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.