Local Content Policy and the opportunities for corruption – Part 2

Jul 30, 2017 News

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Last week, we initiated a discussion on Guyana’s move towards developing a strong Local Content Policy (LCP) and how important this document will be to the nation’s future oil wealth.
Also examined in that article were some of the opportunities that exist for corruption. (See link for further details on that news item — https://www.kaieteurnewsonline.com/2017/07/23/local-content-policy-and-the-opportunities-for-corruption/).
This week’s article continues along that line.

ENFORCING LCP RULES
The discretion often enjoyed by public officials responsible for implementing local content policies, combined with a lack of transparency, opens the door for uneven implementation and enforcement of local content rules.
With this in mind, Transparency International, a global anti-corruption watchdog, cited the case of Kazakhstan. In that nation, international oil companies have complained that local content implementation is “uneven, irregular, and nontransparent, particularly at local levels of government.” This was particularly noted and documented by the US Department of State in 2013. It was also noted that companies in the country have complained of the indiscriminate use of sanctions for noncompliance with local content requirements.
Transparency International said that discretion is also enjoyed by public officials to decide the circumstances in which local content rules do not apply. This can be seen in the case of Nigeria, where the Minister for Petroleum Resources can decide to waive the obligations for a given firm or project under Nigeria’s 2010 Content Development Act.
The global watchdog believes that such discretion may provide incentives for corruption, particularly if the criteria for evaluating waiver applications is not made public, or is not applied in an objective or transparent manner. This very point was made in 2013 by the World Trade Institute.
Furthermore, political interference in the application and enforcement of the law is also seen as problematic in the majority of countries, where the Executive branch of government exercises huge influence over other government branches and agencies as well as state-owned enterprises.
In Mozambique, for instance, Oxford Policy Management noted that in 2012, the national oil company ENH plays a key role in defining the country’s local content strategy. Nevertheless, the company reportedly suffers from political interference and its senior executives are closely connected to the political and business elite, opening space for these groups to extract rents in the sector.

CORRUPT JOINT VENTURES
According to Transparency International, joint ventures are used by oil and gas companies as “a way to share the higher risks and costs associated with the industry or as a way of bringing in specialist skills to a particular project”.
In fact, joint ventures have also been used in the implementation of local content policies. In some countries, Transparency International said that foreign companies wishing to operate in the oil and gas sector can only do so by entering joint ventures with local companies – which usually are state-owned enterprises.
Corruption risks in this process are many, said the global watchdog. It said that there are the risks of corruption in the negotiations phase as discussed above, in the selection of joint venture partners and risks of conflict of interest, among others.
In fact, it was found that in the majority of countries, international companies do not have extensive options for potential joint venture partners. Considering the oil and gas industry in developing resource-rich countries and the close ties between the political and economic elite, Transparency International said that partners are usually state-owned enterprises or companies that are somehow connected to public officials.
As the main characteristic of a joint venture is joint control, the body said that partners are able to appoint government officials to sit on the joint venture board. This generates two main risks of corruption.
“First, the risk of conflict of interest and favouritism as discussed before. Second, according to international anti-corruption laws, such as the UK Bribery Act and the Foreign Corruption Practices Act (FCPA), international oil companies are liable for any bribes or corrupt behaviour by joint ventures partners who act on their behalf,” noted Transparency International.
It noted too that foreign companies face similar compliance challenges with regard to their relationships with third parties.
Transparency International said, “When subcontracting part of their operations to local companies, international companies may also be held liable if these companies engage in corruption. In the UK this is an area of concern for oil and gas companies, as they were already subject to the most prosecutions for bribery and graft of any sector during 2008 and 2012, and for payments and kickbacks made abroad by themselves or partners.”

SHELL COMPANIES
Local content policies may also be circumvented through the use of “fronts” and shell companies. According to Transparency International, foreign oil and gas companies may “hire” local established companies to serve as fronts to satisfy local content requirements.
In this case, the global body said that international oil companies may pay companies registered in the host country to participate in bidding processes; the services are then implemented by the international company, as the local company does not have the capacity or exist.
Transparency International said, “For instance, in Angola, there is evidence that international oil companies are paying illegal fees to contract with front companies in order to comply with host-country laws. The ownership and shareholding structure of these companies is often opaque, and they often lack the capacity to deliver on the awarded contract, with the work usually being carried out by the international oil company.”
In addition, the body said that special purpose vehicles, such as shell companies, may also be used to circumvent local content requirements, particularly in countries where local content rules do not clearly define what constitutes a “local” or “indigenous” company.
Within this framework, the organization said that any company or international service provider registered in the host country, without having to disclose their beneficial owner, can potentially bid for contracts.
The anti-corruption unit said that without requirements to disclose the beneficial owner, it is difficult to assess whether the company in question, is actually owned by a national. It was careful to highlight that this was the case in Nigeria, where local content requirements were misused and contracts to supply the oil industry were awarded to shell companies, inflating costs and increasing the project.
Moreover, Transparency International warned that shell companies may also be used by politicians to disguise conflict of interest and facilitate the award of local content contracts to companies in which they hold interests.
To be continued…

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