Many resource-rich countries are, or have been, pursuing policies to maximise the impact of natural resources. The central theme of this book is the role of local content (LC) policy in economic development. This is a subject of critical importance to resource-rich countries and the study of their economic development. This book analyses LC policies as part of sectoral (oil and gas, O&G) or wider economic and institutional catching up, and aims to situate LC policy within a wider framework of sustainability in the form of industrial diversification and innovation-led growth.
The definition of LC varies from country to country and even between periods of policy implementation. Therefore, it is complicated to unite different elements of policy-making in resource-rich countries into a single definition of LC. To the authors, LC is an industrial tool that can enable domestic producers to expand their activities, at least partially with domestic inputs, and gain access to international technological and managerial expertise. Jointly these factors can improve economies of scale and have positive domestic external effects that enhance producersâ competitiveness on the international market.
LC policy includes mandatory requirements for the local procurement and employment of labour, but also technology transfers and attempts to develop knowledge-intensive industries that form part of a strategy to reduce the reliance on natural resources and facilitate innovation-driven growth. The experiences of a range of resource-rich countries are drawn upon with a particular focus on two developed countries and three emerging markets. Contingent on country-specific institutional factors, macro-economic drivers and social-development objectives, the role of host governments and the articulation of LC policies differ. These factors mitigate the effectiveness of LC policies in facilitating economic and institutional catching up.
In this book we argue that LC policies are often key, but not sufficient, for the realisation of LC within resource-rich countries. The experiences of individual countries provide us with different outcomes and economic consequences. We attempt to identify the drivers and conditions of the experiences of the individual countries analysed in this book and examine what can be (or should be) done in order to optimise the outcomes of LC policy. We aim to identify the factors of success of LC policy implementation.
We have chosen to concentrate on the experiences of LC policy within five oil-producing countries, namely Brazil, Kazakhstan, Norway, Russia and the UK. Our aim is to provide a broad set of comparisons that highlight the similarities and differences between these cases. The case studies presented in this book are general, rather than exhaustive, summaries.
The book is not a manual or technical guide on LC and LC policy, and therefore the choice of issues and case studies was made only on the basis of their particular relevance in understanding the concept of LC within a wider economic setting. So, Norway, for instance, demonstrates an early state-led LC policy, while the UK, developing as an oil region during the same time period as Norway, had a less interventionist LC policy. Notwithstanding the different approaches there has been convergence over time and the eventual LC outcomes, in terms of sectoral catching up, are similar. Kazakhstan is a new oil producer trying to implement LC policy from the beginning of its journey. Both Brazil and Russia have a longer history of O&G production, with a changing emphasis on LC or resource-led development. We attempted here to analyse and understand the patterns and the modalities of LC implementation and its wider consequences for sustainability of the economic development in the resource-rich countries where such policies are taking place.
The authors were fortunate to have direct interactions with the governments and businesses of several of the resource-rich countries referred to in the book, as well as having an inside understanding of the business realities of these countries, especially with regard to the role and activities of major companies in the LC development area. This allowed us to set up and conduct a number of interviews with government and company representatives and discuss the issues of LC policy and their perceptions and understanding of it. These interviews were also based on the previous experience of one of the authors related to LC development in the Caspian Region (Kalyuzhnova 2008). Due to the political and commercial sensitivity around the topic of LC, some of the interviews were conducted under âChatham House Ruleâ: we were entitled to use the information and facts gained during the interviewing process but without permission to attribute it to specific sources; other interviewees are named in the book. Permissions to use company data, such as those of Karachaganak Petroleum Operating BV (KPO), were kindly granted to us.
Chapter 2 âLocal Content: Concepts, Perspectives and Economyâ presents an overview of LC development in the O&G industry from the 1970s to date. It starts by exploring the concept of LC and considering LC policy as an important element of industrial policy. LC policy, as implemented by several countries and as conceptualised throughout this book, is multidimensional and a vehicle for enabling the start-up of economic activity, technological catch up, human capital accumulation and sustaining demand for local goods, work and services. It is also concerned with ownership structure and a transfer of property rights to domestic industrial actors or champions. Nested within this broad conceptualisation of LC is a narrower understanding that focuses primarily on ownership structures.
