Poorly defined terms flagged among major pitfalls of Local Content Policy - Experts

Poorly defined terms flagged among major pitfalls of Local Content Policy – Experts

Jun 15, 2018 News

By Kiana Wilburg

Stakeholders in the oil and gas industry are eagerly awaiting consultations on the second draft of Guyana’s Local Content Policy. In the meantime, Chatham House Advisors, Anthony Paul and Renee Roger Tissot, have highlighted some common pitfalls, which should be avoided in any attempt at a Local Content Policy.
In a comprehensive research paper, the local content experts cited poorly defined or inconsistent terminology as a major hindrance to the success of local content implementation. In this regard, they said it is imperative that governments have consistent definitions of the terms: local content, local company or supplier, and nationals/ locals. The experts said that these terms often have different meanings in trade agreements, treaties, and in government procurement legislation. They said that definition is critical to target setting, measurement and performance management.

Local Content Expert, Anthony Paul

Local Content Consultant, Renee Roger Tissot

Tissot and Paul also noted that the lack of strategic direction is one of the most obvious pitfalls. In this regard, the experts explained that policies that fail to consider long-term objectives with regard to industrialization, economic diversification and strengthening of value creation may focus on the easy ‘low hanging fruits’ of local content activities and miss out on opportunities to create in-country value.
The experts pointed out that priority is sometimes given to low value added activities with limited capabilities for transfer into other sectors. They said that these opportunities often cause short-term local economic booms that tend to be more disruptive to the local population in terms of a surge of consumption and localized inflation, and create community resentment toward those employed in the temporary oil activities.
The local content consultants then turned their attention to insufficient consideration of the changing capacities, resources and activities in the country. This, they said, is a major pitfall that some local content policies fail to address. Tissot and Paul explained that it is necessary for governments to draw a baseline of existing capabilities and periodically assessing progress against the baseline, which allows countries to maximize short-term opportunities and plan for future needs as the knowledge about the resource potential and its impact is better known.
They continued, “Despite efforts in some countries to engage oil operators, local content policies are often developed without a proper understanding of oil companies’ strategies, objectives and procurement practices. Developed in silos from industry, the result of government efforts can fall under two extremes: a rigid policy forcing strict quotas and percentages, resulting in significant cost inflation and delays; or a watered down policy where local content stipulations are encouraged but voluntary, resulting in an irrelevant policy.”
They continued, “Another pitfall has to do with poorly designed implementation strategies that make measurement and reporting too complex or prescriptive, and do not properly consider the capacity of the regulator(s) to monitor and measure performance. This can lead to poor enforcement or conditions that facilitate influence peddling or corruption of public officials.”
The Chatham House Advisors added, “One should also pay attention to the fact that benefits are captured by local elites favouring rentier attitudes rather than competitive solutions.”
Expounding further on this point, Paul said that in many new producing countries, the tax base is very low, which encourages political incumbents to seek other sources of income and to use patronage to secure political loyalty.
Consequently, he said that they may offer supply contracts to local entrepreneurs to reward political loyalty and to companies run by family members of the ruling elite. Paul noted that local content in such instances fails to encourage entrepreneurial development and instead promotes rentier behaviour.
In contrast, Tissot and Paul said that the development of local content should result in the broadening of the tax base. The duo explained that only then can subsoil assets be transformed into other types of assets. They said that there is often a trade-off between maximizing revenue and developing local content, but the extra cost of developing local content is justified if it expands the tax base.
Paul and Tissot agreed that rent-seeking-type local content doesn’t expand the tax base, unless the rent seekers reinvest their rents in other truly productive activities in the country.
Further to this, the local content experts said that poor access to information and the limited understanding of demand and scheduling by local suppliers and training institutions is also a drawback of poorly-crafted local content policies.
“Similarly, the lack of reliable information on availability, competencies and experience of local suppliers and individuals cause operators and their international suppliers to seek outside sources.”
In addition to this, the experts said that the lack of assessment of competencies is a further issue. In this regard, they shared the example that the host country might identify the national availability of welders, without understanding the precise welding competencies that would be required by the project.