Local content is not ‘spending’ in the economy

Jun 08, 2018 Features / Columnists, Peeping Tom

Local content is a concept which is peculiar to foreign investment. A local company cannot be engaged in local content since conceptually local content is concerned with the portion of a foreign company’s operations which are sourced locally.
This brings us to the second notion about local content. It is not so much how much is spent but how much, relative to the overall spending in an area. If for example, a company spends $20M per year in aviation services but only $100,000 of that comes from local content, then the local input is half of one percent which really cannot then be classified as local content since it is much too small.
Buying local is not local content per se. All foreign companies are bound to spend locally in the economy. You cannot operate in an economy and not spend something in the market, shops or stores. When one speaks of local content, then the spending has to be substantial. A foreign company employee taking a special hire from the head office to his home less than two miles away is not local content.
Local content is not about spending in the economy. It is about the local component of value added to the oil sector and to other sectors.
Local content presupposes that there is a foreign entity, which can supply the goods or services required but that a choice is made by the investor to utilize the services of a local player. Which external company is going to come and build a hospital just to provide medical services to Exxon’s employees? Which foreign company is going to build a hotel just so that the Exxon’s high-level guests can be accommodated?
Which foreign newspaper is going to come and run a newspaper so that Exxon can advertise that its corporate social responsibility? Local content then involves a choice for a local service when the same service can be provided by a local.
Local content is about the links, which the foreign company establishes with other sectors. Thus, ExxonMobil needs shipping services; its needs technical services. To what extent are these being provided locally and to what extent is this local content expanding the sectors concerned?
One of the reasons why countries incorporate local content requirements in oil and gas contracts is because five years ago the World Bank warned that in the oil and gas sector, local content in resource-rich countries had mixed results.
The World Bank had pointed out that the oil and gas industry is highly specialized and that the needs of the high technology used in the industry are usually sourced from globally integrated supply chains. Logically, this excludes local suppliers. Since supplier concentration tends to be high, this further crowds out local content. However, in fairness to the companies, if local content requirements are too rigid, it can, according to the World Bank lead to supply bottlenecks.
The blame for poor local content in Guyana’s oil and gas sector cannot be shouldered exclusively by ExxonMobil. The government has to take some blame because all it has been concerned about is how much will be its revenue take from the sector. Little attention has been paid to developing a policy framework, which would allow for the development of local content for the sector.
The government has to promote this development. It cannot wish it and hope that by magic somehow local content capacity will develop overnight.
Unfortunately, Guyana has no industrialization policy much less one geared to promote local content in the highly specialized oil and gas sector.
Guyana has already failed to obtain a decent deal from Exxon. We are shouldered with a 2% royalty and with high levels of cost recovery. This is all the more reasons why local content has to be emphasized.
Nevertheless, the mistake, which seems to be made at present is that the government is confusing spending in the economy with local content. The two are not the same. Unless there is conceptual clarity on this point, market concentration in the oil and gas sector will be to Guyana’s disadvantage.

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