Capacity Building/Local Content in Oil, Gas Insurance

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Nigeria is a richly blessed nation both in terms of huge population and its natural resource endowments. With a population estimated at about 140 million, Nigeria is the largest country in Africa and it is home to one-sixth of the black population in the world. Nigeria is the 8th largest oil producer and has the 6th largest deposit of natural gas in the world. Only about 40 per cent of its arable land is currently. under cultivation. From the North to the South, its greatness is evident. The premium it places on higher education is under­scored by the existence of over 100 tertiary institutions which collectively produce more than 200,000 graduates per annum. There are abundant solid mineral deposits in all parts of the country that remain largely untapped. In spite of these intimidating statistics, development has not taken place in profound proportions in Nigeria since independence in 1960. The poverty level is very high as over 70 per cent of population remains poor. With its endowments, this is clearly an irony.

Oil Sector and rest of the economy

Economic experts have agreed that development has taken place when the standard of living of the citizenry increases with economic growth measured in terms of statistical rise in gross domestic product (GDP). Over the years, the Nigerian nation has experienced phenomenal growth in its GDP caused by huge oil exports and rise in price of crude oil in the global market. For instance, the nation’s GDP increased from N4,7999,66m in 1999 to NI8,222,800m in 2006. On the average, Nigeria spends US$lObillion in the oil and gas sector annually. The impact of this growth and huge investment on the populace has not been as fundamental in terms of employment generation, improved standard of living, linkage with other sectors, upgrade of infrastructure, etc, as 80 per cent of the sector are in the hands of foreigners. For instance, the per capita income for the same period merely increased from US$463.23 to US$1 ,011.73 implying that on the average, each of us lives on US$3 per day! The situation is made worse, according the recent report of Nigerian Extractive Industries Transparency Initiative (NEITl), by lack of transparency in the sector. Only about 5 per cent of the oil and gas sector’s insurance business is in the hands of the local underwriters while about 3 per cent of the nation’s entire work force is engaged in the sector which generates over 75 per cent of the foreign exchange earnings.

Local Content Policy

It is to address this unacceptable scenario that the government evolved the local content policy for the oil and gas sector with the following targets: 45 per cent local content by 2006 and 70 per cent local content by 2010. To drive the process, the Nigerian National Petroleum Corporation (NNPC) created a Content Division which resulted in the setting up of the Nigerian Content Support Fund (NCSF) with take off grant of US$35Om. The Local Content initiative was to facilitate the transfer of technology, human capital development, greater employment of Nigerians, enhance linkage with other sectors, etc. Since the existence of this fund is not even known to many stakeholders, it is not a surprise that several years after the policy was initiated, the oil and gas industry is still chiefly in the hands of foreigners. The level of local personnel trained and technical skills imparted are abysmally low as emphasis is only on welding and fabrication while the top echelon is reserved or dominated by foreigners. Ancillary services like insurance are not even given serious consideration. This has severe implications for the nation and its people because oil is a wasting asset. Except the output and resultant revenue from the sector impacts the nation and its people positively, investments in the sector would have produced sub-optimal results. A clear case of living near the river and remaining perpetually thirsty. Secondly, the environment would have been destroyed without anything done to restore it such that it can continue to sustain life. Thirdly, the resources from the nation would just be devoted to financing the economies of other countries. As more and more foreigners are engaged to work in the sector, the huge incomes they earn will be passed to their home country for developmental activities. The view is rife that except the massive investment, exploration and progress recorded by the oil and gas sector have domino effects on other sectors, the nation will not optimally benefit from this natural endowment. Here lies the propriety of the theme for this year’s Insurance Stakeholders’ Parliament, “Developing Local Content and Capacity Building in the Oil and Gas Insurance Business”.

Capacity Building

Insurance is about risks and the management of uncertainties. The determination of the quantum of risks, probability of occurrence and the provision of cover are within the purview of an insurance expert. To say the least, the risks in the oil and gas industry are enormous and involve huge financial outlays and therefore, require sound technical capacity to accurately assess them. Indeed, oil giants strongly believe that insurance underwriters are both under-capitalised and have inadequate technical expertise to handle insurance risks in the sector. Against the foregoing, underwriters need to build capacity if they are desirous of venturing into this high-risk sector.

Capacity building in the oil and gas sector can be viewed from two perspectives: financial capacity to execute projects and the technical expertise to appreciate the thrust and severity of the business to be undertaken as well as the ability to execute same. Technical capacity in the insurance business in general has been a serious problem and, indeed, one of the driving forces behind the recently concluded consolidation. The view was rife that consolidation will improve the synergies of underwriters as they would have, not only a large pool of personnel to draw from, but also, they can invest some of their funds in training. While it is too early to assess the extent to which consolidation has produced the desired results, I noted in an earlier write-up that, the raising of funds to meet the minimum level of capitalisation set by the National Insurance Commission may be easy, but the development of human capital will not be easy. It will take time. Capacity building involves long gestation.

