Opportunities to improve the Host Community Development Trusts under Nigeria’s Petroleum Industry Act

This research highlights how the provisions of the Petroleum Industry Act (PIA) targeted toward host community development create both opportunities and challenges. The report outlines some of the key concerns under the areas of finance and governance and provides specific recommendations for the legislature and regulator to consider, in their efforts to improve implementation of the HCDTs, and wider PIA. We have structured our discussion around some key questions we believe need to be answered, providing answers where we can, and highlighting when more information and work is needed. It is based on a close reading of the PIA, HCDT regulations, and from analysing the audited accounts of an OGC.

Key Points

  • The Petroleum Industry Act (PIA) establishes the Host Community Development Trusts (HCDTs), which will guide oil and gas company (OGC) investments into community development. While the law and regulations are a good foundation, our close reading highlights several issues related to financial and governance mechanisms that need to be addressed. Urgent changes are needed to make the most of the huge investments, reduce future risks for the oil and gas industry, and avoid tensions across the Niger Delta.
  • The HCDTs will channel huge amounts of resources towards community development, effectively replacing corporate social responsibility projects. The Federal Government of Nigeria (FGN) estimates the total contribution to HCDTs will be US$500-800 million per year (NGN200-330 billion), around ten-times the average annual social spending by OGCs ($72 million or NGN19 billion). The estimated total allocation to HCDTs is almost as much as the Niger Delta Development Commission average annual budget ($806 million or NGN206 billion), which will continue to be spent in parallel. This creates a huge opportunity for coordinated community development spending.
  • More funding for community development is welcome, but historically, the main challenge has not been the lack funds, but the failure to manage this properly, to ensure it benefits communities. Federal and State government funding for the Niger Delta was over NGN1.4 trillion (US$3.7 billion) in 2020. With more, it is in the interest of all parties that these are calculated, collected, and utilised in a transparent and accountable way, which is applied consistently across all companies and communities. The current regulations provide basic guidance, but to avoid future disputes, the regulator needs to specify uniform, transparent, and accountable approaches for: calculating operating expenses, clustering communities, distributing allocations among HCDTs, and establishing mechanisms to manage projects.
  • The audited accounts of OGCs are generally not published, so there is no way to independently verify that companies are contributing what is due. Verification will be at the discretion of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC). Several transparency initiatives have introduced positive measures for reporting payments to government. But we are concerned that similar measures are not in place for payments to HCDTs. Moreover, the FGN has claimed compliance with existing mandatory payments is poor – for example, alleging OGCs owe the NDDC billions of dollars. If OGCs fail to pay HCDTs, NUPRC will need to exercise its powers under the PIA to make warnings, issue fines and revoke licences.
  • The HCDTs seek to incentivise communities to protect the industry’s infrastructure from sabotage, oil theft, and artisanal refining, but do not provide any support to help them achieve this. Instead, they will be penalised under a provision in the PIA which states that deductions can be made to HCDTs for the cost of damage from ‘third-party’ incidents. The regulations expanded the definition to include cost of products lost and operational costs during the period of down time – if implemented, this could theoretically wipe out HCDT contributions. We maintain that this provision in the regulations is out of step with the law, and moreover, that this provision should be removed entirely. It should be the responsibility of OGCs and the FGN to ensure the integrity of infrastructure. Communities are an important stakeholder in these efforts, but would need extensive support to tackle organised criminal networks, which are often armed and working in complicity with the security agencies and government. Private pipeline surveillance contracts were recently awarded to protect the infrastructure. By extension, their success could be integral to community development under HCDTs, so synergies should be explored.

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