DEMYSTIFYING SI 64, LOCAL CONTENT REGULATIONS:
Government last year promulgated Statutory Instrument 64 (SI 64) which seeks to protect locally produced goods from stiff competition from imports.
SI 64 covers 43 product lines which include coffee creamers, camphor creams, white petroleum jelly, body creams, plastic pipes and fittings, wheelbarrows, flat rolled products of iron on non-alloy steel, metal clad insulated panels, baked beans, potato crisps, cereals, bottled water, mayonnaise, peanut butter, jams, maheu, canned fruits and vegetables, pizza bas, flavoured milk, dairy juice blend, ice creams, cheese, second hand tyres, baler and binder twine, fertilisers, flash doors, wardrobes and dining room suites, office furniture, tissue wading, shoe polish, synthetic hair products and woven fabrics of cotton.
It is important to note that prior to promulgation of SI 64 several other instruments have been gazetted removing products from the Open General Import License.
These include SI 18 of 2016 (Pharmaceutical products), SI 19 of 2016 (batteries, floor polish, twine, candles etc.), SI 20 of 2016 (second hand clothing and shoes) and SI 126 of 2014 (plastic packaging, hoses, conveyor belts).
Ironically, the products under SI 64 and previous instruments constitute major imports accounting for the greater share of Zimbabwe’s import bill.
For example, top ten imports from Sadc in 2016 are mineral fuels, cereals, machinery, vehicles, cooking oils, plastics, iron and steel, electricals, fertilisers and paper and paper board with import value of $345,7 million, $297,8 million, $259,1 million, $157,6 million, $146,6 million, $141,3 million, $108,9 million, $94,5 million, $73,99 million and $73,8 million, respectively. Most of these products are on SI 64.
SI 64 has had positive impacts on the economy such as increase in capacity utilisation, increase in foreign direct investment, retooling, job creation and protection, improvements in revenues for corporates and reduction in trade deficit.
Notwithstanding the significant strides made under SI 64, there are obvious shortcoming from the instrument such as: ◆ Exclusion of a wide range of products on the list. SI 64 protected a few products, about 43 lines, out of ten thousand products. There is scope to increase the lines of products under protection. ◆ SI 64 was not crafted from a value chain perspective. Instead, it focused on the final products. For example, cooking oil is under protection but its critical raw materials are not locally available. Hence, the cooking oil sector imports soya beans and crude oil in the region of about $220 million per year — at the end of the day there is insignificant local content. ◆ Capacity issues were not addressed under SI 64 with particular reference to product quality. Product constraints and availability foreign currencies for importation of critical raw materials also needs to be attended to. ◆ SI arguably flouts regional and multilateral trade agreements. While Zimbabwe’s neighbours may be alive to challenges in the economy, it remains fact that the instrument is in contravention to the Sadc free trade agreements. ◆ Cross border traders are not accommodated. In order to deal with these shortcomings, the Ministry of Industry and Commerce is working on local content regulations (LCRs) which is aimed at consolidating the gains from SI 64 by taking products under SI 64 to local content regulations and widening the scope by adding more products. From a trade perspective, local content requirements (LCRs) essentially act as import quotas on specific goods and services, where governments seek to create market demand via legislative action.
LCRs ensure that within strategic sectors — particularly those such as mining where there are large economic rents, or agriculture where the industry structure involves numerous suppliers — domestic goods and services are drawn into the industry, providing an opportunity for local content to substitute domestic value-addition for imported inputs.
Local content requirements are often paired with investment incentives, as part of a “carrot and stick” approach to attracting foreign direct investment (FDI).
The LCRs provides incentives (which can be in the form of taxes or indigenisation credits) for complying companies. Punitive measures for companies preferring foreign goods and services are also applied.
It therefore becomes a business decision for a company to choose to buy locally produced goods and enjoy the incentives or procure goods/services from foreign sources and get the stick.
LCR can take three forms, that is, ownership, procurement or beneficiation.
Ownership, notably requires foreign firms to enter into joint ventures with local firms or to open equity to local partners to obtain licences.
The aim is to ensure that sectors of national interests are not entirely foreign owned or to help the development of “national champions” through transfer of skills, know-how, or technology. In Norway, ownership of a company is not a determining factor.
Brazil now accepts foreign ownership, but prefers partnerships, while Nigeria, Angola, Ghana, and Uganda consider local ownership as determinant. LCR normally comes in a combination of quantitative and qualitative measures.
With respect to quantitative measures, there are minimum thresholds set by Government through legislation which limits how much should be produced locally.
For example, the law may set a minimum requirement of 60 percent of powdered milk to local production. With respect to qualitative requirements, Government may legislate the need for capacity building measures which must be undertaken by companies with the locals especially the small to medium enterprises as well as large local entities.
Legality of LCR
In the multilateral trading system under the World Trade Organisation (WTO), the most relevant agreements on compliance of LCRs are the General Agreement on Tariffs and Trade (GATT), the Agreement on Trade-Related Investment Measures (TRIMs), the General Agreement on Trade in Services (GATS), the Agreement on Subsidies and Countervailing Measures (ASCM), and the Agreement on Government Procurement (GPA).
However, in many cases, LCRs are not only trade related, but essentially investment related.
Therefore, international and bilateral investment agreements also largely regulate the extent to which signatory countries can use certain measures to oblige foreigners to use more local content.
International Experience on LCR
Although it is difficult to make an overall assessment of the impact of 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 champions 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.
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.
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 research and development 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 to 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 research and development 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.
For avoidance of doubt, SI 64 at its inception carried tenants of the LCR from a local procurement perceptive. The LCR which is undergoing promulgation is an expanded scope of the SI 64.
Dr Mugano is an Author and Expert in Trade and Development. He is a Research Associate at Nelson Mandela Metropolitan University and a Senior Lecturer at the Zimbabwe Ezekiel Guti University. Feedback: Email: gmugano@gmail.com , Cell: +263 772 541 209.