Local Content Policies – Historical Evolution of Local Content Policies

local content requirements

The evolution of local content policies has been ongoing over time. It was however a means to improve industrial policy. This was the case during their rigorous implementation as productive development policies (PDPs) during and more so after the Second World War.

From a general economic strategy, local content policies were referred to as import substitution policies/Industrialization (ISP/I). This meant encouraging the development of domestic industry and elimination of foreign goods and services.

It is done through exchange control barriers such as tariffs and quota. In addition, it includes exchange rate policies as well as fiscal and credit policies.

Evolution of Local Content Policies – Start of Industrialization

No doubt that the initial design of ISP was actually at the beginning of industrialization of Europe in the 1750. You should know that this had its origins in the writings of List (1841), which outlined the ‘Infant Industry Argument’.

As the basis for formulation of local content policies is the idea of bringing about industrialisation. In this regard, it is essential that domestic circuits be built in the economy. This can only be achieved by protecting the domestic economy from the world economy.

However, the major facilitation and actual inducement of these policies was as a result of World War I, the Great Depression of the Thirties and more so the  World War II in larger Latin American, Asia and some African countries.

Import substitution policies have distinct objectives in the different countries where they are or have been adopted. There are historical reasons why some of  the countries of Africa, Asia and Latin America did not undergo ISI at the time of, or right after, the European ISI’s but only at a later stage in the 19th Century.

Local Content Policies Evolution – Economic Strategies

The idea of ISP gained further prominence as government interventions increased. In particular, this is towards inward looking strategies which are an attempt by economically less-developed countries to break out of the world division of labour.

In Latin Americas for example, a catalyst to that effect was the United Nations Economic Commission (UNEC) that advocated vehemently for Latin American countries to be self-sufficient in petroleum products and avoid over dependency on exports.

Under this division, Latin America as well as most areas of Asia and Africa specialized in natural resources and the export of food and raw materials. However, they are importing manufactured goods from Europe and the United States.

If anything, throughout most of the fifties and sixties many Latin American as well as Asian governments adopted ISP. This was as the principal method to achieve domestic economic growth and socio-economic modernization.

Local Content Policies in Latin American Countries

Latin American countries grew predominantly on the basis of their  natural resource base. On the other hand, the Asian market grew exponentially as labour-intensive sectors which were facilitated by high level of education.

As a result the concept of protectionism came about and the use of complex system of policies like LCPs was geared to promoting these sectors.

We continue to read and learn more about local content policies evolution.

Brazil Local Content Regulations – A Historical Perspective

Brazil local content regulations are of strategic importance to the country. It enhances domestic industry and promotes jobs as well as increase in incomes.

The promotion of import substitution industries in the fifties and sixties was no doubt an indiscriminate.  There were not attempts to concentrate on industrial sectors which might have had a potential comparative advantage. All industries irrespective of their sizes had protection policies implemented to safe guard the growth in Brazil.

It is thus important to focus on only issues that border on oil and gas industry of which a number of illustrations can be referenced from.

In 1944, for example, the Venezuela government passed a hydrocarbon law that forced oil companies to refine oil in the Republica Bolivariana de Venezuela.

Brazil Local Content Regulations – History

Brazil as country has a long history of import substitution policies. Infact, the government was anxious to promote maximum vertical integration, to promote both final consumer goods industries and intermediate and capital goods sector.

This would thereby give the government national control over most sectors and even more precisely the energy sector.

From 1934, Presidents Vargas regime was eager to pass the mantle of exhaustible natural resources to the nationals. Therefore, the promulgation of the Mine Code declared that mineral resources from the ground belonged to the Federal Union.

In addition, the code declared that foreign and domestic firms alike interested in exploring, production and even refining needed permission from the federal government.

Birth of Petrobras in Brazil

In addition, an announcement that saw an inclusion of local participation came in 1953 by President Vargas when he declared that Petrobras (NOC) should use only Brazilian capital, workers, and know how.

It was a landmark for the people of Brazil and a clear sign of independence from foreign dominance and the beginning of industrialization of the country in the oil and gas industry.

Even though Brazil didn’t have a sophisticated outlook to industrialization in the fifties and sixties, ISPs helped to increase local participation in joint ventures with foreign companies. Brazil was finally able to operate modern technology and developed a capacity and capability to supply the countries needs in the oil and gas industry.

But an even more pressing goal came about in the seventies when Brazil commenced its offshore drilling which resulted to a more national orient model in the eighties.

As a result the transfer of responsibility to the national oil company Petrobras to find and develop a new and national supply industry.

In turn many laws were passed and regulations bodies were set up to foster the growth of the industry. Today it is said that Brazil is one of the countries that focus on new, innovative and complex technologies and even more importantly Petrobras is referred to as one of the most experienced operators in deep waters exploration and production in the world.

