Local Content Policy and the opportunities for corruption

Jul 23, 2017 News

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By Kiana Wilburg
Oil has struck quite a lively debate in recent times. Many persons have been critical of the posture the Government has taken which, on the surface, can be easily described as cautious or self-protective. Media entities have been dishing out articles almost daily about the ills of the sector and apprehensive citizens are asking important questions.
All are curious about what the Local Content Policy (LCP) will entail when ExxonMobil’s operations get into full swing.
But while it is all well and good for there to be calls for Guyana to have a Local Content Policy that is effective, one must be wary of the opportunities for corruption that exist here.

IMPORTANCE
According to Transparency International, resource-rich developing countries usually suffer from low levels of economic and social development.
The global watchdog says that, increasingly, governments have strived to introduce policies and rules that would allow society as a whole to benefit from oil and gas activities. Local content is one of these policies.
The International Petroleum Industry Conservation Association defines LCP as “the added value brought to a host nation through workforce development (employment and training of workforce), and investments in supplier development (developing and procuring supplies and services locally)”
The World Bank in 2013 stated that the main objectives of local content policies are to: create jobs; promote enterprise development; and accelerate the transfer of skills and technologies.
The World Bank has noted that LCPs vary from country to country.
The objectives of these policies, however, are outlined and further detailed in legislation as well as in contracts, licensing agreements or concession agreements between the government and international oil and gas companies.
The World Bank even notes that some countries have taken LCPs so seriously that they have adopted severe penalties in the event of non-compliance. One such country that is an example in this regard is Kazakhstan.
On the other hand, there are countries which prefer the diplomatic route, as they sought to simply “encourage” oil and gas companies to give preferential treatment to local suppliers and workers.
According to the World Bank, local content rules vary across countries. For instance, in Nigeria, the Oil and Gas Industry Content Development Act of 2010 specifies the minimum amounts of local materials and personnel used by oil and gas operators in the country.
In Kazakhstan, a target of 50% local procurement from Kazakh suppliers has been established.
In Angola, a series of local content rules apply for the procurement of goods and services. For instance, there is a list of goods and services that can only be supplied by companies based in Angola; for other goods and services, foreign companies can only participate in tenders in association with an Angola-owned company.
While LCPs have a most noble objective, Transparency International has found that there are opportunities for corruption.
According to the global watchdog, there are a handful of practical challenges that may hamper the effective implementation of these policies, including limited industry capacity to kick-start the process, lack of coordination and often coherence among government agencies, high levels of bureaucracy and opacity, as well as widespread corruption and weak accountability mechanisms.

RISK OF CORRUPTION
If not implemented and managed carefully and made subject to public scrutiny, it is believed that local content can offer significant corruption opportunities.
According to the Global Witness, this form of corruption is “even more damaging than one-off payments for contracts because it means revenues can be stolen from the state continuously, and in a way that is much more difficult for an audit to detect”.
But Transparency International (TI) notes that the literature on corruption risks in local content is, however, very limited.
TI said that available reports indicate that many of the corruption challenges faced by developing resource-rich countries also influence and have an impact on local content policies.
Within this framework, it said that measures that are usually adopted to curb corruption within the public administration, such as enhancing transparency in decision-making, establishing clear and transparent procurement rules, providing access to public documents, and strengthening oversight, are also instrumental to prevent and curb corruption in local content.
Be that as it may, Transparency International noted that there are some characteristics specific to the development and implementation of local content policies that may offer opportunities for corruption.

FAVOURITISM/CONFLICT OF INTEREST
Transparency International has found that many resource-rich countries are considered to be patrimonial societies, where the distinction between public and private is very blurred.
The body said, “Politicians and decision-makers are usually very close to the economic elite, and in several cases are the main beneficiaries of local content requirements. As such, local content rules end up benefiting and generating revenues for government-affiliated individuals, failing to achieve some of their objectives such as promoting enterprise development and the broader sustainable development of the country.”
Transparency International said that there are several examples of conflict of interest and favouritism in the design and implementation of local content policies.
In this regard, it pointed to the case of Nigeria, where local content was easily used by the political and economic elite to extract rents, as well as in Uganda, where close ties between senior public officials and the private sector led to the distortion of the policy-making process and the award of licences and other local content benefits.
The body also noted that several studies have shown that local policies and resources are often directed to groups based on their affiliation, ethnicity and loyalty to the President.
Transparency International highlighted that Angola’s local content policy, for example, has been considered highly vulnerable to exploitation by public officials and their close allies in the private sector.
It said that investigations conducted by Angolan organisations and the US government have raised questions regarding contracts awarded to companies belonging to Angolan decision-makers.
Transparency International said that according to the investigations, in compliance with the local content law that requires international companies to partner with local companies to be able to operate in Angola, an American company entered into a consortium with two Angolan companies to participate in oil blocks.
“However, it turned out that the real owners of one of these local companies were the former chairman and CEO of Sonangol, the Angolan state-owned oil company (responsible for the agreement with the American company), and a minister of state,” the international organization stated.
Moreover, Transparency International has found that opaque and discretionary decision-making may also allow public officials to extort international companies wishing to operate in the country, in order to favour their own companies or those of close friends and family members.
As such, TI said that public officials responsible for the award of contracts and licences may force operating companies to enter partnerships or sign service contracts with particular companies. The global anti-corruption body said that in many cases, the local companies chosen by the public official do not even deliver the services contracted.
In this regard, the Global Witness in 2012 found that international companies merely have to pay the agreed cost which functions as a bribe in order to be awarded the contract and perform the services themselves.
Transparency International noted that in Kenya, for example, the rules in place are considered inadequate and prone to corruption.
According to NGOs operating in the country, “there is a likelihood of local firms being imposed on foreign companies as condition for securing petroleum contracts; and this could provide room for politicians to perpetuate their interest in the oil industry at the expense of the nation” (Kenya Civil Society Platform on Oil and Gas).
To be continued….

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