The Federal Government of Nigeria recently passed the Nigerian Oil and Gas Industry Content Development Act 2010 ("NCA") into law with the objective of fostering the development of indigenous service providers and utilization of Nigerian goods thereby creating economic linkages between the oil and gas industry, which had hitherto functioned as an enclave economy, and the wider Nigerian economy. A number of measures have been introduced in the Act in order to achieve this objective, some of which require preferential treatment for indigenous service providers/goods and a level of discrimination against foreign service providers/goods. These measures prima facie appear to conflict with Nigeria's international obligations, particularly in relation to "national treatment obligations", which are included in some bilateral investment treaties ("BITs") as well as the World Trade Organisation ("WTO") Agreements, in particular Agreement on Trade Related Investment Measures ("TRIMs") & General Agreement on Trade in Services ("GATS").
2. National Treatment Standard in International Law
In order to facilitate and protect foreign direct investment ("FDI") and enhance the protections which may be available under national law, a number of standards or measures have evolved and have become an intrinsic element of several trade and investment treaties whether bilateral or multilateral. These standards include the most favoured nation ("MFN") standard1, the fair and equitable treatment ("FET") standard2, and the national treatment ("NT") standard derogation from which would give rise to liability and may trigger international dispute resolution mechanisms (outside of the municipal judicial system and the uncertainties which may be associated with submission to its jurisdiction).3
National treatment is a standard which requires a host country to extend to foreign investors treatment that is at least as favourable as the treatment that it accords to national investors in like circumstances.4 The standard seeks to ensure "competitive equality" between foreign investors and national investors. It has been argued that whilst national treatment obligations may be seen as providing formal equality of foreign and national investors, where a treaty has been entered between countries which are not on the same development level, the national treatment obligations ignore the reality of "economic asymmetry", which may result in stronger foreign enterprises impeding the development of the weaker national firms.5 Indeed, perhaps in recognition of a weaker developmental stage or the need to retain a level of control over foreign investment in some areas of their economy, some countries enter BITs, which provide for various exceptions to the national treatment obligations.6
2.1 National Treatment in Nigerian Treaty Obligations
In order to encourage FDI and trade, and in the context of globalisation and liberalisation, the Nigerian government entered into various investment and trade treaties (including the WTO Agreements, TRIMS, GATS, and some BITs) many of which include some form of national treatment standard.
2.1.1 The WTO Agreements
This aspect of the paper focuses on two WTO agreements – the TRIMs and the GATS, which include national treatment obligations for WTO member countries, of which Nigeria is one.7
TRIMs was negotiated during the Uruguay Round8 in recognition of the fact that a number of investment measures can have trade restricting or distorting effects.9 It focuses only on investment measures that affect trade in goods.10
With regard to national treatment, Article 2(1) provides that, "[w]ithout prejudice to other rights and obligations under GATT 1994, no member shall apply any TRIM that is inconsistent with the provisions of Article III... of GATT 1994".11 TRIMs also provides an illustrative list of measures which are inconsistent with the national treatment obligations under Article III.412 of GATT 199413 in its Annex. These measures include:
"...those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which require:
(a) the purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production...
These provisions refer to local content obligations14, which are thus prohibited by these rules. Developing country members such as Nigeria may deviate from the national treatment obligations to the extent and in such a manner as Article XVIII of GATT 199415 permit the member to deviate from the provisions of Article III of GATT 1994. Additionally, Article 3 states that all exceptions under GATT 1994 shall apply. These exceptions are mainly provided under Articles XX (General Exceptions) & Articles XXI (Security Exceptions), the provisions of which do not appear to apply with respect to Nigerian content obligations.
Article XVIII:1 provides for national treatment under GATS as follows:
In the sectors inscribed in its Schedule, and subject to any conditions and qualifications set out therein, each Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favourable than that it accords to its own like services and service suppliers.
