World Bank: Main Findings on Local Content Requirements in the Oil and Gas Sector

Introduction

Today I provide my penultimate presentation on “lessons to be learned from global experiences with local content requirements (LCRs) for the oil and gas sector”. Following last week’s presentation on UNCTAD’s Main Findings, today’s column presents the Main Findings of the 2013 World Bank study of the topic. That study concludes: “While local content policies have the potential to stimulate broad-based economic development their application in petroleum-rich countries [has] achieved modest results”. The study sought to 1) “describe the policies and practices meant to foster the development of economic linkages from the petroleum sector”; and 2) “[give] examples of policy objectives, implementation tools and reporting metrics … to derive lessons of wider applicability”.

The study identifies eight main findings:

World Bank: Main Finding 1

The first finding concerns the design of LCRs. The study categorizes the overall orientation of LCRs into two: assertive or encouraging. Assertive-type policies rely on mandated targets and obligations; while, encouraging-type policies rely on incentivizing investors and setting aspirational targets.

This particular finding echoes that of UNCTAD, which as was noted last week, recommends realistic LCR objectives; advocating that, before setting targets, say for example in employment/ training, these should be preceded by skills and capacity assessments to determine the level of needs.

Essentially this finding advocates that cost-benefit appraisals precede the setting of all LCRs targets. Additionally, given the complexity of the sector, it notes that duplication should be avoided, coordination of relevant government agencies promoted, and, the location of institutional responsibility clearly identified for all LCRs. Such considerations raise costs for administering and securing compliance with LCRs.

World Bank: Main Finding 2

The second finding is that LCRs “should be coordinated within Guyana’s development policies”. This means framing them as part of a broader set of development policy interventions. Indeed, their success is tied to the broader directions of development strategy. Thus, if LCRs are directed at generating jobs, a broader development strategy for education/training is a necessary complement.

World Bank: Main Finding 3

Framing LCRs in a broader perspective leads to the third finding: the principal focus of LCRs should be on “market efficiency”. As previously indicated, the petroleum sector is structurally characterized by 1) high capital investment 2) highly specialized inputs (compounded by the offshore location of Guyana’s reserves) 3) great technological complexity, and, 4) high risk.

Given this structure, the sector necessarily remains dependent on its global supply value chain, to drive improvements in quality, standards, reliability, and competitive pricing. This value chain is exceptionally well-organized and experience reveals it will push-back on LCRs. From my perspective, it is hard to imagine how Guyana (with its limited capability) can resist a determined push-back. Prudence therefore, at all stages of the process, is key to likely success.

World Bank: Main Finding 4

The fourth finding recommends that the promotion of a competitive/innovative environment should be the overarching objective. This finding also echoes UNCTAD’s, in that it raises the grave dangers of promoting LCRs as “protection” for domestic businesses, based chiefly on local ownership. Sheltering domestic businesses poses great risk for the Authorities. Experience reveals that, once this occurs, special interests speedily develop in favour of special privileges. From the outset therefore, care is required when setting LCRs. Indeed, I would recommend that, cost-benefit appraisals should determine the extent and duration of every LCR before its approval.

World Bank: Main Finding 5

The fifth finding is that LCRs should be biased towards technology and knowledge spillovers. These two outcomes have proven essential for securing value added, as well as forward and backward linkages in all petroleum-rich countries. This finding is also expressed by the sector mantra: “Fostering technology transfers and spillover effects”.

Clearly, not all linkages entail the same degree of technological complexity or potentiality for: spillover effects, job creation, economic growth, or value added. Such a finding however, highlights the emphasis that should be placed on close targetting and cost-benefit appraisals.

World Bank: Main Finding 6

The sixth finding is based on the observation that, typically, in Guyana-type economies, “skills shortages” across the petroleum sector’s value chain are “pervasive”. And, while the level and distribution of these shortages vary across countries and sub-sectors, the study notes that “many factors” contribute to this outcome; including: 1) the condition of the national education system 2) the size of the petroleum sector 3) the pace of its development, and 4) lags in implementing LCRs. Perhaps, the most stunning observation is: that, whether the design of the LCRs are assertive or encouraging, seems to have the most impact on the outcome!

World Bank: Main Finding 7

The seventh finding is similar to the first in that it also impacts heavily on the design of the LCRs. It suggests the Authorities should seek to maintain the effectiveness of LCR policies, while avoiding the imposition of high administrative and compliance costs. This finding highlights two unique considerations, namely, 1) complex LCRs are very difficult to monitor/regulate, and 2) vague/ ambiguous LCRs do the same.

Due to the above considerations, it is noteworthy that this finding reinforces the earlier one concerning the pressing need for cost-benefit appraisals of all LCR items. Such a conclusion also echoes the UNCTAD finding in regards to issues of transparency and accountability.

World Bank: Main Finding 8

Finally, the study identifies specific benefits earned by LCRs, when these are introduced in the wider context of promoting regional trade synergies and the development of industrial clusters. By the latter is meant a “geographic concentration of interconnected businesses suppliers and associated institutions”. Experi-ence shows these enhance competitiveness, productivity, firm/industry capacity, and economies of scale and scope.

This suggestion sits comfortably with my earlier assertions that Caricom is indispensable to the successful promotion of Guyana as a hub for oil and gas services and related equipment!

Conclusion

Because of space, at the start of next week’s column I shall summarize the above findings, along with those of UNCTAD’s, in two simple Schedules for readers’ convenience.

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