The E15 Initiative Expert Group on Trade and Investment in the Extractive Sector commissioned a paper on local content requirements. This presentation outlines the key elements of the Paper and unpacks the key characteristics of local content requirements.
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Unpacking local content requirements in the extractive sector
1. What implications for the global trade
framework?
Trade and Investment in Extractive Industries
The E15 First Expert Group Workshop
Isabelle Ramdoo
Deputy Head of Programme, Economic Transformation
ECDPM
13 March 2015
Unpacking local content requirements
in the extractive sector
2. 1. Why LCRs?
2. Local content: definitions, scope and depth
3. Instruments: Hard and soft requirements
4. Where have they worked and why?
5. Global regulatory frameworks: What provisions?
6. Way forward: regulate more or regulate better?
Structure of presentation
Page 2ECDPM
3. • Increasing recognition that extractive resources (ER) have not
been sufficiently translated into benefits for the economy and
for the people of resource-rich countries.
• Series of policy measures to capture more gains from ER: LCR
seen as one way is to stimulate the domestic use of factors of
production
• Rationale: address key challenges such as commodity
dependency; socio-economic challenges; mitigating and
managing social and political risks due to rising expectations
• This potentially creates challenges for mining industry but can
also be an opportunity to reduce costs if capacity is available
• Paper focuses on certain types of activities/ linkages that are
potentially realistic for the extractive industry.
1. Why LCR?
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4. • No universal definition of what “local” is or what “content” means.
A multidimensional issue.
Key features
• Spatial dimension : is ‘local’ related only to the geographic
proximity of the mine or does it have a national dimension?
Experience vary (Ghana, Nigeria, Mozambique have some
requirements for local-local sourcing or employment)
• Ownership: where is the company based? where does the capital
come from?
• Local procurement
• Local employment
• Share of value addition
• Sharing infrastructure (corridors)
2. What are LCRs?
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5. a. Hard instruments:
• Legally binding targets companies need to achieve in terms of
employment or procurement sourced locally.
• Where found? in laws, regulations, contracts, tendering
procedures etc. If not applied, may lead to fines or even
cancellation of contracts or licenses
Soft instruments:
• Non-binding instruments seeking to attain same objective as
above.
• Where found? Policy documents and guidelines, tendering
procedures (qualified on basis of competitiveness)
Horizontal incentives:
• Instead of putting a requirement on companies, Govt sometimes
gives incentives to (domestic) companies to attain the same
goal. E.g fiscal support, financial support to develop local
industries or other ‘soft’ industrial policies.
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3. Instruments: hard v/s soft
6. Percentage of countries with different levels of requirements
Instruments: hard v/s soft
ECDPM Page 6Source: Ramdoo I. 2015
Source: McKinsey. 2013
7. Few countries surveyed: all levels of development and from different
geographical locations. Key lessons:
LCRs have been more effective when:
1. There was the capacity to deliver and industries are competitive
(Norway in its early days for eg.)
2. They were temporary and performance-based (Norway)
3. They were flexible and adaptive (Norway, Chile, Mozambique)
4. There was a balance between regulatory measures and ensuring
the competiveness of companies
5. Initiatives are collaborative i.e where industry and government
defined together how to realistically implement objectives of local
content (Chile, Norway, Brazil, Malaysia)
Risks of LCRs being a barrier to business when:
1. Targets were too prescriptive and no or weak domestic capacity
(Indonesia, Nigeria)
2. Penalties that can cause license withdrawal (S. Africa, Nigeria)
4. Where have LCRs been used?
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8. • Most LCRs would be inconsistent with WTO disciplines, unless
implemented through government procurement. Key WTO
provisions relevant to LCRs are:
1. GATT III.4: Prohibits discriminatory treatment between domestic
and foreign firms for like products, if these are mandatory.
2. GATT III.5. Specifically focused on LC, prohibits quantitative
regulations for use of products in specific amounts.
3. TRIMS (do not apply to services): prohibits performance
requirements
4. ASCM prohibits (i) export subsidies that favour specific industries
(LDCs and developing countries with GNP/capita < $1000
exempted) (ii) subsidies linked to LC (Art 3.1b). If subsidies are
combined with local content implemented through govt
procurement, they will fall under Art 3.1b)
5. GATS Art XVI: Depends in what countries have committed in
their schedules
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5. Global regulatory frameworks: what provisions?
9. Other relevant frameworks:
1. Bilateral Investment Treaties: contain provisions that prohibit,
condition or discourage the use of LCRs, such as:
Ø Establishment of joint ventures with domestic participation;
Ø Minimum level of domestic equity participation;
Ø Location of headquarters in a specific region;
Ø Employment conditions;
Ø Export conditions;
Ø Restrictions on sales of goods or services in the territory where they
are produced or provided;
Ø Supply of goods produced or services provided to a specific region or
territory; and
Ø Transfer of technology, production processes or other proprietary
knowledge and R&D requirements.
Contain ISDS provisions
2. FTAs: new generation of agreements (possibly mega regionals)
may have even more restrictions on use of LCRs
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10. Countries see LCRs as a necessary trade off between short-term
efficiency and long-term economic development. If not managed
well, may put at risk investment and companies’ operations
Need to find a balanced and pragmatic approach which make
economic and political sense.
1. Consolidating the WTO ‘acquis’:
How do we prevent the race towards more disciplines in areas not
covered by WTO (competition, procurement, SOEs) in RTAs and
mega regionals?
a. Can we make better use of transparency mechanism, with
(i) A online one-stop shop regarding local content policies
(ii) The setting up of a dedicated platform, where issues of
concerns can be discussed?
6. Way forward: regulate more or better?
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11. b. Rules are hard to change but if we think the current ones are not
sufficient, can we have a variable geometry approach to allow
countries willing to go faster, the space to do so “within the system”
while carefully designing a set of protocols and rules of operation to
guide the process? Is a plurilateral agreement on investment
feasible?
2. Can RECs play a better role within the WTO?
a. On LC, their RoO they can be an interesting alternative to some
forms of LCRs and would encourage the development of VCs.
b. On rules, they are good sounding boards for what international
frameworks would be acceptable by their constituencies because they
themselves set supra-national frameworks. They could have a more
formal role at the WTO (when they have the mandate to do so)
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12. 3. Collaborative partnerships
Outside the multilateral system, but this has proved to worked very
well. So it’s important to have more private sector platforms,
including to exchange experiences around practices.
Some of this exist, but the conversations should not happen in silos,
i.e companies speaking only to companies or with govts but they
should also include other stakeholders around the same table.
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