Under the GATS arrangements, the national treatment obligations of each country are determined by the commitments made in its country schedules.16 Such commitments may be subject to conditions and qualifications determined by the relevant country.17 These conditions are expected to be progressively enlarged through further negotiations.18
Nigeria's schedule includes commitments in relation to four sectors and 28 subsectors – telecommunications, financial, tourism & travel related services and transportation services.19 Nigeria's national treatment commitments in relation to financial services and transportation, areas in which services are provided in the Nigerian oil and gas industry, are the only ones likely to be impacted by the Nigerian content provisions.
2.1.2 Bilateral Investment Treaties
Nigeria has entered into a number of BITs with various countries in order to facilitate and protect FDI which contain a number of standards including MFN20, FET21, and NT standard. Some of these treaties which specifically contain the NT standard include the treaties with the United Kingdom, the Republic of Korea, Spain, Finland, Germany, Turkey & Spain to mention a few.
The national treatment obligations under Nigeria's BITs are quite similar and are likely to be interpreted to convey like benefits to the investors of the relevant countries as that given to Nigerian investors. Key distinctions arise in relation to the exceptions to the national treatment provisions in the German BIT, which has the effect of excluding the applicability of national treatment in order to facilitate economic development. This provides a significant exception for Nigeria, where the need arises.
The effect of the majority of these clauses is that Nigerian investors are not to be accorded preferential treatment in relation to their investments over the nationals of the BIT countries. In the position that they are, liability would arise for Nigeria, where a dispute is referred to international arbitration.
3. Nigeria's Oil & Gas Industry Content Development Act: Does it breach its National Treatment Obligations?
3.1 Nigerian Content: Definition
The NCA defines Nigerian content as "the quantum of composite value added to or created in the Nigerian economy by a systematic development of capacity and capabilities through the deliberate utilization of Nigerian human, material resources and services in the Nigerian oil and gas industry..."22 The definition focuses on the addition of value to the Nigerian economy, which would be through the use of Nigerian goods, services and labour. The objective of the Act is to increase the level of Nigerian content in the oil and gas industry.
3.2 Nigerian Content Instruments
In seeking to actualise its objectives, a number of instruments have been incorporated into the provisions of the NCA. These instruments include the requirements of:
- "exclusive consideration" for indigenous companies in certain circumstances;
- "first consideration" for Nigerian companies;
- "full and fair opportunity";
3.2.1 Exclusive Consideration
Exclusive consideration is required only once in the Act under Section 3(2) which provides that Nigerian indigenous service companies which demonstrate ownership of equipment, Nigerian personnel and capacity to execute shall be given "exclusive consideration" to bid on land and swamp operating areas of the Nigerian oil and gas industry for contracts and services contained in the schedule to the Act. A Nigerian company is a "...company formed and registered in Nigeria in accordance with the provisions of the Companies and Allied Matters Act with not less than 51% shares by Nigerians."23 This means that companies in which majority shares are held by foreign investors (that is those which would be treated as "investors" under various BITs) would not fall within this definition and as such would not be entitled to "exclusive consideration". The Act does not define the term "exclusive consideration", but its use suggests that only Nigerian companies or nationals who demonstrate the qualities indicated in Section 3(2) of NCA would be allowed to bid with respect to certain services.
3.2.2 First Consideration
Section 3(1) of the NCA provides that "Nigerian independent operators shall be given first consideration in the award of oil blocks, oil field licences, oil lifting licenses... subject to the fulfilment of such conditions as may be specified by the Minister." Similarly the term "first consideration" is not defined. It may be reasonably suggested that this obligation requires that in seeking to award oil blocks etc, the national authorities must initially look to Nigerian operators and only in the position that they do not fulfil the conditions specified by the minister or are unwilling or unable to take up these acreages, would foreign oil and gas operators be called upon.
3.2.3 Full and Fair Opportunity for Indigenous Oil and Gas Service Companies
Section 15 of the Act requires that all operators should maintain a bidding process for acquiring goods and services, which shall give full and fair opportunity to Nigerian indigenous contractors and companies. Again "full and fair opportunity" is not defined, however in practice, it would require that Nigerian companies are given adequate notice of tenders and have access to the necessary information required to bid as their foreign counterparts would. This in itself does not appear to be a discriminatory measure and only seeks to ensure that Nigerian companies are treated in an equitable manner.
