The most important objective of having a Local Content Policy (LCP) in place is to develop and support local manufacturing and the provision of service through forward, backward, and sideways linkages along the value chain (Ovadia, 2015).
In order for the LCP to work effectively, it has to be designed to encourage and/or require both exploration and production firms to utilise local companies for the procurement of goods and services, and multinational oil service companies to the domiciled economic activities. Central to LCP is also the development of physical and human capital, as it is stressed that it does not trade but the accumulation of physical and human capital that is fundamental for economic growth (Ovadia, 2015).
Best Practices in Local Content Development
Malaysia:
The objectives of Malaysia’s LCPs are: to (1) provide affordable petroleum resources to the local market; (2) build the foundation for forward links; and (3) secure local involvement and control of both upstream and downstream segments (Nordas et.al,2003). (N.B. space precludes a more detailed examination of other countries’ LCPs).
Policy Tools:
A mix of regulations and incentives-based and capability-building programmes is used to achieve the abovementioned objectives. The main ‘vehicle’ for the Malaysian LCP was the Petronas (Oil & Gas Company), inter alia its participation in PSAs and its policies focusing on developing the local work force’s technical skills and efficiency of their supply industry. Under the PSA terms, contractors are required to:
* Minimise the employment of foreign workforce. To this end, the recruitment of foreign personnel requires the approval of Petronas.
* Train internal Malay personnel. This includes the provision of capability-development programmes that enable Malay personnel to replace the expatriate workforce
* Commit a minimum monetary amount to be allocated to the training of Petronas personnel; the amount being contract specific
* Offer on-the-job training to personnel of the NOC upon the request of Petronas.
Also, every PS contractor is subject to an annual research contribution that is equivalent to 0.5 percent of the sum of cost oil and contractor’s share of profit oil, and the research contribution is tax- deductible. With availability and accessibility of sufficient literature on lessons learned in hindsight — on poorly implemented and less effective LCPs in some African oil producing countries, such as Nigeria and Angola, for example — it is now imperative that local content strategies be adjusted to address important questions about definition and measurement of local content, and seek balance between strong regulation and encouraging investment that secures the best possible outcome. It is the responsibility of host governments to link local content to governance, anti-corruption strategies, and substantive transparency by all parties (Ovadia, 2015).
Development strategies that rely solely on productive investment of petroleum revenues have failed Africa in every case. Yet local content offers new potential to make oil and gas work for African development in the 21st century. To this end, Ovadia (2015) argued that, with the right policies and involvement of all stakeholders, natural resources can be developmental.
Going forward/Recommendations
Having thus benchmarked Guyana’s Draft LCP to the LCPs of other established petroleum producing countries around the world, a number of inherent weaknesses have been identified. While the draft policy recognises in generic terms the objective of local content strategies, it does not speak to specificities with respect to how it intends to execute local content activities and/or strategies.
For example, it highlighted that there will be a regulatory mechanism, but it did not address the workings and functionalities of that mechanism. And it does not speak to a strategy of removing barriers (if any) to local firms’ participation, and what strategies would be undertaken for enhancing the contestability of local firms’ and Guyanese nationals’ participation, as against international firms’ and foreign nationals’.
Overall, the draft document mirrors an academic paper – albeit inadequate – rather than a pragmatic policy paper.
In regard to proposed recommendations, first and foremost, the local content strategies and policies need to be incorporated in the legislative framework. It is noted also that the Draft Petroleum Commission Bill merely speaks to the promotion of local content and local participation in petroleum activities; which is unarguably inadequate, unless there would be a separate legislation to address local content. As was evidenced in local content policies from around the world, without having it incorporated in the legislative framework, it is largely ineffective, and much to the disadvantage of the host countries.
Therefore, the first recommendation for emphasis is the incorporation into the petroleum legislation of clear LCP targets, procurement rules, and strict measurement procedures which need to be identified and established. Policy tools and/or instruments were not addressed as well, hence this need to be worked out. For example, what fiscal incentives would be put in place etc.