The application of the broader and narrower conceptualisation of LC varies from country to country and over time; there are also different actors pursuing LC development. Nevertheless, the similarities relate to maximising the depth and breadth of local input (in different forms such as ownership, control, financing, labour, et cetera) in order to increase local value-added production and additional rent capture from (more) parts of the O&G exploration, development and supporting value chain, including those activities in which nationals, local business and domestic capital are not currently engaged.
Throughout the book a broad perspective of LC is employed, which includes value and rent addition in the resource-rich country by local labour, local procurement and local infrastructure as well as local technology transfer, diversification and innovation. Practical experience of LC policy suggests that although ownership structure can be important and relevant for incentivising the above aims and, potentially, instrumental in generating competitive conditions that facilitate innovation-driven growth, a definition of LC that is entirely based on ownership can be insufficient to achieve sectoral or wider catching up.
Following a discussion of LC evolution and conceptualisation, this chapter relates LC development to economic development, fluctuations in world oil prices and the changing position of LC under such conditions. LC is frequently viewed by companies as a cost of doing business. In a situation of falling or low oil prices, the pressure increases for governments to alter their positions and timing of LC. However, in the longer term LC policy has the capacity to benefit the host country and O&G companies alike. In order for such benefits to emerge LC policy, as well as O&G fiscal regimes, requires flexibility and adjustments from the host government without losing sight of the longer term objectives.
Another important external factor is the relation between LC development and World Trade Organization (WTO) membership. Under WTO rules many forms of LC are prohibitedâthey are perceived as protectionist and trade-distorting measures. Nevertheless, there are multiple examples of violation of WTO rules in the form of WTO members pursuing LC policy. At the same time no country-to-country level case has been pursued under WTO regulations in the O&G sector. There is a clear weakness in the WTOâs dispute-settlement system but, more importantly, interpretations of LC requirements vary making it costly to pursue disputes and damaging for the relations between countries. 1
Besides employment and input-sourcing conditions, LC policy often aims to facilitate technology and knowledge transfer to the host country in order to enable development of new industries. In this book we consider the cases of Brazil, Kazakhstan and Norway, who put in place policies aimed at creating domestic technology leaders as the basis for new product development and market-creating LC leading to additional employment and export. Under WTO regulations there is little scope to utilise access to natural resources for these types of LC policies. In the light of existing O&G clusters and global production networks, new market development may be unlikely in resource-rich emerging markets without some form of trade protection or industrial policy.
The experience of Norway and the UK demonstrates that O&G latecomers can develop internationally competitive goods, work and service industries in the presence of existing technological and industrial clusters. An argument of this book is that LC policies can act as enablers of industrial diversification and innovation-led growth through their interaction with the respective national innovation systems (NIS). Chapter 2 therefore also compares and contrasts key indicators of absorptive, knowledge-creating and knowledge-diffusing capacity across the five case countries. The effectiveness of LC policy in facilitating innovation is here conditioned by the interactions of private firms with government public policy, education and research institutions and other private and public firms. LC policy can be perceived as a strategic intervention to facilitate knowledge transfer, accumulation, technological innovation and economies of scale and to create the conditions for spin-offs and positive externalities to arise.
The knowledge-creation and diffusion capacity of innovation systems reflect the interaction and learning of firms with other firms and the knowledge infrastructures. While several of the economies examined in this book have substantial absorptive capacity a challenge remains to overcome economic, political and social barriers and state autonomy to incentivise economic actors to invest in value-added production or generate higher labour productivity. Educational policies and knowledge institutions (schools, technical colleges, universities, Research & Development institutes, et cetera) are, in this respect, also part of a system that enables LC policy as a vehicle of sectoral or economy-wide catching up.
We argue that under certain conditions LC can be considered an engine of diversification, market and product creation, and technological and managerial innovation. This book adopts a perspective of the market, on one hand, and of the state, on another. Based on this we aim to identify the types of LC policies that condition economic growth and welfare.
