- Home
- Topics
- Backward Linkages (Supplying Extractives)
- Local Procurement Policies, Agreements, and Requirements
- Government Regulations and Contractual Agreements
Government Regulations and Contractual Agreements
At a Glance
- Formal mechanisms to boost local procurement include government regulations and contractual agreements between companies and governments. These may address demand or supply.
- To increase supply, a government can require extractive companies to create supplier development programs that provide training and promote technology transfer.
-
To increase demand, governments can set up contractual agreements by which participating companies must procure a specific set of goods or services locally.
- While, in the short term, companies may be willing to pay slightly higher prices for local goods or services—or overlook a slightly lower quality level—the long-run goal should be to develop fully competitive local industries.
- Policies and requirements typically fail to meet their objectives when there is a lack of capacity to implement, manage, and monitor local content requirements.
Case Studies
Key Resources
- Local Content, Trade and Investment: Is There Policy Space Left for Linkages Development in Resource-Rich Countries? (European Centre for Development Policy Management)
- Unpacking Local Content Requirements in the Extractive Sector: What Implications for the Global Trade and Investment Frameworks? (Isabelle Ramdoo)
- Space for Local Content Policies and Strategies: A Crucial Time to Revisit an Old Debate (Deutsche Gesellschaft fur Internationale Zusammenarbeit (GmbH))
- A Directory of Mining and Oil and Gas Contracts (Resource Contracts)
- World Investment Report 2001: Promoting Linkages (The United Nations Conference on Trade and Development)
- IGF Guidance for Governments: Local Content Policies (Aaron Cosbey, Isabelle Ramdoo)
Topic Briefing
Formal mechanisms to encourage local procurement include government regulations and contractual agreements between companies and governments. There is a wide range of policy provisions that governments can implement, both to increase extractive companies’ demand for local goods and services and to support the capacity of local suppliers.
Government policies to increase companies’ demand for local goods vary widely. Some set percentages of certain types of goods and services that must be purchased locally. Others list specific types of goods and services. Still others consist of general recommendations that extractive companies favor local suppliers.
To increase supply, governments may require extractive companies to create supplier development programs or to provide training to promote technology transfer. It is important to balance any requirements with necessary incentives and support for local businesses.[1] Meanwhile, local businesses must be able to deliver goods and services of the required quantity and quality in a timely manner. While, in the short term, companies may be willing to tolerate a slightly higher price or lower quality than what is otherwise available on the market, in the long run local businesses must develop the capacity needed to be able to compete on the global market without special.
Examples of requirements without numerical targets are provided in table 1. Examples with numerical targets are listed in table 2.
Table 1: Examples of local content requirements without numerical targets, reprinted from Isabelle Ramdoo, “Local Content, Trade and Investment: Is There Policy Space Left for Linkages Development in Resource-Rich Countries?” Discussion Paper No. 205, ECDPM, Maastricht, 2016, 4.
Figure 2: Examples of local content requirements with numerical targets, reprinted from Isabelle Ramdoo, “Local Content, Trade and Investment: Is There Policy Space Left for Linkages Development in Resource-Rich Countries?” Discussion Paper No. 205, ECDPM, Maastricht, 2016, 5–6.
As highlighted by Ramdoo, despite the prolific use of local procurement provisions, as well as other local content policies, many countries continue to attract investment. This suggests that while governments should not institute unreasonable and ineffective local content regulations, there is some leeway for them to use policy to support local suppliers without scaring off investment. But, to ensure success, sufficient capacity is required to implement, manage, and monitor local content requirements.[2] Beyond the risk of potentially impacting foreign direct investment, these measures can also be viewed as protectionist, going against the intent of the World Trade Organization (WTO) provisions and bilateral treaties (such as investment or free trade agreements). The policy space that still remains is examined in-depth by GIZ, and ISTSD and WEF (see articles in the Key Resources). These rules work to promote free trade and limit provisions that require local purchasing of goods and services. In addition to these obligations that can limit the policy space for local procurement, there can be additional limitations outlined in the contract that a government has signed with an extractive company operating in their country.