Local content can support the development of the skills and capabilities of local firmsIn simple terms, local content refers to the use of local skills and materials in constructing and/or maintaining an asset or service. Key components of local content include local employment and skills development, local procurement of goods and services, and enhancing the capacity of local suppliers and contractors.
Local content requirements are perceived by some as being trade-distorting and are generally not favoured under trade agreements. They can also create opportunities for corruption and rent seeking behaviour if not correctly designed and administered. Despite these qualifications, it is EAP’s perspective that local content policies and strategies can be an important instrument to promote development and poverty reduction by providing jobs and opportunities for local businesses, facilitating technology transfer, and building local knowledge and skills that are critical for development.
Oil & Gas Sector
Local content has become an important strategic issue in the oil and gas industry. The governments and other stakeholders of many oil and gas producing states are seeking to secure greater local benefits from oil and gas production. These expectations are becoming important factors in the way governments are determining which companies gain access to hydrocarbon resources. In addition, many companies are realising that local content provides a range of additional business benefits in terms of:
- Building sound relationships with project affected communities and establishing and maintaining a social licence to operate.
- Capturing the performance and efficiency benefits of a qualified local workforce.
- Developing cost-effective, efficient and responsive supply chains.
- Contributing to the development of stable and prosperous host societies that are better places to do business.
However, meeting stakeholder expectations is often highly challenging. The oil and gas industry is highly capital-intensive with limited direct employment opportunities. A significant proportion of the goods and services demanded by the industry are high technology and specialised in nature, and are typically supplied by competitive international markets. In addition, the complex and hazardous nature of the industry demands the highest level of performance in terms of quality, technical integrity, and health safety and environmental standards (EHS).
These challenges are being exacerbated by a geographical shift in the industry towards the developing world. It is projected that 90 percent of new hydrocarbon production will come from the developing countries over the next twenty years. In developing countries with no previous experience of servicing the oil and gas industry and/or with a limited skills and industrial base, it is often very difficult for local workers and businesses to participate in the industry, a situation exacerbated by the quality of local educational systems, arcane regulatory environments, poor access to finance, and deficient local infrastructure.
Despite these issues, leading companies in the industry have demonstrated that it is possible to develop effective local content programs that meet the expectations of key stakeholders and deliver significant strategic and commercial benefits to the companies concerned.
Much of the funding invested in infrastructure construction in low income countries does not benefit contractors, suppliers and workers from those countries as much as it might. Increasing the level of local content can make a major contribution to economic growth and the achievement of the Millennium Development Goals.
Procuring services and goods from local contractors and suppliers and using techniques adapted to the local resource endowment, will generate income locally and make a substantial contribution to economic growth. Creating opportunities for local people to earn income through employment is one of the major means of alleviating poverty in the developing world. The process of constructing, operating and maintaining infrastructure facilities offers significant opportunities for the generation of employment and there is a broad consensus for maximising these opportunities.
A developed local construction industry, embodying enhanced knowledge and skills, is also essential for the maintenance of infrastructure assets. Maintenance is a long neglected issue. A recent study estimates the investment needed to maintain existing assets in sub-Saharan Africa (at 4% of GDP) is almost as high as the investment needed for new infrastructure projects. Reliance on foreign enterprises to design and construct facilities often means they are not sustainable as the expertise may no longer be available once the construction is complete.
We have produced several detailed research reports and guidance notes examining the opportunities to maximise local content in the extractive industries and in infrastructure. EAP is currently working with International Petroleum Iindustry Environmental Conservation Association (IPIECA) to produce further Guidance on promoting local content in the oil and gas industry, and is also assisting the International Finance Corporation to produce a toolkit on the development of a local procurement policy for its client companies.
This briefing note provides practical guidance to oil, gas and mining (OGM) companies on how they can maximise the contribution of local enterprises to the supply chain of their projects in low income countries. It focuses on three major opportunity areas to increase local enterprise participation in project supply chains – modifying procurement policies and processes; modifying contract documentation; and supporting the efficacy of supplier development programs. The document was produced with the support and assistance of the International Finance Corporation (IFC) PENSA Program in Indonesia.
This briefing note has two aims: (1) to show policy-makers that expanding the local content of infrastructure projects is an achievable objective with real long-term benefits and (2) to provide practical guidance on how to implement this. The note is divided into two parts. In part I the authors show that the procurement process can serve as a powerful tool to promote local content in infrastructure construction. However a number of challenges are identified, notably the preference of clients donors, engineers and the business community for expensive, high tech and large scale projects which are not within the capability of the local industry, as well as the failure of international agencies to balance objectives. In part II some suggestions are put forward for overcoming the challenges and promoting local content through minor changes to procurement at each stage of the project cycle.