But could this be as a result of the higher coefficient by multinational companies in Brazil, a research conducted by Clare Rodriguez shows there is a positive externally from MNCs to supplier which creates a positive knowledge spill over’s which would intern lead to higher total factor productivity.

New Brazil Local Content Regulation

Brazil’s local content regulations have been the subject of much debate. Introduced in the fifth licensing round in 2003, the requirements, along with fines for non-compliance, increased exponentially over subsequent rounds. This resulted in not only stifling offshore development, but also restraining the domestic industry that the regulations were meant to cultivate in the first place.  

In 2017, the Brazilian National Petroleum, Natural Gas and Biofuels Agency(ANP) rewrote the terms for the Libra (now Mero) FPSOs. On April 11, 2018, after two years of discussions, the Brazilian National Council for Energy Policy (CNPE) and the ANP published a resolution allowing companies to swap the local content commitments of their existing exploration and production contracts for lower and simpler requirements with reduced fines.

Local Content in Norway

When it comes to local content in Norway, it provides you with an example of great examples in terms of policy. The Norwegian government has introduced legislation necessitating that companies using natural resources also contribute to economic development.

Exploration for offshore oil and gas in Norway began in the mid-1960s and from the 1970s onwards ministers started implementing policy to protect the interests of communities and the economy. Its local content strategy has therefore been held up as an example of good practice for other countries.

Local Content Strategies in Norway

To start with, the government aimed to award contracts to Norwegian bidders when they proved to be competitive in terms of price, quality, delivery time and service. The rationale behind this was to promote the establishment of local industry and this was achieved through cooperation with international oil companies.

When foreign operators started entering the Norwegian industry in the late 1970s, they were strongly encouraged to form research and development (R&D) partnerships and joint development programmes with Norwegian companies and institutions, thus engaging in local content growth.

Overseas firms’ commitment to and strategies for technology transfers were made a crucial and determining factor in the licensing process by the Ministry of Petroleum and Energy, once again putting local content programmes at the heart of investments.

Governmental local content policies meant that Norwegian oil and gas supply companies developed leading class, state-of-the-art technologies and, as a result, many international companies have located part of their R&D chain in the country.

The competencies and technological expertise developed as a consequence of Norway’s local content policies also strengthened its position within the international oil industry. Local supply and service providers to oil activities have proved truly competitive by global standards.

Local Content in Norway – A Historical Perspective

Nevertheless a more interesting case study which has been debated over time is the successful implementation of local content. It si a concept of promotion and development of local industry in the oil and gas industry.

Norway has never made specific legislative requirements as to the share of local content in comparison to a country like Brazil. However, the Norwegian government and authorities alike appreciates the choice of local firms if such firms were competitive in price, quality and delivery.

However in the 70s and 80s it can be argued that local firms were chosen even if they were not arguably the most cost effective”

The Norwegian industry was predominantly that of foreign investors; shell, Exxon, Phillips and BP which is a mirror of what most oil and gas industry initially looked like. Nevertheless at a much later stage  there was an establishment of local oil companies like Statoil and Norsk Hydro.

Even though concessions were awarded to foreign oil companies with exclusive rights for exploration, the local companies are tasked to be operators in production licences. This saw a joint participation of foreign and local companies and a result there was a transfer of technology know how.

At the time of bidding, foreign companies could present Norwegian authorise with its list of operators and the Ministry could also add to the list of operators a local company that fits with the requirements. 

In addition there were agreements among the companies both local and foreign to promote research and development cooperation through Norwegian institutions of higher learning.

Nevertheless Norway never diverted its attention from international competition unlike Brazil’s local content development if anything most local firms are internationally competitive due to their geographic proximity, which has in many ways, is said to have deter protectionism of the industry but has eventually improved international standards nonetheless.

Conclusion

In conclusion, Norwegian tax regime was a vital facilitating concept in the 70s. It saw the government take up to 85% of profit margins.

But due to the drop of oil prices in the 80s the tax regime changed by some fraction of 78%. According to a Deloitte report, the ordinary tax amounts to  27% and special tax 51%, that even today Norway oil is still heavily taxed in order for the state to acquire as much profits as possible. 

Norway is argued in many instances to have passed the Mills and Bastable test. The former requires that a protected industry nevertheless should eventually survive international competition without the protectionism,

The latter is a more stringent one and calls for present value of future benefits arising from policy to compensate the present cost of protectionism.

Note: There is an ongoing Upstream Awards process that seeks to recognize and celebrate individuals or companies that are positively promoting local content policies in oil and gas industry in Africa. You should consider attending one of the events this year!