As you are aware, the occurrence of disasters of profound proportion and devastating impact has become commonplace in our time. This development should ordinarily not pose any problem to insurance companies and practitioners since this is their stock in trade. What has become challenging to insurance practitioners today is, among others, the dearth of requisite technical capability and expertise to effectively manage the special risks associated with certain classes of insurance business as well as handle emerging crises. Yet, due to the absence of a solid capital base, managers of insurance companies erroneously perceive investment in the needed human capital both as wastes and as avoidable costs. No wonder, in carrying out re-engineering programmes, the first casualties are usually staff layoffs and drastic reduction in the budget of training! It is therefore not a surprise that the affected companies were unable to easily deliver on their contractual obligations. To achieve the desired level of human capital development will take much longer time and resource. In terms of financial capacity, the challenge is not as fundamental as underwriters can form consortia to handle businesses irrespective of size and even encourage reinsurance to take on some of the risks beyond a certain threshold. The existence of even a fund created by the Nigerian National Petroleum Corporation which is supported by financial institutions point to the fact that the issue of financial muscle can be addressed without much difficulty.

Compliance to Local Content Policy

In spite of the perceived un-sophistication of the insurance business in Nigeria by the oil majors, it must be encouraged to develop to reach the best international standards. This can only happen through consistent patronage. The oil majors must be compelled to patronise local underwriters in the long-term interest of the nation in addition to the foreign exchange to be saved. Except this happens, the incentive to invest in capacity building by local underwriters will diminish. In this respect, the contracts with oil companies have to be reviewed to ensure greater value for Nigeria. Mandatory compliance clauses on local content need to be part of the agreements. The companies cannot be expected to voluntarily comply with the local content policy of the government, as it does not promote their interest and that of their home countries. This position was succinctly advocated by a 2006 Nobel Laureate in Economics, Prof. Stiglitz (2006: 150) when he argued that “the major responsibility for getting as much value as possible from their natural resources and using it well resides with the countries themselves. The first priority should be to set up institutions that will reduce the scope for corruption and ensure that the money derived from oil and other natural resources is invested, and invested well. It may be desirable to have some hard and fast rules for that investment- a certain fraction devoted to expenditures on health, a certain fraction to education, and a certain fraction to infrastructure. Procedures need to be put into place for independent evaluations of the returns on investments. Stabilization funds are essential. “Except this is done, ultimate benefits will be sub-optimal. This is a choice that we need to make. Stiglitz went further to argue that, “natural resource curse is not fate; it is choice”. We must make the right choice now.

Manpower development in the insurance industry

Although, the history of insurance industry dates back to the 1921 when the Royal Assurance Agency was established in Lagos, it was not until February 1993, when the Act establishing the Chartered Insurance Institute of Nigeria (CIIN) was enacted. This implies that for over 70 years, insurance was not considered a profession, in spite of its immense contributions to the growth of business and the national economy.

In spite of the fact that a lot of Universities and Polytechnics now run degree and diploma courses in insurance, this is just a prelude to the production of qualified insurance practitioners and therefore . grossly inadequate. Given the Federal Government’s policy of not financing professional institutes, it would be foolhardy to expect CIIN to be able to produce the large number of professionals required by the sector. Even the annual sponsorship of a few Nigerians to the West African Insurance Institute in Liberia for short­term courses by the erstwhile govemment-owned Nigerian Reinsurance Corporation in an effort to bridge the skills gap, has remained a drop in the ocean. In view of this, the Petroleum Training and Development Fund (PTDF) must begin to give attention to the training of personnel in insurance, accounting, economics and finance as these are germane to the virility of the oil and gas business. The insurance companies should join forces to assist the CIIN to fast track the production of specialist for the industry.

Conclusion

The local content policy of the government is a well-thought out initiative designed to accelerate the involvement of Nigerians in the all-important oil and gas sector. Several years after it was evolved, not much has been achieved. Although there are no statistics to validate the extent of compliance to the targets of 45 per cent in 2006 and drive towards 70 per cent of 2010, the continuous dominance by foreigners of the commanding heights of the sector bear eloquent testimony to the need for urgent actions by the government and regulatory bodies.

The questions for the insurance Industry are :

How can existing underwriters develop the technical capacity to assess the risks inherent in the sector?

How can they develop the fmancial capacity to underwrite such high-risk insurance business given their poor level of capitalisation?

What is the state of reinsurance business in Nigeria?

How can market-induced consolidation in the insurance sector help?

What role can NAICOM play in this respect?

Local underwriters are currently engaged in different classes of insurance business. What role will specialisation play in helping them to secure oil and gas insurance business?

The 2009 Insurance Stakeholders’ Parliament will provide an opportunity for the articulation of action plans that would address this unacceptable development. You must participate to appreciate the significance of the forum.

Mrs. Babington-Ashaye is the MD/CEO, Risk Analyst Insurance Brokers Limited, Lagos.

Funmi Babington-Ashaye
Funmi Babington-Ashaye