Tanzania LNG Industry Study: Phase III Supplier Development Program Design Table of Contents Background ............................................................................................................................... 1 Objectives ................................................................................................................................. 4 Lessons learned from other supplier development programs ................................................... 5 Critical Success Factors for a Supplier Development Program ................................................ 8 Overview of recommended program design ............................................................................. 8 Project Structure and Activities .............................................................................................. 11 Pillar 1: Enterprise Development ........................................................................................................11 Pillar 2: Policy and Institutional Framework......................................................................................15 Pillar 3: Workforce Development ......................................................................................................20 Pillar 4: Access to Finance ....................................................................................................................24 Conclusion .............................................................................................................................. 25 Appendix 1: Project Structure Summary ................................................................................ 27 Appendix 2: Mtwara Development Corridor and TSDP Synergies ........................................ 27 Tanzania LNG Industry Study: Phase III Background With an estimated 54 trillion cubic feet of natural gas reserves—a figure expected to more than double over the next two years—Tanzania has quickly become one of the world’s leading energy hotspots. The abundance of resources has attracted the attention of prominent global energy companies that are advancing the effort to build a world-class, liquefied natural gas (LNG) facility. A facility of this size and scope could help Tanzania become a leading LNG exporter over the next decade – a development that would transform the nation’s economy and propel the country toward the objective of becoming a middle- income country by 2025. The development of this LNG facility will require an estimated investment of $15-20 billion1 – a sum that alone has the potential to fuel economic activity and expand incomes throughout Tanzania’s economy. However, to fully benefit from this influx of investment Tanzania must address serious constraints at both the macro (policy) and the micro (firm) levels. Recently, under the technical guidance and direction of the World Bank, the DFID, and the EU (through the CIIP), the DAI led a series of analyses focused on aiding the Tanzanian government to understand and identify viable local content development opportunities linked to the future oil and gas LNG investment project. These studies come before significant levels of on-the-ground investment in the LNG project are made and before any Final Investment Decision (FID) has been reached. As such, each phase of these studies has benefited from greater levels of engagement with the private sector, both from the International Oil and Gas companies (IOCs) and local enterprises. Phase I focused on mapping the market demand for goods and services generated by the proposed LNG project. This mapping was matched with a preliminary assessment of key industries associated with supplying goods and services for the LNG project. This phase of work was instrumental toward establishing general cost parameters and understanding local industrial capacity in order to develop a short list of 11 local industries2 with enough commercial potential to merit a deeper gap study. Phase II built significantly off of the Phase I analysis by carrying out eleven in-depth industry gap studies. These gap studies took an acute look at the industrial capacity in Tanzania at present and then measured the readiness of these industries against the predicted market demand from Phase I. The team developed a ‘bottom-up’ measurement of expected levels of labor and goods that will be sourced locally for each of the eleven industries. These estimates relied on both the industrial mapping work completed in Phase I, continuous discussions with key stakeholders and industry experts in Tanzania, and additional in-country assessments of private enterprises in each industry. Phase II analysis concluded that total local value added (measured as payroll and local profits) could range between USD 750 mn to nearly 1 bn depending on improvements made to local industries and enterprises and the lead time to effect these improvements. 3 The estimated value added and employment figures are likely to change once the LNG project design is finalized and more reliable data becomes available on both local capacity and expected market demand. However, these estimates help the Tanzanian government and its development partners prioritize investment in the local market in anticipation of the future LNG project with the aim of improving the level and quality of local value added. 1 Estimates vary depending on technical design, which has yet to be determined, but in a recent stakeholder engagement session BG announced that project is expected to cost between 15 and 20 billion USD. 2 Building Camps Construction Works, Catering, Concrete Works, Docks and Jetties, Electrical Works, Equipment Hire and Scaffolding, LNG Train and Tank Works, Metal and Steel Fabrication Works, Roads and Landing Strips Works, Site Preparation. Services Industry 3 Based on Phase I assumptions and projections. Page 1 Supplier Development Program Considering the potential for significant gains in local capture, this Supplier Development Program framework is designed around the key constraints revealed through Phases I and II: ■ Low level of oil and gas industry awareness: Tanzanian businesses have a very low level of understanding of the oil and gas sector in general, and the services, products, schedules, and procurement processes that typically define the development of an LNG facility. This was evidenced in the focus groups and firm-level interviews where decision making was informed by the most fundamental expectation that gas would be flowing in the next couple of years and that there were few opportunities available. Without exception, the focus groups played a critical information-dissemination role that had not been expected by the facilitators. The asymmetry of information severely limits the upfront ability of Tanzanian firms to participate in the supply chain for the LNG facility, because most are unaware of where and when their services and/or products might be needed, or even the scale of the services required, and what the associated value of the services might be. ■ Business management and growth skills gaps: Most SMEs with aspirations of becoming oil and gas suppliers possess little if any of the required business skills needed to position a local enterprise for doing business with large IOCs, Engineering, Procurement and Construction (EPC) contractors, and prime contractors. Firms that have grown in the Tanzanian economy during the last few decades have done so by mainly responding to domestic consumption needs. Some of the larger and more sophisticated businesses have been able to grow by providing goods and services to larger institutional consumers and foreign companies doing business in Tanzania, and were economically viable enough to develop productive capacity to substitute imported goods previously traded. Firms selling into these markets have learned to improve their business management skills in terms of bookkeeping, financial management, tax compliance, reporting, and documentation. They have also built in-house skills related to business growth operations, such as responding to public tenders and submitting formal commercial proposals. Local firms that do so (excluding those either in a joint venture with a foreign firm or international firms operating locally in Tanzania) are the exception rather than the rule. ■ Industry standards compliance gaps: The oil and gas sector, and specifically IOCs and EPC/prime contractors, is largely driven by risk mitigation. This makes sense given the high dollar value of plant equipment, as well as the potential health, environmental, and personal dangers that exist up and down the value chain. It is therefore understandable that adherence to tested and proven industry and product standards is paramount in doing business. Most local firms are not even aware of the standards and specifications, let alone have the capacity to meet them. The absence of a culture of accreditation means most local firms will not even pass the most basic compliance test and are perceived to be insurmountably challenged to upgrading to meet the demand of the TLNG development project. For example, Health, Safety and Environment (HSE) compliance is almost universally absent among small and medium-sized enterprises (SMEs) in Tanzania. Excepting those industries that do not require a high level of adherence to standards, such as the Services Industry, the current constraints will severely limit the potential for awarding subcontracts to local firms as they reinforce the perception amongst industry participants that there