15 June 2017

Africa: Local Content Regulations - Other Countries' Experiences

Photo: The New Times
Milk (file photo).
analysis

Although the term "local content" is now widely used, no common definition exists. Definitions range from defining local content narrowly as local procurement of goods and services to more broad definitions referring to the total extent of investor involvement with the host economy.

Four potential types of local content can be distinguished:

1. Purchases from national suppliers of goods and services, this constitutes the narrowest and most common definition of local content, although further definitional questions around how 'national supplier' is defined arise (e.g. location of company registration, extent of value addition in country, or equity ownership).

2. Employment of local staff, the employment of staff considered local, which in turn could be defined as nationals or those from the immediate surroundings of the extractives operation.

3. Support to local economic development through local enterprise development or social investment.

4. Effects on induced employment: this includes people who are employed as a result of the spending of wages by employees of the operation in question concerned and, usually, also by the employees of suppliers and customers.

Induced employment cannot be directly influenced by the company but could be a maximisation objective for the government.

In practice, however, most governments ignore this area's potential for human development, in spite of it usually accounting for most of the employment generated as a result of extractive industry investment

Although it is difficult to make an overall assessment of the impact of local content regulations (LCRs) in resource-rich countries, in part due to lack of empirical evidence but also because experiences vary significantly across countries, there is somewhat evidence that LCR managed to bring the expected gains.

In some countries, as World Economic Forum noted, there are many cases where measures have failed to achieve their stated objectives due to a lack of capacity to implement, manage, and monitor LCRs.

Countries that have been successful in using LCRs have all used a combination of quantitative and qualitative measures, based on their capacity to deliver, while ensuring a fair balance between their economic objectives and the viability of investments.

Norway, for instance, enacted regulations that had clear targets and sunset clauses for quantitative regulations.

Initially, foreign companies were required to give preferences to local firms, provided the latter were competitive on the basis of price, quality, and delivery.

This measure was temporary, based on performance and was later relaxed. It led to the creation a national champion, Statoil, and world-class global suppliers.

Today, the domestic supply chain provides between 50 to 60 percent of capital inputs, 80 percent of operational and maintenance inputs, and exports 46 percent of its sales.

Quantitative LCRs have been mainly used to foster local procurement, employment of local staff, technology transfer, or set up joint ventures. In Brazil, use of local content was a key criterion for the award of petroleum rights.

Due to supportive measures by the government to drive the development of local capacity and the key role of the national champion, Petrobras, commitments to local content increased from 25 percent to 80 percent in a decade.

While quantitative LCRs may work, they are in themselves not sufficient to stimulate the development of local suppliers, employment of local staff, transfer of technology, or creation of national champions.

They need to be accompanied by other policies. For instance, Norway also privileged capability and knowledge development, supported by public investment in R&D and developed strategic collaborative partnerships with foreign companies to develop technology and acquire skills.

Similarly, Malaysia and Chile simultaneously established strong partnerships with foreign firms, while at the same time supporting local suppliers (and small and medium-sized enterprises (SMEs) in the case of Brazil) by identifying gaps and facilitating their interaction with foreign firms.

In Brazil, oil and gas field operators are required to pay 1 percent of their gross revenue to the government, which is then invested in R&D schemes in the country.

Others have opted to finance skills development and training by seeking financial contributions from foreign companies or by putting aside a share of royalties.

South Africa and Malaysia have established skills development funds where extractive industries have an obligation to contribute.

In Brazil, a share of royalties goes to the Oil and Gas Sectoral Fund to support specialised training and capacity building. Initiatives led by foreign companies, development agencies (such as the World Bank), and chambers of commerce are an essential element in the success of LCRs.

For instance, a world-class supplier programme was set up in Chile by BHP Billiton to stimulate the emergence of reliable and competitive local suppliers and build a knowledge-based mining sector. This programme was distinctive on several fronts.

The company identified and presented an operational challenge to suppliers instead of simply requesting existing, standardised solutions. This created a demand for innovation, which built a better alignment with market needs and improved the use of resources, and therefore created a secured and tailor-made market for suppliers.

In Ghana, inspired by its experience in Peru, Newmont, in partnership with the World Bank and the Chamber of Mines, developed a programme to support the development of local businesses to supply goods and services, and upscale the capacity of business associations to provide sustainable business support, training, and other services to the local business community. This multi-stakeholder programme led to the creation of an ecosystem of business opportunities around the mining area, including in non-mining activities, such as agriculture.

In South Africa, Anglo American launched a Small Business Initiative to provide business opportunities for SMEs, in particular for historically disadvantaged populations.

Mozambique also has a good track record of collaborative partnerships with the private sector to scale up business linkage programmes.

For instance, the Mozal aluminium smelter was designed and implemented in partnership with a range of stakeholders to stimulate and strengthen local business capacities and enable small enterprises to compete for contracts at different stages, from construction to ongoing operation.

In Nigeria, in contrast, despite strict quantitative targets for employment and local sourcing, satisfactory results in practice have taken time to materialise due to the insufficient capacity of local suppliers to meet targets or the unavailability of sufficient skills to be absorbed by the industry.

Key lessons from LCR experiences

A few lessons can be drawn from the experiences of countries that have implemented LCRs.

First, policymakers need to ensure that the objectives of LCRs are clear and that they are implemented and monitored in a way that they create fully capable and competitive local suppliers and not become obstacles to the development and competitiveness of industries.

When local content policies were well defined and monitored in a pragmatic manner, as was the case in Norway, Chile or Brazil (including quantitative measures), they were found to be more successful.

Second, while mandatory quantitative requirements can work, quotas should not be fixed at a level that local suppliers are not able to deliver. In addition, they should be temporary, performance-based, and should be phased out as industries become competitive.

Functioning and effective LCRs require a holistic approach to industrial policy. This implies that LCRs need to be accompanied by support to build the capacity of suppliers, and address skills gaps or financial constraints, as in the case of SMEs.

Partnerships with the private sector are equally key to develop capacity. Third, LCR ambitions need to be realistic and implementable by the foreign companies. They must be flexible enough to be able to adapt to changing situations.

Norway phased out certain performance-based requirements as its industries became globally competitive. They need to be able to assume some potentially politically difficult trade-offs. For example, Petrobas in Brazil skimmed 20 000 jobs (one-third of its headcount) during the restructuring process in 1997 but gained in efficiency and sophistication.

Fourth, successful experiences suggest that it is important to ensure a balance between quantitative and qualitative measures based on how far those measures can be monitored or implemented.

For example, a legally binding quota for technology transfer may be difficult to monitor because it may not be possible for governments to identify, in the first place, which technology companies should use.

In the case of joint venture requirements, unless there is a business case to do so, there is a risk of creating a "forced marriage" that will fail if there is no trust, no shared objective, and no complementarity.

Countries were most successful when local content development was conducted through strategic collaborative partnerships with companies.

Finally, the importance of innovation, R&D, upgrading capabilities, and technology transfer should not be underestimated.

These are essential complementary policies to build competitive local suppliers and efficient providers.

Zimbabwe is currently occupied with the development of LCRs. It is therefore important to take into account some of these lessons. Together we make Zimbabwe great.

Dr Mugano is an Author and Expert in Trade, Investments and Development. He is a Research Associate at Nelson Mandela Metropolitan University and a Senior Lecturer at the Zimbabwe Ezekiel Guti University.

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