BRIEF

Local Content in Oil, Gas, and Mining

January 27, 2016

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LOCAL CONTENT POLICIES:
  • Aim to leverage the extractive value chain to generate sustained and inclusive growth through economic diversification and employment opportunities.
  • Generate opportunities for regional integration and international trade and can gradually reduce countries’ dependence on external aid.
  • Depend on early engagement and collaboration among government, extractive industry companies, and communities.

CONTEXT

Foreign capital in mineral and petroleum producing countries has historically driven investment and employment. But the most valuable contribution to long term sustainable and inclusive growth comes from the ability of the extractive industries to generate further benefits to the domestic economy beyond the direct contribution of its value-added, through productive linkages with other sectors.

Government intervention in the petroleum and mining sectors to support broad-based economic growth is hardly a new trend. The extent and type of intervention has evolved over time from the restrictions on imports, and direct state intervention, to more complex policies aimed at creating backward and forward links. While these policies have the potential to stimulate broad-based economic development, their application in resource-rich countries has achieved mixed results.


" Local content in the extractive industries is being given ever higher priority by host governments through a wide array of policy instruments. And oil, gas and mining companies now rate local content among the most significant expectations in the communities in which they operate. "
Silvana Tordo

Silvana Tordo

Lead Energy Economist, The World Bank

STRATEGY

 

While Local Content Policies (LCPs) have the potential to stimulate broad-based economic development, which is necessary to alleviate poverty, achieve prosperity and ensure sustainable economic and social outcomes, their use has achieved mixed results. There are many reasons for that. The use of specialized inputs and the technological complexity of the petroleum sector often limit the possibility of developing links into the local economy. An economy that is very limited can hardly be expected to quickly supply services. A fast-growing extractive sector coupled with too ambitious local content targets may exacerbate supply bottlenecks arising from increased aggregate final demand. This would ultimately affect employment and output trends in other sectors of the economy, and create distortions and inefficiencies. Furthermore, the size and location of extractive projects also affect the type of potential links, and the speed at which they can efficiently develop.

It is important to understand the trade-offs and pitfalls that the development of LCPs may entail. Since LCPs are part of a broader category of policy interventions aiming to strengthen the productive structure of a particular economy, their success largely depends on their interaction and coherence with broader economic development policies and related implementation tools. It is therefore possible that, for example, the success of regulatory interventions to increase local employment in the oil and gas sector may require an improvement in the quality of education, changes in labor mobility, improvement in infrastructure, and so on, while policies leveraging economic diversification through the extractive industry may require stable macroeconomic policies that attract foreign investment, provide more leverage in trade agreements, and improve the financial market. The sustainability of a newly created domestic manufacturing sector may require a level of demand that goes beyond the domestic market thus requiring trade agreements, the development of resource corridors and regional integration.

A nontrivial issue connected to LCPs is their compliance with international trade regulation. Although trade agreements do not appear to have been a principal concern for governments in the design of LCPs, the overall sharpening of local content requirements in many resource producers has triggered recent trade proposals suggesting a renewed interest in promoting the liberalization of energy services, and access to WTO members’ markets by foreign suppliers.

These are complex challenges that can only be addressed with a common understanding and shared objectives among stakeholders. This requires early engagement and collaboration among stakeholders, and involves cross-sectoral, national, regional, local, and cross border considerations. Supporting local employment and a competitive and sustainable local industry goes well beyond the remit of the corporate social responsibility agenda, requiring industry-wide collaboration and multi-stakeholders involvement. But private sector led initiatives need to be grounded in the overall local content strategy of the government. The lack of a clear strategy and regulatory framework ultimately hinder local content development.

Policy design involves national, regional, local, and cross border considerations. The intersection between global and local dimensions of development based on extractives and the time inconsistency among stakeholders places the World Bank in a unique position to use its convening power and global expertise to generate common understanding of the potential benefits of local content policies as well as generating and sharing knowledge on design and implementation pitfalls thus avoiding costly mistakes. SEGOM’s research on LCPs design and implementation in the mining and petroleum sectors suggests that knowledge and capacity gaps, lack of common standards, and inadequate stakeholders’ consultation, are among the factors that determine the relative success of LCPs among resource-rich countries. The Global Conference on Local Content Policies in the Extractive Industries organized by SEGOM on September 30-October 1, 2013 confirmed these findings. To address these gaps SEGOM is leading efforts to create a global partnership on LCPs in extractives. The new partnership will be a catalyst to sustainable economic diversification and increased local employment through policy change, stakeholders’ facilitation, project implementation, and knowledge creation and sharing.

 


" Africa has a unique opportunity to leverage the current boom in investments in mining and associated infrastructure. Identifying opportunities, "picking winners," and developing industries that link directly into the mines could have a transformational impact in terms of diversified growth and job creation. "
Kristina Svensson

Kristina Svensson

Senior Mining Specialist, The World Bank

OUTLOOK

To make a real difference we must engage at three levels:

•  Global level through targeted research on LCPs’ effectiveness and related implementation and monitoring tools with the objective to generate the knowledge base for the development of guidance notes and tool-kits.

•  Country level through technical assistance to governments for the design of LCPs and related implementation strategies and arrangements.

•  Knowledge sharing and dissemination through advocacy and promotion of effective LCPs through dialogue with government representatives, industry associations, supplier organizations, parliamentarians associations, civil society organizations, donors, and other relevant institutions.


The Extractives for Local Content Development Community of Practice

This C4D-based online collaboration platform connects policy makers, companies, academics and practitioners, to share and create knowledge around local content development in the extractive industries. It is a one stop shop for current debates, peer to peer-exchange, events, and critical research that will allow you to deliver better results. Our vision is to build an active forum for mutually beneficial knowledge exchange enabling experts worldwide to implement the best possible local content solutions.

To join the World Bank Community of Practice, register here: https://collaboration.worldbank.org/welcome

• Click on the “Login/Register” Button on the top right to create an account

• Look up the group “Extractives for Local Content Development” 

• Ask to join

Please indicate in your profile information how your work relates to local content for oil, gas and mining.

For questions, contact nhandler@worldbank.org