Revisiting local content requirements

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.

IN FACE of diminishing competitiveness of our products, both locally and externally, together with the need to fight soaring trade deficits and employment creation, Zimbabwe has no option but to promulgate local content into law. This week and subsequent weeks I will dwell on this subject as we rally each other in building our great country.

Local content is narrowly defined as value created around the region that immediately surrounds the extractive sector. In Ghana, Newmont gives more priority to “local” companies, that is, those businesses situated in the vicinity of mining operations.

More broadly defined, it involves the recognition of the “nationality” of capital or location of companies’ headquarters. Companies may therefore be considered as local if:

they are locally based and locally owned;

locally based but foreign owned; or

locally owned but foreign based. Ownership, procurement and beneficiation are part of the broader approaches to definition of local content requirement (LCR).

Ownership, notably requiring 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.

Maximisation of local procurement and preferences given to sourcing from local companies, is an opportunity to localise supply chains where varying technologies and inputs are needed and used. If competitive, this may have considerable impact on reducing companies’ operating costs while at the same time increasing the value that can be captured by local businesses.

Beneficiation, a percentage of raw materials to be further transformed or beneficiated locally, notably through forward linkages can be used to inform LCR. Countries such as Australia, Mongolia, Brazil, Nigeria, Zambia, and more recently South Africa have strong

(a) (b) (c)

policies in this regard.

In some countries, local employment at different stages of the value chain and of different levels of competencies is require in order to meet LCR. This is often accompanied by requirements to enhance local capabilities of employees and suppliers, through training, skills and expertise development, and transfer of know-how and technology — requirements to bring some level of technology or perform research and development (R&D) in the country so that companies can perform competitively by using latest state-of-theart technology, or for local companies to benefit from technology transfer.

Countries experience

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 suc- cessful 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.

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. A number of Nigerian companies have, however, started to internationalise themselves and are now operating in other African countries. But given the potential of Nigeria, this remains largely insufficient.

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.

In Nigeria, 1 percent of the total value of contracts awarded in the upstream sector goes to a Content Development Fund to support training and business support services.

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,

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