12th Parliament 2017 – 2019 – Session 15

A.    Introduction
The Local Content Bill is a proposed Act of parliament sponsored by Baringo Senator Gideon Moi geared at providing a framework to:

a)       Facilitate the local ownership, control and financing of oil and gas exploration activities;

b)      Increase the local value capture along the value chain in the exploration of gas and oil in Kenya; and

c)       Develop indigenous skills and enhance participation of local persons across the extractive industry value chain.

The Bill has passed the first reading and is currently pending second reading.

B.    Key definitions
¨Local content” means the added value brought to the Kenyan economy from the extractive industry through systematic development of national capacity and capabilities and investment in developing and procuring locally available work force, services and suppliers for the sharing of accruing benefits.

¨Local person¨ means a person, firm or entity performing works, services or supplying goods and materials to an operator whether as a subcontractor or otherwise, whose business enterprise is incorporated under the laws of Kenya and which is effectively owned and controlled by a Kenyan national.

¨Operator” means a person, firm or entity licensed by the government to undertake exploration, development and extraction activity with respect to natural resource in the extractive industry.

¨Value chain¨ means the sequential stages in the extractive industry life cycle including the exploration and development, production, treatment, transportation, refining or other beneficiation and distribution.

C.    Key Authorities under the Bill
1.      Local Content Committee (The Committee)
The Bill proposes the establishment of a Local Content Development Committee to among other duties:

a)       Oversee, co-ordinate and manage the implementation of local content in the country as well as advise the Cabinet Secretary on the same;

b)      Ensure measurable and continuous growth in the development and adoption of local content in respect of all activities in the extractive industry;

c)       Consult with and collaborate with County Governments in the implementation of this Act; and

d)      Maintain a local content data base outlining:

                                                               i.      Projects, operations and programs on extractive activities in each county including the required goods and services and the delivery timelines;

                                                             ii.      A register of suppliers of goods and services relevant to the extractive industry in Kenya; and

                                                           iii.      Human resource development programs of operators and their connected entities including awarded work permits.

2.      The Cabinet Secretary in charge of Extractives
The Cabinet secretary is empowered to among other things:

a)       Revoke licenses issued under the Act;

b)      Promulgate Regulations;

c)       Spearhead formation of national policies for the extractive industry;

d)      Recommend appropriate financial incentives that would benefit the extractive industry;

e)      Recommend affirmative action policies and limitations of engagement of foreign personnel within the extractives industry in Kenya; and

f)        Prescribe (in consultation with the Committee) Public Participation Guidelines.

D.   Key Issues under the Bill
There are 7 key issues under the Bill relating to:

a)       Required Plans and Approvals;

b)      Procurement;

c)       Equity Participation, Employment and Succession;

d)      Capacity Building;

e)      Financial Obligations and Implications;

f)        Transparency, Reporting and Record Keeping; and

g)       Mandatory Contract Requirements.

1.      Required Plans and Approvals
The Bill requires extractives companies to have (and submit for approval) a long-term local content plan as a condition to grant and utilization of extractive licenses, permits or interests. Once the long-term plan is approved, extractives companies will be required to submit annual local content plans with relation to each year of the approved extractive activity program.

Under the Bill, Local Content plans are required to include information on:

a)       The procurement, expected quality and utilization of local goods and services within the locality of the extractive activity;

b)      The qualifications and employment plans of local persons to be engaged;

c)       Workforce development strategies relating to local persons to address identified skill gaps within the local labor force;

d)      Strategies for the support of local participation in the extractives’ activities;

e)      The exploration and production work program and budget estimate with regard to local content component of each approved program;

f)        Strategies for the preference of qualified local persons as well as locally produced quality goods and services;

g)       An employment and skills development plan;

h)      A Research development plan;

i)        A Technology transfer plan;

j)        A Financial services plan;

k)       Succession plans for positions not held by Kenyans; and

l)        Such other plans as the Cabinet Secretary may prescribe.

The submitted plan is reviewed by the Committee and subjected to public participation of the affected local persons and relevant stakeholders. The proposed approval process takes 60 to 90 days from date of submission of the proposed plan.