Chapter 3 âDifferent Models of Local Content Implementation in the Oil and Gas Industryâ examines five examples of LC development. The authors compare and contrast current practice in Brazil, Kazakhstan and Russia against historic practice in Norway and the UK, emphasising in all cases that LC policies were embedded in a wider framework of macro- and micro-economic management. In Chap. 2 the authors distinguish between market-creating, sustaining and efficiency LC policy, which offers a broad taxonomy of the variety of LC policy. At the implementation level, however, national policies often represent a combination of each of these.
This chapter highlights a variety of LC development approachesâpast and present. The Norwegian and UK experiences of the 1970s and 1980s in some sense provide the âbenchmarkâ cases for LC development, but it is also clear that the economic and institutional conditions of these two countries differ substantially from those found in current resource-rich emerging markets. Nevertheless, the experiences of these countries are important to explore as early LC implementers, and are often referred to as âsuccessful,â especially the case of Norway, in lieu of the internationally competitive O&G clusters emerging in Stavanger (Norway) and Aberdeen (UK).
Brazil has a rich and long experience of implementation of LC policy aimed at economy-wide catching up. Incentivising innovation-led development in O&G services/supply is taking place against a backdrop of a developing NIS and incentivising innovation-led development more generally. However, the recent corruption scandal at state-controlled LC champion, Petrobras, and rigid LC requirements also highlight the challenges and inefficiencies that can accompany LC policy and its implementation and may affect Brazilâs future regulatory environment.
The analysis also brings out the specifics of Russia and Kazakhstanâs contrasting experiences of LC development. These two ânewâ economies emerged from the same Soviet innovation system, but nevertheless with different degrees of national-level O&G competencies and developmental challenges. From an economic point of view, Kazakhstan found itself in more need of developing LC policies than Russia. For Kazakhstan, LC policy has become a vehicle for economy-wide catching up, whereas Russia, initially, developed LC policy as a vehicle for specific and selective technological and sectoral catching up before external constraints resulted in a more systematic and economy-wide policy of self-sufficiency.
All these issues are addressed in general terms with respect to the broader economic impacts and the specific issues relating to LC policy. The analysis draws on these five specific case studies to illustrate the importance of the initial conditions for LC policy, institutional settings and aspirations for the national control of the process of LC development.
Chapter 4 âDeterminants of Local Content Policies and Driversâ analyses issues of governmental policies with regard to macro-economic and social challenges. While the basic motivation behind LC policy tends to be similarâstimulating economic growth and industrial development and ensuring wider non-fiscal benefits from O&G developmentâit is also clear that the implementation and success of LC policy is contingent on a number of macro- and micro-economic conditions.
The variation in these conditions structure trade-offs between state control over downstream development/supply-chain operations and international oil companiesâ (IOCsâ) access to rent and operational autonomy. From a public perspective LC policy is also about ensuring that the micro-economic behaviour of O&G companies conforms to wider economic and social considerations. Often, the resource-rich countries do not necessarily possess the technological and managerial capacity to exploit their reserves. In addition, there may be a lack of appropriate institutions and civil service capacity to ensure that rent also flows to socially enhancing and productive developments and investments. Finally, resource-rich countries may not have the private or public financial capacities that enable exploration and development.
The final chapter of the book therefore concentrates on the challenges described above facing host governments and international companies. As a generalisation, initially during the exploration and development phase, the host country trades access to the countryâs resources for access and risk management in technology/management, institutions/civil service and finance. The trade relationship evolves as domestic institutions evolve, learning takes place in the domestic private and public sectors and the financial capacity of the host country improves.
There are different illustrative examples presented in the final chapter, which are concerned with solving these challenges. One is related to establishing national oil companies (NOCs) in order to facilitate technological and managerial spillovers, where LC policy can be part of a strategy of facilitating such spillovers. These would form the fundamental principles for employment growth and diversification of the economy. The cases of Norway and the UK are presented as examples of successful technological innovators. The role the NOCs play is not only in the build-up of institutional capacity and championing of domestic procurement and technological innovation; they also provide a regulatory role. Kazakhstanâs KazMunayGas (KMG) offers an example of these multiple roles.
The financial capacity of resource-rich countries plays a crucial role in the optimal management of resource rent, where the ...