How host governments can improve local content

The approach to localisation efforts have to be changed if improvements are to be made

The industry currently accounts for 33% of regional real GDP.
The industry currently accounts for 33% of regional real GDP.

Words: Georges Chehade, partner, and Yahya Anouti, snior associate, Stratgey& (formerly Booz & Company)

The global oil and gas industry needs to reconsider how it approaches the issue of local content.

Today, most resource-rich developing countries are adopting stronger local content requirements. Decision makers in these countries want operators and suppliers to hire and train more local staff, and to source more goods and services in-country as a means of building up the local oil and gas supplier ecosystem.

In many cases, these governments have been disappointed by previous local content efforts, primarily because international oil and gas companies have tended to approach the issue with a compliance mindset.

Under this line of thinking, local content was treated as a form of corporate social responsibility, an obligation that companies needed to meet as a cost of doing business in a particular country.

In response, policy makers should adopt a revised approach built on collaboration instead of compliance. They should not simply demand more local content nor should they introduce more punitive enforcement measures. What host governments and national oil companies need to do is to lead change by being more specific and clear about their objectives.

This improved approach requires five steps. First, host governments and national oil companies must establish the current baseline, by clarifying the main features of their business environment—the state of local capabilities, the national development agenda, and who the nongovernmental stakeholders are.

They must then communicate that to international companies so that they have a clear sense of the environment they are working in and who they will have to cooperate with.

It is important that governments and companies alike understand that there is an ecosystem of stakeholders that includes various ministries, regulatory bodies, and local companies in adjacent sectors. Countries also need to clarify what options exist for the development of local content, whether that means employment opportunities, the availability of local suppliers, or other measures.

Second, countries and companies need to define success together. That is, they need to agree on clear objectives—the skills, capabilities, and economic activities they want to build up in the oil and gas sector, and the country’s broader ambitions for developing its energy resources.

These objectives should be specific, measurable, and, most important, achievable. Every country, in defining its ambitions regarding the extractive industries, must accept that some activities will develop more slowly, or not at all, and adjust its local content policies accordingly.

For example, in countries with a fair degree of industrial development, a local content program might focus on how local suppliers can gain access to contracts, or how to develop higher-value-added activities such as research and development.

In less advanced countries, governments may focus more on early-stage intervention, such as training suppliers on standard contracting and procurement processes, supporting the financing of suppliers, or education and training in technical skills.

This focus on basic development is often a source of tension with host governments, many of which are impatient to move directly to more sophisticated activities, which they perceive to be dominated by the company’s expatriate staff and international suppliers.

However, policy makers must gain an objective sense of their country’s capabilities and needs. A more realistic approach will ensure that the country develops its local industry in a logical and sustainable way, starting with foundational skills and then building to more advanced capabilities.

Third, governments and companies must agree up front on the costs and benefit trade-offs of local content activities over time. For example, companies should understand that sourcing certain goods locally may mean project delays or higher costs while those capabilities are developed.

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That in turn can change the revenue dimensions of a given project. On the other hand, countries should accept that an aggressive project time line may require a higher proportion of expatriate technical staff.

At the same time, international companies should analyze how such options may benefit their activities over the long term, both locally and globally. Countries can help in this effort, by creating a more persuasive case built on shared wins, rather than a one-way flow of benefits away from international companies to host governments.

For instance, companies can often lower their staffing costs through the use of local workers rather than their own expatriate workforce. They can also potentially lower the cost of goods and services by developing more competitive local supplier ecosystems and decrease their international shipping and import costs.

Fourth, governments must coordinate internally when setting priorities and objectives. This entails making sure all relevant agencies are involved—not only the agencies overseeing the oil and gas industry, but the whole stakeholder ecosystem, including education, employment, industrial development, and national energy players.
Developing a unified view can be challenging; multiple stakeholders often have competing agendas, and there is often no single government view. Still, the burden is on governments to generate some consensus as to their overall goals in developing oil and gas resources.

Similarly, countries need to determine who will “own” the local content program. Ideally, ownership should reside within a single government entity to ensure clear accountability, with oversight from a broader and more inclusive body that includes key stakeholders throughout the government.

From a resourcing perspective, the government representatives developing and overseeing the country’s local content program need to be credible to their industry counterparts, with the technical knowledge needed to understand any issues the operators may face.

Fifth, governments and companies must measure and communicate performance. The program should include quantitative goals and metrics that are determined in the early stages of the project, and structured so that all sides can measure progress in a rigorous way, such as through the number of graduates with target skill sets, or the number of local contractors supplying a specific good or service.

The role of primary contractors here is crucial — their own efforts must be fully tied into the performance management system if they are to be fully accountable for their role in helping deliver progress.

The performance management system should also include mechanisms for the oil and gas company to communicate the local content program’s progress to the host government, demonstrate its value, and celebrate its success.

Accordingly, every oil and gas project must include frequent reviews to confirm that the local content program is meeting expectations, and to agree on adjustments where necessary. This “do-learn-improve” method requires a clearly defined process, adequate resourcing, and strong governance mechanisms. The review process must also be transparent.

In the past, efforts to foster local content in host countries have fallen short of expectations, and created a gap between the development aspirations of host countries and the economic imperatives of international players.

To prevent this gap from widening, now is the time for governments to adopt a collaborative approach to local content—one that is more flexible, dynamic, and pragmatic.

Improving their relationship with international operators is the best way for host countries to derive their due reward from natural resources—benefits that go beyond rents and taxes and potentially help the country build up the skills and capabilities it needs for long-term economic success.

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