Local Content Policies

Despite being blessed with resources, some nations still struggle with high unemployment rates, undiversified economic structures, and weak industrial basis. Carefully thought-out Local Content Policies (LCPs) can help economies realize their long-term goals most importantly, maximizing the national GDP. These policies consider the different skill sets of the labor force and local producers, various infrastructure assets and challenges as well the investment environments.^[1] LCPs in the oil industry for example can be traced back to the 1970s when first introduced in the North Sea that restricted the state’s direct involvement in the sector to restriction of imports.^[2]

Since, governments can influence both the demand and supply side of local employment, regulations via local content policies are crucial. Another local content measure may include import substitution policies or requirements for firms to incorporate their firms in the host economy or establish manufacturing in the host country. Local content policies often include but are not limited to basic local content requirements, export restraints, local management requirements, joint venture requirements, location requirements, local equity requirements, and or Transfer Requirements (Technology or Knowledge).^[3] Public interventions are also implemented which are either incentive-based or regulatory-based (Based on volume or value targets for example). Private sector interventions are important once the LCPs are established, the implementation comes from the industry itself.^[4]

Therefore, local content policies, aim to boost local services and goods, providing employment for all those involved directly or indirectly. These policies, inevitably provide economic diversification in terms of attracting new industries and companies. As seen in the case of Saudi Arabia, as part of Vision 2030, diversification from Oil and Gas is necessary for the Kingdom. As quoted by His Royal Highness Prince Mohammed bin Salman bin Abdulaziz, “Our country is rich in its natural resources. We are not dependent solely on oil for our energy needs.” And “The second pillar of our vision is our determination to become a global investment powerhouse.” ^[5] Furthermore, they aim to create local direct employment, develop the skillsets of their national workforce, and improve social inclusion.

‘Local’ can be categorized into three main approaches, Value addition, Geography, and Ownership. ^[6] Value addition is the amount of value added to the economy, by goods, services, or any products that provide substantial local economic activity. Geography refers to the local registration or incorporation or the operation of business activities on the national, regional, or provincial level. Lastly, Ownership deals with the participation of locals in the business by either being employed by management or owning some part of the business.

However, it is important to note if Local Content Policies are not managed properly, it may lead to negative consequences on the economy. This could be in terms of inflationary pressure on process, negative impact on trade relations on leading to pressure on local businesses which can lead to misallocation of resources in order to adhere to the policies. A study compared the developmental strategy of resource-rich countries in Latin America to that of the USA, Australia, and some Scandinavian countries. Latin American countries only followed the standard import substitution policy while the other countries diversified around the comparative advantage of their resource sector. The findings in the study support the use of policies aimed to develop sectors connected to the resource sector where countries have a comparative advantage. ^[7]

Therefore, some considerations are important before drafting local content policies. ^[8] includes but is not limited to the size of the market and the stability, such that the market is stable and possesses sufficient size and potential otherwise, incentivizing and investing in building manufacturing capacity can be very difficult. Moreover, LCPs should not be very restrictive too quickly in order to increase the success chances of ventures. Since governments are policymakers and monitoring authorities, smooth communication and communication with firms can really help build realistic expectations. Policymakers will be informed about industry-specific knowledge timely and can make decisions such as providing subsidies. Another important consideration is around the transfer of technology and knowledge. For technology and knowledge transfers to occur, there must be adequate absorptive capacity in the host country and a bridgeable gap between foreign and domestic technologies. ^[9]

Local Content Policies play an important role to ensure that the benefits and rewards are realized by the host country. For economies with significant oil and gas sectors, national strategies and policies translate the benefits from this sector onto other economic sectors of a given national economy. This holds, especially true in the case of Saudi Arabia as well, therefore, this article discusses the local content policies related to oil-based economies. LCPs are related to Saudi Arabia, Norway, and Nigeria.

As seen in the case of British Petroleum (BP) and Anglo American, for example, they spent an estimated 87% and 64%, respectively, of total value created on suppliers in 2014. These expenditures dwarf tax and royalty payments which, for BP and Anglo-American, amounted to 2% and 11%, respectively. ^[10] In Norway’s case the series of LCPs introduced after 1969 when oil was first discovered, were successful in gaining benefit from the oil and gas sector, where 50% of capital inputs and 80% of operations and maintenance was provided by local Norwegian firms. Moreover, exports comprised half of their sales by the early 2000s. ^[11] This was due to the requirement that Norwegian companies would be required to source all their operations. This preferential treatment given to Norwegian firms and mandatory requirement of transfer of knowledge, skills, and technology spearheaded Norway’s infant petroleum industry.