No extractive activity is to be undertaken without proper approval. Extractive companies will therefore be required to develop all the above listed plans in alignment with the threshold set under the Bill.

2.      Procurement
Under part VI of the Bill, extractive companies are required to submit to the Committee an annual work plan of the programs and budgets for the activities for the year. The Committee uses the submitted plans to determine which specific projects shall be subject to procurement in accordance with the Act and the same shall be advertised by the Committee in at least two newspapers of wide circulation, on the Committee website and on any other media.

Extractives companies are required to:

a)       Comply with the minimum local content requirements set by the Cabinet Secretary and the Committee under the Act- proposed at a 30% and may be reviewed via Gazette Notice;

b)      Maintain a bidding process providing fair opportunity for the acquisition of local goods and services;

c)       Require that all bids submitted by extractives allow provide for the maximum utilization of local goods and services through-out the extractive industry Value chain;

d)      Provide for equal treatment of foreign and local persons in the bidding process with fair opportunity and preference given to local persons;

e)      Prefer local persons where the difference in prices quoted does not exceed 10% of the price quoted by a competing foreign person;

f)        Give first consideration to local companies in the grant of a license, award or contract;

g)       Require the use of local goods and services as well as obtain the authorization of the Cabinet Secretary before importing goods and services not available locally;

h)      To advertise, evaluate and award all tenders (relating to extractive operations in Kenya) in Kenya only and to obtain the approval of the Cabinet Secretary where an extractives company intends to advertise the same outside Kenya.

3.      Equity Participation, Employment and Succession
Under the Bill, an extractives company is expected to:

a)       Comply with the guidelines and contracting standards set by the Cabinet Secretary on the threshold with respect to the percentage of local equity ownership;

b)      Submit a Report to the Committee on the Conditions of service and staff demography of all persons employed or contracted by an extractives company;

c)       Submit a succession plan to the Committee for each position in an extractives company not held by a local person within 6 months of the coming into force of the Bill;

d)      Comply any directives issued by the Cabinet Secretary / Government policies on affirmative action within the extractives industry;

e)      Minimize the employment of foreign personnel and ensure that foreign employees are only engaged in positions for which an extractives company cannot find a suitably qualified and experienced local after reasonable advertisement in at least two newspapers of wide circulation in Kenya and other media as the Committee may determine.

4.    Capacity Building
An extractives company is expected to:

a)        Comply with the Government´s strategic plan for the transfer of technology and Research;

b)      Develop an employment and skills development plan aimed at enabling an extractives company to develop local capacity through:

                                i)            Technical service contracts, joint ventures and strategic alliances to broaden capacity building opportunities;

                               ii)            Technology transfer strategies with local enterprises to provide credible and measurable plans on incremental transfer of know how to local persons; and

                             iii)            Internships at all levels of the extractive value chain to develop a competent national skills pool.

c)       Develop a Transfer of Technology and Research Plan outlining:

                                i)            An activity plan to promote the effective transfer of technology from an extractives company to local persons;

                               ii)            The specific requirements for the transfer of Technology;

                             iii)            Expected outputs

                             iv)            The timeframe of implementation; and

                               v)            The anticipated expenditure to be incurred by an extractives company.

d)      To develop a Research and Development Plan outlining:

                                i)            A five-year plan (to be reviewed annually) of research initiatives to be undertaken by an extractives company in Kenya;

                               ii)            The expenditure plan for the implementation of the identified research initiatives; and

                             iii)            Request for proposals on the identified research initiatives.

5.      Financial Obligations and Implications
Under the Bill, an extractives company is expected to:

a)       Open and maintain a bank account with an indigenous (100% or majority Kenyan shareholding) bank;

b)      Submit a non-tax-deductible training levy consisting of such percentage of net revenue as may be prescribed by the Cabinet Secretary in consultation with the Committee in order to support the objectives of the Act;

c)       Set aside the prescribed amount of an extractives company annual gross revenue for the purposes of carrying out Research and Development within Kenya. The prescribed amount shall be notified via Gazette Notice by the Cabinet Secretary in consultation with the Committee.

d)      Develop a Financial Services plan outlining:

                                i)            The nature of the financial services required by an extractives company;

                               ii)             A forecast of the financial services required during the duration of the project; and

                             iii)            The expenditure plan relating to the use of financial services related to the project.

