Government Regulations and Contract Agreements

At a Glance
  • To increase supply, government provisions can include requirements for extractive industry companies to create supplier development programs which provide trainingand promote technology transfer.
  • While companies may be willing to pay slightly higher prices, or accept slightly lower quality for goods or services in the short term, in the long run, the primary goal of incentivizing or forcing companies to buy locally must be to become fully competitive.
  • Despite the prolific use of local procurement provisions, as well as other local content policies, many countries continue to attract investment.
  • Provisions typically fail to meet their objectives when there is a lack of capacity to implement, manage, and monitor local content requirements.

Formal mechanisms to encourage procurement locally include government regulations and contract agreements between companies and governments. There is a wide range of policy provisions that governments can implement, both to increase the demand by extractive industry companies for goods and services as well as to support the supply by building local business capacity. Policies to increase demand for local goods vary greatly, ranging from set percentages of certain types of goods and services that must be purchased locally, to lists of products that must be purchased in country, and less specific statements that state “as much as possible must be purchased in country”. To increase supply, government provisions can include requirements for extractive industry companies to create supplier development programs or requirements to provide training to promote technology transfer. When working to advance local procurement, it is important to balance any types of requirements with the necessary incentives and support for local businesses.[1] Ultimately, local businesses must be able to meet extractive industry company demand generated through policy provisions, meeting the required quantity, quality, and timely delivery required by companies. While companies may be willing to tolerate paying a slightly higher price for a good or service in the short term, or accepting slightly lower quality, in the long run the goal of incentivizing or forcing companies to buy locally must be to facilitate businesses to become fully competitive so that they do not need the additional preference.

Examples of requirements with and without numerical targets are provided below, as outlined by Ramdoo in her 2016 paper on local content policies.

Figure 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? (ECDPM, 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?,( ECDPM, 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 and not scare off investment. She continues that provisions have failed to meet their objectives when there is “a lack of capacity to implement, manage, and monitor [local content requirements] LCRs”.[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 as well as bilateral treaties (such as investment agreements or free trade agreements). The policy space that still remains is examined in-depth by GIZ, and ISTSD and WEF (see articles below in 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.

View footnotes

[1] Emily Nickerson, Jeff Geipel, Harry James. The relationship between local procurement strategies of mining companies and their regulatory environments: A comparison between South Africa and Namibia, (CIRDI and MSV, 2017), 50 (conclusion #6)

[2]  Isabelle Ramdoo, Unpacking local content requirements in the extractive sector: what implications for the global trade and investment frameworks?, (Geneva: International Centre for Trade and Sustainable Development and World Economic Forum , 2015), 5

Key Resources

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