Local Content policy must embrace strong regulatory practices to protect against `fronting’ – UG Business Professor

In a country where dishonesty is pervasive…

Professor Leyland Lucas

Dr Leyland Lucas,  Visiting Professor at the School of Entrepreneur-ship and Business Innovation (SEBI) at the University of Guyana has said that the pursuit of an effective local content policy for the oil and gas industry must seek, among other things, to create a local content policy that seeks to bring an equity of benefits.

“Whenever new opportunities arise, there will always be efforts to accrue benefits by some who are not entitled to do so. Particularly in a country such as ours where control systems are stretched and dishonesty is pervasive, regulations must be enacted against such things as ‘fronting.’ Strong regulatory controls must be established to guard against firms using nefarious means to indicate their eligibility. While no fool-proof system can be designed, there must be enough sizeable penalties to serve as disincentives to those who seek to violate the rules,” the UG Professor writes in an article published in this issue of the Stabroek Business.

Professor Lucas says, meanwhile, that the building of a strong educational system is essential if Guyana is to benefit from an oil and gas-driven local content policy. “For me, a strong educational system is essential to benefitting from any local content policy. The educational system must provide the skills needed by local firms that are either positioned or are seeking to position themselves to benefit from any local content policy,” Professor Lucas says in a paper titled ‘Challenges to Local Content Policy’ prepared for publication in the Stabroek Business.

And according to Dr. Lucas, Guyana may, as yet, still not have such an education system. “Over the years, we have seen tertiary institutions receiving limited resources. One does not produce engineers, supply chain management experts, logistics personnel, managers and forensic accountants overnight, Lucas says, adding that “doing so requires years of investment in academic offerings.” The university academic says in his article that such investments “require the recruitment of highly qualified and committed faculty, capable and innovative academic administrators, provision of equipment on which state-of-the-art training can occur, construction of modern training facilities and a shift in the approach to learning,” which shift, her said, should emphasize both risk-taking and innovativeness “as against the current focus on rote learning and regurgitative practices.”

And Lucas says in his article that the requirement that a specific percentage of inputs be produced by local manufacturers represents one of the simplest ways in which local firms can benefit through backward linkages. However, he contends that in order to exploit these opportunities there is need for a vibrant manufacturing base, one that can deliver inputs in a timely manner. “To do so the manufacturing base must exist and delivery systems must be reliable. These are inseparable as products that cannot be delivered are valueless. Hence there must be some commitment, (locally) to building a manufacturing base supported by a reliable logistics system to ensure timely delivery.”

The strengths of a robust local content policy, however, do not gainsay the threatened downside of what he describes as a “Johnny come lately” effect on material supplies. He explained that firms capable of supplying items to the oil and gas sector, upon discovering that the prices being offered “are significantly higher than what is paid elsewhere may withdraw from the traditional market thereby creating an artificial shortage. “With that shortage comes rising prices and possible health consequences for the remaining populace. Thus, as part of local content policy one must attempt to ascertain the possible effects of supply diversion.”

Lucas says that similar instances of artificial shortages can also emerge for human capital in already undersupplied areas. He contends that “if nurses, doctors and other critical human resources determine that through local content policy they can benefit from increased earnings, then they will opt to pursue this option. By doing so it again creates artificial shortages in other already stretched areas.”

The UG Business Professor says, however, that amid concerns about artificial shortages, one possible unintended but highly beneficial consequence of any local content policy “could be a significant shift of population away from the coastline towards regions close to the oil and gas sector. He said that while it is possible that a significant number of supplies which can yield returns from local content policy are likely to come from the coastline and traditional regions of production, “incentives could be provided to encourage firms to relocate to areas currently underpopulated,” Lucas added.

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