3.3 Do These Nigerian Content Obligations Breach Nigeria's National Treatment Obligations & What Dispute Resolution Mechanisms Are Available?
The common characteristic of most of the obligations discussed above is that they require some form of positive discrimination or preferential treatment in favour of Nigerian goods and/or services provided by Nigerian nationals/companies or Nigerian operators. In particular, the requirements for
- exclusive consideration of Nigerian service providers in land and swamp operating areas;
- first consideration for Nigerian goods and services in the Nigerian Content Plan, as well as for Nigerian operators in the award of licences and permits;
are not compatible with Nigeria's NT obligations in international treaties. In our view, the requirements for "full and fair opportunity" for Nigerian goods and services as well as the provisions in relation to labour and research do not conflict with the national treatment obligations discussed above.
3.3.1 WTO Agreements
The provisions in relation to preferential treatment for goods are in conflict with the Nigerian national treatment obligations under TRIMs, consequently, an action may be brought by a WTO member country under the WTO dispute resolution mechanisms.
The provisions in relation to services also appear to be incompatible with Nigeria's national treatment obligations under GATS. It should however be noted that these obligations are limited generally to four sectors– telecommunications, financial, tourism & travel related services and transportation services24, subject of course to the qualifications stated in Nigeria's services schedule and in particular to financial and transport services.25
As dispute resolution under the WTO Agreements is brought by member countries, any companies which feel discriminated against would need to lobby their governments to initiate action against the Nigerian government under the WTO dispute resolution mechanisms.
Disputes under the WTO Agreements are resolved under the Uruguay Round Understanding on Rules and Procedures Governing the Settlement of Disputes. Once a dispute is brought by a WTO country member, a panel would be set up to settle the dispute. The remit of the panel is to examine whether the measures complained of are in conflict with a WTO agreement and where this is found to be the case, it would so declare and may recommend steps to be taken to bring them into conformity. Such recommendations may include requiring the offending member country to change or repeal the offending measure. In this regard, where all or any of the local content instruments discussed above are found to breach WTO rules, Nigeria may be required to amend or repeal these obligations.
3.3.2 Bilateral Investment Treaties
The NCA obligations also appear to breach the national treatment obligations under the various BITs. It should be noted that most of the exceptions under the BITs are limited to preferential treatment under free trade zones and tax legislation/treaties, which would not apply in this case. The development exception granted under the German BITs however, may be applicable as long as the conditions of that exception can be shown to be fully met by the NCA. Where this is the case, German companies discriminated against may not be able to claim for failure to be accorded national treatment.
We must note also that under the BITs mentioned above, an investor that is discriminated against by the NCA would have a right of direct enforcement and may refer a dispute for resolution under the relevant international arbitration regime. We suggest that the holder of the right to refer the action is the party discriminated against and not every party which suffers or may suffer a negative effect from the discriminatory action. Foreign operating companies would have a right to claim in relation to the right of "first consideration" granted to Nigerian operators in relation to the award of oil blocks. Furthermore, the suppliers of foreign goods and services would have a right to claim for a breach of the national treatment obligations under the various BITs in relation to these local content instruments.
4. Concluding Remarks
This paper does not speak to the desirability or the necessity of these local content measures for economic development. Indeed a number of arguments have been put forward, which suggest that national treatment obligations have the effect of constraining government's policy space and depriving developing economies of necessary tools for economic development.26 Whilst these arguments may be accepted, our focus is to highlight Nigeria's existing international obligations and the questions they pose in relation to foreign investors' rights as beneficiaries of these obligations.
1. See United Nations Conference on Trade and Development ("UNCTAD"), Most-Favoured-Nation Treatment, UNCTAD Series on Issues in International Investment Agreements, (New York & Geneva: United Nations, 1999).
