A look at local content rules and the case of Ghana

Governments will often implement local content laws with a noble intent, mandating a policy of working with local companies, or “buying local,” in an effort to create jobs, spur local industry and avoid the “resource curse” of falling deep into poverty despite an abundant wealth in natural resources.

However, on their own, these policies don’t provide a silver bullet.  It can be a challenge to determine how the laws can function within the context of a specific market — which can lead to several pitfalls. For the many stakeholders involved in that process — governments, investors, extractive companies and civil society — it requires close and continuous dialogue to achieve the desired degree of inclusive growth.

If implemented effectively, local content regulations can have great impact. In the decade since Brazil — a giant in the offshore oil industry — passed its local content rules, an estimated 875,000 jobs have been created and the value of equipment and supplies purchased in the domestic market has reached around $14 billion.

But the policy is not without its faults — from capacity bottlenecks to allegations of corruption and graft. The setbacks stem from a mismatch between an industry’s demands and the constraints of a local market and can serve as a cautionary tale for countries that are in the early phases of managing natural resources.

Ghana is one example of a country where these challenges are playing out. A relative newcomer to large-scale oil production, the country approved lofty regulations in 2013 that will eventually require up to 90 percent of goods and services tied to oil industry deals to be sourced locally by 2020, with requirements around local staffing as well.

In Ghana and other similar markets, skills gaps are typically the most prevalent barrier to meeting local content laws.

“What we see most often are regulations that go in place that force multinational companies to work with local companies, but nothing being done to ensure that sufficient training is provided,” said Harry Pastuszek, vice president of enterprise and community development for Pyxera Global, a nongovernmental organization that works on local content initiatives.  

Oil companies have noted that local suppliers who bid for procurement opportunities often fall short of meeting industry requirements in areas such as information technology, systems management and environment, health and safety standards. For developing countries that are new to natural resource development, that is hardly surprising.

That skills gap creates a market void that NGOs have typically bridged through various technical assistance and training initiatives. Pyxera, for example, manages one such program in Ghana that has resulted in more than $12.5 million in supply contracts being awarded to local small and midsized enterprises.

International oil companies who hold concessions to develop local resources also often pitch in with similar skills and training initiatives. But in order for those programs to be sustainable over the long-term, they must eventually be run by the host country’s largest stakeholders, namely the government or the country’s national oil company, he said.

“Our role as an NGO working in these spaces ends up being one where we arguably supplant the government,” Pastuszek said. “In almost all markets, it’s a given that you will have the national oil company as a partner. It becomes a matter of ensuring that the architecture of the program is owned and led by the entities that have the largest stake in the general good of the economy.”

In addition to technical skills, experts say that ongoing training is also greatly needed to develop a robust culture of compliance and business ethics.

“Due diligence in anti-corruption and raising awareness of legislation such as the U.S. Foreign Corrupt Practices Act or U.K. Modern Slavery Act can be alien concepts in other cultures,” said Paula Luff, the former head of corporate responsibility for U.S. oil company Hess.

Local content laws themselves can naturally create conditions that are conducive for bribery and corruption by mandating a fixed reserve market of suppliers for international operators to procure from. International oil companies may understand compliance codes, but as Luff noted, the oil industry relies heavily on contract labor.

“That labor doesn’t work for you, which fundamentally poses an operational risk,” she said.

Access to capital is also a major burden on local industry. Small and midsized businesses that win supply contracts under the auspices of local content laws can often run into various funding difficulties.

A common issue in Ghana is the long lag times as domestic suppliers wait for international oil companies to pay out invoices. Payment horizons that stretch from 40 to 60 days and are considered standard accounting practice for oil companies can cause significant strain on a Ghanaian SME’s working capital.

The dilemma is an example of how international business practices can run at odds with local conditions. International oil companies are generally aware of the discrepancy, but often point to the local factors that contribute to the problem in the first place, such as exorbitantly high interest rates charged by local commercial banks.

With these myriad of challenges, the practical realities of achieving some of the goals in local content laws may not be achievable. In the case of Ghana, some oil industry experts have deemed the requirements unrealistic.

More fundamentally, local content rules can conflict with the practical realities of achieving them. Though Ghana is a relative novice in oil production it has local content laws that some oil industry experts deem unrealistic, in part because Ghana’s oil industry is still quite young and the targets are so high. By contrast, local content requirement laws in Brazil — considered to have among the industry’s most stringent regulations — only run as high as 70 percent on average.

“There will always be low-hanging fruit [to include local industry],” said Luff, such as construction, logistics, or waste management services. But to reach the higher and more inclusive targets it will take ongoing multistakeholder dialogue. “Together with academic institutions and NGOs you have to do gap analysis to figure out what you need, who else needs to be brought in as partners. And a multistakeholder effort to address those gaps is the only way to develop a plan.”

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