Scoping the capital budgeting implications of local content development legislation
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Scoping the capital budgeting implications of local content development legislation

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Scoping the capital budgeting implications of local content development legislation Scoping the capital budgeting implications of local content development legislation Presentation Transcript

  • Scoping the capital budgeting implications of local content development legislation Evidence from new adoption countries (e.g., Nigeria and Ghana)Centre for Energy, Petroleum and Mineral Law and Policy University of Dundee Dr Ayodele Asekomeh
  • Content/Outline  What is “local content”?  Local Content and FDI in perspective  Some background…  Capital budgeting implications  Research Questions  Research Approach  The Issues  Prognosis2
  • What is “local content”?  Definitions  Value added activities taking place within a resource producing country (Neff, 2005)  When a foreign company makes products in a country, the materials, parts etc. that have been made in that country rather than imported. A minimum level of local content is sometimes a requirement under trade laws when giving foreign companies the right to manufacture in a particular place (FT Lexicon, 2012)3
  • What is “local content”? (cont’d)  Definitions (cont’d)  Value contributed to the national economy through expenditure on goods and services (indirect economic impacts and multiplier effects) (Warner, 2010)  Last definition highlights the link between Foreign Direct Investment (FDI) and local content (LC) and the intended objectives of local content legislation4
  • Local Content and FDI in perspective  FDI is positively correlated with growth and technical progress through the ‘contagion’ or ‘spill-over’ effect (Findlay, 1978; Lim, 2001)  However, FDI could negatively affect domestic firms – reduced market share and reduced capacity utilization (Harrison, 1996)  Local content legislation creates restrictive conditions designed to compel domestic growth or uptake of FDI-related spill-over effects or5 regulate FDI (Qiu and Tao, 2001)
  • Local Content and FDI in perspective (cont’d)  However, local content restrictions may mean that FDIs attracted are of the type that offer less opportunities for development through contagion (Moran, 1998)  Two reflective questions • Before imposing restrictive conditions through local content legislation, do policy makers fully consider contextual differences and potential unintended consequences? • To what extent does local content legislation infringe the WTO’s TRIMs agreement? (Note exception made for developing countries)6
  • Some background…  Several solutions proposed for the “resource curse” – the paradox that resource-rich countries end up being more impoverished by the exploitation of such resources than without them  Predominantly, these involve adopting policies used by countries that have deployed resources sustainably, e.g.:  Development of the UK oil industry (a steep learning curve from limited local equipment and services)7  The Norwegian Model; Trinidad and Tobago
  • Some background…(cont’d)  However, ‘direct’ adoption of such models often ignore contextual differences e.g., risk tolerance, institutional quality and political competition (Nolan and Thurber, 2010; Thurber et al., 2011) – see chart for illustration.  A review of the Nigerian (2010) and Ghanaian (2009) Local Content Acts indicates:  Focus on policies intended to stimulate domestic macroeconomic growth with favourable microeconomic conditions for local operators  Little consideration for microeconomic choices of8 international operators or IOCs
  • Some background…(cont’d) Contextual differences and suitability of role-models9 (Source: Thurber et al., 2005)
  • Capital budgeting implications – Research Questions  How do/would IOCs treat LC provisions from a capital budgeting perspective?  Hypothesis #1: International operators would modify planning assumptions to reflect increased risk and “difficult” business environment  In what ways and to what extent would LC legislation alter the investment decisions of IOCs?  Hypothesis #2: FDI decrease would not be compensated for by10 increased domestic activity
  • Capital budgeting implications (cont’d) – Research Approach  One or a combination of:  Survey of IOCs operating in countries adopting LC  Survey analyst and reviewers of IOCs’ financial information  Review of relevant IOC financial statements  Develop sensitivity models to test how IOCs will react or are reacting to the provisions  Assess long-term impact/success or otherwise11 of the local content legislations
  • Capital budgeting implications (cont’d) – The Issues  Costing of inputs;  Compliance and  Financing (securing reporting costs e.g., project finance with submission of Nigerian domestic banks); Content Plan;  Contractual issues and  Preferential treatment; “locked-in” terms re quotations and global supply chain competitive bidding partners and providers; (margin determination;  Quality issues; game theory?);  Project management  Contribution to Local constraints; Content fund: what benefit?12  Perceived risks
  • Capital budgeting implications (cont’d) – Prognosis  Limited success of local content programmes in fostering long-term development  Emergence of some dominant local players (state-backed monopolies?)  Monitoring issues (effectiveness of LC monitoring board)  Myers’ (2005) notion [that partnership between producers and consumers to promote energy- efficient non-oil-based industries in low-income producers would be a quid pro quo for secure13 energy markets] would be constrained
  • References  Findlay, R. (1978), “Relative Backwardness, Direct Foreign Investment, and the Transfer of Technology: A Simple Dynamic Model,” Quarterly Journal of Economics, vol. 92, pp. 1-16  FT Lexicon (2012) – Definition of Local Content http://lexicon.ft.com/Term?term=local-content) – accessed 24 April 2012  Harrison, A. (1996), “Determinants and Effects of Direct Foreign Investment in Cote d’Ivoire, Morocco, and Venezuela,” in Industrial Evolution in Developing Countries, ed. By M. J. Roberts and J. R. Tybout, New York: Oxford University Press  Lim, E-G. (2001), “Determinants of, and the Relation Between, Foreign Direct Investment and Growth: A Summary of Recent Literature,” IMF Working Paper WP/01/175  Moran, T. (1998), Foreign Direct Investment and Development: The New Policy Agenda for Developing Countries and Economies in Transition, Institute for International Economics, Washington, D.C.  Myers, K. (2005), “Petroleum, Poverty and Security,” Africa Programme14 Briefing Paper AFP BP 05/01, Chatham House
  • References (cont’d)  Neff, S. (2005). Memorandum on International Best Practice in Development of Local Content in the Energy Sector, available at: http://www.neiti.org.ng/sites/default/files/page/uploads/local-content-5-9- 051.pdf  Nolan, P. A. and Thurber, M. C. (2010), “On the state’s choice of oil company: risk management and the frontier of the petroleum industry,” Stanford Program on Energy and Sustainable Development, Working Paper #99  Qiu, L. D. and Tao, Z. (2001), “Export, foreign direct investment, and local content requirement,” Journal of Development Economics, vol. 66, pp.101-125  Thurber, M. C., Hults, D. R. and Heller, P. R. P. (2011), “Exporting the ‘‘Norwegian Model’’: The effect of administrative design on oil sector performance,” Energy Policy, vol. 39, pp. 5366-5378  Warner, M. (2010), “Are Local Content Regulations a Pathway to Competitiveness or a Road to Protectionism?” Local Content Solutions15