scoping the capital budgeting implications of local content development legislation
TRANSCRIPT
Scoping the capital
budgeting implications of
local content development
legislation
Centre for Energy, Petroleum and Mineral Law and Policy
University of Dundee
Dr Ayodele Asekomeh
Evidence from new adoption countries
(e.g., Nigeria and Ghana)
What is “local content”?
Local Content and FDI in perspective
Some background…
Capital budgeting implications
Research Questions
Research Approach
The Issues
Prognosis
Content/Outline
2
Definitions
Value added activities taking place within a
resource producing country (Neff, 2005)
When a foreign company makes products in a
country, the materials, parts etc. that have been
made in that country rather than imported. A
minimum level of local content is sometimes a
requirement under trade laws when giving foreign
companies the right to manufacture in a
particular place (FT Lexicon, 2012)
What is “local content”?
3
Definitions (cont’d)
Value contributed to the national economy
through expenditure on goods and services
(indirect economic impacts and multiplier effects)
(Warner, 2010)
Last definition highlights the link between
Foreign Direct Investment (FDI) and local
content (LC) and the intended objectives of local
content legislation
What is “local content”? (cont’d)
4
FDI is positively correlated with growth and
technical progress through the ‘contagion’ or
‘spill-over’ effect (Findlay, 1978; Lim, 2001)
However, FDI could negatively affect domestic
firms – reduced market share and reduced
capacity utilization (Harrison, 1996)
Local content legislation creates restrictive
conditions designed to compel domestic growth
or uptake of FDI-related spill-over effects or
regulate FDI (Qiu and Tao, 2001)
Local Content and FDI in
perspective
5
However, local content restrictions may mean
that FDIs attracted are of the type that offer less
opportunities for development through contagion
(Moran, 1998)
Two reflective questions
• Before imposing restrictive conditions through local
content legislation, do policy makers fully consider
contextual differences and potential unintended
consequences?
• To what extent does local content legislation infringe
the WTO’s TRIMs agreement? (Note exception made
for developing countries)
Local Content and FDI in
perspective (cont’d)
6
Several solutions proposed for the “resource
curse” – the paradox that resource-rich countries
end up being more impoverished by the
exploitation of such resources than without them
Predominantly, these involve adopting policies
used by countries that have deployed resources
sustainably, e.g.:
Development of the UK oil industry (a steep
learning curve from limited local equipment and
services)
The Norwegian Model; Trinidad and Tobago
Some background…
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However, ‘direct’ adoption of such models often
ignore contextual differences e.g., risk tolerance,
institutional quality and political competition
(Nolan and Thurber, 2010; Thurber et al., 2011)
– see chart for illustration.
A review of the Nigerian (2010) and Ghanaian
(2009) Local Content Acts indicates:
Focus on policies intended to stimulate domestic
macroeconomic growth with favourable
microeconomic conditions for local operators
Little consideration for microeconomic choices of
international operators or IOCs
Some background…(cont’d)
8
Some background…(cont’d)
9
Contextual differences and suitability of role-models
(Source: Thurber et al., 2005)
How do/would IOCs treat LC provisions from a
capital budgeting perspective?
Hypothesis #1:
International operators would modify planning
assumptions to reflect increased risk and “difficult”
business environment
In what ways and to what extent would LC
legislation alter the investment decisions of
IOCs?
Hypothesis #2:
FDI decrease would not be compensated for by
increased domestic activity
Capital budgeting implications –
Research Questions
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One or a combination of:
Survey of IOCs operating in countries adopting
LC
Survey analyst and reviewers of IOCs’ financial
information
Review of relevant IOC financial statements
Develop sensitivity models to test how IOCs will
react or are reacting to the provisions
Assess long-term impact/success or otherwise
of the local content legislations
Capital budgeting implications
(cont’d) – Research Approach
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Costing of inputs;
Financing (securing
project finance with
domestic banks);
Contractual issues and
“locked-in” terms re
global supply chain
partners and providers;
Quality issues;
Project management
constraints;
Perceived risks
Compliance and
reporting costs e.g.,
submission of Nigerian
Content Plan;
Preferential treatment;
quotations and
competitive bidding
(margin determination;
game theory?);
Contribution to Local
Content fund: what
benefit?
Capital budgeting implications
(cont’d) – The Issues
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Limited success of local content programmes in
fostering long-term development
Emergence of some dominant local players
(state-backed monopolies?)
Monitoring issues (effectiveness of LC
monitoring board)
Myers’ (2005) notion [that partnership between
producers and consumers to promote energy-
efficient non-oil-based industries in low-income
producers would be a quid pro quo for secure
energy markets] would be constrained
Capital budgeting implications
(cont’d) – Prognosis
13
Findlay, R. (1978), “Relative Backwardness, Direct Foreign Investment,
and the Transfer of Technology: A Simple Dynamic Model,” Quarterly
Journal of Economics, vol. 92, pp. 1-16
FT Lexicon (2012) – Definition of Local Content
http://lexicon.ft.com/Term?term=local-content) – accessed 24 April 2012
Harrison, A. (1996), “Determinants and Effects of Direct Foreign
Investment in Cote d’Ivoire, Morocco, and Venezuela,” in Industrial
Evolution in Developing Countries, ed. By M. J. Roberts and J. R.
Tybout, New York: Oxford University Press
Lim, E-G. (2001), “Determinants of, and the Relation Between, Foreign
Direct Investment and Growth: A Summary of Recent Literature,” IMF
Working Paper WP/01/175
Moran, T. (1998), Foreign Direct Investment and Development: The New
Policy Agenda for Developing Countries and Economies in Transition,
Institute for International Economics, Washington, D.C.
Myers, K. (2005), “Petroleum, Poverty and Security,” Africa Programme
Briefing Paper AFP BP 05/01, Chatham House
References
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Neff, S. (2005). Memorandum on International Best Practice in
Development of Local Content in the Energy Sector, available at:
http://www.neiti.org.ng/sites/default/files/page/uploads/local-content-5-9-
051.pdf
Nolan, P. A. and Thurber, M. C. (2010), “On the state’s choice of oil
company: risk management and the frontier of the petroleum industry,”
Stanford Program on Energy and Sustainable Development, Working
Paper #99
Qiu, L. D. and Tao, Z. (2001), “Export, foreign direct investment, and
local content requirement,” Journal of Development Economics, vol. 66,
pp.101-125
Thurber, M. C., Hults, D. R. and Heller, P. R. P. (2011), “Exporting the
‘‘Norwegian Model’’: The effect of administrative design on oil sector
performance,” Energy Policy, vol. 39, pp. 5366-5378
Warner, M. (2010), “Are Local Content Regulations a Pathway to
Competitiveness or a Road to Protectionism?” Local Content Solutions
References (cont’d)
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