Key aspects of Local Content Policies

The Oil and Gas industry is a capital intensive industry and creates relatively few permanent jobs. It is therefore important that the non-oil sector which supplies goods and services, financial services, food, logistics, raw materials, research and development (R&D), security, skills, technology and other inputs/products to the Oil and Gas sector is deliberately grown and diversified. Local Content Policies needs to be realistic and targeted with the aim of using Oil and Gas spending as a catalyst for creating sustainable local industry. Poorly targeted Local Content Policies can increase costs, reduce Government tax revenue and create a brain drain in oil companies. The key questions to ask before implementing any Local Content Policies are the following:

• Are Local Content Policies consistent with national development plans?
• Are Local Content Policies realistic, and will they enhance economic growth?
• Will the Local Content Policies generate sustainable and competitive businesses beyond the Oil and Gas sector?
• Is the process for the procurement of services from local companies transparent?

The Local Content boost to national income offers any developing country a unique and exciting chance to alleviate poverty and create broad-based development and improved standards of living across the country. But international experience points to challenges which are often faced by resource-rich developing countries in translating Oil and Gas wealth into peace and prosperity. Much has been written about the “resource curse”—developing countries that become reliant on Oil and Gas see a deepening of a range of political, economic and social challenges. So, in order to ensure the resources provided will be used to yield lasting benefits to present and future generations, key issues of public debate are:

• the importance of balancing Oil and Gas production with the conservation of diverse cultures and wider environmental well-being;
• ensuring other sectors of the economy will withstand fluctuating Oil and Gas prices;
• enforcing high standards of corporate responsibility and compliance on the part of investing companies;
• ensuring that the anticipation of wealth from the country’s Oil and Gas industry does not intensify land insecurity, sectarian competition and other conflicts; and
• building public participation and capacity to understand the new sector.

Tackling the above issues requires sound policy leadership at all stages. A wide range of stakeholders need to work together for this to happen: government technocrats and politicians, local government officials, law-enforcement agencies such as the judiciary and police, international and national civil society organisations (CSOs), the media, opinion leaders, traditional institutions, religious leaders, companies and development partners.

From the governments’ perspective, Local Content regulations define a public commitment to create jobs, support domestic suppliers and/or provide economic benefits to local populations. From the Oil and Gas companies’ standpoint, procurement is a process with the purpose to ensure the existence of services, equipment and materials taking into account five variables: price, time, quality, quantity and place. From the local communities’ viewpoint, initiatives related to Local Content allow them to collect the benefits created by the extraction of their natural resources. In light of the divergent goals of the Oil and Gas companies, government and local communities, constructive dialogue is crucial to pave way for mutually beneficial relationships.

Generally speaking Local Content policies and laws are either formulated with a view to prescribe or to incentivize the behaviour of investors. For several reasons, most countries have adopted the former. This is probably because Governments prefer to assume a leadership position in determining the role of resources projects as engines for economic growth. On the other hand, advocates of incentives based policies prefer liberal regulatory frameworks that challenge investors to work within the limits of global competitiveness and corporate resources to optimize local inputs without undermining projects or country competitiveness. In addition, those who prefer the open market economy approach argue that prescriptive policies are not sustainable because they distort competition and tend to be effective only while the resource is available to be leveraged.

“Local Content Key enabler for Oil and Gas projects in emerging markets: Investing, Developing and providing oversight in countries of operation” by Mireille Toulekima