Local Content in the 2021 National Budget - Part 4

Introduction

The 2021 National Budget identifies a successful local content policy, LCP, as required for converting projected petroleum windfall revenues into sustained economic differentiation and growth; combined with economic diversification and development. I have addressed this topic at great length before, paying particular attention to two seminal studies; namely UNCTAD’s, 2013 and the World Bank’s 2013. These two studies are devoted to evaluating and advancing research on lessons to be learned based on global experiences with local content requirements, LCRs, and public policies in the oil and gas sector. Regrettably, space does not permit a repeat of this exercise here.

Findings UNCTAD

For readers’ convenience Schedule 1 below summarizes the five main findings listed in the UNCTAD 2013 study. These findings reference: focus on firm capacity building, competitiveness and value-added for the economy; transparency, accountability and a level playing-field; realism and adaptation to changing conditions; the phasing-in and phasing-out of LCRs; and, the recognition that LCRs should not be portrayed as a panacea for all challenges to the economy. Thus:

Schedule 1: UNCTAD Five Main Findings

Item Main Findings (UNCTAD)1 on LCRs2 in Oil & Gas Sector

1. LCRs should be concluded as part of a broad strategy of promoting competitiveness, creating value-added & capacity building for firms.

2. LCRs should be based on openness, transparency, accountability, and backed by strong and accountable institutions operating on a level playing-field.

3. LCRs should embody realism in target setting, allowing for modification as conditions change.

4. LCRs should be phased-in and phased-out orderly, catering for changed conditions and avoiding entrenchment of special interests in support of protectionism.

5. LCRs should not be promoted as a panacea for every challenge facing the domestic economy.

Notes:

Source:

Adapted from UNCTAD, 2013.

Findings World Bank

In similar manner, Schedule 2 summarizes the eight main findings in the World Bank, 2013 study. These refer to: the design of LCRs; their coordination and location of institutional responsibility; their overall focus on market efficiency; the promotion of economy-wide competition; fostering technology and spillovers; support for local skills development; avoiding high administrative and compliance costs; and the promotion of industrial clusters and trade synergies. Thus:

Schedule 2: World Bank Eight Main Findings

Item Main Findings (World Bank) on LCRs1 in Oil & Gas Sector

1. Key Design Features: Assertive (mandated targets) or Accommodating (incentivizing behaviours) Clear and realistic objectives Cost-benefit appraisals for all LCR

2. Coordination of Government agencies and clear delineation of institutional responsibilities for oversight and monitoring.

3. Address market inefficiency as the overall strategy.

4. Promote economy-wide competition and emergence of an efficient domestic economy.

5. Foster technologies and spillover effects. 6. Support development of adequate local skills 7. Avoid imposing high administrative and compliance costs. 8. Develop industrial clusters and regional trade synergies.

Note:

Source:

1UNCTAD = United Nations Conference on Trade & Development

2LCRs = local content requirements/policies 1LCRs = Local content requirements/policies.

S. Tordo et al,

LCRs in the Oil and Gas Sector, World Bank, 2013.

LCRs and Protectionism

In my earlier columns on this topic, I had stressed the focus of local content policy has significantly evolved over the years. Initially, it was conceived as simply “the percentage share of local inputs that must be embodied in a domestic producer’s output.” Nowadays, however, it is more broadly conceived as encompassing a focus on economic localization, indigenous ownership, and other such deeper economic constructs.

And, accompanying this evolution, it has evoked profound debates as to whether state policies designed to promote localization are not by their intent elevating greater barriers to international trade! If they are so doing, then it is argued LCRs are fundamentally inconsistent with the World Trade Organization’s (WTO) trade principles.

Empirically however, a wide range of countries, large and small, rich and poor, industrialized and non-industrialized and indeed located on every continent and region of the globe have, as a matter of fact implemented LCRs in the recent past. And, they have continued to maintain this practice.

This obvious contrast between WTO principles and global practices creates hidden pitfalls, which the Guyana Authorities and the broader public should be aware of. I had suggested in my earlier writings that the best defence of the view, which most Guyanese intuitively hold, that is, LCRs for Guyana are fair and just, is indeed rooted in sound economic theory. I tried, therefore, to indicate in those columns “the development rationale for LCRs in Guyana is rooted in the country’s historical experiences of extensive and intensive dependence on the fortunes and mis-fortunes of extractive industries sales in world markets and the special characteristics of the oil and gas sector”.

I had elaborated on this through specific discussion of: 1) the enclave economy, 2) the infant industry notion, 3) economic linkages and spillovers, and, 4) Caricom as a production platform for Guyana. I was careful, however, to insist that the reputed case for LCRs as a form of “backward backdoor protectionism” should not be underestimated and/or dismissed lightly. If the Authorities do this, they risk great peril.

WTO and LCRs

Today the WTO regulates LCRs through three “general” and one “plurilateral” provision, which is applicable to about two scores of countries. The three general provisions are 1) Trade Related Investment Measures (TRIMs) 2) Agreement on Subsidies and Countervailing Measures (ASCM) and, 3) General Agreement on Trade in Services (GATS). The plurilateral agreement relates to Government Procurement Measures (GPM).

Based on case studies, as much as US$93 billion in global trade has been reduced (exports and imports) by LCRs. (Hufbauer et al , 2013) An OECD study (2013) using its METRO model also reveal that LCRs have 1) led to a decline in global trade (both exports and imports) 2) occurred in every global region 3) resulted in those countries imposing LCRs, having lost competitiveness outside the targeted sector and 4) led to rising domestic costs in all sectors, thereby reducing the beneficial effect of diversification measures.

Conclusion

Next week I consider the gas to shore project as a concrete example of LCR.