Monday, February 6, 2023

The Paradox of Plenty: Reflections on Implementing Guyana’s Local Content Laws

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By Vivian M. Williams, Esq. and Dr. Terrence Blackman – OilNOW

In October 2022, the Guyana Business Journal (GBJ) challenged a panel in Episode V of its Webinar series Transforming Guyana to deliberate on How Guyana could maximise local capture from its oil and gas sector

This reflection, a thought experiment on refining the local content trajectories for Guyana, emerges from the contributions to the panel discussion. Prevailing Guyanese discourse presumes that a local content law is necessary for Guyana. Therefore, much of the debate has focused on implementing local content requirements. However, Vice President Dr. Bharrat  Jagdeo, the government’s chief policymaker on oil and gas matters, has noted that the government recognises the Oil & Gas learning curve is steep and that the Government is cognisant that “there are several policy-making issues that will haunt us until we have a settled regime…Because we are new to this business.

The countries successfully implementing aggressive local content requirements share three distinct features. They are integrated into the global economy, have many suppliers, and have a large labour force. With less than a million people, Guyana does not currently fit this profile. Guyana is not deeply integrated into the global economy; it needs a robust variety of suppliers and lacks a large labour force. Researchers have identified five factors necessary for effective local content regulation (LCR) implementation. These are: 

  • Large Market size and stability 
  • The right level of local content requirements 
  • Cooperation and financial incentives 
  • Potential for knowledge transfer 
  • Technology Knowledge 

In contrast to the above, Guyana is a relatively small market that needs more technological sophistication especially given that the knowledge gap between local and foreign firms is wide. Guyana has set administrative control by locals at 70% to be implemented over the next several years. Additionally, it requires 51% local ownership of firms and 90% of the firm’s employees to be locals. More than half of the 40 sectors the law applies to have 70% or more local content requirements. Thus, even as the government has worked extensively through the drafting process with international experts and economists to set ambitious and potentially achievable targets, the LCR climb ahead for Guyana remains steep.

Three Structural Constraints to Effective Local Content Implementation in Guyana

  1. Supply of Local Content 

Although Guyana has already embarked on several ambitious training initiatives funded by the government and industry, fundamentally, local content requirements can only be met by the existing available supply of local content goods and services. In the short run, supply problems can only be solved if firms have the excess capacity to respond to a sudden increase in demand. Guyana currently needs more supply of relevant skills, products, and services. This is the work of years and decades, not months. 

Apart from a shortage in total units of the various products and services, individual Guyanese suppliers operate on a small scale relative to the demand. While local firms operate on a small scale, oil and gas procurements are routinely bundled in large orders. The evident benefits from large-scale procurement are (a) effective supply chain management and (b) efficiency gains from economies of scale. This means products and services must be produced in sufficiently large quantities to satisfy purchase orders. Therefore, mandating that firms break procurement orders into smaller bundles to facilitate local micro-enterprises will create inefficiencies and foster tensions inimical to the aims of the LCR regime, which could lead to the marginalisation of small Guyanese firms from the oil and gas sector. Local firms will have to significantly scale up their operations to participate in the oil and gas sector. Consequently, they will be forced to reposition and reallocate assets from the non-oil sector to take advantage of the oil boom. This is the path to the Dutch Disease if not managed effectively.

  1. Structure, Size, and Culture of Local Firms 

Guyana’s human capital and capital availability infrastructure also face significant constraints. Decades of migration have diminished Guyana’s human capital. The government and the private sector estimate that the labour supply would need to increase by approximately 150,000 to meet demands for the booming oil sector. There is limited availability of capital needed for local business expansion in the country. This necessitates the government to look outward to build the capacity it needs. I.e., partnering with foreign firms and capital. Therefore, an essential question for internal stakeholders is the extent to which the local content requirements catalyse and facilitate this type of partnership. 

Andrew Schnitzer, one of the panelists at the Guyana Business Journal roundtable, underscored the importance of trust. If foreign firms do not trust local firms to perform at an adequate level of efficiency, they may stay out of the market altogether. 

To succeed, Guyana must create an environment of trust to foster partnerships between local firms lacking capacity, i.e., capital and expertise, and foreign firms with ability. Trust is built by easing into local content. Such an incremental approach is more likely to result in gains without the concomitant market distortions. Guyana has embarked on implementing an ambitious local content plan; it will require an adequate institutional framework to succeed. 

III. Institutions and Enforcement Capacity 

Even as the government is working on adding regulatory capacity, indeed a positive development, the local content law remains a new and complex legal regime to manage, as evidenced by the case of Ramps Logistics. Developing countries like Guyana must ensure robust compliance with the rule of law and existing regulations. Experience has shown that local content laws can create conditions conducive to exacerbating political and social tensions in countries with weak institutions and widen the gap between the rich and the poor. Adherence to the rule of law must be tempered by a consideration of diversity, equity, and inclusion. 

What does the imperative of Diversity, Equity, and Inclusion (DEI) mean in 2023 Guyana?

One potential dark side of Guyana’s local content requirements is that it can contribute to the entrenching of an infrastructure of ethnic and political hierarchy if not implemented carefully. A robust national embrace of diversity, equity, and inclusion tenets would diminish ethnic tension while strengthening cohesiveness. The Government should therefore lead the movement toward diversity, equity, and inclusion by using its influence in public and private procurement to amplify DEI targets for companies. 

The Critical Challenge

The critical challenge is for Guyana to be true to itself and to retain as much value from the Oil and Gas sector as possible within Guyana’s current and evolving socioeconomic and political context. Three fundamental pillars of change are necessary for successfully implementing local content requirements: 

(a) local firms’ structure; 

(b) local firms’ size; and

(c) local firms’ culture. 

The first two pillars of change are necessary to produce greater efficiency and capacity. The third pillar is essential for diversity, equity, and inclusion which is required to drive broadly shared Guyanese engagement and prosperity. This is the lesson from decades of experience with LCR implementations from dozens of countries. 

Guyana is right to confront the fundamental questions of local content early and thoroughly as it looks to learn from the experiences of other countries to avoid the resource curse. However, despite the significant efforts already underway, change will take time; as VP Jagdeo has presciently noted in this arena, the learning curve is indeed steep.

About the Authors

Dr. Vivian M. Williams, Esq. is an attorney with an international practice that includes the US and Caribbean States. He also serves as an Adjunct Professor in the Department of International Business at the Zicklin School of Business – Baruch College. His research interest includes the role of law and institutional structures in perpetuating or remedying social injustice and economic inequality. He holds a doctorate in business administration, an MBA, and a Master of Laws degree. 

Dr. Terrence Richard Blackman is a member of the Guyanese diaspora. He is an associate professor of mathematics and a founding member of the Undergraduate Program in Mathematics at Medgar Evers College. He is a former Dr. Martin Luther King Jr. Visiting Professor at MIT and a member of The School of Mathematics at The Institute for Advanced Study. He previously served as Chair of the Mathematics Department and Dean of the School of Science, Health, and Technology at Medgar Evers College, where he has worked for almost thirty years. He graduated from Queen’s College, Guyana, Brooklyn College, CUNY, and the City University of New York Graduate School. He is the Founder and CEO of the Guyana Business Journal.

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