Local content policies: the experience of some others

Preventing measures

Last week’s discussion of local content around Guyana’s oil industry established two key points based on current talks on the matter. One, that local content is linked to the supply of goods that are directly related to the value-added operations of the oil industry.  In other words, these goods are capital goods like drilling rigs, oil platforms and subsea equipment that are critical to the competitive production of oil, none of which Guyana has the capacity to produce nor will do so in the short-run.

As a result of this, local content policies of Guyana ought not to have a direct bearing on the value added or competitive position of any foreign investor in the oil industry.

In addition, last week’s article pointed out that several provisions under the WTO TRIMS Agreement prohibit the use of certain performance requirements. These prohibitions have focused primarily on preventing measures that discriminate against goods providers who are foreign investors from other WTO member states in favour of goods providers who are nationals of the host country. 

Against that background, this week’s article seeks to provide information about the experience of both developing and developed countries in handling local content policies (LCPs), under a much broader scope.  In particular, the article will look at how other countries have implemented key characteristics of local content policies with respect to their extractive industries and identify useful elements for a country like Guyana.

 

Restraining provisions

 

What should be pointed out is that there exists under the WTO another set of restraining provisions that relate to services.  The GATTS also places certain limits on measures affecting foreign investors, including measures favouring local service suppliers over foreign service suppliers, and measures requiring foreign firms to enter into joint ventures with domestic entities as a condition of market access.

The provisions about local content of concern here specifically fall under the rules pertaining to trade-related investment measures or TRIMS. The objectives of the TRIMs Agreement, as defined in its preamble, include “the expansion and progressive liberalization of world trade and to facilitate investment across international frontiers so as to increase the economic growth of all trading partners, particularly developing country members, while ensuring free competition”. This agreement recognizes that certain investment measures can restrict and distort trade.

 

WTO and local content

 

Article 4 of the agreement does however allows developing countries to deviate temporarily from the obligations of the TRIMs Agreement once the conditions set out in Article XVIII of the WTO are satisfied.  This provision refers to safeguard measures for balance-of-payments difficulties.   This tells countries that in conceptualizing TRIMS a conscious effort was made to limit the formulization of local content policies.  However, it did acknowledge that TRIMS could also be too restrictive and choke the development ambitions of developing countries.

It has left countries with some wiggle room to boost development efforts and to minimize their balance of payment problems.

Some of these flexibility measures include, providing consistent subsidies or other supports to domestic firms; requiring or incentivizing use of domestic service suppliers  and domestic labour; requiring or incentivizing transfers of technology; requiring or incentivizing R&D or other expenditures to be made in the host state;  requiring or incentivizing firms to locate their headquarters or particular activities in the host state, or to locate their investment in a particular area in the host state, among others.

Despite clear rules that prohibit certain forms of LCPs, such as mandatory numerical targets, many countries maintain them or have introduced new ones in recent years. While these are discussed in the WTO TRIMs committees, which require countries to notify or discuss such measures, the WTO surveillance mechanism is not strongly implemented.  There is no known dispute settlement case relative to local content requirements in the extractive sector that has been brought to the WTO.

 

Experiences in implementing LCPs

With the influx of foreign investment in Guyana’s extractive industries, be it mining and now oil and gas, it is becoming important to pay closer attention to the adoption of LCPs.  For Guyana, local content policies will not have a direct bearing on the value creation or competitive position of any foreign investor in the oil industry as a result of the country’s inability to produce a number of manufactured goods needed in the extractive sector.  However, these policies could still have a direct bearing on the development of the labour market (employment creation), development of domestic industries, and promotion of technology, innovation and research and development.

Many governments have used regulatory instruments to set minimum quantitative targets when hiring local labour or training staff. Some governments even require companies to provide a large share of managerial positions to local employees where a specific number of senior managerial positions are earmarked for nationals.

Further, some even insist on a certain percentage of remuneration to be re-invested into training local staff. In Brazil’s oil and gas industry, local employment and training is one of three key determinants in the bidding process. Kazakhstan has a minimum requirement of 95 per cent for the hiring of locals. In Ecuador, the Mining Law requires 80% of companies’ workforce to be locals while the Hydrocarbon Law requires that companies employ 90% of local staff in technical positions and 100% for administrative jobs.

In South Africa, companies are compelled to make a five per cent contribution of their annual payroll to the development of human resources.

 

Stimulate industries

Local content policies also help in the development of domestic industries to stimulate these industries in supplying goods and services.

This could be accomplished through mandatory joint ventures between foreign investors and domestic entities; preference being given to companies headquartered or registered in the domestic market, and where certain types of activities are allocated to firms that are owned and managed by locals only. Norway and the UK both adopted the joint venture approach in the early stages of their hydrocarbon sectors.

In Uganda, if goods and services required are not available in the country, these can only be sourced by a company that has entered into a joint venture with a Ugandan company, on the condition that the latter holds an equity stake of at least 48% in the joint venture.

This joint venture policy could possibly be an option for Guyana to increase the opportunities for benefiting from investment in the extractive sector, countering the issue of not benefiting from value creation or addition in the extractive sector.  Local content becomes an even more useful concept as Guyana tries to develop a “Green Economy”.

 

Developed countries

Local content policies geared towards promoting technology, innovation and research and development are more evident in advanced economies or countries where industries have reached a level of maturity. Regardless, however, it is still important as not only would companies invest in R&D but governments could provide financial incentives to local firms, encouraging them to develop superior technology to better enable these firms to compete globally. There are currently no firms in Guyana that are large enough to support R&D but this could be a government initiative to fund R&D at local education institutions.

In the Philippines, a minimum of 1.5 per cent of the operating costs annually must be allocated to support the development of mining technology and geosciences.

Sweden provides significant financial support to its research institutions specialised in mining-related activities and has developed at the same time, strong partnerships to connect businesses with R&D. Similarly, Finland provides substantial loans and grants to its public research institutions to support domestic companies in becoming global leaders in specific sections of mineral value chains.

In Norway, the government has implemented and promoted local content by establishing a mandatory condition upon international oil companies to transfer technology and expertise to scale up local participation in the oil and gas industry.

Impact

The implementation of local content policies have proven to work for countries. Given the emergence of Guyana’s oil and gas sector, and with the existence of a strong mining sector, local content policies could enhance the labour market, stimulate the development of domestic industries, and, possibly through this, add value to each industry through innovation from research and development.

 

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