Learning From Local Content Policies: Insights From a Study of Six Resource-Rich Countries
Since the 1970s, dozens of countries have enacted local content requirements in an effort to translate foreign direct investment, particularly in extractive industries, into local economic development. These policies require multinational companies to source local goods, services, and labor in a wide range of sectors, from civil works to transportation services. Yet the outcomes of these policies have been checkered—some approaches have strengthened local industries while others have been ineffectual or even counterproductive. As local content policies continue to expand in resource-rich countries around the world, policymakers should learn from these experiences when designing their own approaches.
Drawing from DAI Energy and Resources Group’s years of research and work in the developing world, this article presents a preview of selected insights from a cross-section of local content frameworks in Angola, Brazil, Ghana, Mozambique, Nigeria, and Tanzania. These countries were selected to provide a range of extractives sector experience and policy approaches, and demonstrate the impacts of local content policy decisions in different contexts. Examining past experiences with implementation yields important lessons and best practices in formulating local content policy as a tool to achieve high-level development outcomes.
The following highlights the study’s key insights:
Local content policies are only as good as a country’s capacity for enforcement. In several of the countries studied, stringent requirements and a lack of institutional capacity have led to ineffective enforcement of the regulations. In Ghana, for example, some multinational companies have skirted joint venture requirements by establishing illegal shell companies. These shell companies fulfill the letter of the law without actually earning revenues that feed positive impacts back into the greater Ghanaian economy. Ghana’s Petroleum Commission has attempted to crack down on shell companies, but with limited success. Given the experience of Ghana and others, countries with relatively weak institutional capacity for enforcement should consider a less stringent approach that still benefits the local economy.
Local participation in the form of equity ownership by nationals may not translate to national development objectives. The stated objectives of local content policies in Angola, Ghana, Nigeria, and Tanzania were capital retention, local employment promotion, technology transfer, and broad-based development. However, the link between equity ownership and these development objectives was generally weak in Angola and Nigeria. The alternative approach, as in Brazil, promotes the development of domestic value chains by incentivizing foreign companies to perform activities in-country. This approach is generally more effective at promoting economic development if domestic industry is already at a developed level.
Robust data is crucial for setting realistic local content targets. In Brazil, a detailed picture of the local supply capacity and of industry demand allowed for the design and implementation of impactful local content interventions in areas such as financing, capacity building, and infrastructure investment. Conversely, lack of data and information on local capacities has made it difficult to set local content targets elsewhere. For example, Ghana and Nigeria mandated local content targets inconsistent with their supply capacities. Tanzania also lacks structured information management systems to manage the knowledge required to support local content policy formulation and implementation.
The maturity and competitiveness of the country’s extractive sector (for example, oil and gas or mining) should be considered when formulating local content policy. Countries such as Angola, Brazil, and Nigeria have implemented highly prescriptive local content regulations with some degree of success due to the maturity of their industries and vastness of their resources. However, countries with nascent industries that have adopted strict prescriptive local content regulations have largely failed to produce the intended development outcomes. For example, Ghana implemented onerous regulations (including joint venture requirements and relatively aggressive local content targets) with a nascent oil and gas sector, before consolidating its attractiveness for investment. These regulations have largely failed to achieve the desired results, and the country is now working to reformulate its local content policy in order to enhance its competitiveness. Countries aiming to leverage local content to achieve long-term objectives should moderate prescriptive regulations based on their relative competitiveness in the market.
Sustained public-private dialogue can promote long-term local content development. In Angola, Ghana, Nigeria, and Tanzania, public engagement of the oil and gas industry is still lacking. The public sector tends to adopt an arms-length approach in dealing with the industry, assuming an agent-principal format with government seeking to control and enforce, rather than engage and collaborate. This approach has often resulted in significant delays in approving Plans of Development, agreeing on respective roles and responsibilities between the public and private sector, and achieving a collaborative spirit in local content development. Brazil, on the other hand, is a case where strong engagement with the private sector has yielded positive results.
Local content policies will continue to evolve as a tool for economic development. Kenya just announced a new local content bill, while draft legislation to update current policies is being prepared in countries such as Indonesia, Mozambique, and Tanzania. By incorporating lessons learned from previous experiences implementing local content requirements, policymakers can avoid the mistakes of the past and craft informed local content strategies that promise a more prosperous future.