Article by Godwin Ofosuhene Nkrumah, Senior Associate, Energy & Infrastructure, Bentsi-Enchill, Letsa & Ankomah
On 17 February 2022, the Petroleum (Local Content and Local Participation) (Amendment) Regulations, 2021 (LI 2435) (the Amendment Regulations) was passed to mark the first amendment to Ghana’s famed Petroleum (Local Content and Local Participation) Regulations, 2013 (LI 2204) (the Local Content Regulations). The Local Content Regulations has been heralded by many as being the foremost driving force behind the government’s policy of indigenising ownership, knowledge, expertise, and technology in Ghana’s extractives industries, particularly the upstream petroleum industry.
With time, however, the implementation of some aspects of the Local Content Regulations has revealed challenges that have threatened investments in the industry. In particular, the requirement for foreign service companies to form Joint Venture (JV) companies with Indigenous Ghanaian Companies (IGCs) has created a rather rigid regime of doing business in the industry. Regulation 4(6) of the Local Content Regulations provides as follows:
“A non-indigenous Ghanaian company which intends to provide goods or services to a contractor, a subcontractor, licensee, the Corporation or other allied entity within the country shall incorporate a joint venture company with an indigenous Ghanaian company and afford that indigenous Ghanaian company an equity participation of at least ten percent.”
The incorporated JV structure has not always been appropriate for the performance of certain contracts in the industry. Firstly, foreign service companies whose proprietary technologies are required for petroleum operations in Ghana have resisted the use of incorporated JV structures due to intellectual property concerns. Also, the requirement to form JV companies to perform short-term contracts has not been attractive to foreign companies given the expense involved in forming the companies and having to wind up such companies after the expiry of their short-term contracts. Lastly, the mode of implementation of the JV requirements by the Petroleum Commission (the Commission) has complicated the regime. Whereas foreign companies were previously allowed to set up JV companies by first registering as external companies, the Commission subsequently introduced a requirement for foreign companies to incorporate wholly owned subsidiaries before using these subsidiaries to form the JV companies with the IGCs. The result of double expenses of incorporation has contributed to the unattractiveness of the regime.
The passing of the Amendment Regulations has, therefore, brought some relief to the industry, especially at a time when investments in the industry are dwindling following global attempts to transition to cleaner energy. The Amendment Regulations seeks to introduce some flexibility and discretion into the regime for doing business in the upstream petroleum industry. The Amendment Regulations introduces a new regulation 4(6A) in the Local Content Regulations which provides as follows:
“Despite subregulation (6), the Commission may direct that
an indigenous Ghanaian company enters into a channel partnership or a strategic alliance arrangement with a non-indigenous Ghanaian company, or
a non-indigenous Ghanaian company enters into a channel partnership or a strategic alliance arrangement with an indigenous Ghanaian company where in the opinion of the Commission, the channel partnership or strategic alliance will deepen local content and local participation and maximise technology transfer to the indigenous Ghanaian company.”
The Amendment Regulations has therefore, introduced alternate arrangements to the JV structure for foreign companies to do business in the form of channel partnerships and strategic alliances with IGCs. “Channel partnership” and “strategic alliance” are defined in the Amended Regulations as follows:
““channel partnership” means an arrangement between an indigenous Ghanaian company and a non-indigenous Ghanaian company including a distributor, a vendor, a retailer, a consultant, a system integrator, an original equipment manufacturer or a value added reseller to market and sell the products, services or technologies of the non-indigenous Ghanaian company in the country …”
““strategic alliance” means an arrangement between a non-indigenous Ghanaian company and an indigenous Ghanaian company by which the
responsibilities of each partner are clearly defined; and
partners agree to share resources to undertake a specific mutually beneficial project while each retains independence …”
Although the Amended Regulations do not define “arrangements”, it is assumed from the premise to the newly inserted sub-regulation 4(6A) that the requirement to form incorporated JV companies with IGCs will no longer apply where the Commission directs a foreign service company to form a channel partnership or strategic alliance with an IGC to perform a contract. Foreign service companies will be able to make a case to the Commission for consideration of the circumstances of each business opportunity to determine the best vehicle to be used to pursue the opportunity. It is expected that this flexibility will help attract investments into the industry to stimulate the needed growth.
Other amendments introduced include a redefinition of an IGC and the reservation of certain activities for IGCs. The Amended Regulations raises the indigenous shareholding requirement for qualification as an IGC from 51% to 100%. Thus, an IGC must now be fully owned by Ghanaian citizens to enjoy the benefits conferred under the Local Content Regulations. The Amended Regulations also reserves for IGCs certain activities ranging from the supply of certain goods and chemical substances to the provisions of certain services. Reserved goods include chase boats, communication equipment, petroleum products, and security equipment and accessories. Reserved services include bunkering, catering, cleaning, dredging, construction, civil works financial accounting, insurance, legal, security, and general consultancy services. Lastly, reserved chemical substances include acetone, ammonia, glycerine, formaldehyde, sodium hydroxide, sulfuric acid, and xylene.
The Amendment Regulations is commendable as it provides a good balance between the localization agenda and the need to encourage foreign investment. We would expect the Commission to publish guidelines on regulation 4(6) of the Local Content Regulations (as amended) spelling out clearly how the Commission intends to implement same. This would be necessary to prevent abuse of the Commission’s powers and ensure that the intended objects of the amendment are achieved.