It went further by integrating domestic firms for large development projects and encouraging Joint Ventures or setting up subsidiaries in Norway. Furthermore, financial support was provided for R&D to upgrade the workforce’s oil-sector-specific skills and knowledge. In so, it is crucial to highlight the importance of Government support in designing, implementing, and monitoring of local content policy. As seen in the case of Norway, policies were implemented at the firm level, which was inline with the local content policies, encouraging Multinational oil companies to integrate domestic firms and enterprises in large development projects to foster joint ventures and cooperation agreements between domestic and foreign companies. ^[12] International oil companies were required to set up fully operating subsidiaries in Norway.

On the other hand, LCPs for the Oil & Gas sector in Nigeria saw less success as compared to Norway. Hufbauer pointed out that the expertise and skills of the Nigerian workforce may pose a major hurdle for foreign companies to fulfill Nigeria’s local content policies targeting the labor market, as Nigeria’s literacy rate lies at 65 percent.^[13] Therefore, the LCPs in Nigeria’s case were difficult to achieve leading to limited success. Adedeji also points out the local content development targets were set progressively starting at 45 percent of local content in 2007, reaching 70 percent in 2010, and exceeding 80 percent by 2020. ^[14] Requirements such as the hiring of Nigerian employees after four years of operation and replacing 95% of foreigners in Management positions made it difficult to operate as often Nigerian employees were inexperienced or lacked the education for the task. Furthermore, a requirement for supporting companies to be local, especially those offering financial services. ^[15] These requirements made local content problematic for new businesses.

In Saudi’s case, according to the Local Content & Government Procurement Authority of Saudi Arabia, Local content is a national agenda. LCGPA’s policies are well thought out to be in line with Vision 2030. Local content in KSA deals with Saudi-related elements within labor and skills, goods and services, core assets, Intellectual Property (IP), and technology. ^[16] Under this framework, the preference mechanism dictates, price preference, mandatory list, local content score in the commercial evaluation, and minimum local content threshold as well as the contracting method in the case of localization of industry and knowledge transfer. ^[17] Therefore, Economic and Industrial participation in Saudi Arabia is managed by the LCGPA, where some principles the policy shall adhere to are Sustainability, Responsibility, and Direct Economic Participation. ^[18]

This analysis provides an overview of local policies, their background, their importance, and their current and historical status. The absence of effective LCPs and their consequences is also discussed along with mitigation techniques. A case of one of the oldest LCPs from Norway and Nigeria has been discussed as the positive and negative difference it made to the respective economy. Lastly, the Local content policies by Saudi are overviewed.

(Cosbey & Ramdoo, 2018)
(Tordo, Warner, Manzano, & Anouti, 2013)
(Johnson, 2016, p. 7)
(Weiss, 2016)
(Leadership Message by His Royal Highness Prince Mohammed bin Salman bin Abdulaziz)
(Cosbey & Ramdoo, 2018)
(Tordo, Warner, Manzano, & Anouti, 2013, p. 27)
(Johnson, 2016, p. 8)
(Kuntze & Moerenhout, 2013)
(Johnson, 2016, p. 9)
(Johnson, 2016)
(Halland & Ossowski, 2015, p. 95)
(Weiss, 2016)
(Weiss, 2016, p. 18)
(Weiss, 2016, p. 19)
(Izzet, Croall, Dizar, & Allehidan, 2021)
(LCGPA)
(The Economic Participation Policy, 2022, p. 6)

References

2030, V. (n.d.). Leadership Message by His Royal Highness Prince Mohammed bin Salman bin Abdulaziz. Retrieved from Vision 2030: https://www.vision2030.gov.sa/v2030/leadership-message/
Cosbey, A., & Ramdoo, I. (2018). IGF Guidance for Governments: Local Content Policies Executive Summary. Ottawa: IISD. Retrieved from IISD: https://www.iisd.org/publications/guide/igf-guidance-governments-local-content-policies
Halland, H., & Ossowski, R. (2015). The Extractive Industries Sector: Essentials for Economists, Public Finance Professionals, and Policy Makers,” World Bank Group. World Bank Group.
Izzet, A., Croall, G., Dizar, Y., & Allehidan, M. (2021). SAUDI ARABIA LOCAL LABOUR MARKET LOCAL CONTENT: VALUE CREATION. Riyadh: Takamol Advisory Unit.
Johnson, L. (2016). Space for Local Content Policies and Strategies. COLUMBIA CENTER ON SUSTAINABLE INVESTMENT STAFF PUBLICATIONS.
Kuntze, J.-C., & Moerenhout, T. (2013). “Local Content Requirements and the Renewable Energy Industry – A Good Match? ICTSD, 11-13.
LCGPA. (n.d.). Preference Mechanisms. Retrieved from LCGPA: https://lcgpa.gov.sa/en/LocalContent/Pages/Local-Content-Mechanisms.aspx
Tordo, S., Warner, M., Manzano, O. E., & Anouti, Y. (2013). Local Content Policies in the Oil and Gas Sector. Washington: The World Bank.
Weiss, M. (2016). The role of local content policies in manufacturing and mining in low- and middle-income countries. Inclusive and Sustainable Industrial Development Working Paper Series.