An extractives company may benefit from government fiscal incentives to facilitate activities aimed at developing technological capacity and skills of local enterprises as well as any applicable tax-deductions for certain categories of training expenditure where training is for the benefit of Kenyan nationals.

6.      Transparency, Reporting and Record Keeping
Under the Bill, an extractives s company is required to report:

a)       Local content performance annually across all an extractives s company projects and activities in Kenya within 45 days of the commencement of extraction activity including:

                                i)            the expenditure incurred by an extractives s company on local content;

                               ii)            the hours worked by local persons and foreigners as well as their positions and remuneration.

b)      An annual statement of Local Content outlining:

                                i)            Payments made to local licensees and suppliers supplying local goods and services to an extractives s company;

                               ii)            Payments to local licensees and suppliers for the supply of non-local goods and services;

                             iii)            Payments of salaries, profits, dividends on shares and other tangibles paid to Kenyan nationals;

                             iv)            A list of all contracts awarded in the period under consideration and the services or equipment contracted.

c)       Submit quarterly reports to the Committee setting out:

                                i)            The employment and training activities undertaken in the relevant quarter including the specifics of new locals employed and their job descriptions;

                               ii)            A comparative analysis of the approved employment and training plan and the undertaken activities in order to assist the Committee to monitor compliance; and

                             iii)            Any other information requested by the Committee.

d)      Submit a bi-annual plan to the Committee outlining:

                                i)            The financial services utilized by an extractives s company in the preceding 6 months and the expenditure incurred by an extractives s company in procuring such services;

                               ii)            A forecast of the financial services required in the ensuing 6 months and the projected expenditure for such services; and

                             iii)            The nature of the financial services required and the expenditure for such services made by an extractives s company.

An extractives s company is required to maintain proper operation records including documentation certifying the cost of local goods, labor and services in order to facilitate the determination of local content expenditure by the Committee.

7.      Mandatory Contract Clauses
Clause 51 of the Bill requires an extractives s company to ensure that all an extractives s company partners, contractors and subcontractors and connected entities are contractually bound to report local content information to an extractives s company and where requested to the Committee as well as permit the Committee/authorized agents to access records for purposes of verifying the reported local content information.

E.    Offences
The Bills creates various offences such as If an extractives company were to :

a)       Submit a plan, report, return or other document knowingly containing a false statement. This is punishable by a maximum fine of two million Kenyan shillings or imprisonment for a maximum of three years or both.

b)      Connive with a Kenyan citizen to deceive the Committee as representing an indigenous Kenyan Company to achieve local content requirement. This punishable by a maximum fine of three Million Kenyan shillings or imprisonment for a maximum term of 5 years or both.

c)       If an extractives company or a connected entity:

                                i)            Carry out extractive activities without meeting the local content requirements;

                               ii)            Fail to submit a local content plan;

                             iii)            Fail to satisfy the local content requirements of the local content plan;

                             iv)            Fail to submit its Local content performance report or annual work plan to the Committee

An extractives company would be liable to a fine of five percent of the value of the proceeds obtained from the extractive activity in question up to a maximum of two million Kenyan shillings and the relevant directors/mangers may be subjected to imprisonment for a term not exceeding twelve months in addition to the fine imposed.

F.     Conclusion
Should the Bill be passed by Parliament, an extractives company would have to:

a)       Re-align its Local Content Strategy to the Local content requirements as well as develop the required long-term and annual local content plans;

b)      Re-align an extractives company’s stakeholder engagement framework to ensure it meets the public participation requirements set out in/ promulgated under the Act in addition to an extractives company’s;

c)       Significantly increase its financial commitment to research and development, capacity building and transfer of technology;

d)      Re-align its contracting strategy to comply with the procurement thresholds under the Act;

e)      Review its transparency report to include reporting on local employment and local content and the social investments made as part of obligations under the Act.

It is important to note that contracts and memorandums of understanding that were executed prior to coming into force of the Act shall continue in force as if entered into under the Act while any new contracts or work plans must be made in compliance with the Act.