Structural approach to maximizing Local Content Development: national benefits for an emerging petroleum-producing country

Initial efforts on local content have already contributed to the emerging oil sector transformation in Guyana. This can be seen from the first set of investment activities that are currently occurring with the establishment of new business frontiers, since 2015. However, capturing more of these expenditures through productive economic activities could have a dramatic impact on the local economy. Such economic benefits can allow for the development of policy implications from Guyana’s approach to managing the future oil resources and promoting economic and social development. Through the adoption of good policy, state bureaucracies with relative autonomy can help ensure positive developmental outcomes (Ovadia 2014).

What does the use of local content solutions in development add to the notional understanding of natural resources and development? For states seeking to nurture capitalist development, local content and the tenure of economic activity by foreign and domestic companies in-country offer a model of state intervention with support among a broad base of local stakeholders that can also be supported by international actors. While promoting economic development, local content strengthens the national bourgeoisie by providing autonomy for national capitalist accumulation within the external structural constraints imposed by the global system. In effect, it represents a potential working model for reversing decades of underdevelopment under global neoliberalism and moving once again towards industrialisation, job creation and the alleviation of poverty (Tordo and Anouti 2013).

The private sector has an important role in the adoption of Local Content Policies (LCPs); however, they are just one of many stakeholders. Local content must also attract attention from civil society groups. State agencies must make a strong effort to engage civil society, and for their part, many organisations simply must give sufficient attention.  Outside of the international oil industry, local institutions must understand local content’s potential and significance. For that reason, there is a lot that can be accomplished through applied research and encouraging public participation in the creation, implementation and enforcement of these important policies as well as in ensuring an enabling governance environment for local content to operate and make good on Guyana’s development through its emerging petroleum industry.

Adopt a structural approach through:

1. Promoting the localization of materials and service.
2. Creating of business opportunities in downstream.
3. Developing workforce: training and entrepreneurship
4. Support attracting and enabling foreign investment in Guyana.

International Oil Companies (IOCs) and Economic Development

The role of local content in stimulating economic development of emerging petroleum-producing countries critically depends on the business practices used by IOCs to respond to local content policies. The political economy of petroleum production in developing countries has always been dominated by the role of the government and those of IOCs in ensuring that the petroleum industry contributes positively to economic development. The industry accounts for the largest proportion of Foreign Direct investment (FDI), primary commodity exports and fiscal revenues; yet economic growth and development outcomes are relatively worsening, a phenomenon called resource curse (Aunty 2012). Without well thought-out policy interventions, this inverse relationship leads to stagnation of non-petroleum sectors of the economy (or Dutch Disease), declining manufacturing exports (or increasing manufacturing imports), poor governance and economic inequality (Ettenborough et al 2003).

Historically, the petroleum industry was regulated by petroleum laws (production sharing and joint operating contracts) and fiscal regimes that favoured a techno-economic paradigm (Lessard and Miller 2001). This was justified on the exceptionally capital-intensive production function of petroleum extraction and the fact that technology for petroleum production could traditionally be provided only by IOCs. Therefore, by legislating on local content, developing petroleum-producing countries bind IOCs to a commitment to develop the host country’s local economy as equally as the commitment profit maximise. Local content regulations tend to benefit local firms by limiting foreign competition (UNCTAD 2007).

Local content policy places restrictions on imports thereby raising the prices of imported components and ensuring that locally manufactured components can be accessed by consumers at lower final prices. In the case of the petroleum industry, consumers are IOCs while producers are local firms (suppliers and contractors). Local content can therefore help to address the resource curse by stimulating domestic manufacturing thereby increasing domestic employment and income growth in host countries. However, the existence of local content policies does not necessarily guarantee such outcomes. The business practices used by IOCs to deal with the opportunities (e.g. low-costs labour and component parts) and challenges (e.g. shortage of skilled labour and poorly developed manufacturing base) associated with local content policies also determines the effectiveness of local content policies in helping host countries deal with the resource curse problem.

National Context that Shape IOCs Business Practices

The business practices of IOCs in the context of local content include actions taking to increase sourcing of local supplies (Blalock and Simon 2009), dealing with local supplier opportunism (Liu et al. 2011) and developing global human resources strategies (Egels-Zanden 2014) that can be adapted and implemented to enhance local legitimacy in specific host developing country. The success of such practices also depends on the formulation of clear business policy choices relating to financing, organisational forms and implementation. Thus, the success of multi-national corporations in a host country depends on well design strategies and practices to ensure effective responses to major changes in the country’s institutional policies.

Given the above reasoning, the business practices used by IOCs to respond to local content policies can be understood in terms of two inter-related areas, namely, technology capacity development and human capacity development, both of which come into play to shape IOCs’ wider contribution to economic development. In terms of technology capacity development IOCs are under pressure to source equipment from local suppliers (where possible) and/or support the upgrading of local manufacturing capacity to a point where they can serve as preferred suppliers. In terms of human capacity development IOCs are required to give preference to host-country nationals when recruiting and/or to develop their capacities/capabilities to work in IOCs’ local operations. The inter-play of technology and human capacity development increases the productive capacity of the economy (jobs and income) and can contribute to efforts aimed at deal with the resource curse problem by enhancing economic development (Kazzazi and Nouri 2012).

Moreover, there are some thematic pillars which underpin the local content strategies of the IOCs and are reflected in the narratives they use to document their human resources and sourcing practices. These practices take the form of specific initiatives, programmes and activities developed and implemented by each IOC in specific developing countries.

Table 1: Thematic Pillars of Local Content Strategies of IOCs.

Source: Narrative analysis to identify themes on each IOC’s local content strategy documents/websites. (Ngoasong 2014)

The business practices of IOCs include a number of initiatives to build capacity and skills across the industry value chain, developing and/or sourcing labour and technical inputs locally, providing community investments in non-petroleum sectors all of which create employment, income and economic growth (Click and Weiner 2010). Such indicators have the potential to address the resource curse as well as reduce the risks of doing business in petroleum-producing developing countries such as Guyana.

Policy Implications

On the basis of the above discussion two specific recommendations are offered:

• The first relates to consistent documentation. The government should create a national system, institutional repository or database that is accessible to all key stakeholders for reporting and assessing the business practices used by IOCs to respond to local content policies (Salawu, 2010).
• The second recommendation is the need for measures to ensure that specific local content programmes/activities are negotiated directly between IOCs and local stakeholders (e.g. local suppliers, recruitment agencies, and community groups) rather than through large foreign Engineering, Procurement and Construction (EPC) firms.

Guiding Principles for Local Content Policies

The following principles are generally applicable for emerging producers and may help to avoid the common pitfalls that can hamper local content policies (Marcel et al. 2016)

• Principle 1 – A national strategy for economic development should guide local content policy
• Principle 2 – Local content policies should create value beyond the sector
• Principle 3 – Ground objectives in a realistic assessment of resources and capabilities
• Principle 4 – Local content policies should be adaptive
• Principle 5 – Integrate the procurement strategy with local content efforts

There should be regular reviews with the partner companies and other supporting agencies (such as training institutions and industry associations), and policy and targets should be amended where necessary. This process will work best where there is clarity at the time of the licence being issued, ongoing good communication between the national authority, the respective ministries and the partner companies and also good in-country coordination (for example, between the energy, transport, education and commerce ministries). To increase coordination and efficiency, a central planning agency can be a good candidate for driving this process.