The importance of local leaders has been exacerbated by the pandemic, which constrains international hires, squeezing the talent pool for engineers, construction managers and geologists. Some international companies have also partnered with local universities to both sponsor and scout young talent. Maxam collaborates with the University of Mines and Technology of Tarkwa and sponsors interns through a program called YESS, now also extended to Burkina Faso. Maxam’s current regional operational manager has been recruited through this program.

Supporting skills development is more challenging for international contractors without a permanent in-country base. 30-years old Australian EPC and EPCM company Lycopodium is running development and learning programs focused on know-how transfers to empower locals to become leaders and knowledge-holders in their own right, said Peter de Leo, managing director: “It’s incumbent on all of us to build local capacity, not just because this is the right thing to do, or because this is the way to improve people’s lives in a tangible way, but because travel restrictions have severely hindered foreign recruitment creating a talent shortage.”

Local content has been largely effective at prompting local skills development, and today Ghana is actually exporting its talent to other African countries. Where the balance needs to be drawn is at the expat quota, which, argues Bill Witham, the CEO of AAMEG (Australia-Africa Minerals & Energy Group) should not fall under 4% for local content to remain meaningful and reasonable: “Any country will, at some point, require expertise from abroad, so setting expat limits under 4% of the workforce is unrealistic for some projects, especially during construction. Local employment is certainly encouraged and desirable, but not to the extent when good intentions end up compromising the quality and economics of a project. Local content laws should not be abused to the point where corruption can take place or investors leave the country because it becomes impossible to operate in.”

The Minerals and Mining (Local Content and Local Participation) Regulations, 2020 (L.I 2431): was enacted in 2020 to consolidate laws relating to local content found under the Minerals and Mining Act, 2006 (Act 703) and various regulations including the Minerals and Mining (General) Regulations, 2012 (L.I. 2173) and the Minerals and Mining (Support Services) Regulations, 2012 (L.I. 2174). The Regulations apply to holders of mineral rights, mining support service companies and holders of licenses to export and deal in minerals. Highlights of the Regulations include the following: a. hiring of local staff in various employment categories including: General Manager, Mine Manager and all non-technical and non-engineering roles; b. providing for gender-inclusive recruitment in Localization Programs; c. engaging Ghanaian-owned and Ghanaian-managed service providers for technical, engineering, insurance, accounting, legal and financial services; and d. submitting a 5-year procurement plan to the Minerals Commission for the procurement of local goods and services.

Other notable provisions include the introduction of a requirement for mining companies to list at least 20% of their equity on the Ghana Stock Exchange (GSE) once they meet a certain threshold in capital expenditure threshold (the threshold is yet to be determined).

(Prepared by Zoe Phillips Takyi–Appiah, Senior Partner, JLD&MB Legal Consultancy)

Market competition

Local SMEs often find themselves trapped: To service large mining companies, they need to upscale and upskill, but to obtain the money to upscale, they need to be large enough and show a good track record of contracts to satisfy lenders. Access to capital is the most challenging aspect for local companies. Even when the banks approve a loan, borrowing costs are very high, with interest rates over 10% in Ghana, while the cedi’s depreciation against the US dollar makes the acquisition of equipment from abroad particularly expensive. “Local banks have incredibly high interest rates and steep collateral requirements because they perceive SMEs as high-risk borrowers. This is a massive impediment for many local players that are unable to boost their business without bank financing; meanwhile, international players enter the market with a lot of ready-to-spend capital whilst operating at scale economies thus giving them a competitive advantage with respect to selling prices,” said Ernest Nsiah, managing director of Ghanaian supply and delivery company EDM African Services.

The difficult access to capital is a result of two twin factors, explained NanaAma Botchway, managing partner of female-led law firm N. Dowuona & Company: “The first issue is the bank’s reduced appetite for risky loans when there is scope to be profitable at lower risks with a selected and well-known client base. On the other hand, the SME sector is not helping itself; especially when they start out, SMEs tend to have an informal structure in the marketplace, and they are unable to provide all the necessary corporate governance and documentation expected of them.”

“We can see more African entities capable of undertaking large-scale and significant work, and it is only fair they should claim greater protections and more participation. Nevertheless, a lot of the work that could be done locally is still performed by foreign companies. Local content laws should not just give locals more work, but more capability and expertise to act independently. The best way to achieve this skills transfer is through lucrative collaborations between local and foreign companies so that, over time, more tasks can be transferred to locals. My opinion is that we are still a far stretch from that.”

Mouhammed Kebe, Partner, Geni and Kebe

By contrast, international companies can leverage commensurate capital, experience, logistics infrastructure, which has a “bullying” effect on the market, thinks Kwame Amponsah, general manager of local contractor Ramoth Services. To compete, companies like Ramoth enter a price battle, offering overhead costs and a readiness to meet the client’s required pricing.

International contractors agree with the necessity of levelling competition. Peter de Leo, the managing director of Lycopodium thinks local content is very “warranted,” even though it can be challenging to implement. Lycopodium has been working with all the big names in West Africa. It has also been awarded the contract for EPM services at Ghana’s biggest current investment, the Ahafo North, and is also at the forefront of the main upcoming mines, working at the Bomboré gold project in Burkina Faso, the Séguéla gold project in Ivory Coast, and the Goulamina lithium project in Mali.

Local content laws seek to fix the competition local-international and SME-multinational through requirements that the industry engages Ghanaian-owned and Ghanaian-managed service providers for technical, engineering, accounting, legal, and financial services. This intervention was deemed necessary in the first place because of the disproportionality of capital between SMEs and MNCs, but also to fight off a misperception of lower quality when the job is done locally.

Fabian Limberger, the CSO of leading local contractor Rocksure International, the single contractor running Perseus (ASX: PRU)’s Edikan mine, feels it is fair that regulators give a nudge to mining companies so that they pay greater attention to local companies, but that ultimately, skills should be the main factor. “Local content laws cannot and should not override merit-based considerations. For the past 10 years, Rocksure has won tenders because of our performance record and we are well-positioned to prove ourselves in a continuous competitive environment based on this premise.”

Rocksure has been on the other side of the coin, having a contract outside of Ghana removed from them despite overperforming targets, which Fabian sees as a direct contradiction of free competition principles.

As a result of the stricter requirements to engage local services, more international players are opening up to JVs to satisfy local participation criteria and avoid any potential setbacks. Martin Addy, the territory manager for explosives at Orica Ghana, is looking to affiliate with a local company very soon, saying it has become “a must” to partner with a local entity to stay relevant.

Local players are also keen on partnerships. “One of the best mechanisms that can increase the effectiveness of local content laws is the encouragement of JV partnerships between international and indigenous players,” said Ernest Nsiah, managing director of EDM African Resources. “EDM wants to be seen as complementary to key international players like Epiroc and Sandvik. We have always recommended them to prospective customers for the purchase of capital equipment; we expect that the collaboration will be reciprocal in the years ahead.”

Image courtesy of Genser