2. See UNCTAD, Fair and Equitable Treatment, UNCTAD Series on Issues in International Investment Agreements, (New York & Geneva: United Nations, 1999).
3. See generally Aderemi Ogunbanjo, "The National Treatment Standard in International Investment Law", unpublished LL.M thesis, University of Birmingham School of Law, 2008. Aderemi is a senior associate at Odujinrin & Adefulu and her thesis can be made available on request by email to email@example.com .
4. UNCTAD, National Treatment, UNCTAD Series on Issues in International Investment Agreements, (New York & Geneva: United Nations, 1999).
7. Nigeria has been a member of the WTO since 1 January, 1995. See http://www.wto.org/english/thewto_e/countries_e/nigeria_e.htm for information on Nigeria's trade statistics, WTO commitments, disputes, trade policy reviews and commitments.
8. The Uruguay Round refers to the negotiations which began in Punta del Este, Uruguay, and culminated in the establishment of the WTO in January 1995.
9. See the preamble to TRIMs.
10. Article 1 of TRIMs
11. Article III of GATT 1994 generally deals with national treatment on internal taxation and regulation.
12. Article III.4 of GATT 1994 provides that, "[t]he products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product."
13. GATT 1994 refers to the General Agreement on Tariffs and Trade 1994 in Annex 1A to the WTO Agreement.
14. See WTO, WTO Analytical Index – Guide to WTO Law and Practice (2nd. Ed.), (WTO, Geneva; 2007). See also Department of Trade and Industry ("DTI"), "WTO Trade Investment Measures (TRIMs) Agreement", http://www.dti.gov.uk/files/file22992.pdf , last visited on the 24th of May 2010.
15. This Article permits developing countries to deviate from the other Articles of GATT 1994 where this is required to promote the establishment of a particular industry for economic development purposes or for balance of payments purposes and provides for the specific conditions under which such deviation can take place. These conditions include a requirement to notify other WTO member countries. Our review of its provisions does not suggest that it would operate to cover the Nigerian content obligations. In any case, we are not aware that the procedural steps required under this Article have been taken by the Nigerian government in order to be able to treat the Nigerian content obligations as allowable deviations.
16. Article XX:1 of GATS
18. UNCTAD, "Current International Arrangements Governing Foreign Direct Investment", 1996 (TD/B843)/5.
19. See the link to Nigeria's GATS schedule at http://www.wto.org/english/tratop_e/serv_e/serv_commitments_e.htm#commit_exempt , last visited on the 25th of May 2010 and Bankole & Oyedipe, "GATS & Nigeria: Dealing with Multilateral Services Negotiations Within the Context of Unilateral & Development Objectives", paper prepared for ILEAP Workshop, African Strategies for Bilateral and Multilateral Trade in Services Negotiations, March 9-12 2005, held at Accra, Ghana.
20. See United Nations Conference on Trade and Development ("UNCTAD"), Most-Favoured-Nation Treatment, UNCTAD Series on Issues in International Investment Agreements, (New York & Geneva: United Nations, 1999).
21. See UNCTAD, Fair and Equitable Treatment, UNCTAD Series on Issues in International Investment Agreements, (New York & Geneva: United Nations, 1999).
22. Section 109 of the NCA.
23. See Section 109 of the NCA.
24. See the link to Nigeria's GATS schedule at http://www.wto.org/english/tratop_e/serv_e/serv_commitments_e.htm#commit_exempt , last visited on the 25th of May 2010 and Bankole & Oyedipe, "GATS & Nigeria: Dealing with Multilateral Services Negotiations Within the Context of Unilateral & Development Objectives", paper prepared for ILEAP Workshop, African Strategies for Bilateral and Multilateral Trade in Services Negotiations, March 9-12 2005, held at Accra, Ghana.
25. See sections 50 & 52 of the NCA for local content policy for financial services and for transportation services (see the schedule to the NCA.
26. See Aderemi Ogunbanjo, note 3 above & UNCTAD, note 4 above.
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