Report urges flexibility by African nations in ‘local content’ investment

The report cited the extractive industries (40-page / 1.84 MB PDF) as a sector where flexible incentive mechanisms such as indicative targets, loans, tax breaks, and co-investments “could be better than rigid requirements”.

According to the report, “in many cases, significant levels of local content may become realistic only in time and with forward planning, so future targets could incentivise that planning…Conversely, if governments choose to require extractives companies to use local content even when it is more expensive, phasing out this requirement will incentivise local firms to increase efficiency.”

The report said: “Given the cost and complexity associated with sourcing goods and services internationally, extractives companies will use local firms without mandatory requirements provided they are competitive on cost and quality.”

Akshai Fofaria of Pinsent Masons, the law firm behind Out-Law.com, said: “Focusing on an enabling environment rather than on rigid and largely aspirational local content requirements may emerge as a more potent argument at this low-price point in the economic cycle for extractives.”

Most research shows that mandatory local content requirements “are often economically inefficient”, the report said. “They can create opportunities for rent-seeking, especially in the oil and gas sector, where expenditure tends to be more concentrated than in the mining sector on plant equipment ahead of production. The alternative approach is to focus instead on developing the enabling environment – institutional, regulatory, political, and attitudinal – for local and national firms.”

A focus on the enabling environment could, the report said, “lead to market supporting policies” such as training local businesses, acting as a “knowledge broker” (such as informing local firms about opportunities to supply goods and services to extractives companies), and conducting a “gap analysis... most importantly in the area of reinforcing public regulatory and planning capacity at the sub-national level but also in areas such as access to land and infrastructure”.

The report said “evidence shows that countries that have focused on the enabling approach instead of setting targets have been at least as successful in increasing levels of local content”. The report cited Chile as one nation that had “succeeded in using its extractives industry to develop the local economy, without explicitly mandating local content requirements”. According to the report, this was achieved “by creating a strong enabling environment and a culture of public-private collaboration”.

Chile’s Consejo de Competencias Mineras (Mining Skills Council), “recently surveyed 23 projects in the feasibility study stage in the copper, gold, and silver mining sectors to identify upcoming human capital gaps and harmonise job descriptions across the industry”, the report said. “The government then used the results of the survey to organise training programmes for disadvantaged individuals, notably in maintenance and operations.”

The report said: “With several African countries expecting new resources to come into production in the coming years, now is the time to focus attention on the potential of natural resources to benefit current and future generations. With the right investments and policy commitments, such countries can utilise their new natural resources to help create more equitable societies with less poverty, healthier and more educated populations, and strong and broad-based economic growth.”

A 10-point guide to local content (6-page / 1MB PDF) published last year by an expert panel representing industry and the African mining, banking, consulting, investment and energy sectors, said there was “no single approach” to local content development and international business should not seek a consolidation and replication of regulation across multiple markets.

The panel, which was brought together by Pinsent Masons and the strategy and communications consultancy Africa Practice for the first of ‘The Africa Sessions, 2014’, said “just because a business is locally-owned does not mean that it will succeed and create local manufacturing capacity or local jobs”. The panel said the “most forward thinking governments are now recognising that local ownership can be the least important element”.