Lessons learnt on local content regulations

Although mandatory or prescriptive local content requirements may seem tempting — in order to “force” companies to procure locally — such policies are associated with real risks of market distortions, economic inefficiencies and unintended consequences.

NEVERTHELESS, for governments that do pursue such policies, this section presents some reflections on how to strengthen their implementation. This discussion is critical for Zimbabwe since Government is in the process of establishing local content regulations.

Transparency, standardisation and accountability

Given the large sums involved relative to national economies, local content policies are vulnerable to rent-seeking and capture by special interest groups. This is particularly the case where mandatory and/or prescriptive policies are used. The recent Brazilian experience illustrates this, but it is not the only example.

If governments consider that it is preferable to require mandatory local content then the requirements have to be public, the scope for discretionary decision-making by authorities needs to be minimal, all companies have to be treated equally, and companies’ procurement processes have to be audited by third-party auditors in order to ensure the equitable treatment of all companies.

Maintaining flexibility over time

Experience from case studies shows that local content targets may be more effective if they are implemented in a phased approach. As capacity increases, local content targets can be adjusted. This also helps to avoid setting unrealistic targets at the outset. The policy should also recognise that there may be some areas of operations where local capacity is not available in the short term.

Establishing a unified method of local content measurement

For the purposes of monitoring and evaluating performance in meeting local content targets, it is important to introduce a standardised method of measuring local content. Different measures can produce different results, and the lack of clearly defined metrics can lead to overstated local content achievements.

The experience of countries like Brazil and Kazakhstan shows that standardised measurement and reporting on local content makes it easier to monitor and evaluate performance and can lead to increased compliance, although attention must be given to keeping a check on the implied high administrative costs. A “simple” measure of, for example, local value added may not satisfy the relevant economic policy objectives of the local content policy, which may require a more nuanced.

South Africa’s scorecard approach to monitoring local content South Africa’s scorecard to monitor compliance with the Broad-Based Black Economic Empowerment (B-BBEE) policy allocates 40 out of 105 points to “Enterprise and Supplier Development”. To score points on this criterion, firms need to demonstrate that they buy goods and services from suppliers with strong B-BBEE recognition levels.

This element also measures the degree to which enterprises carry out supplier development initiatives intended to accelerate the sustainable growth of black enterprises.

Local content policy needs to have the force of law

If a mandatory local content policy is pursued it needs to place clear and enforceable legal obligations on companies. The experience of Nigeria shows that, prior to the enactment of the Nigeria Local Content Development Act, local content policies were negotiated in individual contracts but were largely ignored by international extractive companies because they lacked the force of law. However, the introduction of local content law with appropriate sanctions has led to better compliance. Furthermore, monitoring efforts by civil society organisations and other interest groups are simplified by establishing a company’s obligations in law, rather than in individually negotiated contracts.

Creation of well-resourced and specialised institutions

Effective local content policies need to be implemented by dedicated and independent Government authorities staffed with qualified personnel who are knowledgeable regarding industry practices. Such authorities can be responsible for monitoring local content and ensuring that local suppliers are guaranteed the opportunity to apply and compete for contracts.

They should be tasked with establishing a registry of competent and qualified local vendors. They should also track opportunities in the value chain and on future projects and make the information available to local suppliers. Individual contracts are more likely to contain confidentiality clauses that make it difficult to access information on the local content requirements of companies, especially in the oil and gas sector.

Building Blocs for LCRs

International experience has shown that for LCRs to be successful critical building blocs like promotion of an enabling environment, strengthening and clarification of the legal and regulatory framework, encouragement of collaboration among stakeholders, capacity building, planning, information sharing and transparency and targeting sectors with smallest gaps.

Promoting an enabling environment

For local content policies to be successful it is essential that the environment surrounding local businesses supports their aspirations to become suppliers to the extractive industry rather than putting obstacles in their way. The Government can create an enabling environment by removing barriers to entry such as poor infrastructure, promoting the development of skilled labour, strengthening institutional co-ordination, facilitating coordination of local suppliers, removing regulatory requirements, and supporting increased access to finance.

Strengthening and clarifying the legal and regulatory framework

Clear regulation, monitoring, and oversight are necessary for the effective and transparent implementation of local content policies. The rights and responsibilities of companies need to be defined and must be known to the companies when they take investment decisions. This involves ensuring a well-resourced and accountable administrative system with clearly defined functional responsibilities. The coherence of the regulatory framework is key to facilitating implementation of local content initiatives.

Some countries, such as Angola, have multiple pieces of legislation requiring inclusion of local workers and local procurement of goods and services. The multiplicity of legal instruments leads to multiple institutions supervising the enforcement of local content rules, which can lead to conflicting responsibilities and poor co-ordination. For example, one possible source of disadvantage for local suppliers is a lack of alignment between trade provisions in mining legislation and wider trade policy.

In some countries, there is a practice of according extractive sector investors the right to import equipment free of duty. While this is not a significant problem for highly specialised equipment unlikely to be manufactured in the host country, much equipment, particularly in the nonfuel mining industry, is “dual use” — that is, it is also used in other sectors. One example is road construction equipment. If suppliers of such equipment exist in the country, they often depend on imports of components that may be subjected to high import duties. They may therefore end up at a disadvantage when competing with foreign suppliers.

Encouraging collaboration among stakeholders

Collaboration among foreign companies, their integrated service providers, and domestic suppliers in the development of a sustainable local industrial capabilities is key to increasing local content.

Moreover, the country case studies show that the clustering of activities, as in the Antofagasta region of Chile, can enhance productivity and efficiency through knowledge spill overs, synergies, better co-ordination, and efficient access to public goods.

Building capacity

Successful policies to support local content have focused on building the capacity of local businesses and investing in human capital. Local businesses need to understand how to do business with firms big firms, for instance, by producing goods to the required standard in terms of quality and safety, adapting themselves to international foreign firms’ bidding processes, and taking steps to acquire international certification.

Planning ahead to ensure sustainability

Local content policies should be introduced by government once investor interest manifests itself and well before any actual projects have started. Policy interventions that are introduced early help to avoid misalignment of project development timelines, timelines set by local content regulations, and timelines around the building of local capability. Local content planning should be integrated with broader development planning.

In terms of timing, the objective should be to have the development phase coincide with the end of the capacity building exercise for local suppliers. Policies should also support the development of capabilities and skills that can increase productivity of the wider economy, even after sub-soil resources have been depleted — for example through certification systems that increase the portability of skills.

Information sharing and transparency

Local content policy will be more effective if local businesses are aware of the opportunities that exist in the extractive industry and also if extractive companies are aware of the capabilities of local companies. For all stakeholders to play their part, a skill and capability inventory of local suppliers and their areas of competence should also be made accessible to multinationals.

Transparency in awarding tenders is also an important consideration. The criteria for award of contracts should be public and companies should also disclose the reasons for rejecting bids.

Targeting the sectors with the smallest “gaps”

Governments should work with industry to identify the parts of the value chain where local firms have capabilities for timely delivery of the required quality at a competitive price or where the potential to build capacity exists. Such an identification process allows for the design of capacity building measures and the removal of institutional obstacles.

The sectors identified need not be high technology industries; agriculture is often one of the sectors that should be targeted since additional demand, both from extractive companies and their employees, allows local farmers to invest in order to raise productivity.

Even when the skills required are basic, as is often the case in mining projects, local suppliers to extractive projects typically employ more people than the projects themselves — and for the workers concerned, this is often their best chance to escape poverty.

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.